Sudan
2006 Article IV Consultation and Staff-Monitored Program: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Sudan
Author:
International Monetary Fund
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Publication Date:
24 May 2006
eISBN:
9781451833782
Language:
English
Keywords:
ISCR; CR; government; staff appraisal; higher-than-projected oil price environment; financing option; authority; reform program; inflation objective; exchange rate; savings account; Sudanese authorities; Oil sector; Energy subsidies; Currencies
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Sudan’s 2006 Article IV Consultation reports that growth has been robust, inflation has been kept at a single-digit level, and important reforms have been undertaken. There has been progress with financial sector reforms and trade liberalization, and the managed floating exchange rate regime has been working well. Despite an increase in oil revenues, the fiscal space of the central government will be constrained because of the transfers required by the peace agreement and decentralization.

Abstract

Sudan’s 2006 Article IV Consultation reports that growth has been robust, inflation has been kept at a single-digit level, and important reforms have been undertaken. There has been progress with financial sector reforms and trade liberalization, and the managed floating exchange rate regime has been working well. Despite an increase in oil revenues, the fiscal space of the central government will be constrained because of the transfers required by the peace agreement and decentralization.

I. Introduction

1. During the last seven years, the authorities have maintained close cooperation with the Fund as evidenced by good performance on successive Staff-Monitored Programs (SMPs) and by making payments in excess of obligations falling due. During January 27– February 9, 2006, a staff team visited Khartoum to conduct discussions on the 2006 Article IV consultation, the performance under the 2005 SMP, and an SMP for 2006.1 The attached Memorandum of Economic and Financial Policies (MEFP, Attachment I) describes the authorities’ program and their policy commitments through December 2006.

2. In concluding the last Article IV consultation on April 29, 2005, Directors stressed the importance of keeping inflation low, strengthening the tax base, improving oil sector transparency, and containing nonconcessional borrowing. During the midyear review of the SMP on December 2, 2005, Directors urged the authorities to press ahead with the implementation of the Comprehensive Peace Agreement (CPA) and redouble efforts to resolve the crisis in Darfur. Directors also encouraged the authorities to formulate a prudent budget for 2006, scale back fuel subsidies, adopt the Government Finance Statistics (GFS) methodology, and increase the level of payments to the Fund.2

3. The authorities have been carrying out staff recommendations, although there have been some slippages and delays. Inflation pressures have been contained, and measures to broaden the tax base and improve administration have been undertaken. However, the adoption of GFS (GFSM 2001) methodology has progressed slowly, and the target on nonconcessional borrowing has been missed. The program for 2006 contains important commitments to increase fiscal and oil sector transparency as well as higher payments to the Fund.

4. The framework for assistance to Sudan by donors and multilateral institutions is based on the reports prepared by the Joint Assessment Mission (IMF, UN, World Bank, and the authorities) in early 2005 and the commitments made by donors and the government at the Oslo Conference in April of that year.3 Since then, the first semiannual consultative group meeting (the “Sudan Consortium”) to follow up on these commitments, redefine priorities, and foster mutual accountability was held in Paris during March 9–10, 2006 (Appendix II). Fund staff provided input and participated at these events.

II. Stocktaking of Performance and Medium-Term Outlook

5. Sudan’s economic performance in recent years has been good despite adverse security conditions and the difficulties of concluding and implementing the CPA. Growth has been robust, inflation has been at single-digit levels, and important reforms were undertaken. The authorities attained macroeconomic stability, lifted price controls, set up liberal foreign investment and foreign exchange regimes, pursued an ambitious privatization and enterprise-restructuring program, and began a second phase of reforms to liberalize the trade regime. The authorities have also finalized a strategy to try to attain the Millennium Development Goals, increased pro-poor and investment spending in 2005, and plan to finalize an interim Poverty Eradication Strategy in 2006.

6. Notwithstanding these achievements, progress was not smooth and major challenges remain. In the period ahead, Sudan’s main tests are to make the Government of National Unity fully operational, achieve peace throughout the country, sustain growth and economic stability, and reduce poverty. The difficulties in ensuring the effectiveness of the new government (and the newly created North-South commissions) cannot be underestimated. Similarly, resolving the crisis in Darfur and dealing with potential unrest in the Eastern provinces is a major challenge. Sustaining growth and stability and fostering poverty reduction will require further structural reforms and addressing the country’s social and reconstruction needs. Lastly, the ongoing process of fiscal decentralization requires improvements in implementation capacity, transparency, and coordination at different levels of government.

7. Sudan’s economic prospects are promising, but there are also risks. The medium-term outlook, based on the continuation of reform policies, envisages growth of 8–10 percent per year, low inflation, and rising international reserves (Table 1). The economic growth assumptions reflect the effects of the ongoing investment boom, the improved prospects for the South in the period after the peace agreement, and prospective economic reforms. The external current account deficit is projected to decline gradually and remain financed by external capital inflows. Fiscal and balance of payments gaps of about 1.5–2 percent of GDP per year are assumed to be covered by official grants. While the outlook is favorable, there are risks arising from the influence of anti-reform groups that may oppose necessary reforms, unresolved domestic political tensions, and weak institutions (especially at the subnational level).

Table 1.

Sudan: Medium-Term Macroeconomic Scenario, 2005–10

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Sources: Sudanese authorities; and Fund staff estimates and projections.

Includes estimated capital spending by state governments.

Crude oil revenue.

Includes expected official transfers of about $1.8 billion pledged in Oslo for the 2006-08 period.

The projections for Sudanese oil blends are based on March 2006 WEO oil prices.

Sudan: Medium-Term Prospects, 2005–10

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Sources: Sudanese authorities; and Fund staff estimates and projections.

III. Recent Developments and Performance Under the Program

8. The CPA is being implemented, albeit with some delays. An interim national constitution was put into force and the Government of National Unity and the government of Southern Sudan were set up in mid-2005.4 The central government has begun transferring oil revenues to the South as stipulated in the CPA, although the exact amounts due are still under discussion.5 Furthermore, important commissions dealing with North-South borders, the oil sector, and financial aspects of fiscal federalism are not yet functioning effectively.

9. Progress has been made at the Darfur peace talks in Abuja, but the situation on the ground remains precarious. There has been progress on a revenue sharing agreement as well as on power-sharing and security arrangements. However, the security situation in Darfur has deteriorated during the last year, and the international community has stepped up pressure for strengthening peacekeeping operations in the region. Relations between Sudan and Chad have also deteriorated because of allegations that each country is supporting rebel forces in the other country.

10. The economy has been growing at a fast pace and macroeconomic conditions have been stable. Real GDP grew at an estimated rate of 8 percent in 2005, owing mainly to a recovery in agriculture and robust activity in construction and services. After rapid growth in 2003 and 2004, oil sector output remained virtually unchanged in 2005 at 287 thousand barrels per day (Table 2). Average inflation in 2005 was contained at 8.5 percent. At end-February 2006, the 12-month rate of inflation was 5.8 percent.

Table 2.

Sudan: Selected Economic and Financial Indicators, 2001–06

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Sources: Sudanese authorities; and Fund staff estimates and projections.

Includes estimated capital spending by state governments.

Cash basis.

End of period.

As a share of exports of goods and services.

uA01fig01

Real GDP Growth

(in percent)

Citation: IMF Staff Country Reports 2006, 182; 10.5089/9781451833782.002.A001

uA01fig02

CPI Inflation

(in percent)

Citation: IMF Staff Country Reports 2006, 182; 10.5089/9781451833782.002.A001

11. The external current account worsened in 2005, but the balance of payments was supported by strong capital inflows. Oil export revenues rose because of higher oil prices, but imports rose drastically and non-oil exports slowed. The latter suffered from transportation bottlenecks, high domestic demand, and, possibly, real exchange rate appreciation (Box 1). At the same time, the strong trend in capital inflows continued (mainly in the form of foreign direct foreign investment in industrial, telecommunications, transport, and banking activities) allowing for a buildup of net international reserves from 1.9 months of imports at end-2004 to 2.6 months at end-2005 (Table 3).

Table 3.

Sudan: Balance of Payments, 2002–06

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Sources: Sudanese authorities; and Fund staff estimates and projections.

Includes payments to oil companies as stipulated in production sharing arrangements.

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

Starting from 2006, the reported price is a weighted average of prices for different crude blends.

uA01fig03

Balance of Payments

(in percent of GDP)

Citation: IMF Staff Country Reports 2006, 182; 10.5089/9781451833782.002.A001

Exchange Rate Trends and Competitiveness

Since late 2004, improved market fundamentals coupled with a move towards a market-driven exchange rate have led to an appreciation of the dinar. In 2005, the economy grew at fast pace and higher oil prices led to a 35 percent increase in oil exports. In addition, foreign direct investment rose sharply from US$1.8 billion in 2003 to US$3.8 billion in 2005.During the last year, the currency appreciated by 12 percent and 17 percent in nominal and real effective terms, respectively.

uA01fig04

Exchange Rates

(Index, 2000=100)

Citation: IMF Staff Country Reports 2006, 182; 10.5089/9781451833782.002.A001

Beyond the effects of growth and foreign exchange inflows, higher levels of government spending have also put pressure on nontraded goods’ prices and contributed to the real appreciation. Prices of nontraded goods (housing, water, and electricity) grew at an average rate of 11 percent in 2004–05, while prices of tradable goods (food, clothing, and other consumer goods) grew by an average of 6 percent.

Trade performance also suggests that competitiveness may be deteriorating, although other factors have also played a role. In 2005, the volume of non-oil exports (mainly agricultural products and livestock) fell. Export volumes were also affected by supply constraints (inadequate capacity at the port, deterioration in the road infrastructure), conflict in livestock-rich areas, and higher domestic demand.

uA01fig05

Sudan: Non-oil Exports, 1998-2005

(Indices 1995=100)

Citation: IMF Staff Country Reports 2006, 182; 10.5089/9781451833782.002.A001

Looking ahead, the oil sector boom coupled with strong fundamentals will likely exert further upward pressure on the equilibrium real exchange rate. This highlights the importance of removing structural bottlenecks and improving the business environment to preserve competitiveness in non-oil export and import-competing sectors.

12. After three years of surpluses, the fiscal balance turned into a deficit in 2005. Oil revenue continued to rise, but it could not keep pace with the increase in government spending (Table 4). Transfers to the South and northern states increased significantly because of the CPA and fiscal decentralization in the North. At the same time, a domestic fuel subsidy equivalent to 3.5 percent of GDP emerged as domestic fuel prices were not increased in line with rising international prices.6 The fiscal deficit was financed by bond sales to the domestic nonbank sector and a lower-than-programmed accumulation of deposits in the oil savings account.

Table 4.

Sudan: Central Government Operations 2002–06

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Sources: Sudanese authorities; and Fund Staff estimates and projections.

From 2005 onwards, oil revenues are reported on an accrual basis and are valued at international prices.

For 2006, the authorities have reclassified about SDD 30 billion (0.4 percent of GDP) of expenditures on wages and salaries to the states from Chapter 3 to Chapter 1.

The gross shortfall in oil revenues from the low consumer prices is accounted for as a subsidy within Chapter Two expenditures. The figure does not include the proceeds from excise taxes on some oil products.

Oil-related transfers as per the peace agreement with the south.

In 2006 the authorities plan to privatize a total of 13 entities including Sudan Telecommunications Company, Sudan Airways, Seaports corporation and the National Building and Construction Company.

Excluding grants. In percent of non-oil GDP. The reduction in the ratio in 2005 reflects a drop in excise rates.

Includes estimated capital spending by subnational governments. Before 2006 a part of the transfers were expenditures carried out by the central government on behalf of the states. Since then, part of Chapter 3 transfers are capital spending by the states.

uA01fig06

Fiscal Indicators

(in percent of GDP)

Citation: IMF Staff Country Reports 2006, 182; 10.5089/9781451833782.002.A001

13. In 2005, money demand remained high and the dinar appreciated. Money demand was bolstered by the strong pace of economic activity and increased financial intermediation. Despite central bank’s attempts to mop liquidity through open market sales of government securities and foreign exchange, broad money and reserve money grew by 45 percent and 35 percent, respectively (Tables 5 and 6). Credit to the private sector also grew rapidly (by 65 percent) during the year.7 Money demand pressures, backed by strong foreign exchange inflows, translated into dinar appreciation.

uA01fig07

Monetary Indicators

(12-month percent change)

Citation: IMF Staff Country Reports 2006, 182; 10.5089/9781451833782.002.A001

14. Faced with a trade-off between higher inflation and exchange rate appreciation, the authorities have appropriately allowed the exchange rate to appreciate. In the context of Sudan’s managed floating exchange rate regime, the authorities have been monitoring inflation developments closely and allowed the exchange rate to appreciate in response to incipient inflationary pressures. While also aimed at containing excessive exchange rate volatility, foreign exchange market intervention has been geared to the attainment of the program’s foreign exchange accumulation reserves objectives rather than targeting an implicit path for the exchange rate.

15. The authorities took steps to improve the import tariff structure and increase flexibility in the foreign exchange market. As part of a three-year import-tariff reform program, the authorities lowered the top tariff rate from 45 percent to 40 percent. The average tariff fell to 20 percent, and there are plans to reduce it further to 15 percent or less by 2008 (MEFP, ¶23). Regarding the foreign exchange market, the authorities have recently allowed for further flexibility (through auctions) in the pricing of foreign exchange. Sudan maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions (Appendix I).

16. Banking system soundness indicators improved in 2005. The ratio of nonperforming loans to total loans fell from 8.9 percent in 2004 to 6.9 percent at end-2005. During the same period, capital adequacy ratio for the banking system increased from 10.8 percent to 12 percent (Table 5).8

Table 5.

Sudan: Monetary Survey, 2002–06 1/

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Sources: Sudanese authorities; and Fund staff estimates.

For 2005, the monetary survey includes all banks operating in Sudan.

The figures for 2006 are calculated at the program exchange rate.

Including fixed capital.

17. The authorities made progress with the envisaged fiscal and financial sector reforms. They set up a medium taxpayer unit to boost non-oil revenue collection, adopted the Automated System for Customs Data at customs ports, and strengthened cash management through cash plans and better coordination between the ministry of finance and the central bank. Regarding monetary and financial sector reforms, the central bank introduced competitive auctions of government securities, implemented a new financing window for banks using collateral-based certificates, and privatized a large bank (Khartoum Bank). The authorities have also been setting up the new federal structure in the banking system (required by the CPA) by enacting laws to restructure the central bank and banking activities and by establishing a branch of the central bank in the South. Furthermore, the central bank has formulated a strategy for screening mergers and acquisitions and opened the banking sector to foreign banks.9

18. Performance under the 2005 SMP was broadly satisfactory. Three of the five quantitative targets and all but one structural benchmark for end-December 2005 were met (Tables 7 and 8). The target on the domestic financing of the fiscal deficit was missed by a small margin, while the ceiling on nonconcessional borrowing was not observed as US$935 million in loans were contracted during the year. The authorities explained that, in the absence of concessional financing, these loans financed key water and electricity projects.10 The structural benchmark on converting the 2006 budget in GFSM 2001 format was delayed because of technical difficulties in the preparation of the budget; the authorities expect to implement this measure in May 2006.

Table 6.

Sudan: Monetary Authorities’ Accounts, 2002–06

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Sources: Sudanese authorities; and Fund staff estimates.

The figures for 2006 are calculated at the program exchange rate.

Balance of the new oil savings account of the national unity government (as envisaged in the peace agreement with the south).

Table 7.

Sudan: Quantitative Targets Under the 2005 Staff-Monitored Program

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Sources: Sudanese authorities; and Fund staff estimates.

Outstanding stock at end-2004.

As specified by the technical memorandum of understanding (IMF Country Report No. 05/180, attachment I), the program targets for domestic financing of the budget deficit and for changes in the NDA of the central bank have been reduced, and the international reserves target have been raised by the difference between programmed and actual revenues accumulated in the oil savings account.

Defined as total net borrowing by the government, including net borrowing from the central bank (including Government Musharaka Certificates (GMCs) and changes in deposits of the central government with the central bank but excluding oil savings account), net sales of GMCs outside the central bank, revenues from privatization, and repayments of domestic arrears.

This target applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274 - (00/85), August 24, 2000), but also to commitments contracted or guaranteed for which value has not been received. Debt will be deemed to be concessional when the currency-specific discount rate (determined by the market-related “commercial interest reference rates (CIRR)” as published by the OECD) applied to the contractual schedule of charges and principal payments indicates a grant element of at least 35 percent. The target excludes the financing of the Merowe hydropower project. The end-December target in the revised program has been increased to reflect a higher-than-programmed oil price.

Including foreign banknotes in the vaults of the central bank.

Table 8.

Sudan: Structural Benchmarks under the 2005 Staff-Monitored Program

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IV. Report on the Discussions

19. The discussions focused on economic policies for 2006 and macro-relevant structural measures to sustain growth and foster poverty reduction, and the 2006 SMP. The main Article IV issues relate to the need to consolidate macroeconomic stability and pursue pending reforms. In this context, particular attention was given to the need to streamline tax exemptions, create the conditions for successful fiscal decentralization, improve efficiency and transparency in public sector operations, and support continued private sector development in light of the recent appreciation of the dinar. The program for 2006 contains measures to maintain inflation in single-digits, keep the fiscal deficit under control, reorient public spending to increase pro-poor outlays and reduce fuel subsidies, and implement key measures to improve fiscal and oil-sector transparency and reform the financial sector.

A. Macroeconomic Policies

20. The economic outlook for 2006, underpinned by higher oil output, is favorable. The macroeconomic framework envisages GDP growth of 13 percent and average inflation of 7.5 percent. The non-oil sector is expected to grow by 7 percent, but oil production will increase by nearly 70 percent (to 492,000 barrels per day) as two new oil fields come on stream. The new oil (Dar blend) is of lower quality compared to Sudan’s traditional oil (Nile blend). The forecast for 2006 envisages prices of US$55 and US$40 per barrel of Nile blend and Dar blend, respectively.

21. The fiscal stance in 2006 is intended to support macroeconomic stability. The overall fiscal deficit is projected to fall from 1.8 percent in 2005 to 0.9 percent of GDP in 2006 because of higher oil revenues.11 The domestic financing of the deficit is expected to be 0.3 percent of GDP (compared to 1.6 percent in 2005) and is consistent with a financial program that targets 7.5 percent inflation and a further accumulation of international reserves.12

Sudan: Selected Fiscal Indicators, 2004–06

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Sources: Sudanese authorities; and IMF staff estimates and projections.

22. The authorities intend to reinvigorate the non-oil revenue effort of recent years and to continue saving resources in the oil savings account. Oil revenues will rise because of higher oil output, while non-oil revenues are expected to increase because of improvements in administration (including tax collection in the South) and a rationalization of tax exemptions (see Section B below). The oil savings account is expected to accumulate the equivalent of 1.4 percentage points of GDP in 2006.

23. Given the need to preserve macroeconomic stability, the authorities’ fiscal framework for 2006 envisages a reorientation of expenditures away from lower priority areas. The fiscal framework envisages a moderate growth in outlays on wages and on goods and services and a smaller fuel subsidy.13 The authorities recognize that the fuel subsidy does not benefit the poor and, despite opposition from vested interest groups, intend to begin dealing with the problem in 2006. They consider that a large increase in fuel prices could be counterproductive, but will be informing the public about the costs of the subsidy and developing a strategy for the automatic pass-through of changes in world prices in the future.14

24. The authorities’ plan to devolve resources to the states and foster national unity through infrastructure investments entails a sizable increase in public spending. Central government transfers to the South and to northern states are expected to grow significantly in 2006. The bulk of the latter (meant for state-level spending on health, education, and water) and some national capital expenditures are deemed pro-poor.15 The authorities recognize that capacity constraints will condition the effectiveness of such spending, but see their strategy as the only option to reduce poverty in disadvantaged areas and prevent the disintegration of the country.

25. Successful decentralization will require good budget preparation procedures, sound budgetary and financial management, transparency, and effective monitoring. Careful coordination of expenditure and borrowing plans between the Government of Southern Sudan, the northern states, and the central government will be critical in safeguarding macroeconomic stability. The newly created Fiscal and Financial Allocation and Monitoring Commission (FFAMC) established under the CPA will need to lead and coordinate work in these areas.

26. The authorities plan to focus on attaining reserve money targets in an environment of exchange rate flexibility. Reserve and broad money growth are targeted at 25 percent and 28 percent, respectively, consistent with the GDP growth and inflation objectives and with an increase in money demand driven by financial deepening and the reintegration of the South. The conduct of monetary policy will require the flexible use of instruments (e.g. domestic open market operations and foreign exchange market operations) to deal with a number of uncertainties such as the fiscal behavior of subnational governments, money demand in the South, and foreign exchange inflows. While the authorities expressed concern about exchange rate appreciation pressures and external competitiveness, they agreed with the staff that maintaining flexibility in the exchange rate combined with improvements in the business environment through structural reforms is the most appropriate policy response. In this regard, they intend to carry out a World Bank-sponsored investment climate assessment later this year.

B. Structural Reforms

27. The authorities agreed on the need to reinvigorate the reform momentum by proceeding with the implementation of pending reforms. The discussions covered selected reforms in the following areas: tax policy and administration, expenditure management, oil sector transparency, and financial system restructuring.

28. Tax policy and administration. Following efforts over the last few years to streamline exemptions and improve administration, the authorities recognize the need to reinvigorate reforms in these areas (Box 2). As part of the program, they intend to stop the renewal of expired business-profits tax and customs-duty exemptions, introduce self-assessment for large and medium-sized taxpayers, and set up three federal tax offices in major cities in the South. The authorities also intend to prepare a program to revamp the system of investment incentives in line with best international practices.

Tax Reforms—Progress and Future Agenda

Sudan has carried out important tax policy and administration reforms in recent years. The main policy reforms were the introduction of a value-added tax, the phasing out of privileges for major oil distribution companies, and the removal of income tax exemptions. Key administration reforms involved setting up large and medium taxpayer units, enforcing departmental fee collection, and implementing the Automated System for Customs Data. Because of these reforms, non-oil tax revenues as a share of non-oil GDP rose from 7 percent in 2002 to 9.9 percent in 2005.

Notwithstanding these achievements, further reforms are needed:

  • The Investment Encouragement Act should be modified by removing tax holidays and customs duty exemptions while grandfathering existing beneficiaries. To improve the cost-effectiveness of investment promotion, a system of accelerated depreciation should be implemented.

  • A low (20 percent or less) uniform business profit tax (currently, there are different rates depending on the type of economic activity) needs to be adopted.

  • VAT exemptions, especially on capital goods and selected consumer goods need to be scaled back.

  • Improve audit and collection enforcement by the large taxpayers unit and implement self-assessments by taxpayers and risk-based methods in tax and customs administration.

29. Expenditure management. The authorities recognize that the success of the rapid move to a decentralized system of public finances depends on appropriate regulations, implementation capacity, transparent reporting, and effective monitoring mechanisms. At present, however, capacity in the South and other states is weaker than at the central government, highlighting the need for urgent investments in administration and training. A key initial step is to ensure the efficient operations of the new Fiscal and Financial Allocation and Monitoring Commission (FFAMC). At the same time, close cooperation between the federal government, the Government of Southern Sudan, and other state governments will be essential to coordinate development planning and implementation and attain good macroeconomic outcomes (Box 3). Regarding fiscal reporting, the authorities intend to pursue an ambitious timetable for compiling budget execution reports according to the GFSM 2001 format (covering operations of the central government and the government of Southern Sudan). Lastly, the government is conducting its first public expenditure review in consultation with the World Bank (Fund staff will assist on revenue management).

Macroeconomic Challenges of Implementing the CPA

The CPA contains numerous peace-related provisions (including the modalities of power and wealth sharing with the South) and strengthens the federal system of government in Sudan. On the monetary front, the CPA envisages a new national currency and a single monetary policy conducted from Khartoum. On fiscal matters, the CPA confers autonomy to the South by transferring a share of national oil revenues and allowing the South to levy state taxes and retain one-half of the federal taxes collected in the region. The Government of Southern Sudan and other states can also borrow at home or abroad.

The challenges of implementation and the implications for macroeconomic outcomes are manifold:

  • Monetary policy. The central bank plans to introduce conventional instruments of monetary policy in the South because of the dual nature of the new banking system stipulated in the CPA (Islamic banking in the north and conventional banking in the South). The central bank will also need to strengthen its regulatory and supervisory capacity to cover banks in the South.

  • Single currency. Introducing a new currency is essential to provide for a single means of payments in the South, develop its economy, and integrate the South with the rest of the country.

  • Tax collection. The Government of Southern Sudan lacks capacity and infrastructure to collect taxes in its territory. Customs posts and tax offices will gradually begin to operate this year.

  • Coordination of spending. Coordinating the composition of expenditures will be essential to ensure the harmonization between national projects and those in the South and allow the central government to formulate a countrywide public expenditure program. Coordinating the timing of expenditures is also crucial to ensure a smooth conduct of monetary policy.

  • Transparency and monitoring. The FFAMC will be critical to ensure transparency and monitor the allocation of nationally collected funds to the Government of Southern Sudan and northern states.

  • Coordination on budget preparation and execution. Coordination on budget preparation and execution (including coordination of borrowing plans) will be necessary to safeguard fiscal sustainability and macroeconomic stability.

30. Oil sector transparency. The authorities’ near-term reforms in this area include the monthly publication of detailed oil sector data, the completion and publishing of the audit of Sudapet (a state-owned oil company with equity stakes in a number of fields), and the regularization of the hitherto ad hoc transfers of profits from the state-owned oil companies to the treasury (MEFP, ¶21). The authorities are also expected to clarify the operational role of the National Petroleum Commission, a high-level body created under the CPA to manage oil sector policy.

31. Financial system restructuring. Cognizant of the importance of implementing CPA-related financial sector reforms, the authorities intend to proceed with the restructuring of the central bank and the introduction of the new currency. MFD has been providing intensive technical assistance in these areas. The most critical reform is the introduction of the new currency, and the authorities are aware of the risks involved, i.e., inappropriate planning for distribution and lack of safeguards to prevent fraud at the time of implementing the currency exchange. Following on the Financial System Stability Assessment (FSSA) prepared in March 2005, the authorities are also proceeding with a strategy to restructure commercial banks based on increasing minimum capital requirements and capital adequacy ratios and ensuring banks’ compliance with prudential norms.

C. External Debt and Relations with Creditors

32. Sudan’s debt overhang continues to condition development prospects. At end-2005, the stock of public and publicly guaranteed external debt was US$27.7 billion, of which US$24.4 billion was in arrears.16 In present value terms, the estimated stock of debt is US$26 billion, or about 690 percent of the three-year average of exports of goods and services. The authorities are worried that, after seven years of successful implementation of consecutive SMPs, Sudan’s pressing needs to finance programs for achieving the Millennium Development Goals cannot be met because of lack of access to concessional resources related to Sudan’s debt problems.

33. To strengthen Sudan’s record of cooperation with the Fund, the authorities committed to increase the level of payments to the Fund to US$45 million in 2006. In recent years, Sudan’s payments to the Fund have exceeded obligations falling due, leading to a small decline in arrears. In 2005, Sudan paid US$30 million to the Fund as envisaged under the SMP. The staff emphasized the importance of increasing payments to the Fund in light of the deterioration of a number of indicators showing payments as a share of debt service capacity (Table 9). The authorities have taken this decision notwithstanding the need to deliver a peace dividend and a reduction in the fiscal space because of the requirements of the CPA.17

Table 9.

Sudan: Indicators of Debt Service Capacity, 2002–06

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Source: Fund staff estimates.

Exports of goods and services adjusted for oil related payments for services and transfers to foreign investors.

As percent of Eigth Review Quota.

Domestic fiscal revenue, net of transfers to states.

34. Sudan has been making debt service payments to almost all multilateral creditors and selected bilateral creditors that have provided new financing in recent years. In 2005, multilateral creditors excluding the IMF, World Bank, and the African Development Bank made a net resource transfer of US$74 million, while Arab bilateral creditors made a net transfer of US$68 million. In the same year, Sudan paid other bilateral creditors (China, India, and Malaysia) a net amount of US$84 million. These creditors have financed a number of water and electricity projects in recent years (IMF Country Report No.05/180).

35. The staff urged the authorities to minimize nonconcessional borrowing, noting the potential complications with a potential debt relief operation and the higher cost of debt relief for existing creditors. The authorities emphasized that their strategy to foster national unity called for undertaking substantial investment projects and that, in light of the limited fiscal space after the peace agreement and lack of access to concessional financing, they had to finance these projects from other sources. They also noted that these loans should be viewed as exceptional and that they are project-specific facilities to be disbursed over a number of years, not direct budget support. Lastly, the authorities expressed concern that it may take a long time until sanctions are removed and Sudan can regularize its debt situation. The authorities’ initial borrowing plans for 2006 amounted to US$1.1 billion. The staff pressed the authorities to prioritize their projects and minimize this type of borrowing. The authorities later indicated that they could limit this type of borrowing to about US$700 million. Almost two-thirds of the borrowing would be for projects related to the reconstruction of a North-South railway and the construction of roads to the South and to Darfur.18 The authorities acknowledged the concern of Sudan’s creditors about this borrowing, and committed to limit contracting these facilities as much as possible, especially if concessional financing becomes available.

D. Data Issues and Technical Assistance

36. Sudan’s economic data is sufficient for surveillance and program monitoring, but inadequacies remain. The quality of Sudan’s economic data has improved in recent years, especially through the participation in the Fund’s General Data Dissemination System. Monetary and financial sector statistics are comprehensive and timely, and detailed data on oil sector shipments, revenues, and payments are available regularly. However, fiscal expenditure data are not compatible with GFS methodology, national accounts are virtually nonexistent, details on oil production from new blocks are not available, and statistics on capital goods imports and foreign direct investment are weak.

37. In the near term, Sudan’s technical assistance priorities comprise the adoption of GFSM 2001 methodology (budget classification, accounting, auditing, and reporting); tax administration; fiscal decentralization and public financial management; issuance of the new currency; banking supervision and liquidity management; and fiscal and real sector statistics. The Fund is coordinating a technical assistance program on financial sector reforms and is expected to continue providing assistance on some of the fiscal areas mentioned above. In addition, with occasional support from Fund staff, the World Bank will continue providing technical assistance to the Government of Southern Sudan on several areas including public financial management.

E. The 2006 Staff-Monitored Program

38. The program for 2006 aims at maintaining macroeconomic stability, ensuring the implementation of macro-relevant commitments under the CPA, and increasing fiscal and oil sector transparency. The macroeconomic objectives and the policy commitments are described in the MEFP and were mentioned in sections A-C above. The program contains measures to keep inflation at no more than 7.5 percent, increase budget allocations on social and infrastructure projects, and lower the fuel subsidy. Other commitments include establishing rules and procedures for the FFAMC, beginning fiscal reporting according to GFS, publishing detailed oil sector data and oil-related transfers to the South, and introducing the new national currency.

V. Risks to The Outlook

39. Sudan’s economic prospects are good, but significant risks exist. The main risk is a weakening of political resolve to maintain macroeconomic stability, advance critical reforms, and foster Sudan’s integration with the world economy. This could set off a negative cycle of bad policies and worsening prospects for a united and peaceful Sudan. At the same time, the authorities’ hope that Sudan’s good performance under successive SMPs over the past seven years would pave the way for a resolution of Sudan’s debt problems has not yet materialized. While the authorities want to foster Sudan’s integration with the world economy and are aware of the negative impact of developments in Darfur on the views of key creditor countries, they are also concerned that the persistence of the external arrears problems and the lack of concessional financing may make it more difficult to continue implementing the reform agenda.

40. The lack of resolve could manifest itself in delayed action to lower fuel subsidies and implement fiscal and oil-sector transparency reforms as well as an inability to adhere to the fiscal spending ceilings. There are also potential pitfalls in trying to mount a modern administration in the South and in other states, prevent wasteful spending of transfers to subnational governments, and carry out a successful monetary policy amidst unpredictable spending patterns of subnational governments.

VI. Staff Appraisal

41. Despite a difficult year marked by the beginning of the implementation of the CPA and a deterioration of the security situation in Darfur, the authorities managed to strike a balance between the pressures for a peace dividend and policies that maintained macroeconomic stability. Economic growth in the non-oil sector was robust, foreign direct investment reached new heights, and inflation was contained within single-digit levels. While there were some slippages on budget execution (mainly because of the fuel subsidy) and a higher-than-projected level of nonconcessional borrowing, most of the quantitative and structural targets under the program were met. As a result, performance under the 2005 SMP was broadly satisfactory. Since some policy actions were delayed last year, the authorities will need to press ahead with those policies and other critical reforms to achieve their objectives.

42. The program for 2006 aims at sustaining Sudan’s recent record of high growth, preserving macroeconomic stability, and meeting the country’s development and poverty reduction needs. The program contains a prudent fiscal framework with realistic revenue and expenditure assumptions, as well as a reorientation of public spending toward social and infrastructure investments. The staff is particularly encouraged by the authorities’ commitment to improve fiscal and oil sector transparency. However, the continued reliance on nonconcessional borrowing is a serious concern.

43. Despite an increase in oil revenues in 2005–06, the fiscal space of the central government has been constrained because of the sizable increase in transfers required by the peace agreement and decentralization. The increase in transfers, coupled with higher capital expenditures, will lead to a substantial increase in pro-poor development spending. At the same time, the authorities will need to focus on improving expenditure management and monitor closely the effectiveness of the additional spending. In this context, the intended reorientation of public spending is welcome, including the much-needed steps to reduce fuel subsidies. Regarding the latter, the staff urges the authorities to bring domestic fuel prices in line with export prices and develop an automatic mechanism for future price adjustments.

44. The staff urges the authorities to press ahead with the fiscal reform priorities. These include rationalizing investment incentives to protect the non-oil tax revenues; building capacity, transparency, and accountability at all levels of government to support decentralization; and improving fiscal transparency through the adoption of GFS methodology. The authorities also need to redouble their efforts to ensure close coordination between the Government of Southern Sudan, the northern states, and the central government.

45. Monetary policy should continue to focus on attaining the authorities’ inflation objectives in an environment of exchange rate flexibility. Fiscal prudence and a proactive monetary policy with close management of reserve money will help to ensure that inflation remains subdued. The authorities will also need to ensure flexibility in the pricing of foreign exchange to prevent the excessive monetization of external inflows and thus accommodate a prospective real exchange rate appreciation without rekindling inflationary pressures. In this regard, the current managed floating exchange rate regime remains appropriate. At the same time, structural reforms to remove structural rigidities and lower transactions costs will be the best way to safeguard external competitiveness and improve profitability in non-oil exports and import-competing sectors.

46. The authorities should be commended for the implementation of a number of financial system provisions of the CPA. In 2006, the central bank will need to proceed with its internal restructuring, provide the basis for the effective functioning of a dual banking system, and introduce the new currency. The staff urges the authorities to embark on a well-planned, expeditious, and transparent process to introduce the new currency given the importance of the latter in fostering development in the South and the country’s economic integration.

47. Sudan’s external debt problems continue to constrain access to external development financing. Sudan’s record of cooperation on economic policies and payments to the Fund in recent years augur well for the clearance of Sudan’s arrears at the appropriate time. In the meantime, the authorities’ should strive to minimize contracting nonconcessional debt as such borrowing threatens debt sustainability and could delay the process of securing creditors’ participation in a potential debt-relief operation. In this regard, the staff underscores that it will be critical for creditors and Sudan to treat all such new borrowing under the Highly Indebted Poor Countries’ Initiative. This will ensure that any eventual relief provided under the Initiative is sufficient to restore debt sustainability.

48. Looking ahead, the authorities should focus on the implementation of the CPA, sustained efforts to achieve peace throughout the country, capacity building, and the effective use of Sudan’s oil wealth. In the near term, the main risk is a weakening of the reform effort. In this regard, the authorities should also strive to preserve macroeconomic stability and proceed with the reforms envisaged in the 2006 program. These include conducting a prudent monetary policy in a flexible exchange rate environment, adhering to the fiscal spending targets, monitoring the effectiveness of public spending, lowering fuel subsidies, and proceeding with the envisaged fiscal and oil-sector reforms.

49. While the proposed level of nonconcessional borrowing implies that in this area the program is no longer equivalent to an upper-credit tranche arrangement, the SMP is a valuable tool to support the reform momentum at a critical juncture in the country’s history when the CPA needs to be implemented amidst a complex political environment. The program contains important actions to preserve economic stability and increase fiscal and oil-sector transparency as well as higher payments to the Fund. It also provides a framework within which donors can support the peace process and afflicted areas. Except for the high level of nonconcessional borrowing, the staff considers that the 2006 SMP continues to be equivalent in strength to a Rights Accumulation Program.

50. Sudan’s economic data remains generally adequate for surveillance and program monitoring. It is proposed that the next Article IV consultation with Sudan be held according to the standard 12-month cycle.

Table 10.

Sudan: External Financing Requirements and Sources, 2002–06

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Source: Fund staff.

Excludes interest payments and official transfers and includes oil sector profit remittances.

Excluding the IMF.

Includes all other net financial flows.

Table 11.

Sudan: Millennium Development Goals, 1990–2003

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Source: World Bank, World Development Indicators.

APPENDIX I Relations With The Fund

(As of February 28, 2006)

I. Membership Status: Joined 09/05/57; Article VIII.

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Financial Arrangements:

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VI. Projected Obligations to the Fund: (SDR million; based on existing use of resources and present holdings of SDRs):

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VII. Exchange Rate Arrangements

The legal tender is the Sudanese dinar, which replaced the Sudanese pound in proportion SDD 1=LSd 10 in 1999. Since October 1998, the exchange rate system has been unified—market participants trade freely within a unified regulatory framework. In 2001, the foreign exchange market came under pressure and the Central Bank of Sudan (CBOS) introduced a formal band of ±1.5 percent (later broadened to 2 percent) around the official rate and began auctioning its foreign exchange within the band. In May 2003, the CBOS adopted a managed-floating exchange rate regime. The formal exchange rate band was abandoned and the auction system was replaced with direct transactions in the interbank market. The CBOS established an internal limit of ±2 percent in intraday trading in the average daily market rate. In 2004, the CBOS changed the permissible intraday exchange rate fluctuation from ±2 percentage points to ±3 percentage points. Sudan maintains one inoperative bilateral payment agreement with Egypt and an inoperative payment clearing account with the former Soviet Union. Sudan maintains an exchange system that is free of restrictions on the making payments and transfers for current international transactions.20

VIII. Article IV Consultation

Sudan is on a 12-month consultation cycle. The last Article IV consultation discussion was completed by the Executive Board on April 29, 2005 (IMF Country Report No.05/180).

IX. FSAP Participation

The FSAP work took place during October 9-14, 2004 and was completed during December 1– 14, 2004. The Financial System Stability Assessment report was discussed by the Executive Board on April 29, 2005.

X. Resident Representative

The Fund’s resident representative office in Khartoum was reopened in October 2005, as a shared post with Djibouti.

XI. Technical Assistance

In January 1995, the Executive Board decided to resume Fund technical assistance to Sudan. The following table contains a summary of the technical assistance provided since 2002.

Sudan: Technical Assistance from the Fund, 2002–2006

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APPENDIX II Sudan: Relations with the World Bank 21

(As of March 17, 2006)

The World Bank has no active lending portfolio in Sudan because of Sudan’s default on its financial obligations to the Bank, which led to the suspension of disbursements in April 1993. After discussions between the Bank and the Sudanese authorities on the need for Sudan to take steps toward normalizing its relations and establishing a track record with the Bank, the authorities started making “good faith” payments of US$1 million per month to the Bank since July 1999 and US$500,000 per month since October 2002. The amount of payments has not been sufficient to prevent a continued accumulation of arrears, which stood at about US$372 million as of March 16, 2006 (from US$145 million at the end of 1999). Sudan’s outstanding Bank debt, including arrears, is approximately US$1.3 billion.

The Bank was mostly absent from Sudan between 1992 and 2002. In the 1970s and 1980s, the Bank was a major player in the reconstruction of Sudan, following the Addis Ababa peace agreement of 1972. As the prospects for peace with the South rose in 2003, the Bank formulated a strategy for reengaging with Sudan in the event of peace. This strategy, described in the Sudan Country Reengagement Note (CRN), was discussed by the Executive Board of Directors on July 10, 2003. Main areas of emphasis in the CRN are knowledge generation and sharing, capacity building to support policy reform, demonstration projects to improve delivery of social services, and resolution of the debt overhang. In addition to capacity building, the Bank, together with the Fund, provided technical resource persons for the discussions around wealth sharing in the peace talks. The Bank is also providing technical support to the Darfur peace talks in Abuja, Nigeria.

Between January 2004 and March 2005, the Bank co-led (with the UN) a Joint Assessment Mission (JAM), covering eight thematic sectors.22 IMF staff participated in a number of workshops and contributed to the economic policy cluster. The JAM synthesis report: “Framework for Transition, Reconstruction and Poverty Eradication,” was completed in March 2005. The Report outlines the reconstruction and development needs for Sudan over the six year Interim Period as well as a Monitoring Framework that reflects policy reforms and commitments made by the government which are needed to implement the Comprehensive Peace Agreement (CPA). The Report, presented at an April 2005 Donors’ Conference in Oslo, raised US$2.0 billion in pledges for 2005–2007.

To report on progress on policy commitments and to renew financial pledges, it was agreed that a twice-yearly Sudan Consortium meeting would be held. The first meeting of the Consortium took place in Paris on March 9 and 10, 2006. During the Consortium, the government reported on progress and an assessment made by the Bank, IMF and UN laid out the joint views of staff with respect to the credibility and implementation of the policies and programs, key constraints, and proposed next steps. Particular attention was paid to the need for improved public expenditure and revenue management at all levels of government as well as good governance. The broad conclusion was that progress is being made in implementation of the CPA, although there have been delays (i.e. need for effective functioning of the National Petroleum Commission and other institutions). The centrality of poverty eradication and the MDGs was reaffirmed; however, the government must follow through with the implementation of commitments on pro-poor development. Donors also reconfirmed the levels of financial pledges made at the 2005 Oslo Donors’ Meeting.

The Comprehensive Peace Agreement agreed between the government of Sudan and the Sudan People’s Liberation Movement (SPLM) specified that two Multi-Donor Trust Funds (MDTFs) be established to facilitate the coordination of external donor financing of Sudan’s reconstruction and development needs as laid out in the JAM. One fund would be for the new National Government (NG) for war-affected areas in the north and the transition zones, and one for the government of Southern Sudan (GoSS). The MDTFs would remain operational through the six years of the Interim Period. MDTF-financed activities would be within the context of a unified budget and a coherent public expenditure process. Approximately US$500 million was pledged in Oslo toward to two Trust Funds, nearly all of which has been formally committed over 2005-2007. The World Bank is the Administrator for both MDTFs. The MDTFs are now effective and the first projects have been approved.

As part of the JAM, a workshop with the government and the SPLM initiated work on a joint strategy for poverty eradication (PRSP). IMF staff also participated. During this workshop, the parties reached an agreement on a shared vision for poverty eradication, with an articulation of strategic objectives and associated operational implications. A joint concept note was developed that provides the foundation for a national Poverty Eradication Strategy. Based on this work, the interim PRSP is expected to be finalized in 2006.

To support capacity building and policy reform, a US$4.5 million Low-Income Countries under Stress (LICUS) trust-fund grant for Sudan was approved in December 2004. The grant focuses on capacity building and institutional development of fiduciary and aid-management systems both in the North and in the South. The trust fund complements two ongoing Post Conflict Fund grants from the World Bank totaling US$3.0 million.

The World Bank is also preparing a Public Expenditure Review (PER), with selected broad activities, which are distinct for the NG and the GoSS. The proposed approach is pragmatic in that a series of distinct activities are being designed to build joint understanding and ownership and to begin to address capacity-building needs through end-2007. IMF staff will participate in this work in the areas of their competence. Lastly, World Bank staff is working at a technical level with the IMF and other multilateral creditors to explore options for clearance of arrears and debt relief.

APPENDIX III Sudan: Statistical Issues

Available economic data are generally adequate for surveillance and program monitoring. However, there are many areas where further improvements are needed, particularly in compiling national accounts, state budgetary data, and external trade and financial statistics. This appendix discusses outstanding statistical issues by sector.

As a participant in the Department for International Development (DFID) project for Anglophone African countries, Sudan has been receiving technical assistance in various statistical issues. DFID financed three Statistics Department (STA) missions in June– July 2003 (monetary and financial statistics, balance of payments statistics, and the General Data Dissemination System (GDDS) metadata completion), contributing to Sudan’s participation in the GDDS starting in August 2003.

In early 2004, Sudan also received assistance for the initial stages of preparation of a strategic plan for the Central Bureau of Statistics (CBS). In May 2005, an STA/METAC mission assessed the technical assistance needs in macroeconomic statistics and identified emerging statistical priorities in the statistics-producing agencies. In December 2005, a follow-up mission on monetary and financial statistics visited Khartoum to assist the authorities in further implementing the action plan developed by the mission in 2003.

I. Real Sector

In recent years, practices in the production of the monthly Consumer Price Index (CPI) have been commendable. Monthly CPI data for the Khartoum area are provided shortly after the end of each month, while the CPI for other states is provided with a three-month lag.

The compilation of the national accounts is subject to delay. The national accounts statistics suffer from a lack of basic information for many sectors, including oil, livestock, horticulture, and most services. On the expenditure side, data are lacking on final consumption by households, investment, and changes in stocks. There are no national accounts or industrial production data at sub annual frequencies. Furthermore, the annual data are being reported with a lag of over three years. There is an urgent need to increase funding to the CBS and rebuild its capacity. Priorities include introducing the 1993 System of National Accounts, conducting a census of agricultural production, carrying out a household survey, producing poverty statistics, and improving coordination between the CBS, the Ministry of Finance and National Economy (MOFNE), the Ministry of Energy and Mining, and the Ministry of Agriculture and Livestock. A peripatetic real sector expert provided technical assistance on national accounts through end-2003.

II. Fiscal Sector

Government Finance Statistics are broadly adequate for program monitoring, with the main revenue, expenditure, and financing items reported on a monthly basis with a lag of about one month. Financing items are consistent with the monetary accounts. The reported statistics are for the central government only, and do not include the states and publicly owned corporations. Data are submitted using an outdated economic classification and, while the allocation of resources by MOFNE to the various ministries is reported, their actual expenditures are not. There is an urgent need to improve accounting and reporting procedures, introduce GFS classifications according to guidelines provided in the Government Finance Statistics Manual (GFSM) 2001, and implement technical assistance recommendations on GFS. Monthly and quarterly fiscal data are not reported for the Government Finance Statistics Yearbook or for the International Financial Statistics (IFS). The October 2005 mission assisted the authorities in developing a budget classification and budget execution reports in line with the GFSM 2001 methodology.

III. Monetary Sector

Sudan has received significant technical assistance to improve the collection, compilation, and dissemination of monetary and financial statistics. The most recent STA mission took place in December 2005, and assisted in implementing the ongoing action plan. Progress has been made in several areas including finalizing the new report form and its accompanying guidelines, which were scheduled for pilot testing during the first quarter of 2006. The weekly flash report on the activities of the Central Bank of Sudan (CBOS) is consistent with relevant components in the depository corporations’ survey as recommended in the Monetary and Financial Statistics Manual.

In general, the monetary statistics compiled by the CBOS are acceptable for monitoring purposes. However, the central bank should complete the harmonization of its accounting codes and network connections as this would improve data collection and compilation. In addition, the central bank should work with the Ministry of Finance to review and reconcile government accounts held with the banking system to ensure their appropriate classification in the monetary survey. There is also a need to develop a framework for future collection and incorporation of South Sudan’s banking activities into the monetary statistics. Another follow-up mission on monetary and financial statistics to Sudan will be considered after the authorities have completed the priority actions recommended by the December 2005 mission.

IV. External Sector

Daily exchange rate data are reported to the Fund with minimal lags, but there are several areas for improvement in the external accounts, particularly with regard to foreign direct investment, trade, and oil statistics. The authorities need to provide clarification on items that qualify as international reserves in general, and those earmarked reserves in particular, and should begin compiling the data template on international reserves and foreign currency liquidity.

Regarding import statistics, there are significant discrepancies between the reports from customs and from the central bank. The July 2003 STA mission identified some possible causes and, in collaboration with the authorities, attempted to reconcile the data. The mission reported some progress on implementing previous STA recommendations. However, the lack of survey data continues to affect the compilation of important balance of payments items such as foreign direct investment.

Medium-term oil production projections and data on amortization of private sector debt need substantial improvement. The authorities have made some progress in improving oil projections, but need to provide more detailed information on the phasing-in and expected production levels of new blocks and on amortization of debt in the oil sector.

Sudan: Data Quality

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Sudan: Table of Common Indicators Required for Surveillance

As of March 17, 2006

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, and rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D); Weekly (W); Monthly (M); Monthly/Weekly (M/W); Bi-monthly (B); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA)

ATTACHMENT I

March 9, 2006

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. de Rato,

Slightly more than a year ago a historical peace agreement was signed that ended more than twenty years of civil war between the north and the South of Sudan. Implementation of the Comprehensive Peace Agreement is now underway and we have formed a new government of national unity. This government has now turned its efforts to peacefully resolving the Darfur crisis. To this effect, we have been an active and good faith party in the peace talks currently held in Abuja.

Meanwhile we have sought to implement economic policies that aim at maintaining economic stability, fostering growth, and reducing poverty. We believe these will be important factors in promoting peace and reconciliation throughout the country. We appreciate in that respect the close and long-standing policy dialog with the Fund. Discussions with Fund staff on the 2006 Article IV consultation, and on a new Staff Monitored Program for 2006 were conducted in Khartoum in February 2006.

The attached Memorandum of Economic and Financial Policies (MEFP) sets forth our policy intentions under the 2006 SMP. We are committed to maintain macroeconomic stability and advance the reform agenda. The government believes that these policies are adequate to achieve the objectives of the program and will consult with the Fund on any revision of the policies contained in the MEFP. Notwithstanding the enormous financing needs for national reconstruction and peace that we face, and to strengthen our cooperation, we propose to increase our payments to the Fund from $30 million in 2005 to $45 million in 2006.

We are committed to a process of economic integration both within Sudan and with the international community, but our success depend also on the support we get from multilateral institutions and development partners. In this regard, we look forward to the Fund’s Executive Board’s discussion of the SMP and to the resolution of Sudan’s debt and arrears problems in the near future. In the meantime, we will intensify our efforts to obtain financing assurances from creditors for arrears clearance and debt relief under the Heavily Indebted Poor Countries and the Multilateral Debt Relief Initiatives.

Sincerely yours,

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GOVERNMENT OF SUDAN Memorandum of Economic and Financial Policies

March 9, 2006

1. This memorandum sets out the economic policies and objectives of the government of National Unity for 2006. These policies will be pursued in the context of an IMF staff-monitored program (SMP) for 2006.

I. Recent Developments

2. Despite the tremendous challenges we faced in the first year of implementation of the Comprehensive Peace Agreement (CPA), we have tried to maintain the thrust of our economic policies, achieved high economic growth, and contained inflationary pressures. In 2005, GDP growth is estimated at 8 percent while average inflation was contained at 8.5 percent. High oil prices supported the balance of payments and allowed for a further accumulation of international reserves. Economic stability, robust growth, and a stronger balance of payments led to an 8 percent appreciation of the Sudanese dinar against the U.S. dollar.

3. Fiscal performance was weaker than programmed, owing primarily to the expanding fuel subsidy.1 Although higher than in 2004, oil revenues were also lower than programmed because of a delay in commencing oil production in Blocks 3 and 7. In addition, non-oil revenues were below projection because of an increase in the volume of imports exempted from VAT (capital goods and NGO-related imports). The lower-than-programmed revenues and higher expenditures led to a withdrawal of deposits from the oil savings account and higher-than-programmed non-bank financing (mostly government securities). Following the stipulations of the CPA, we initiated transfers to the government of South Sudan.

4. Broad money during the year grew by 45 percent, while reserve money growth increased by 35 percent. Both variables exceeded the programmed amounts because of high foreign exchange inflows and an expansionary fiscal stance. Private sector credit also increased rapidly during the year (62 percent).

5. We undertook a number of structural reforms in the fiscal arena. To enhance non-oil revenues, a medium taxpayer unit was set up early in the year. A three-year tariff reform program was prepared and the first phase of the reform was initiated in the 2006 budget. In customs administration, we adopted the ASYCUDA++ and plan to implement risk based verification system later this year. We continued our efforts to strengthen cash management by the preparation of a cash plan on a regular basis and improving coordination between the ministry of finance and the central bank through regular high-level meetings. Notwithstanding our efforts, we acknowledge that further improvements in cash management are warranted.

6.Banking system soundness indicators improved in 2005. While credit expanded rapidly during the year, the ratio of nonperforming loans to total loans decreased from 8.9 percent in December 2004 to 6.9 percent at end-2005. The asset quality of banks also improved. As of December 2005, a total of 18 banks (out of 24 banks) complied with capital adequacy requirements. As for the concentration of credit, almost 40 percent of the increase in credit to the private sector was granted by a single bank. We have put this bank under close supervision to monitor its lending activities.

7. Regarding monetary operations, we began auctioning Government Musharaka Certificates (GMCs) and Government Investment Certificates (GIC) through competitive tenders without predetermined prices, phased out the existed financing window for banks, and implemented the new financing window by using collateral-based certificates. We also launched the Central Bank Ijara Certificates (CIC) in the fourth quarter of 2005 to help manage short-term liquidity. During 2005, we privatized the Khartoum Bank and granted four new licenses for commercial banks: Al-Salam Bank, the Egyptian Sudanese Bank, Capital Bank, and the Emirate Sudanese Bank. The restructuring of the central bank to function within a new federal banking system has already begun with the Central Bank of Sudan (CBOS) changing its legal structure and the approval of new laws for the central bank and for commercial banks. Lastly, the CBOS has established its branch in Juba as envisaged in the CPA.

8. Despite a number of difficulties related to the first year of implementation of the peace agreement with the South, we made every effort to meet the targets under the Staff-Monitored Program and met three of the five quantitative targets for end-December and all but one of the structural benchmarks. The quantitative target on the financing of the fiscal deficit was missed by a small margin, while the target on nonconcessional borrowing was missed as new loans for US$122 million were contacted in the second half of the year. These loans were needed to finance critical water and social projects and were contracted as we had limited access to concessional financing and grants. Regarding the conversion of the 2006 budget into GFSM 2001 format (end-December structural benchmark), we have not been able to proceed as fast as planned because of complexities in the preparation of the 2006 budget, which in turn are related to the implementation of the new revenue sharing arrangements under the CPA. However, given the importance of this reform, we will implement this measure by May 2006.

II. Medium-Term Outlook and Challenges

9. The CPA provides a good framework for building a prosperous and peaceful Sudan. Despite initial unavoidable delays, we are fully committed to implement the agreement, tackling regional inequalities, and reducing poverty. In this regard, we launched a strategy to meet the Millennium Development Goals and intend to finalize our interim Poverty Eradication Strategy by the end of this year. We will also continue to reorient public spending toward disadvantaged regions and social and infrastructure projects as well as on capacity building and the revamping of public financial management systems at all levels of government. We are committed to clear arrears and achieve debt sustainability, but we will need comprehensive and deep debt relief beyond traditional mechanisms.

10. Meeting Sudan’s medium term challenges will require economic stability, sustained growth, the spread of peace throughout the country, and regularization of relations with donors and creditors. We are committed to prudent macroeconomic policies and a new wave of structural reforms to strengthen the business environment, foster agricultural development, and improve transparency in the oil sector as well as in the use of public resources. This will require improvements in policy coordination between (and within) national and subnational governments as well as capacity building. Notwithstanding higher oil revenues, fiscal policy will mobilize non-oil revenues to lower the dependence on oil revenues and preserve a prudent fiscal policy. The medium-term outlook envisages economic growth of 8–10 percent per year, a continued decline in inflation to 5 percent or less by 2008, and reductions in poverty levels.

III. Outlook and Policies for 2006

11. The 2006 program of the national government assumes economic growth of 13 percent, bolstered by a large increase in oil production and continued high growth in the non-oil sector. The average inflation objective is 7.5 percent, compared to 8.5 percent in 2005.

12. Fiscal policy. The fiscal deficit (including grants) will be contained at no more than 0.9 percent of GDP as both revenue and expenditure increase rapidly. On the revenue side, oil revenues will increase because of high international oil prices and higher output. For budget purposes, the benchmark price of oil has been set at US$45 per barrel for the Nile blend crude and US$40 for the new DAR blend crude. Non-oil revenues will benefit from improvements in administration, including improvement in collections in the South and other states, and from a rationalization of tax exemptions (see below). On the expenditure side, the recently approved budget figures have been revised because they were based on unfeasible assumptions about the size of the oil subsidy. Compared to the budget figures, we will contain the intended large increase in civil servants’ salaries, expenditures on goods and services, transfers to the northern states, and domestically financed capital expenditures, to ensure that the fiscal framework is compatible with our goal of economic stability. This will be done in a manner that protects proposed spending on programs that directly benefit the poor—namely pro-poor development spending. Further, any shortfall in non-oil revenues will be covered by restrain in lower priority expenditures from Chapter I and Chapter II. We hope that increased development assistance from the international community in 2006 will also help co-finance pro-poor programs. We will inform parliament of these changes vis-à-vis the budget as no supplementary budget will be required.

13. Fuel subsidies. We intend to review the policy on domestic fuel prices this year to reduce the sizeable subsidy. We realize that these subsidies do not benefit the poor, distort the allocation of economic resources, contribute to environmental problems, and compromise other valuable expenditures. Still, we will ensure the public is well informed about this policy action. Later this year, we will also finalize a strategy to eliminate these subsidies and adopt an automatic mechanism that passes through changes in world prices of crude to product prices.

14. Monetary policy. The program will target a broad money growth rate of 28 percent in 2006, consistent with GDP growth and inflation objectives, and an increase in money demand reflecting the reintegration of the South. The monetary target and the projected build-up in foreign reserves will allow for an appropriate growth rate of credit to the nongovernmental sector. The conduct of monetary policy will be challenging given a number of uncertainties, including the fiscal behavior of national and sub-national governments, introduction of the new currency, the size of the private capital movements, and large oil export receipts. Accordingly, we expect to reassess the monetary targets mid-year to ensure that it remains in line with the program’s inflation objective.

15. Monetary operations. We will rely heavily on open market operations for supporting banks’ liquidity needs and government and central bank securities will continue to be issued in competitive auctions. Direct lending to banks will be limited and collateralized by short-term securities, while lending to public enterprises (including for agriculture) will remain at its end-2005 level.

16. Exchange rate flexibility. As exchange rate appreciation pressures are likely to continue, we will ensure exchange rate flexibility to safeguard our inflation objective. The envisaged fiscal expansion for 2006 will exert pressure on monetary aggregates and on inflation, which will need to be appropriately sterilized through open market operations and/or foreign exchange operations.

17. Competitiveness. High external inflows and an expansionary fiscal stance have recently led to an appreciation of the real exchange rate, which in turn appears to have been partly responsible for a decline in non-oil exports in 2005. As these trends are expected to persist, we will intensify our efforts to improve the business environment for the private sector through the removal of structural bottlenecks (especially on transportation) and other institutional reforms as well as efforts to foster rural development. In this regard, we will be conducting an investment climate assessment with the assistance of the World Bank. The assessment will identify key areas of improvement as well as indicators to be tracked over time.

18. Tax policy and administration. To protect our tax base, the Ministry of Investment will not refer to the Council of Ministers any proposal to renew expired business profit tax exemptions granted under the Investment Encouragement Act. By October 2006, we will finalize a program to revamp the system of investment incentives in consultation with Fund staff and in line with best international practice. The program will also address the need to adopt a uniform system of profit tax rates to ensure a level playing field for investors across sectors. Lastly, we will examine the scope for expanding the VAT base by bringing exempted items into the tax net. In the area of tax administration, key measures include the introduction of self-assessment for large and medium-sized taxpayers and setting up three federal tax offices in major cities in the South.

19. Fiscal decentralization. Pro-poor spending (i.e. transfers to states, state-level capital expenditures and some pro-poor national development expenditures) increased in 2005 and is expected to increase further in 2006. In order for such spending to realize the intended benefits, a strengthening of public financial management at all levels of government (including better transparency and accountability) is our key priority. We also plan to make significant progress on the public expenditure review, which will focus on pro-poor spending, decentralization and public financial management, and implement the necessary provisions to ensure coordination in budget preparation, execution, and monitoring between the national government, the GOSS, and other states. To underpin the decentralization reforms envisaged under the CPA and to maximize the benefit from cooperation among the different levels of government, rules and procedures for the Fiscal and Financial Allocation and Monitoring Commission will be established and made operational by end-June 2006.

20. Fiscal reporting and accounting. We are committed to the implementation of GFS methodology at all levels of government. We will begin reporting under the GFS format the 2006 fiscal framework of the national government to parliament (by May) and monthly budget execution (by June). The GOSS is also committed to fiscal transparency and regular reporting and will follow the same schedule as the National Government. Other aspects of GFS implementation will require a larger project to support public financial management at the national, state and local levels, for which we will seek assistance from development partners. We also intend to upgrade our system of recording the outturn of development spending from the current cash basis to an accrual basis. The current system, among other difficulties, has led to inaccuracies in the measurement of development spending and in a pattern of accumulation of arrears that are paid down in the subsequent year. Later this year, we will modify the chart of accounts to ensure that the 2007 budget is prepared in accordance with GFSM 2001.

21. Oil revenue management and transparency. As the oil sector becomes more important in Sudan’s economy, we will ensure that oil proceeds are wisely used for the welfare of the whole population. Our response to the specter of the “oil curse” in the form of wasteful use of oil revenues that have affected a number of countries with dire consequences for development will be transparency in oil sector operations and sound expenditure policies. In the near term, we will publish monthly detailed oil sector data and clarify the role and status of the National Petroleum Commission consistent with the CPA. We will also publish the 2004 and 2005 audited accounts of Sudapet, and ensure regular transfers to the treasury of the net operating income from the Sudan Petroleum Corporation and from Sudapet including that resulting from exports of fuel products. In addition, the prevailing marketing mechanism (open international tenders) for export of Nile blend crude will be extended to the new Dar blend crude after an initial test period of six months. Lastly, we intend to discuss will be discussing with Fund staff the medium-term agenda for subsequent oil sector reforms, including the process for joining the Extractive Industries Transparency Initiative.

22. Financial sector. In 2006, we will implement restructuring plans for the central bank and for commercial banks as well as the financial reform program discussed during the recent FSAP. We are also planning to introduce the new national currency (as envisaged in the CPA) in the second half of this year. We have also initiated a reform program to develop and restructure commercial banks (2006-2008). By end-2006, we will increase minimum capital requirements for commercial banks from SDD3 billion to SDD6 billion (US$25 million) and increase the capital adequacy ratio from 8 to 12 percent. We will also require banks to implement action plans to meet provisioning and capitalization requirements. Lastly, the CBOS will encourage mergers of commercial banks according to specific guidelines. In order to permit screening of any merger/acquisition, we will carry out an evaluation of banks to identify their net worth and share value.

23. Trade and Payments. In the 2006 budget, we initiated the first phase of the three-year tariff reform program by reducing the top tariff rate from 45 percent to 40 percent, which will reduce the average tariff rate to 20 percent. By 2008, we plan to further reduce tariff dispersion and lower the average tariff rate below 15 percent, especially through reductions in the top tariff rate.

24. Technical assistance. For the coming year, we would like to request further technical assistance from the Fund and other development partners in the following key areas:

  • Implementation of Government Finance Statistics Methodology (GFSM 2001) (budget classification, accounting, execution, and auditing)

  • Budget reporting, including accounting of development expenditures

  • Fiscal decentralization and public financial management

  • Issuance of the new currency

  • Banking supervision

  • Liquidity management

  • Microfinance

  • Balance of payments, monetary, and real sector statistics.

IV. Relations with the Fund and other Creditors

25. External debt problems. In 2006, Sudan’s debt service payments capacity will be constrained by the considerable burden of implementing the peace agreement and dealing with widespread poverty and regional inequalities. Any shortfall (or even a delay) in donor assistance or a significant negative shock in oil prices would further limit our capacity to service our obligations. We are making partial debt service payments to almost all multilateral creditors and selected bilateral creditors that have provided new financing in recent years. At the end-2005, stock of public and publicly guaranteed external debt was about US$27.7 billion in nominal terms, of which US$24.4 billion was in arrears. We are still hopeful for an early resolution of Sudan’s debt problems—including debt relief under the HIPC initiative and under the Multilateral Debt Relief Initiative—through concrete action by our key creditors and multilateral institutions. Needless to say, Sudan’s income level calls for substantial debt relief to finance programs for achieving the Millennium Development Goals.

26. External financing. Sudan has continued to suffer from limited access to concessional loans because of the difficulties in resolving our debt and arrears situation. Development needs, however, are vast, and we have had to rely on nonconcessional facilities to finance critical development and social projects. We are fully aware of the concern of other creditors about this borrowing, and we will limit the contracting of such facilities as much as possible. At the same time, we see these levels of borrowing as exceptional and temporary, as they are an integral part of our strategy to unite the country after the signing of the peace agreement with the South. For this year, we will need to begin critical infrastructure and transportation projects that will require new financing equivalent to as much as US$700 million. Two critical large projects involve the reconstruction of a railway linking the North and the South and the construction of roads to the South and to Darfur. We will make every effort to avoid incurring nonconcessional loans and we hope that we can obtain concessional resources from donors and other creditors. At the same time, these projects cannot wait, and this may force us to contract nonconcessional loans for up to that amount. In line with our commitment to increase the transparency of public sector operations, we will continue to share openly with Fund staff our plans and information on loans and we will publish detailed information on all government or government guaranteed facilities (see Table 2 below).

27. Payments to the Fund. In addition to strong cooperation with the Fund on economic policy matters, Sudan made regular payments to the Fund as committed under the 2005 SMP. The Fund’s preferred creditor status will be maintained by ensuring that our payments continue to exceed obligations falling due. To demonstrate our continued cooperation, we will increase payments to the Fund from US$30 million in 2005 to US$45 million in 2006. However, because oil and non-oil revenues will be much lower in the first half of the year (the new oil fields will only be at full production in the second half of the year and non-oil revenues are cyclical), payments to the Fund up until June will be US$15 million. We hope that our record of cooperation will be fully recognized at the appropriate time through a rapid resolution of Sudan’s debt and arrears problems.

V. Program Targets and Monitoring

28. Program monitoring. The program covers the period January-December 2006 and takes into account the financial position of the South. It contains semi-annual quantitative targets (end-June and end-December test dates) and structural benchmarks. Given the impact of the South’s finances for the financial program, the targets on net domestic assets and international reserves of the central bank will have an adjustor for any lower-than-programmed withdrawals of deposits by the government of South Sudan as noted in the attached Technical Memorandum of Understanding (TMU). There is also an adjustor on the value of oil export proceeds. The program targets and key structural benchmarks are specified in Tables 1 and 2 below.

Table 1.

Sudan: Quantitative Targets Under the Staff-Monitored Program 1/

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Sources: Sudanese authorities; and Fund staff estimates.

As specified by the technical memorandum of understanding.

Outstanding stock at end-2005.

Table 2.

Structural Measures for 2006

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29. Compilation and provision of information. To insure the effective monitoring of the program, the relevant ministries, the CBOS, and the Central Bureau of Statistics will compile and share with Fund staff all core economic data on a timely basis as specified in the attached TMU.

Sudan Technical Memorandum of Understanding

1. This memorandum specifies the understanding reached with the Fund staff regarding quantitative targets, structural benchmarks, and reporting for the 2006 staff-monitored program (SMP).

2. The SMP relies on five quantitative indicative targets for up to end-March and end-September and an equal number of quantitative targets for end-June and end-December. The targets are (i) ceilings on the change in net domestic assets of the Central Bank of Sudan (CBOS); (ii) ceilings on the domestic financing of the fiscal deficit; (iii) floors for the buildup of net international reserves of the central bank; (iv) ceilings on new nonconcessional external loans contracted or guaranteed by the government or the central bank; and (v) floors for payments to the Fund. Broad money, reserve money, total government revenues from crude oil exports and oil savings account will be monitored as memorandum items. Some of these targets are subject to adjustors depending on the financial position of the government of South Sudan and total government oil export revenue performance. The definitions of these variables and the adjustors are set out below. All the quantitative targets and structural benchmarks are displayed in Tables 1 and 2 of this attachment.

3. Net domestic assets (NDA) of the CBOS are defined as the sum of the Net Domestic Credit of the CBOS, the net issue of money market instruments and other items net. Net Domestic Credit is defined as net credit to the central government (i.e. Government Musharaka Certificates (GMCs), Government Investment Certificates (GICs), and any other form of central bank credit to the central government minus total central government deposits) plus net central bank claims on state and local governments, central bank claims on public enterprises, and claims on banks, and minus Central Bank Ijara Certificates (CICs). The definition of the central government comprises all accounts of line ministries and agencies controlled by the government (corresponding to Group no. 11, Group no. 12, and some accounts of the Group no. 19 in the CBOS general ledger), the Zakat funds (recorded under Group no. 13), and margin deposits placed with the CBOS by the central government against letters of credit issued by the CBOS. The definition includes all oil-related accounts controlled by the government. To evaluate program targets, the dinar equivalent values of foreign exchange denominated items in the balance sheet of the central bank will be calculated at the program exchange rate.

4. Domestic financing of the fiscal deficit is defined as total net domestic borrowing by the central government, including net borrowing from the banking system (including GMCs and GICs), net sales of GMCs and GICs outside the banking system, and revenues from privatization. The definition of central government for the purpose of this criterion is the same as the one applied for the NDA of the central bank.

5. Net international reserves (NIR) are total gross non-earmarked official foreign reserve assets on active accounts plus reserve assets of the government of Southern Sudan in the central bank minus official short-term liabilities (i.e. no more than one-year maturity). The assets are maintained on accounts with overseas correspondent banks and foreign exchange banknotes in the vaults of the central bank. Short-term liabilities include short-term liabilities, IMF deposit accounts, nonresident deposits, and (overdrawn) foreign correspondents accounts.

6. Limits on contracting or guaranteeing of nonconcessional external debt apply to all forms of debt of more than one-year maturity contracted or guaranteed by the government or the CBOS. It applies not only to debt as defined in point no. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision no. 12274-(00/85), August 24, 2000), but also to commitments contracted or guaranteed for which value has not been received. The degree of concessionality of debt will be calculated as specified in the Guidelines.2

7. Broad money is defined as the sum of local currency circulating outside of the banks, banks’ demand, and time and savings deposits. It also includes transferable deposits and margin deposits against letters of credit placed by state and local governments, nonfinancial public enterprises, and the nonbank private sector with the CBOS. Reserve money is defined as the sum of local currency circulating outside of the banks, total reserves (required and excess) for banks, and deposits at the CBOS included in broad money.

8. Adjustor on the financial position of the government of South Sudan (capped). The program target for changes in the NDA of the central bank will be reduced (increased) and the international reserve target will be increased (reduced) by the amount of any decline (increase) in net central bank claims on the government of South Sudan. The adjustor will not apply if the stock of net claims on the government of South Sudan turns positive.

9. Oil revenue adjustor (symmetric). The programmed government oil revenue from crude oil exports is based on the program’s assumptions about oil prices (f.o.b. Port Sudan) and quantities expected to be exported (see Table below). Accrued revenue is the cumulative government oil revenue inflows based on actual shipments at current international prices (f.o.b. Port Sudan). The portion of oil revenue for use in the 2006 budget is estimated at a price of oil of US$45 per barrel for Nile blend and US$40 for Dar blend (benchmark prices). The accrued government oil revenue in excess of the planned budgeted amounts is deposited in an oil saving account (OSA), a locked sub-account within net credit to the government at the CBOS. The programmed OSA accumulation for the year is US$509 million.

The oil revenue adjustor will work as follows:

  • If the accrued government revenue from crude oil exports exceeds the programmed amount (either because the price and/or volume exceed the programmed levels), these proceeds will also be deposited in the OSA. The program targets for domestic financing of the budget deficit and NDA will be reduced, and the international reserves target will be increased, by the difference between the accrued and the programmed amounts.

  • If the accrued government revenue from crude oil exports falls short of the programmed amount, the program targets for domestic financing of the budget deficit and NDA will be increased and the international reserves target will be reduced by the difference between the programmed and the accrued amounts.

  • If within a given quarter the accrued oil revenue that goes to the budget falls below the planned amount, appropriate amounts will be withdrawn from the OSA to ensure that cumulative oil revenues for use in the budget match the cumulative amounts planned in the fiscal program.

Table 1.

Sudan: Government oil revenues from crude exports

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10. Data Reporting. The following table contains the agreed reporting framework. To the extent possible, the data will be submitted in both printed and electronic form to the IMF local office.

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1

The staff team comprised Mr. Gelbard (head), Mr. Ilahi, Mr. Al-Ghelaiqah, Ms. Maseeh (all MCD), Mr. Hussain (PDR) and Mr. Chua (FAD). Mr. Pérez (MCD) joined the mission for a few days. Mr. de Schaetzen (Resident Representative) assisted the mission and participated in the discussions. The mission met with senior government officials including the First Vice-President, Mr. Salva Kiir Mayardit; representatives of the business and the banking community; and members of the donor community.

2

Most Directors supported the view that the policy commitments under the SMP continued to be in line with what would be required for a Rights Accumulation Program (RAP) and that performance under successive SMPs since 2000 should be taken into account in determining the length of a RAP. A number of Directors suggested that, at the appropriate time, the requirement of a RAP could be waived altogether.

3

The Joint Assessment Mission report to the Oslo Donor Conference in April 2005 provided a comprehensive view of development challenges in Sudan and outlined the areas in need of donor assistance. At that time, donors pledged US$2 billion in development assistance to Sudan during 2005–07.

4

Under the new constitution, the national unity government has authority over national sovereignty, central banking, and selected central government functions. The Government of Southern Sudan has a large degree of autonomy (especially on fiscal matters) and responsibility for 10 states in the South.

5

The South’s share of revenues is based on oil production from fields in the South. However, the precise demarcation of where all fields lie needs to await the work of a technical commission envisaged under the CPA.

6

Fuel prices are set administratively and the estimated fuel subsidies are implicit; that is, they reflect domestic sales at below export prices with no explicit compensation in the budget. The staff has urged the authorities to record these subsidies as an explicit expenditure item and set an automatic adjustment mechanism to adjust them in line with world prices.

7

About 60 percent of the new credit was channeled to the services and trade sectors. Regarding the concentration of the new credit, almost 40 percent originated in a single bank. The central bank has stepped up supervision of this bank to monitor its lending portfolio.

8

It should be noted that measures of regulatory capital in Sudan are artificially high because fixed assets are improperly counted as capital. The authorities are reviewing accounting norms for commercial banks to correct the problem.

9

In 2005, the authorities granted four licenses for new banks.

10

Project-related nonconcessional loan contracts with China amounted to US$814 million, while contracts with the Islamic Development Bank and the Arab Monetary Fund amounted to US$102 million. Iran provided a loan for U$S19 million with a grant element of 25 percent.

11

The fiscal framework is based on revised oil revenue and expenditure projections compared to the original 2006 budget. The authorities intend to inform Parliament about the changes to the original budget as mentioned in the MEFP.

12

Given the potential for crowding out associated with high domestic borrowing, the authorities’ program envisages a decline in borrowing from the nonbank sector from 1.3 percent of GDP in 2005 to 0.7 percent of GDP in 2006.

13

While some fuels are priced close to international levels, selected fuels such as gas oil carry a large subsidy element. Sudan’s level of (implicit) fuel subsidies in 2005 (3.5 percent of GDP) was in the middle range compared to other oil exporters. The staff estimates that a price increase of 60 percent will be needed to eliminate the subsidy on gas oil.

14

The decline in the fuel subsidy in 2006 reflects, in part, a decline in fuel imports that enjoy a higher subsidy per unit compensated by a significant increase in the domestic production of such products. The subsidy is also lower because of the recent appreciation of the dinar and lower oil prices in 2006.

15

The aggregate level of pro-poor spending in 2006 is close to the more than doubling of such spending (in percent of GDP) promised by the government at the Oslo Donors’ Conference in 2005.

16

About 70 percent of the debt is owed to official bilateral creditors (almost equally divided between Paris Club and non-Paris Club creditors). The remaining debt is owed to multilateral institutions (17 percent) and commercial creditors (13 percent).

17

As shown in Table 9, the increase in payments has begun to reverse the erosion of Sudan’s payments to the Fund in relation to various indicators of debt service capacity, including official reserves.

18

The remaining amount is intended for water and irrigation projects. The authorities noted that these intentions are plans and not final operations. They indicated that they would seek to obtain the highest possible degree of concessionality and will not use oil as collateral. These potential loans are not yet factored in the fiscal or the balance of payments projections.

19

The projection of charges and interest assumes that overdue principal at the report date (if any) will remain outstanding, but that forthcoming obligations will be settled on time.

20

In November 2005, the authorities removed two remaining exchange restrictions under Article VIII, Sections 2, 3 and 4 of the Fund’s Articles of Agreement. At that time, they lifted the prohibition that applies to importers in arrears with valid import licenses from executing payments and transfers for import transactions and eliminated the multiple currency practice arising from the use of a historic buying rate for the resale of export proceeds.

21

Prepared by World Bank staff. For additional information, contact Ms. Jill Armstrong, Country Program Coordinator for Sudan, Tel. (202) 473-8471.

22

The full report is posted at: http://www.unsudanig.org/JAM.

1

The prices of most domestically consumed fuels were set when the 2005 budget was formulated and remained unchanged since then despite rising international prices. These prices are traditionally set by decree and are not automatically adjusted in response to changing market conditions. The SPC discounts the difference between domestic and world prices when it transfers oil revenue to the treasury. This way of handling the oil subsidy will be addressed in future fiscal execution reports and budgets by presenting the subsidy as an expenditure item.

2

For program purposes, a loan is considered concessional if the grant element is at least 35 percent calculated using a discount factor based on the Commercial Interest Reference Rates (CIRRs) published by the OECD plus margins depending on the loan maturity. The margins are 0.75 percent for repayment periods of less than 15 years, 1 percent for 15–19 years, 1.15 percent for 20–29 years, and 1.25 percent for 30 years or more. The average of the CIRRs over the last ten years will be used for loans with a maturity of at least 15 years and the average of the CIRRs for the preceding six months will be used for shorter maturities.

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Cover IMF Staff Country Reports
Sudan: 2006 Article IV Consultation and Staff-Monitored Program: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Sudan
Author:
International Monetary Fund
Volume/Issue:
Volume 2006: Issue 182
Publisher:
International Monetary Fund
ISBN:
9781451833782
ISSN:
1934-7685
Pages:
70
DOI:
https://doi.org/10.5089/9781451833782.002

Real GDP Growth

(in percent)

CPI Inflation

(in percent)

Balance of Payments

(in percent of GDP)

Exchange Rates

(Index, 2000=100)

Sudan: Non-oil Exports, 1998-2005

(Indices 1995=100)

Fiscal Indicators

(in percent of GDP)

Monetary Indicators

(12-month percent change)