Sudan
Staff Report for the 2000 Article IV Consultation and Fourth Review of the First Annual Program Under the Medium-Term Staff-Monitored Program
Author: International Monetary Fund
Publication Date:
09 Jun 2000
eISBN:
9781451833690
Language:
English
Keywords:
ISCR; CR; end-March program level; reserve; oil revenue; staff appraisal; government indebtedness; tax authority; Sudanese authorities; exchange rate; interventionist government policy structure
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The macroeconomic objectives of the 1999 Staff-Monitored Program (SMP) have been broadly achieved in Sudan. The macroeconomic situation at the end of 1999 was modestly more expansionary than programmed. Budget expenditure was maintained below the program level throughout the year and a surge in oil prices in late 1999 has increased oil revenue above budgeted amounts. Broad money growth at end-December was roughly in line with the 1999 program. Both oil and non-oil revenue were strong in the first two months, and expenditure was below trend, allowing the government to build up deposits at the central bank.

Abstract

The macroeconomic objectives of the 1999 Staff-Monitored Program (SMP) have been broadly achieved in Sudan. The macroeconomic situation at the end of 1999 was modestly more expansionary than programmed. Budget expenditure was maintained below the program level throughout the year and a surge in oil prices in late 1999 has increased oil revenue above budgeted amounts. Broad money growth at end-December was roughly in line with the 1999 program. Both oil and non-oil revenue were strong in the first two months, and expenditure was below trend, allowing the government to build up deposits at the central bank.

I. Introduction

1. Focus of the report. Discussions on the 2000 Article IV consultation and Sudan’s performance under the fourth quarterly review of the first annual program under the medium-term staff-monitored program (MTSMP) took place in Khartoum during March 25–April 9, 2000. This report presents the mission’s findings on economic performance through end-1999, the outcome of the 2000 Article IV discussions, and the objectives and policies for the remainder of 2000 under the MTSMP, as described in the attached Letter of Intent and Memorandum of Economic Policies addressed to the Managing Director and dated May 7, 2000.

2. Fund and World Bank Relations. Sudan has Article XIV status. Relations with the Fund and the Bank are summarized in Appendices I and II.

3. Directors’ views. On February 28, 2000, the Executive Board considered the Third Review of the First Annual Program and the Program for 2000 under the MTSMP, EBS/00/22, (2/14/00), and also gave further consideration to the Managing Director’s complaint with respect to compulsory withdrawal. At that time, the Board welcomed the adoption by the Sudanese authorities of a program of economic and financial adjustment for 2000 consistent with the key parameters of the MTSMP. The authorities were urged to take all necessary actions to implement the program fully, including by maintaining appropriately tight fiscal and credit policies and implementing key structural reforms. The Board further agreed to give consideration within six months’ time to lifting the suspension of Sudan’s voting and related rights in the Fund.

4. Political situation mixed. Sudan’s efforts to normalize political and financial relations with the international community continue. A senior U. S. official was in Khartoum in March to meet with the government, the first to visit Sudan since 1998, while high-level contacts with neighboring countries are expanding. Following the March extension of the state of emergency through end-2000, the timing of the proposed reconciliation conference with the opposition which is slated to pave the way for new elections has not yet been scheduled. The prominent Umma political party, headed by the former Prime Minister El-Mahdi, has broken off from the alliance of opposition groups and returned to Khartoum after a decade’s absence for discussions with the government. However, despite meetings under International Governmental Authority for Development auspices between the government and the Sudan Peoples’ Liberation Army, no progress is being made in the peace process, and conflicts between government and armed opposition forces continue.

II. Background

5. After decades of stagnation and instability, encouraging signs of economic progress along with continuing challenges. During the last three years under staff monitored programs, Sudan made progress in reducing macroeconomic imbalances and in beginning to dismantle an interventionist government policy structure, contributing to the solid economic growth (averaging about 6 percent) achieved in the last third of the 1990s (see Table 1).1 This progress was achieved against the background of several natural disasters, a civil conflict, and net outflows on the official capital account. Together with the recent thaw in relations with neighboring countries, the Arab world, and to some extent the EU, as well as the onset of oil production, it raises hope that the improvement in economic performance can be sustained. However, despite the relatively strong economic growth in recent years, much of the Sudanese population remains mired in poverty and overall social indicators are weak (Table 2).

Table 1.

Sudan: Selected Economic and Financial Indicators, 1997–2000

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

1997–98 revised by Central Bureau of Statistics.

Reflects reclassification in December 1999 of old claims on the government (see Table 4).

Excluding interest due, public transfers, and oil pipeline imports.

Non-oil transactions.

Includes short-term debt, and actual debt service payments (to the Fund and other creditors).

Table 2.

Sudan: Demographic, Social and Education Indicators

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Source: Central Bureau of Statistics, Ministry of Finance and National Economy; and World Banes World Development Indicators.

Population under the age of 15 and over the age of 65 as a share of the total working-age population.

1995 data.

1994 data.

6. Long-term risks for Sudan’s macroeconomic outlook. Looking ahead, obstacles to future growth persist—many of which were outlined in the 1999 Article IV Staff Report. The new revenues from oil provide a welcome boost to budget resources but will not on their own be able to sustain the required increase in development and social spending, while public expectations and political pressures for immediate visible use of oil revenues are rising. Sudan has large tracts of arable land, but the deteriorating infrastructure, recurrent problems with flooding, an inappropriate institutional framework in the irrigated sector, and a secular decline in world commodity prices, have undermined the agricultural sector—which through the 1990’s has been the most important source of economic growth (Box 1). The fragile and undercapitalized banking system does not appear capable of supporting private sector growth, and is constrained by an outdated legal system. The public enterprise sector is small but still inefficient, and privatization is constrained by the poor state of most enterprises and limited domestic or foreign interest. Investment in physical and human capital remains low. The civil service is strong in relation to comparator countries and most of the key decision-makers seem committed to reform, although overall administrative capacity is still low and the civil service underpaid. While the authorities recognize the need to limit military spending particularly in light of competing budgetary needs, further spending pressures will continue—including possibly for demobilization. Finally, Sudan’s external debt, estimated at US$24 billion at end-1999 is immense. Any eventual resolution is likely to be complicated and time consuming and there is a growing domestic perception that Sudan might make better use of its new foreign exchange earnings for purposes with near-term productive results rather than debt service to non-disbursing creditors.

III. Recent Developments and Program Performance Through End-1999

A. Macroeconomic Developments

7. The macroeconomic objectives of the 1999 SMP were broadly achieved. Grounded in solid growth in agriculture (mainly in livestock, and the rainfed and nontraditional crops sectors) and boosted by the start-up of oil production mid-year, real growth is estimated at about 6 percent in 1999, continuing the trend of recent years (Table 1). Inflation, which had been on a declining trend, experienced a year-end flicker upward to 17 percent due in part to higher than anticipated spending pressures in Ramadan and ahead of the Eid-al-Fitr holiday in January, and in part to the rise in sorghum prices as a result of lower production compared to one year earlier. The result was an average inflation rate for the year of 16 percent, somewhat exceeding the 14 percent program target.

Sudan: Sources of Growth—Past and Future

Real growth has expanded at an average 5 percent throughout the 1990’s, but at a higher average 6 percent growth rate since the start of the staff-monitored programs in 1997. Through the years the agriculture sector has maintained its primary importance in the economy, accounting for about 40 percent of total GDP. Given its heavy weight on the economy, developments in agriculture have an obvious important impact on the outcome for overall real growth in the economy, as can be seen in the developments in 1996 when drought affected the rainfed crops. In recent years, traditional crops—particularly in the irrigated sector—have become less important sources of growth than nontraditional crops and livestock. Outside of the diversification taking place within the agricultural sector, the other major new source of growth is from the onset of oil production.

Contribution to Growth by Sector

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1. Sources: Sudanese authorites and Fund staff estimates.Includes oil sector.

There is considerable economic literature on the determinants of growth, with general agreement on the importance of certain key factors, including high investment, low inflation, and strong social indicators-such as for education. For very rough comparison purposes, the table below sets out current indicators for Sudan against data indicating variables associated with some fast-growing economies.

Factors Affecting Growth 1/

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Sources: Fischer, Sabay and Vegh (1998) IMF WP/98/52. Sudanese authorities and Fund staff estimates.

Sudan’s economic adjustment program began in earnest in 1997.

There is no consensus regarding the direction of the effects of government consumption on growth; the impact depends on the type and quality of government spending, and its financing.

8. Modestly more expansionary than programmed overall macroeconomic policy stance. Budget expenditure was maintained below the program level throughout the year and a surge in oil prices in late 1999 increased oil revenue above budgeted amounts (Table 3 and Chart 1). However, these were not sufficient to fully offset shortfalls in non-oil revenue (customs revenue fell short due to lower than expected imports in the fourth quarter), emergency expenditure earlier in the year following flooding, and lower than expected foreign financing inflows. As a result, while the overall fiscal deficit, at 0.9 percent of GDP, was less than targeted under the program, net domestic financing of the fiscal deficit was slightly above target (by 0.1 percent of GDP).

Table 3.

Sudan: Central Government Budget, 1997–2000

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Sources; Sudanese authorities and Fund staff estimates.

Based on original 2000 GOS budget.

The authorities’ 2000 budget is based on an oil export price of US$15.75 per barrel, while staff Projections are based on the WEO-consistent oil price of US$21.5 per barrel (February 2000).

Includes wages, salaries, pension and social insurance.

Includes current and capital expenditure.

Includes all actual payments, including interest amortization and arrears repayments.

Repayments of loans to foreign partners who financed the Sudanese equity share in the refinery and the pipeline.

CHART 1.
CHART 1.

SUDAN: FISCAL DEVELOPMENTS

Citation: IMF Staff Country Reports 2000, 070; 10.5089/9781451833690.002.A001

Source: Sudanese authorities; and IMF estimates.

9. Broad money growth at end-December was roughly in line with the 1999 program (Table 4). While credit to government exceeded the benchmark level, credit to private sector was sharply lower than programmed, falling during the year (Charts 2–3). As a result, the benchmark on net domestic credit of the banking system was met (Appendix III, Table 1). However, net domestic assets of the banking system exceeded the indicative benchmark substantially partly due to the higher than envisaged government borrowing and partly due to an unexpected rise in net assets caused by unprogrammed increases in the accounting entries for the accrued interest on government debt done at end-December for the year as a whole (paragraph 42 below), repayment of some Agricultural Bank debts by the BOS and, to smaller degree, for not as yet fully explained reasons.2 Reserve money significantly exceeded the expected level for end-1999, fueled by stronger than expected seasonal transaction demand for currency in December associated with Ramadan (Table 5). After some depreciation in the first half of 1999, the exchange rate has remained broadly stable in nominal terms. Against the background of generally declining inflation and nominal exchange rate stability, the real effective exchange rate appreciated through end-year by 19 percent; although on a year-average basis, the real exchange rate depreciated in 1999 over 1998 (Chart 4).

CHART 2.
CHART 2.

SUDAN: CREDIT DEVELOPMENTS

Citation: IMF Staff Country Reports 2000, 070; 10.5089/9781451833690.002.A001

Source: Bank of Sudan
CHART 3.
CHART 3.

SUDAN: MONETARY DEVELOPMENTS

Citation: IMF Staff Country Reports 2000, 070; 10.5089/9781451833690.002.A001

Source: Bank of Sudan.
CHART 4.
CHART 4.

SUDAN: EXTERNAL AND PRICE DEVELOPMENTS

Citation: IMF Staff Country Reports 2000, 070; 10.5089/9781451833690.002.A001

Source: Sudanese authorities; and staff estimates.1/ Excluding public transfers.
Table 4.

Sudan: Monetary Survey, 1997–2000

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Reflects the reclassification in December 1999 of old claims on government from other items (net) into gross credit to the government. The 1999 program should be compared to the “old” 1999 column. The 2000 program has been revised to reflect the reclassification.

The increase in the counterpart to valuation changes mainly reflects the change in the value of the BOS liabilities owing to exchange rate movements.

Commercial banks net claims consist of deposits of public entities and local governments, in addition to central government deposits which in turn consist mainly of temporary end-month balances used to pay wages at the beginning of each month. Thus, as classified, changes in this item do not only reflect changes in commercial banks’ net claims on the central government.

Table 5.

Sudan: Monetary Authorities’ Accounts, 1997–2000

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Sources: Sudanese authorities and Fund staff estimates.

Revised due to reclassification at end-1999; see Table 4, footnote 1.

The 2000 target for official reserve accumulation is subject to an adjustor, see Attachment, Table 1.

Reclassified from reserve money in 2000.

10. Gross official reserves above target level. Higher than expected oil export prices helped to offset the weak performance of traditional exports, resulting in a better than programmed outcome for the current account deficit (excluding interest due and public transfers) at 3.5 percent of GDP (Table 6). The Bank of Sudan (BOS) closed the year by accumulating US$6 million of gross usable official reserves above program levels for a total US$53 million.

Table 6.

Sudan: Summary Balance of Payments, 1997–2000

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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.

The gross reserves accumulation target in 2000 is subject to an adjustor as described in the Attachment, Table 1.

11. Relations with non-Fund creditors. Through end-December, payments of US$30 million were made to creditors other than the Fund, in line with the program benchmark. In the first months of 2000, Sudan cleared its arrears with the Arab Fund for Economic and Social Development (AFESD) and its full membership was restored. Discussions to regularize relations with the Kuwait Fund are underway. (Details in paragraphs 40–41.)

12. The early economic indicators for 2000 are positive. Both oil and non-oil revenue were strong in the first two months, and expenditure was below trend, allowing the government to build up deposits at the central bank. Inflation dropped in February from end1999 peaks, although it remained unchanged in March in the low double digits. There has been no visible pressure on the exchange rate which has remained stable at around 257 dinars per U.S. dollar.

B. Implementation of end-December 1999 Structural Measures

13. Previously delayed structural reforms moving forward (Appendix III, Table 2). The June 1 starting date for the introduction of the VAT has been officially announced to the public, and the tax authority—under new management—has now completed basic staff training, and is vigorously pursuing public information programs and finalizing taxpayer registration. Implementing regulations for the Investment Encouragement Act have now been passed which go beyond previous expectations to close import tax loopholes by removing discretionary elements, such as by tightening the definition of goods to be exempted, limiting the number of exemptions, and providing exemptions uniformly to all investors, in addition to centralizing the exemption granting authority (paragraph 32).

14. Remaining fiscal and monetary reforms for end-year completed. The unified taxpayer identification number was introduced for large taxpayers as scheduled in December. Measures to reduce the size of non-performing loans and to ensure adequate provisioning were agreed between commercial banks and the BOS. The BOS has initiated its plan for coming to an agreement with non-compliant banks for achieving appropriate capital adequacy ratios (see paragraph 31 below). Finally, banks are now applying a unified methodology for calculating incomes and profits based on a 1998 BOS circular requesting that all banks adopt the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) accounting principles.

15. The other structural benchmarks for end-1999 were completed as scheduled. In the area of trade reform, the last remaining export tax—on cotton—was removed and the first phase of import tariff reform implemented, including the reduction of the maximum tariff to 60 percent and the number of tariff bands to 4, with a resulting average tariff of about 22 percent. The MTSMP’s 1999–2000 privatization plan is on track: three enterprises are at the point of sale, and the government share in the telecommunications company (Sudatel) has been decreased through the sale of shares to the public to 58 percent from 68 percent with a further reduction through an additional tranche slated to be sold through the stock exchange in the next month. Timetables for making primary education compulsory throughout Sudan have been adopted by the states: three states have already adopted compulsory primary education and the remainder have plans to introduce it by 2002.

IV. Report on the Discussions

16. Focus of the discussions. With macroeconomic policy and outturn broadly in line with the program, the main issues during these discussions were sustaining and improving the current broadly positive macroeconomic conditions, implementation of the structural reform agenda without further delays, and the macroeconomic impact of the emerging oil sector. The first oil revenue accrued to the budget in the last quarter of 1999, and the authorities are only now beginning to grapple with the issues involved in being an oil producer-even if only a modest one—and are not yet fully confident that the projected levels of oil inflows will materialize (Box 2). The authorities were encouraged with the positive impact of past structural and economic reforms on the Sudanese economy and are eager to continue the reform program. However, they remained convinced that it would be most prudent to continue their steady but gradual approach to structural reform rather than risk political or economic disruptions by moving too quickly.

A. Medium-Term Macroeconomic Strategy

17. Macroeconomic objectives. The authorities agreed with the staff on the broad outlines of the medium-term macro framework, consistent with the MTSMP framework first set out in EBS/99/64, 4/28/99 and updated in the attached Memorandum of Economic Policies (Attachment, Annexes I and II). The objectives include real growth averaging 5.5 percent, inflation tapering off to 5 percent, and an improvement in the external current account and in the official reserve position—particularly following the anticipated increase in the government’s share of oil production by 2004–05 (Table 7).

Table 7.

Sudan: Medium-Term Macroeconomic Scenario, 1998–2005

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

Excludes interest due and transfers; includes all oil transactions.

Non-oil transactions.