Statement by Peter Ngumbullu, Executive Director for Sudan and John Mafararikwa Senior Advisor to Executive Director

This paper examines Sudan’s 2005 Article IV Consultation and the Final Review of the 2004 and 2005 Staff-Monitored Program (SMP). Between 2001 and 2004, the economy of Sudan grew at an average rate of 6.4 percent per year, and the non-oil sector expanded at an annual rate of 5.3 percent. The program for 2005 is based on prudent financial policies. The program will need to be adjusted by midyear to reflect additional financing arising from higher oil prices and aid and previously unfunded expenditures on social and infrastructure projects.

Abstract

This paper examines Sudan’s 2005 Article IV Consultation and the Final Review of the 2004 and 2005 Staff-Monitored Program (SMP). Between 2001 and 2004, the economy of Sudan grew at an average rate of 6.4 percent per year, and the non-oil sector expanded at an annual rate of 5.3 percent. The program for 2005 is based on prudent financial policies. The program will need to be adjusted by midyear to reflect additional financing arising from higher oil prices and aid and previously unfunded expenditures on social and infrastructure projects.

Key points

  • The Sudanese signed a comprehensive peace agreement in early January 2005 and negotiations are underway to resolve the disturbances in Darfur.

  • The authorities are calling for the removal of the remaining sanctions on Sudan to allow the country a fast take-off.

  • Permanent peace and the ongoing broad based high economic growth will help Sudan reach the MDGs and reduce poverty if adequate external assistance, including debt relief is delivered in a timely manner.

  • The authorities are grateful for the generous donor pledges made in Oslo and urge for timely disbursement of these resources.

  • Performance under the 2004 SMP and the program for 2005 meet the strength of a RAP and performance since 2002 has been of similar strength.

  • Payments to the Fund have exceeded those needed to stabilize arrears.

  • To meet immediate demands arising from the peace agreement, the humanitarian situation in Darfur and drought relief, wage increases and other important outlays have been postponed and payments to the Fund will remain at their level of 2004.

  • Due to lack of access to development financing, Sudan has been forced to contact non-concessional loans to finance growth enhancing investments.

  • Sudan’s debt is unsustainable. The net present value of debt is 850 percent of exports, far exceeding the 150 percent under the HIPC Initiative.

  • Sudan has met all the conditions (policies and payments) of a RAP since 2002. The Fund should now move speedily to facilitate the clearance of Sudan’s arrears and allow the country to forgo RAP and move directly to PRGF and HIPC.

  • Debt relief and access to humanitarian and development assistance is critical to sustain peace in Sudan.

Introduction

On January 9, 2005 the Sudanese signed a comprehensive peace agreement, bringing finality to a prolonged civil conflict, in which more than a million human beings perished and several millions others were displaced. The authorities are engaged in negotiations to bring lasting peace to Darfur and the rest of the country. This removes a major obstacle for socio-economic development and effective utilization of aid. With permanent peace, Sudan now has all the basic ingredients that enhance its potential and chance to reach the MDGs, including a diverse resource base and a committed leadership with solid track record of pursuing and implementing prudent macroeconomic and structural policies. In fact, the medium-term outlook envisages real GDP growth rates of 8-9 percent, exceeding the minimum rate for reaching the MDGs. Already between 2001-2004 real GDP growth rate averaged 6.4 percent and is expected to accelerate to 8.3 percent in 2005.

These positive developments should now be followed and complemented by fast delivery of technical assistance for human and institutional capacity building in the new environment and adequate and timely development and humanitarian assistance. This will help cement peace while fast tracking the country towards poverty reduction and reaching the MDGs. In this regard, the recent donor conference in Oslo, Norway, was timely and the authorities thank development partners for their generous pledges while urging them for timely disbursement. The authorities are also requesting those countries that still maintain sanctions against Sudan to remove them and assist the authorities the country make progress in dealing with the current challenges.

The Fund has a critical role to play in unlocking development assistance and facilitating debt relief. The authorities have been implementing RAP equivalent policies and payments under successive Staff Monitored Programs (SMP) since 2002. With this solid performance and the peace agreement, the authorities are requesting the Fund to facilitate clearing arrears immediately and allow Sudan to forgo the Rights Accumulation Program (RAP) and move speedily to a PRGF and HIPC Initiative simultaneously.

Performance in 2004 and the 2005 SMP

Performance under the 2004 SMP was broadly in line with the program. All quantitative benchmarks were met with the exception of the contraction of non-concessional loans, which was necessitated by lack of access to financing at appropriate terms and the need to finance immediate needs of the economy. Structural benchmarks were broadly implemented and some were post-poned to take into account the peace agreement and to provide room for adequate preparation. Both the performance during 2004 and commitments under the 2005 SMP are equivalent in strength to that required under a RAP.

Output Growth

Real GDP growth accelerated to 7.3 percent in 2004, reflecting the continued implementation of strong policies. While oil output surged, growth remains broad based, with strong performance of agriculture manufacturing, construction, power and services sectors. This diversification of growth provides assurances that monetary, structural and exchange rate policies have been appropriately managed to avoid a Dutch Disease following the discovery of oil. Real GDP growth is projected to accelerate to 8.3 percent in 2005. The major sources of growth are the significant increase in oil production and private and public investment in infrastructure. Nevertheless, non-oil GDP will be adversely affected by reduced crop production due to weak rainfall in many parts of the country.

Fiscal Performance

The humanitarian and security situation in Darfur prompted the authorities to increase expenditure through a supplementary budget. Also, reflecting the ongoing return of economic activities to most parts of the country, capital outlays increased from 3.1 percent of GDP in 2003 to 5.4 percent in 2004. As a result, total expenditures increased from 15.8 percent of GDP in 2003 to 20.2 percent in 2004. The authorities stepped up their effort to mobilize domestic resources. The establishment of a large taxpayers’ unit improved efficiency in revenue mobilization, while the reduction in exemptions and a new telecom license fee broadened the tax base. As a result non-oil revenue increased from 8 percent of GDP in 2003 to 10 percent in 2004, exceeding the program target of 9 percent. The oil stabilization account continues to serve the country well. Given the increased oil prices, the authorities also increased their contributions to the oil stabilization account above the program target. The overall fiscal balance recorded a surplus of 1.3 percent of GDP compared to a deficit of 1.2 percent under the program, obviating the need for new net domestic financing.

In 2005 the country is facing a number of expenditure pressures. To accommodate the peace process, transfers to the South are increasing as well decentralization-related transfers to other states. Given the tight domestic resource envelope, a planned civil service wage increase and allocations to social sectors, infrastructure and general reserves have had to be postponed until additional financing is identified. On the revenue side, in view of the increase in international oil prices, which will also increase revenue, the OSA benchmark price was raised to accommodate pressing needs. Further increase in revenue will rely more on structural measures to broaden the base and improve efficiency. In the sprit of nursing the nascent political stability and consolidating implementation of the peace agreement, raising taxes has not been considered as an option in 2005, and for the same reasons, the excise tax on domestic petroleum products was reduced to mitigate the social impact of the ongoing increase in oil prices. In anticipation of a clearer picture emerging from the ongoing formation of a National Government, demand on transfers to cope with the return of displaced persons, progress in Darfur, the extend of donor support, among others, it is anticipated that a supplementary budget would be appropriate around the middle of the year to accommodate unfunded expenditure needs while identifying additional financing.

Monetary policy

High FDI inflows and oil export revenues posed challenges for liquidity management during the first half of 2004. however, in the second half of the year, monetary conditions were tightened through open market operations, foreign exchange sales, increase in reserve requirements and calling back of loans extended to banks. Consequently broad money growth decelerated and inflation was contained at 8.4 percent, slightly above the 7.7 percent of 2003. Banking system indicators improved, with the ratio of nonperforming loans falling and profitability and capital adequacy ratio increasing.

In 2005, average inflation is projected to be contained at 7.5 percent. The authorities are gearing for potential monetary shocks emanating from the introduction of a new currency, aid flows, oil export receipts, large capital inflows and a structural increase in the demand for money associated with the reintegration of the South. These developments will require active monitoring by the BOS and closer coordination with the central government and the government of the South. The authorities will review the situation in mid-year and will need technical assistance to cope with these challenges.

External sector

Oil exports grew by 50 percent and non-oil grew by a strong 37 percent. The country also benefited from higher transfers from abroad and FDI inflows. As a result, the current account deficit declined to 4.1 percent of GDP and foreign exchange reserves increased from 1.5 months of imports at end-2003 to 2.9 months at end-2004. Measures were taken to enhance exchange rate flexibility; the band for daily exchange rate fluctuations was widened to ±3 percent while some restrictions on the amount of foreign exchange traded were removed. Although the local currency appreciated somehow against the US$, this did not jeopardize competitiveness, given that it was underpinned by strong fundamentals and prudent monetary and exchange rate policies. The export sector therefore remains vibrant and competitive, as reflected by high growth of non-oil exports.

Oil and non-oil exports, especially cotton and meat, are projected to grow rapidly in 2005. However, imports are expected to grow faster, led by post-conflict related needs as well as investment related imports. Notwithstanding the continued capital inflows, and projected humanitarian aid and project financing, the outlook is clouded with potential exogenous shocks emanating from uncertainties in oil prices, the extend of peace related needs, the vagaries of the weather and the timing of aid delivery. In this context, the authorities are prepared to take contingency measures and will continue increasing international reserves.

Structural Reforms

The authorities enhanced their agenda for structural reforms. A comprehensive review of tax exemptions was completed and this will be followed by a streamlining of the tax incentives regime. Tax privileges of four major oil distribution companies lapsed at end-2004 and will not be renewed. A medium-term tariff reform program was developed and the timing of implementation will take into account the revenue consequences in the face of huge resource demands from the peace agreement. Oil sector transparency was further improved; and, the Sudan Petroleum Corporation (SPC) was audited and the audits of the subsidiaries are in progress. Preparations are underway to align SPC accounts with the country’s commercial accounting standards.

Structural reforms will be deepened in 2005. In the fiscal area, the autonomy of the cash management system will be enhanced, and a single treasury account for the ministry of finance will be set-up while those for the rest of the ministries will be done in 2006. Work on the GSF classification methodology in the budgetary accounts will be accelerated in 2005 and completed by 2006. The South is taking-off with the GFS classification. The tax base will be further broadened by setting up of a medium-size taxpayers’ unit while transparency in the oil sector will be further improved. In the monetary area, capacity will be strengthened in managing monetary operations, especially effective short-term liquidity forecasting and coordination with fiscal operations. The authorities are broadly in agreement with the FSAP recommendations and intend to formulate an action plan to implement them. External sector reforms will continue, including further tariff reform that will take into account the need to minimize revenue losses, fulfilling commitments under AFTA and COMESA and advancing preparations to join the WTO. The authorities are urging for the removal of trade sanctions to improve effectiveness in their operations and policies.

Payments to the Fund

Sudan has maintained a good record of payments to the Fund. In 2004, US$32.4 million was paid to the Fund, compared to US$30 million envisaged under the program. These payments were US$12.5 more than what is needed to stabilize arrears to the Fund. While oil receipts increased in 2005, peace and other demands have added pressure on the domestic resource envelope, arising from the substantial and immediate budgetary pressures from the peace agreement with the south, expenditure increase in the Darfur for enforcing peace and humanitarian assistance, relief to a number of areas that have been hit by drought, and more resources are needed to deepen the ongoing nationwide decentralization process, especially in light of the peace agreement, and uncertainties remaining about future oil receipts and the extend of donor support. The authorities therefore intend to maintain payments to the Fund in 2005 at the level of 2004.

Need for External Assistance

Sudan has implemented difficult reforms without external financial support. This situation has forced the authorities to contract some non-concessional loans for critical investments in the oil sector, electricity generation and water supply, which has contributed to boosting economic growth. To avoid compounding the debt problem and debt relief negotiations, the authorities are requesting for faster progress towards clearing arrears, debt relief and access to concessional financing. In making payments to creditors, the authorities have been giving preference to the Fund, other multilaterals and creditors that are providing new financing.

The Joint Assessment Mission, comprising the Bank, UN, Donors, the Fund and the authorities (North and South) estimated Sudan’s post-conflict needs for the first phase of the peace agreement (2005–2007) at US$7.9 billion. Of this amount, US$5.3 billion will come from domestic sources leaving a financing gap of US$2.6 billion. To fill this gap, donors pledged a total of US$4.5 billion in Oslo, Norway on April 11-12, 2005. Of this amount, US$1.9 billion is for development assistance and US$2.6 billion is for direct delivery for humanitarian support. The World Bank has established two trust accounts to help manage and disburse external assistance. The authorities are grateful to the donors for their generous pledges and they will make an effort to address some of the concerns expressed by donors to secure disbursement. However, streamlining of donor conditionality is needed for the timely delivery of these resources which are critical to sustain peace and economic development.

External Debt Burden and Arrears Clearance

Sudan’s external debt is unsustainable. Total outstanding debt exceed US$25 billion, most of which is in arrears. The net present value of debt is estimated at US$24 billion, about 850 percent of exports of goods and services, far exceeding the 150 percent threshold under the HIPC Initiative. Oil output’s contribution to growth is expected to peak in 2006 but to subsequently decline thereafter. To alleviate the debt burden and allow Sudan to consolidate peace and development, the Fund should move expeditiously to facilitate the clearance of Sudan’s arrears, paving the way for more comprehensive and deeper debt relief. Given Sudan’s strong track record of policies and payments, and the urgency for debt relief, there is a valid case for Sudan to skip the RAP altogether, and move directly to the PRGF and bring forward the decision point under the HIPC initiative. The Paris Club should also be advancing the discussion of modalities for providing debt relief to Sudan and such discussions should invite and incorporate non-Paris Club creditors with substantial exposure to Sudan. In the case of Sudan, deep and faster debt relief is possible only if all creditors move to provide debt relief in tandem and at comparable terms. The BWI staffs and donors should also help provide technical assistance to strengthen local capacity to speed-up debt relief negotiations.

Technical Assistance Needs

The authorities are grateful for the extensive technical assistance provided by the Fund since Sudan began implementing SMPs. This has helped to build institutions, enhanced capacity for macroeconomic management, and strengthened the coverage, timeliness and quality of the statistical database, among other benefits. The signing of the peace agreement and the resumption of economic activities country-wide, especially the reintegration of the South will pose new challenges to existing institutions, and will stretch the existing limited administrative capacity and will require the building of new institutions as well as extensive training of locals. In this regard, the authorities are requesting technical assistance in the areas of revenue administration, fiscal federalism, strengthening government financial management, GFS classification, introduction of the new currency, liquidity forecasting, etc. The authorities presented their full list of TA needs and training requirements to the relevant departments within the Fund during the Spring meetings and hope that their request will be accorded high priority given their good track record of implementing TA recommendations.

Conclusion

The Sudanese authorities intend to cease the opportunity provided by the comprehensive peace agreement with the South to bring peace to the whole country and embark on an ambitious economic and social development agenda that will lead the country towards the MDGs, while maintaining macroeconomic stability. This objective can only be met within the context of an enabling external environment and with adequate technical and financial support from the international community. Sudan has established a long and solid track record of policy implementation and deserves to be fast-tracked in clearing arrears, qualification for PRGF and access for debt relief under the HIPC initiative. The Oslo donor conference set the appropriate pace and scope for external assistance and the authorities urge the Fund to fully restore its relations with Sudan, assume its catalytic role for international support and provide technical assistance. Removal of sanctions and provision of market access will allow Sudan to accelerate economic development.

Sudan: Staff Report for the 2005 Article IV Consultation, Final Review of the 2004 Staff-Monitored Program, and the 2005 Staff-Monitored Program; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Sudan
Author: International Monetary Fund