Sudan
2007 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
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International Monetary Fund
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Publication Date:
11 Oct 2007
eISBN:
9781451833799
Language:
English
Keywords:
ISCR; CR; broad money; June data; June; authority; debt service; foreign exchange; financial system; monetary policy; private sector; International reserves
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This 2007 Article IV Consultation highlights that Sudan’s economic growth continued to be strong in 2006. Overall real GDP increased by 12 percent, despite a lower growth in oil production than previously projected. Non-oil GDP increased by roughly 10 percent—buoyed by a continued recovery in agriculture and strong activity in manufacturing, construction, and services. The fiscal position weakened in 2006, reflecting mostly oil revenue shortfalls. The external current account position also deteriorated, reaching a deficit of roughly 13 percent of GDP.

Abstract

This 2007 Article IV Consultation highlights that Sudan’s economic growth continued to be strong in 2006. Overall real GDP increased by 12 percent, despite a lower growth in oil production than previously projected. Non-oil GDP increased by roughly 10 percent—buoyed by a continued recovery in agriculture and strong activity in manufacturing, construction, and services. The fiscal position weakened in 2006, reflecting mostly oil revenue shortfalls. The external current account position also deteriorated, reaching a deficit of roughly 13 percent of GDP.

I. Introduction

1. Sudan has maintained close cooperation with the Fund over the last eight years, as evidenced by generally good performance under successive staff monitored programs (SMPs) and by making payments in excess of obligations falling due. This positive track record is notable given a rapidly changing economic landscape as well as international political pressures associated with a post-conflict environment. Performance under the 2006 SMP was mixed, however, reflecting a worsening economic situation and weaknesses in the policy framework.

2. Sudan’s economy has significant potential if concerns related to policy management and security can be improved. The major challenges discussed were: (i) policies to ensure macroeconomic stability in the context of significant structural changes; (ii) recent fiscal performance and the need for further reform of public financial management, tax policy, and tax administration; and (iii) financial sector reform and development. Agreement was reached on an 18-month SMP (July 2007–December 2008), which balances a prudent macroeconomic framework with fiscal reforms to increase the revenue base, and financial sector reforms to strengthen financial intermediation.

II. Recent Developments and Performance Under the 2006 SMP

3. The Comprehensive Peace Agreement (CPA) is being implemented, and progress is being made in a number of key areas. Most of the commissions mandated in the CPA have now been formed. However, three critical commissions—the National Human Rights Commission, the Electoral Commission, and the Land Commission—have yet to be created. Draft bills on these bodies will be discussed when the National Assembly reconvenes in October. Importantly, the National Assembly recently passed legislation to establish the National Audit Chamber. The nationwide exchange to a new national currency (the Sudanese pound) was also largely completed as of end-June 2007 (a limited exchange is available for a few additional months in remote parts of the country).

4. Darfur remains Sudan’s single most difficult political issue. Recent developments, however, suggest room for some guarded optimism. Sudanese negotiators agreed on June 12 in Addis Ababa to the deployment of the full 23,000 strong UN/African Union hybrid force in Darfur. There remains the significant risk that this achievement will be short-lived if it is not followed by domestic and international political dialogue to address the root causes of the Darfur crisis.

5. Economic growth was strong in 2006, but inflation rose. Overall real GDP increased by 12 percent (Text Table 1), with growth in oil production over 26 percent. Non-oil GDP increased by roughly 10 percent—buoyed by a continued recovery in agriculture and strong activity in manufacturing, construction, and services. However, the 12-month rate of inflation nearly tripled from 5.6 percent in 2005 to 15.7 percent in 2006. A substantial portion of the price surge was linked to an increase in administered prices (fuels and transportation) in the third quarter of 2006. The rate of inflation declined to 8–9 percent by February–March 2007 (largely due to a drop in food prices), and has remained in this range through June.1

Text Table 1.

Selected Economic Indicators, 2002–06

(In percent of GDP, unless otherwise noted)

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Sources: Sudanese authorities; and Fund staff estimates.

Cash basis.

6. Oil production was below target in 2006, and the performance of a new crude (Dar blend) on international markets was initially disappointing. Average daily production rose from 287,000 barrels per day (bpd) in 2005 to 364,000 bpd in 2006. While this increase in output was notable, it was well below projected levels of 492,000 bpd envisioned at the beginning of the year. Technical problems delayed production of Dar blend from new fields until the fourth quarter. Further, marketing problems with Dar blend (which is highly acidic and difficult to process), resulted in substantial discounts in international markets. Many of the technical problems continued into the first part of 2007, limiting production and exports. By the end of the second quarter, however, key infrastructure problems had been resolved, and Dar blend had found wider acceptance in international markets, resulting in a substantial increase in price.2

7. The fiscal position deteriorated substantially in 2006, reflecting mostly revenue shortfalls. The overall deficit is estimated to have widened to over 4 percent of GDP (2 percentage points higher than targeted in the revised 2006 SMP—Text Table 2). Shortfalls in oil revenue played a key role. Non-oil revenues were also lower than projected, however, due to administrative deficiencies and wide use of tax exemptions—notably in the VAT, customs, and business profit tax (the tax-to-GDP ratio fell from 6.9 to 6.3 percent from 2005 to 2006). In addition, capital spending exceeded programmed levels, and poor expenditure control resulted in further accumulation of domestic arrears (equivalent to about 2 percent of GDP). The deficit was financed by running down the oil savings account (OSA), issuance of government bonds, and central bank credit. The deficit on a commitment basis was larger due to accumulation of arrears and the nonrecording of expenditure financed by the issuance of promissory notes (“sanadats”). Some of the loss of fiscal discipline also appears linked to fulfilling commitments under the various peace agreements in the absence of anticipated donor funding.

Text Table 2.

Sudan: Selected Fiscal Indicators, 2006

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Sources: Sudanese authorities; and IMF staff estimates.

8. Many of the fiscal difficulties that emerged in 2006 carried over into the first quarter of 2007. With continued difficulties in the production and sale of Dar blend, oil revenues again fell short of projections. With expenditures remaining largely in line with the budget, the overall deficit for the first quarter was roughly 6 percent on an annualized basis. Critically, the shortfall in oil revenue is having a direct impact on the public finances not only of the national government (the Government of National Unity—GNU), but also on the Government of Southern Sudan (GOSS). Most of GOSS’s income derives from the share of oil revenues accorded to the South under the Wealth Sharing provisions of the CPA. The shortfall in production and export of Dar blend in the first quarter (relative to GOSS expectations) has resulted in the emergence of a substantial deficit for GOSS and the need for either considerable cuts in expenditure or additional donor financing.3

9. The external current account worsened significantly in 2006, reaching a deficit of roughly 13 percent of GDP. While exports of crude oil rose by some 70 percent in volume terms, the extremely low price received for Dar blend resulted in an increase of only 24 percent in value terms. Nonoil exports, meanwhile, declined by some 11 percent in dollar terms—with notable drops in cotton, gum arabic, and livestock products. The strong appreciation of the dinar appears to have had some impact, but an increasingly costly business environment also appears to have been a factor. Imports—particularly of capital goods—surged over the course of the year, reflecting strong foreign investment and capital spending. The large current account deficit contributed to a sharp drop in net international reserves of the central bank, which fell by almost one-third (from US$1.9 billion at end-2005 to less than US$1.4 billion by end-2006). The loss in international reserves also resulted from increased foreign exchange sales to mop up excess dinar liquidity associated with fiscal expansion and the injections into state-owned Omdurman Bank, and to bring the dinar to a soft landing after two years of steady appreciation.

10. Monetary policy was largely accommodative during the first half of 2006, but was tightened in the latter part of the year. Broad money growth (year-over-year) peaked at 45 percent by July 2006—roughly in line with end-2005 levels. Growth of credit to the private sector was notably more rapid, however, reaching almost 90 percent by July, which added to pressure on prices and international reserves. Money and credit growth slowed dramatically in the final three months of the year, however, due largely to corrective actions by the central bank, a decline in deposits linked to the difficulties in Omdurman Bank, and central bank sales of foreign exchange. Broad money growth ended the year at 27 percent, while private sector credit growth declined to 45 percent. Data for the first five months of 2007 show a continuation of this trend. Broad money growth as of end-May stood at 5 percent—the lowest level in more than five years—reflective of the continued drop in net foreign assets. Private sector credit growth has also slowed further to 16 percent as of end-May (Figures 1 and 2).

Figure 1.
Figure 1.

Sudan: Broad Money Growth and Contribution

(12-month growth, percent)

Citation: IMF Staff Country Reports 2007, 343; 10.5089/9781451833799.002.A001

Figure 2.
Figure 2.

Claims on Private Sector of Commercial Banks

(12-month growth, percent)

Citation: IMF Staff Country Reports 2007, 343; 10.5089/9781451833799.002.A001

11. The dinar appreciated steadily during 2006 but has remained flat during 2007. The dinar rose by 12.7 percent in nominal terms vis-à-vis the U.S. dollar in 2006. The real effective exchange rate appreciated by 21 percent during the same period due to the surge in inflation. From end-December onwards, however, the dinar has been virtually flat—fluctuating within a very narrow range—and the exchange rate system is now a de facto peg. The stability of the dinar relative to the dollar has been facilitated by continued ample sales of foreign exchange by the central bank, leading to a further decline in net international reserves to an uncomfortably low level of US$563 million (less than three weeks of imports) as of end-May 2007 (Figure 3).

Figure 3.
Figure 3.

Sudan: Net International Reserves

Citation: IMF Staff Country Reports 2007, 343; 10.5089/9781451833799.002.A001

12. Financial sector indicators (FSIs) have deteriorated markedly, reflecting fiscal expansion, rapid credit growth, the accumulation of government arrears, and the intervention of state-owned Omdurman Bank (Text Table 3 and Table 10). Although banks’ capitalization levels remain above statutory requirements (set at 12 percent of risk-weighted assets), financial soundness indicators have notably weakened. Additionally, due to the existing low provisioning levels it is possible that banks are de facto undercapitalized. Between 2005 and 2006, the ratio of nonperforming loans (NPLs) to assets almost tripled, reaching a level of 19.4 percent at end-2006. In the first few months of 2007, NPLs rose further and stood at 23.9 percent of loans in April 2007. Much of the downturn in FSIs is linked to the state-owned Omdurman Bank.4 Prolonged mismanagement, regulatory forbearance, and accumulation of nonliquid (and nonperforming) government debt put pressure on Omdurman Bank’s position—leading to official intervention and several injections of liquidity from the central bank (totaling SD120 billion—1.5 percent of GDP) during September 2006–January 2007.5 A number of other banks have also shown substantial portfolio deterioration, however.

Text Table 3.

Sudan: Financial Soundness Indicators, 2005–07

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Sources: Bank of Sudan

Data for December 2006 and March 2007, refers only to 27 of the 30 existing banks due to data limitations (excludes Sudanese Agriculture Bank, Capital Bank, and Industrial Development Bank).

13. Performance under the 2006 SMP was uneven—representing a break from Sudan’s usual good track record. Two of the five quantitative targets (payments to the Fund and the ceiling on nonconcessional borrowing) were met (Table 7). The remaining three targets (net international reserves, net domestic assets, and domestic financing of the government) were not met. A major factor in this regard was the need to meet commitments under various peace agreements in the absence of disbursements from donors. Another factor was a shortfall relative to projected revenues from oil exports. Most structural reforms under the program were implemented, although some with delays. Only three of the benchmarks—fiscal reporting on a GFSM 2001 basis, publishing of financial audits of state oil company Sudapet, and formulation of a program to revamp investment incentives under the Investment Encouragement Act—were not met (Table 8).

III. Policy Discussions

A. Overview

14. In light of the above issues, the discussions focused on (i) policies to ensure macroeconomic stability and growth; (ii) short and medium-term reforms to improve public financial management, tax policy, and tax administration; and (iii) financial sector reform and development.

B. Macroeconomic Policies

15. The economic outlook for 2007–08 should be favorable if recent imbalances can be addressed, but would be subject to risk in the absence of substantial policy adjustment. The macroeconomic framework envisages real GDP growth of about 11 percent in both 2007 and 2008, and average inflation of 8 percent and 6.5 percent, respectively. With the completion of a long-delayed marine terminal and pipeline, oil production and exports are expected to pick up in the second half of 2007, bringing annual daily production above 500,000 bpd,6 with a modest increase to 565,000 bpd in 2008. Nonoil GDP growth is expected to be in the range of 8 percent in 2007, reflecting government efforts to reign in the fiscal deficit, the effects of lower credit growth, and some slowing of foreign investment. Non-oil growth is projected to pick up again in 2008, however, assuming a resumption of private sector credit, buoyant activity in construction and services, and a resumption of foreign capital inflows.

16. Fiscal adjustment is central to the government’s plan to ensure macroeconomic stability and to address the imbalances that emerged in the last part of 2006 and early 2007. The authorities are keenly aware of the impact that fiscal expansion has had on inflation, and how nontraditional financing of the deficit (in the face of repeated revenue shortfalls) has negatively affected corporate and banks’ balance sheets. The authorities agreed on the need to more closely align expenditures with available resources, and in this context the discussion centered on ways to bring the 2007 fiscal deficit to 3.8 percent of GDP, compared with an estimated deficit under the approved budget of 5.6 percent of GDP (see MEFP, ¶20). While this implies a significant of level adjustment, the program target still allows for a 20 percent increase in nominal terms in primary expenditures (excluding interest payments and the fuel subsidy), and protects spending related to government commitments under the various peace agreements. Importantly, this target is consistent with a monetary policy framework aimed at ensuring single digit inflation, and an acceptable level of nonbank financing. A similarly prudent approach on the fiscal side is envisioned for 2008 (a deficit of about 3 percent of GDP), while also allowing room for greater transfers to the states in support of fiscal decentralization.

17. Most of the fiscal adjustment is from expenditure cuts, but several revenue measures are also being implemented. The authorities agreed to implement measures to control expenditures and improve budget execution. They intend to reduce expenditures in the second half of 2007 by 1.6 percent of GDP relative to the approved 2007 budget.7 There was concern that further expenditure cuts could impact either the government’s commitments under the peace agreements, or result in the accumulation of arrears. The government also increased the VAT rate from 10 percent to 12 percent, effective June. The authorities also agreed to reduce tax incentives/holidays in the context of the 2008 budget (see below and MEFP, ¶21–23). The authorities also indicated their intention to hold off on any further tariff reductions in 2007.8

18. Monetary policy has sought to contain recent risks to macroeconomic stability, but the limits and costs of the current strategy are recognized. Staff argued in this context that macroeconomic and empirical analysis indicated that the dinar had become overvalued by end-2006 (although more recent data suggest the degree of overvaluation has diminished—see Box 1), and that greater exchange rate flexibility should have been allowed to facilitate adjustment and protect reserves. The authorities highlighted that macroeconomic stability is a relatively recent phenomenon in Sudan. They saw as critical the need to contain the impact of fiscal expansion and the intervention of Omdurman bank, and ensure minimal spillover onto inflation and the exchange rate. In this context, the central bank sold sufficient foreign exchange to mop up domestic liquidity and to provide a soft landing for the exchange rate after several years of steady appreciation (particularly given the introduction of a new currency, which was completed in July 2007). The authorities viewed this strategy as largely successful, but having come at the cost of lower net international reserves. Moreover, they noted that the cash margin requirement on sight letters of credit was introduced primarily for prudential reasons given the rise in NPLs, but also to more tightly limit the demand for foreign exchange.

Resource Inflows, External Competitiveness, and the Exchange Rate

Oil has brought both benefits and challenges to Sudan. Government revenue and the balance of payments have reaped considerable benefits from the oil sector in terms of exports, domestic sales, and related foreign investment. The spending of these resources and the scale of investment, however, have led to upward pressures on the real effective exchange rate (REER), which has appreciated by about 40 percent since January 2005 (Figure 1). The flow of resources into Sudan is likely to continue over the medium term, and with it the challenges of maintaining economic stability and promoting non-oil sector growth—both of which will be critical in addressing widespread poverty and unemployment.

Figure 1.
Figure 1.

Sudan: Real Effective Exchange Rates

(2002=100)

Citation: IMF Staff Country Reports 2007, 343; 10.5089/9781451833799.002.A001

Figure 2.
Figure 2.

Sudan: REER and Exports of Non-Oil Products (real)

(2002=100)

Citation: IMF Staff Country Reports 2007, 343; 10.5089/9781451833799.002.A001

The value of the dinar has historically been closely tied to oil prices, but has recently deviated from this trend. Sudan’s REER has been closely correlated with oil prices since the start of oil production (Figure 3). This is consistent with typical models used to examine the real exchange rate for oil-exporting countries, after accounting for Sudan-specific characteristics—such as the low-level of non-oil exports and the strong correlation between oil prices and the non-oil fiscal balance as a share of non-oil GDP. Based on a simple regression (which should be treated with caution given the small sample), the real effective exchange rate of the dinar (dashed line in Figure 3) started to deviate from its historical trend (solid line in Figure 3) in the second half of 2006. This was largely on account of higher inflation (relative to trading partners) and the continued nominal appreciation of the dinar, and suggests that the dinar was likely overvalued by the end of 2006. Since that time, however, the REER has moved back toward the implied trend (ie, the degree of misalignment has declined) due to (i) a drop in inflation; (ii) a steady nominal rate vis-à-vis the U.S. dollar (a de facto peg since January 2007); and (iii) rising oil prices. Figure 4 plots the deviation of the real exchange rate from the trend against non-oil exports. The negative correlation suggests that the real appreciation of the dinar may have negatively affected external competitiveness.

Figure 3.
Figure 3.

Oil Prices (Real, US$) and REER, 2000-Q2 2007

(Natural Logarithm, quarterly)

Citation: IMF Staff Country Reports 2007, 343; 10.5089/9781451833799.002.A001

Note: Q2 2007 includes April and May only.
Figure 4.
Figure 4.

REER Deviation and Non-oil Exports, 2000-Q1 2007

(Natural Logarithm, quarterly)

Citation: IMF Staff Country Reports 2007, 343; 10.5089/9781451833799.002.A001

(Deviation from the trend, based on oil prices)

Increasing productivity will be key to ensure external competitiveness and non-oil growth. The World Bank’s “Doing Business” (2006) survey highlights the difficulty with respect to hiring and firing, obtaining credit, and enforcing contracts. Structural reforms to remove these rigidities will be necessary to increase productivity and stimulate investment to ensure growth.

19. Looking forward, it was agreed that rebuilding foreign exchange reserves should be a priority (see MEFP, ¶17–18). The authorities recognized that international reserves of the central bank had fallen to unacceptably low levels, and that rebuilding a sufficient cushion should be a priority for 2007 and 2008. In this context, they agreed to target an increase in net international reserves to US$1.3 billion (1.4 months of imports) by end-2007 and to US$1.8 billion (1.7 months of imports) by end-2008.9 The authorities also recognized that exchange rate flexibility would be an essential element to this strategy, even if this implied some depreciation. They agreed that the central bank should more closely limit its interventions to servicing the market for current international transactions and smoothing short-term volatility. In this context, the mission suggested greater use of indirect instruments (GMCs and GICs), rather than sale of foreign exchange, to manage liquidity—consistent with allowing for greater flexibility in the exchange rate. In this regard, the authorities noted that central bank holdings of government securities are currently about two-thirds of excess reserves, and that these instruments could be used for liquidity management purposes. The authorities intend to remove the cash margin on sight letters of credit and import credits by the end of 2007.

20. Also critical from the authorities’ perspective was a monetary program that allowed for a resumption of credit to the private sector. While aware of the need to rebuild reserves, keep a lid on inflation, and reduce NPLs, the authorities stressed that it was important to have greater liquidity available to the private sector—particularly given the credit crunch evident in the first part of the year. In this context, the authorities agreed on reserve money and broad money growth targets of 18 percent and 24 percent, respectively (see MEFP, ¶18). The broad money target is consistent with projected economic growth, inflation, and money demand growth resulting from issuance of the new common currency. These targets will also allow for ample private sector credit growth (albeit less rapid than in recent years) of near 40 percent by end-2007. The program for 2008, which will be discussed in more detail in subsequent missions, targets reserve and broad money growth of 20 percent and 25 percent, respectively.

C. Structural Reforms

Growth and external competitiveness

21. Maximizing Sudan’s potential will require a balancing of macroeconomic policies and structural reforms to ensure competitiveness, poverty reduction, and non-oil growth. Oil production, and accompanying capital inflows, have already had a significant impact on the structure of Sudan’s economy, and brought new challenges to macroeconomic management (Box 1). These flows are likely to be a feature of Sudan’s economic landscape over the medium and long term. A commitment to fiscal prudence and a flexible approach to exchange rate and monetary policy will help ensure macroeconomic and external stability, but these policies must be complemented by attention to infrastructure, regulatory, and other bottlenecks that may impede investment and non-oil growth.

22. The authorities are aware of the challenges for medium and long-term growth, and are committed to a process of review and reform. A new five-year plan (2007–11) recently drafted by the National Council for Strategic Planning, highlights a number of areas for attention. Key among them are: (i) physical infrastructure—particularly electricity and transport; (ii) irrigation projects and prioritizing agriculture sector expenditures; (iii) improving production and management processes in the agricultural and industrial sectors to meet international standards; (iv) aligning training and education outputs to labor market needs; (v) modernizing and developing the judicial system; and (vi) simplification of administrative and legal procedures to facilitate domestic and foreign investment. The authorities have also committed to producing a draft PRSP by March 2008.

Fiscal reforms

23. A key pillar underlying the government’s fiscal reform effort is a set of measures to improve public financial management. A significant amount of the financial stress evident in late 2006 and early 2007 stemmed from the inability to adjust public expenditures in the face of revenue shortfalls, and resort to nontraditional forms of public finance—including issuance of promissory notes and the accumulation of arrears. The authorities recognized the negative impact that these practices were having on growth, confidence, and macroeconomic balances. They have started to implement measures to put public finances on a firmer footing, and more closely align expenditures with available resources, including (see MEFP, ¶21–23): (i) establishing a Treasury Single Account (TSA); (ii) enacting commitment controls that limit expenditures by line ministries to monthly or quarterly cash plans; (iii) halting the use of sanadats, standing orders, and other nontraditional forms of finance; and (iv) adopting the full economic and functional classifications of the Government Financial Statistics Manual (GFSM) 2001.

24. Over the medium term, emphasis must be given to improvements in tax policy and administration, with a view to creating a more stable revenue base and lessening dependence on volatile oil earnings. Despite significant progress in tax policy and administration in recent years, the authorities shared the staff’s view on the need to make further improvements in these areas (Box 2), and agreed to broaden the tax base by reducing VAT exemptions and income tax holidays. At the same time, the authorities believed that the scope for a significant reduction in tax exemptions was limited as most exemptions were on capital goods. Moreover, the authorities were concerned that eliminating tax incentives may harm investment.

Tax Reform in Sudan

Sudan has undertaken a number of tax reforms since 2000, including introduction of a VAT (2000), imposition of an excise tax on benzene, and improvement of the tariff structure. As a result, tax revenue rose from 5.8 to 8.6 percent of non-oil GDP during 2001–04. More recently, however, tax revenue fell to 7.4 percent of non-oil GDP during 2005–06, and ranks as one of the lowest among countries in the region (Table 1). Given the challenges ahead, including oil revenue volatility and pressures to show a “peace dividend” through public investment, further efforts are needed to increase tax revenue, notably through improvements in tax policy and revenue administration.

Table 1.

Tax Revenue for Selected Countries, 2001-2006 1/

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Sources: IMF country documents; Government Finance Statistics (IMF); and Fund staff estimates

For all countries, except for Egypt and Nigeria, the fiscal coverage is the central government. For Egypt, the fiscal coverage includes central government, NIB, and social insurance funds. For Nigeria, the fiscal coverage includes the federal, state and local governments.

For Egypt and Kenya, the fiscal year ends on June 30th.

Tax policy is impacted by exemptions and incentives for businesses. Under the Investment Encouragement Act (IEA), businesses can enjoy five- to ten-year exemptions (renewable) from the business profits tax and customs in a large array of activities at an estimated cost of 2.0 percent of GDP. The VAT exempts a wide range of goods at an estimated revenue cost of 1.2 percent of GDP. The personal income tax (PIT) base is very narrow, with a large number of allowances. Almost all government employees and about 80 percent of private-sector workers are exempt.

A number of revenue administration reforms have been introduced, but challenges remain. Key reforms included establishing the large taxpayer office (LTO)—which accounts for 70 percent of domestic tax collection—and the medium taxpayers office (MTO); and raising the VAT threshold to SD 10 million. On the other hand, the 2007 budget enacted a number of ill-advised tax measures. These include raising the VAT rate on telecommunication services from 10 percent to 15 percent (which fragmented the VAT system) and exempting agricultural inputs from custom duties.

Fiscal decentralization poses further challenges to tax policy and revenue administration. Greater clarity is needed on assignment of tax authority and revenue collection between the GNU, the GOSS, and the various state governments. For instance, the base of the PIT is not yet harmonized between the GNU and the states. The assignment of customs collection authority at the borders needs to be clarified, as there appears to be two different systems in place between North and South.

Addressing these challenges will require bold steps. In terms of tax policy, the authorities would gain by replacing the incentives under the IEA with a system of accelerated depreciation, unifying the business profit tax at around 20 percent, scaling back VAT and customs exemptions, and broadening the personal income tax base. In terms of revenue administration, there is a need to restructure the network of tax offices and establish a function-based headquarter structure; adopt a simple, transparent criterion for the selection of taxpayers administered by the LTO and MTO; and improve compliance programs to support a proper self-assessment system. Without these steps, current initiatives, such as major IT investments, could fall short of the authorities’ objectives.

Financial sector reforms

25. Continued financial sector reform and development is an essential pillar for Sudan’s medium and long-term prospects. While progress has been made in deepening financial intermediation, Sudan’s financial system remains relatively underdeveloped (Box 3). In the short-term, improvements to ensure the soundness of the banking system will likely dominate. Over the medium and long-term, however, there are a range of reforms that Sudan could undertake to achieve a more efficient channeling of savings to investment, and more closely integrate the financial systems of the North and South.

Financial Sector Intermediation

Sudan’s financial system is relatively small compared with countries at a similar level of development (Table 1). There is no interbank market; the equity and foreign exchange markets are shallow, and nonbank financial institutions are small. Sudan remains underbanked, given the low ratios of deposits and credit to GDP. Only a small share of the population has access to bank services, and enterprises often face difficulties in obtaining funding from banks or the capital markets.

Table 1:

Indicators of Financial Development, 2006

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Source: International Financial Statistics.

The financial system is dominated by commercial banks, which accounted for 97 percent of the sector’s total assets at end-2003. Nonperforming assets are relatively high, and provisioning low (Table 2). Symptomatic of a low level of competition, spreads and profitability indicators tend to be higher than in other economies.

Table 2:

Banking Sector Indicators 1/

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Source: Global Financial Stability Report, April 2007, and International Finacial Statistics.

Latest data available: Egypt (end-2006, except ROA and ROE for Sept 2006); Sudan (Apr-2007, except CAR for Mar-2007, and spread for end-2003); Yemen (end-2006); Nigeria (end-2005); Kenya (end-2005, except spread end-2006).

For Sudan, lending-deposit spread equals the difference between the effective investment rate and the effective deposit rate.

Priority reforms include measures to (i) improve the legal and regulatory framework (greater corporate transparency and creation of a credit bureau); (ii) rehabilitate Omdurman bank; (iii) enhance competition to reduce the cost of financing for small firms; and (iv) promote the integration of the northern and southern financial systems. These reforms would increase financial deepening and facilitate Sudan’s financial integration with other countries in the region.

26. The authorities agreed that there was ample room for modernization and development of the financial system, and highlighted the progress that has already been made in a relatively short period. Commercial banking only appeared in Sudan in the 1960s, and almost entirely in the form of subsidiaries of foreign banks (with different operating procedures and standards). In 1999, however, the Bank of Sudan launched a comprehensive banking reform policy aimed at bringing the banking sector in line with international standards, including the recommendations of the Basle Committee. Reforms focused on capital adequacy, banking structure and improvement of human resources, statistics and accounting, and bolstering the central bank’s supervisory capacity. Now entering a second generation of reform, a second round of recapitalization is currently underway, and additional reforms are focused on mergers, modernization of information technology, development of an interbank market, building capacity for supervision of conventional banking in the South, and implementation of the Islamic Financial Services Board (IFSB) standards (equivalent to Basle II for Islamic banks).

27. Regarding specific actions for 2007–08, an audit of Omdurman Bank will be done by a local affiliate of one of the internationally recognized auditing firms. Based on the findings of the audit, the central bank will prepare a plan for resolution/restructuring of the bank (see MEFP, ¶25). Also, commercial banks are being required to submit well-specified action plans to achieve compliance with existing regulations on capitalization and provisioning.

D. External Debt and Relations with Creditors

28. Sudan’s external debt overhang remains a serious concern. The end-2006 stock of public and publicly-guaranteed debt is estimated at US$27 billion in nominal terms, up by about US$9 billion since end-2000. The bulk of the increase reflects primarily a further buildup of arrears (approximately US$6 billion) to Paris Club and non-Paris Club creditors. It also includes new drawings of some US$520 million from Arab multilateral and bilateral creditors, as well as from China and India. In NPV terms, the end-2006 stock of external debt was equivalent to roughly 55 percent of GDP and 340 percent of exports. The authorities expressed concern that, after nearly a decade of cooperation on policies and payments, no concrete progress has been made on alleviating Sudan’s external debt burden—despite debt relief provided to other countries in similar circumstances—severely limiting Sudan’s prospects for meeting the Millennium Development Goals (MDGs).

29. A debt sustainability analysis (DSA) based on the joint Bank-Fund Low-Income Country Debt Sustainability Framework was prepared and discussed with the authorities. The results for the baseline scenario suggest that, even assuming prudent macroeconomic policies and further increases in oil revenues, most of Sudan’s debt ratios remain above the indicative thresholds for sustainability. Moreover, with its heavy reliance on oil, Sudan is highly vulnerable to both oil production and price shocks. The analysis also suggested that Sudan will be at a much lower risk of further debt distress if it curtails recourse to any additional nonconcessional borrowing.

30. The authorities agreed that they needed to minimize nonconcessional borrowing. The authorities emphasized that contracting of such loans had been limited in recent years, that these loans were principally in the form of supplier credits, and that they were generally tied to specific development projects (Box 4). The financial implications will also be monitored by the respective debt units of the Bank of Sudan and the Ministry of Finance and National Economy. They authorities argued that limited fiscal space, the lack of access to more traditional forms of concessional finance, and pressing development needs associated with the various peace agreements and unification left nonconcessional borrowing as a necessity. But they intended to limit contracting of nonconcessional borrowing to US$700 million annually in 2007 and 2008 (see MEFP, ¶28).

Nonconcessional Borrowing

Sudan has made recourse to nonconcessional financing in recent years mainly from China and India, reflecting the limited access to concessional loans because of the difficulties in resolving its debt and arrears situation. The authorities signed US$589 million and US$125 million of nonconcessional loans in 2006 and the first quarter of 2007, respectively (Table).

Most of the contracted loans have been used to finance infrastructure and social development projects such as power, water supply and transportation. Debt units at the central bank and the ministry of finance are in charge of monitoring and compiling data on disbursements and repayments of all external borrowing.

Sudan: Foreign Nonconcessional Loans Agreements, 2006-07 Q1

(Millions of U.S. dollars)

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Sources: Government of Sudan.

Number in parentheses is grant elements (percent).

31. Cooperation with the Fund will likely continue to be strong, but the authorities do not see the current approach of token payments as a solution to the arrears issue. The authorities paid in excess of their commitment for 2006, and intend to make minimum annual payments of US$50 million in 2007 and 2008 (see MEFP, ¶29). The authorities wished to convey their intent to continue cooperating with the Fund in this regard, but highlighted that such token payments are not a meaningful solution to Sudan’s obligations to the Fund—the lion’s share of which is in overdue charges rather than original principal. Resolving Sudan’s overdue financial obligations remains a high priority for the government. To this end, the authorities believe that debt relief under HIPC and MDRI initiatives will play a crucial role in helping Sudan to normalize its relations with the Fund and other multilateral and bilateral donors.

E. Data Issues and Technical Assistance

32. Sudan’s economic data are sufficient for surveillance and program monitoring, but some inadequacies remain. The quality of Sudan’s economic data has improved in recent years—in part because of participation in the Fund’s General Data Dissemination System. Monetary and financial sector statistics are comprehensive and generally timely, and information on oil production, shipments, pricing, and transfers of revenue are available regularly. Significant progress is also being made on fiscal reporting, and should culminate in the adoption of GFSM 2001 classification for the 2008 budget. However, regular data on domestic debt (particularly standing orders, promissory notes (sanadats and letters of guarantee), and arrears) is uneven. This highlights the need to press ahead with a centralized domestic debt office in the MOFNE. CPI and national accounts data remains weak, but should improve with the completion of the national census and the household budget survey.

33. The authorities emphasized the need for continued technical assistance from the Fund. Priorities for the short-term include further training on GFSM 2001 methodology, assistance on improving public financial management (commitment control and treasury single account), tax policy and administration, and fiscal federalism. Improving bank supervision is also seen as critical (particularly in the context of a dual banking system). In this context, the Fund is providing technical assistance to the South in the areas of currency exchange and supervision of conventional banking systems. The authorities also reiterated their desire for an FSAP update as soon as possible.

IV. Risks to the Outlook

34. Sudan’s economic prospects continue to be good, but significant risks remain. The main risk for reforms remains waning political support, given Sudan’s concern with lack of progress by the donor community on debt relief. From the authorities’ perspective, Sudan has made a good faith effort to cooperate with the Fund and the international community on economic policies, even when such actions were politically costly. The authorities accept that such actions were in the best interest of macroeconomic stability and development, but also point out that there has been no corresponding action on debt relief or donor financing. Other risks include volatility in oil production and prices as well as capital flows, weaknesses in public financial management, and failure to move quickly and decisively to improve financial sector indicators. It will be critical for macroeconomic stability to forcefully implement the policies outlined in the attached MEFP.

V. Staff-Monitored Program

35. The 18-month program aims at addressing the institutional and policy weaknesses underlying the emergence of macroeconomic imbalances in 2006–07, ensuring the safety and soundness of the financial system, and laying the groundwork for medium-term macroeconomic stability and growth. The proposed semi-annual quantitative targets for end-December 2007, end-June 2008, and end-December 2008, as well as the structural benchmarks are detailed in Table 1 and Table 2 of the attached MEFP. Semi-annual staff assessments are envisaged under the program.

VI. Staff Appraisal

36. Sudan must navigate a challenging course over the next few years with many competing objectives. These include implementation of various peace agreements, addressing development needs with limited resources, and maintaining macroeconomic stability in the face of a rapidly changing economic landscape.

37. The 18-month staff-monitored program aims at sustaining the recent record of high growth, preserving macroeconomic stability, and meeting the country’s development and poverty reduction needs. The program balances a prudent fiscal framework with fiscal reforms to increase the revenue base for financing needed expenditures and financial sector reforms to strengthen financial intermediation and increase investment.

38. Meeting the twin objectives of higher expenditures for development needs and macroeconomic stability will require better expenditure management and bold fiscal reforms to increase revenues. Serious imbalances emerged in the latter half of 2006 and early 2007 resulting in arrears buildup, deterioration of financial sector conditions, and exchange rate pressures. Staff welcomes the authorities’ recent decision to tighten fiscal policy while maintaining peace commitments to the various regions. Conservative revenue forecasting, improved expenditure management, and more transparent budget execution are key to maintaining macroeconomic stability and preventing a recurrence of the problems observed in 2006 and early 2007. It is noteworthy that the authorities agreed to lower the budget deficit by about 2 percent of GDP in the second half of 2007 and to take important measures to control expenditures and improve budget execution.

39. Fiscal reforms are needed to improve the revenue base. Sudan’s tax-to-GDP ratio is relatively low compared to other countries at a similar level of development. This is largely on account of generous tax incentives/holidays, but also weak tax administration. Generous tax incentives may encourage some foreign investment, but macroeconomic stability, a transparent and predictable tax structure, and a good infrastructure base are far more important to potential investors. In turn, a stronger revenue base will be needed to finance infrastructure spending in a noninflationary manner. In this regard, the authorities’ recent decision to broaden the tax base by reducing VAT exemptions and income tax holidays is a step in the right direction. Staff also welcomes the authorities’ recent efforts to improve tax administration. Although not likely to raise significant revenue in the short-term, these and other revenue measures will be an important component in the fiscal outlook for 2008 onwards.

40. The conduct of monetary policy will likely be more challenging than in the past. Shifting FDI and other capital flows, volatility in oil-related foreign exchange movements, aid disbursements, and the monetization of the south make it particularly important to closely monitor monetary developments to ensure that money growth remains in line with the inflation objective. The conduct of monetary policy will also need to increasingly rely on open market operations—with an emphasis on indirect monetary policy instruments—as well as on greater coordination between the finance ministry and the central bank. In this regard, staff welcomes the central bank’s decision to acquire government securities from the banking system. The trading of these instruments could, in future, be used to meet liquidity management objectives, rather than relying on sales of foreign exchange.

41. Greater exchange rate flexibility will be needed to buffer the economy from external shocks and protect reserves. The central bank has had the difficult job of trying to achieve a soft landing for the dinar in an environment of expansionary fiscal policy and lower-than-expected oil revenues. Staff notes the authorities’ concern that excessively rapid adjustment in the exchange rate could have had a disruptive impact on the economy, particularly given that the shortfall in oil production was temporary. However, this resulted in an uncomfortably low level of reserves. Further, although difficult to quantify the exact magnitude, staff analysis suggests that the level of the exchange rate may have become somewhat overvalued by end-2006 (although the magnitude of misalignment has since diminished). Accordingly, staff welcomes the authorities’ decision to allow greater exchange rate flexibility and to rebuild foreign exchange reserves to more comfortable levels. Staff also welcomes the authorities’ decision to eliminate the exchange restriction and multiple currency practice arising from imposing a floor on cash margins for letters of credit and import credit. In light of this, staff recommends the approval of this restriction and multiple currency practice until end-2007.

42. To address concerns about external competitiveness, the authorities must press ahead with structural reforms to increase productivity. It is difficult to assess to what extent the real appreciation of the dinar in 2005–06 has negatively impacted non-oil exports. However, indications are that structural rigidities and low labor productivity have played a more fundamental role in the weakening of external competitiveness than the recent appreciation of the exchange rate. Improving the business climate will be necessary if recent strong growth is to be sustained.

43. Sustaining strong growth will also require a greater role for the financial sector to channel savings into needed investment. Notwithstanding the progress made over the past few years in developing Sudan’s financial system, financial intermediation is still relatively low. Moreover, financial sector indicators have recently deteriorated. In this regard, it will be important to prepare a resolution/restructuring strategy for Omdurman Bank based on the results of the forthcoming independent audit. The central bank must also more actively enforce prudential standards and ensure that banks comply with existing regulations on capitalizations and provisioning, based on credible and independent loan assessments.

44. Sudan’s external debt problem continues to constrain access to external development financing. Sudan’s record of cooperation on economic policies and payments to the Fund augur well for the clearance of Sudan’s arrears at the appropriate time. In the meantime, the authorities should 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 Enhanced Heavily Indebted Poor Countries’ initiative. This will ensure that any eventual relief provided under the initiative is sufficient to restore debt sustainability.

45. While the proposed level of nonconcessional borrowing implies that in this area the program does not meet the standard of upper-credit tranche conditionality, the SMP is a valuable tool to support the reform momentum. The program contains important actions to reduce the budget deficit by 2 percent of GDP, address critical weaknesses in public financial management, rebuild international reserves, and tackle difficult problems in the banking system. 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 2007–08 SMP continues to be equivalent in strength to a Rights Accumulation Program.

46. While Sudan’s economic prospects are good, important risks exist. The main risk is a weakening of political resolve to maintain macroeconomic stability, advance critical reforms, foster Sudan’s integration with the world economy, and resist political pressures—particularly in the context of forthcoming elections. It will be crucial for the authorities to implement the envisioned fiscal adjustment in order to maintain macroeconomic stability.

47. It is proposed that the next Article IV consultation with Sudan be held on the standard 12-month cycle.

Table 1.

Sudan: Selected Economic and Financial Indicators, 2003–08

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Sources: Sudanese authorities; and Fund staff estimates.

Based on the staff proposal.

Includes estimated capital spending by state governments.

Cash basis.

End of period.

As a share of exports of goods and services.

Average of Sudanese blends. Since 2006, the price reflects the introduction of a new crude (Dar blend) that trades at a substantial discount because of its low quality.

Table 2.

Sudan: Central Government Operations, 2004–08

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

Represents the authorities’ 2007 budget with oil revenues evaluated at current international prices.

Excluding VAT transfers to northern states in the amount of SDD 107 billion for 2007.

Valued at international prices.

Includes departmental fees, public enterprise profits, revenues from government joint ventures, and telecom license fees.

Established in 2007 based on the framework of the Abuja agreement regarding peace in Darfur, and the East Peace Agreement regarding Eastern states. It includes SDD 40 billion for Darfur, SDD 27.5 billion for Eastern states, and SDD 1.5 billion for others.

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

Table 3.

Sudan: Monetary Survey, 2005–08

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Sources: Sudanese authorities; and Fund staff estimates.
Table 4.

Sudan: Monetary Authorities’ Accounts, 2005-08

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Sources: Sudanese authorities; and Fund staff estimates.

Balance of the Oil Savings Account of the national unity government (as envisaged in the peace agreement with the south).

Table 5.

Sudan: Balance of Payments, 2004–08

(In millions of U.S. dollars unless otherwise indicated)

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

Includes payments to oil companies related to profit-sharing arrangements.

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

Table 6.

Sudan: Medium-Term Macroeconomic Scenario, 2006–12

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

Includes estimated capital spending by state governments.

Crude oil revenue.

Sudanese oil blends. Projections are based on the latest WEO assumptions. (based on future prices).

Table 7.

Sudan: Quantitative Targets Under the 2006 Staff-Monitored Program 1/

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Sources: Sudanese authorities; and Fund staff estimates.

Based on CR/06/182, Attachment I, Table 1, and Midyear Review under the SMP, Table 6.

Outstanding stock at end-2005, except for external nonconcessional debt and payment to the Fund which are in flow terms.

As specified in the Technical Memorandum of Understanding (CR/06/182, Attachment I), three program targets for December 2006 have been adjusted as follows: i) The target on net domestic assets of the central bank has been increased by the difference between programmed and accrued government oil revenue (SDD 136 billion) and increased by the (non-programmed) change in bank claims on the Government of Southern Sudan (SDD 17 billion). ii) The target on net international reserves has been reduced by the difference between accrued and programmed government oil revenue (US$677 million) and reduced by the (non-programmed) change in central bank claims on the Government of Southern Sudan (US$84 million). iii) The target on the domestic financing of the central government has been increased by the difference between accrued and programmed government oil revenue (SDD 136 billion). In addition, the central bank’s NDA outturn in June and December 2006 is valued at the program exchange rate.

Table 8.

Sudan: Structural Benchmarks under the 2006 Staff-Monitored Program

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Table 9.

Sudan: Indicators of Debt Service Capacity, 2002–07

(In millions of U.S. dollars; unless otherwise indicated)

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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 Eighth Review Quota.

Domestic fiscal revenue, net of transfers to states.

Table 10.

Sudan: Financial Soundness Indicators for the Banking Sector, 2004–07

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Source: Bank of Sudan.

Data for December 2006 and March 2007, refers only to 27 of the 30 existing banks due to data limitations (excludes Sudanese Agriculture Bank, Capital Bank, and Industrial Development Bank).

Free capital equals regulatory capital minus fixed assets.

Amended NPLs exclude murabaha contracts that are overdue for less than 3 months.

Table 11.

Sudan: Millennium Development Goals, 1990–2005

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Sources: World Bank, World Development Indicators.

Attachment I. Sudan: Letter of Intent

July 27, 2007

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. de Rato:

Sudan has maintained close cooperation with the IMF over the past many years. This cooperation has helped us implement economic policies that aim at maintaining economic stability, fostering growth, and reducing poverty—which are necessary to promote peace and reconciliation throughout the country.

The attached Memorandum of Economic and Financial Policies (MEFP) sets forth our policy intentions under an 18-month Staff Monitored Program (SMP) covering July 2007 through December 2008. We are committed to maintaining macroeconomic stability and advancing the reform agenda, which will focus on fiscal reforms to increase the revenue base for financing needed expenditures and financial sector reforms to strengthen financial intermediation. The Government believes that the policies and measures set forth in the attached MEFP are adequate to achieve the objectives of the program, but it stands ready to take additional measures that may be appropriate for this purpose. The Government intends to make these understandings public and authorizes the IMF to publish this letter, the attached MEFP, and the IMF staff report.

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

Sincerely yours,

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Attachment II. Sudan: Memorandum of Economic and Financial Policies

July 27, 2007

1. This memorandum sets out the economic policies and objectives of the Government of National Unity (GNU) for the period July 2007 to December 2008. These policies will be pursued in the context of an IMF staff-monitored program (SMP).

I. Performance Under the 2006 SMP

2. Program performance under the 2006 SMP was uneven, due in large part to a number of unforeseen factors and challenges related to implementation of peace agreements. Two of the five quantitative targets (payments to the Fund and the ceiling on nonconcessional borrowing) were met. The remaining three targets (net international reserves, net domestic assets, and domestic financing of the government) were not met. Critical in this regard was the need to meet commitments under various peace agreements in the absence of disbursements from donors. Also a factor was a shortfall relative to projected revenues from oil exports. With respect to net international reserves, the need to absorb excess domestic liquidity—generated mainly by fiscal expansion and intervention in Omdurman Bank—and lower oil revenues resulted in a substantial decline in foreign exchange reserves of the central bank in the last quarter of the year. Most structural reforms under the program were implemented, although some with delays. Only three of the benchmarks—fiscal reporting on a GFSM 2001 basis, publishing of financial audits of state oil company Sudapet, and formulation of a program to revamp investment incentives—were not met.

II. Recent Developments

A. Developments in 2006

3. Despite the numerous challenges in implementing various peace agreements, the government has endeavored to maintain a focus on ensuring high levels of economic growth within an environment of macroeconomic stability. For the most part, we have been successful in these objectives. Growth was robust in 2006, and Sudan was one of the region’s strongest countries in terms of attracting investment. With rapid growth have come new challenges—some have related to volatility in oil production and pricing, while others have stemmed from the need for greater flexibility and coordination in implementing macroeconomic policy.

4. The Sudanese economy achieved a growth rate of about 11.8 percent in 2006—largely in line with program expectations. A substantial increase in oil production (albeit less than hoped) contributed to this robust performance. Nonoil growth was also strong, however, at an estimated 10.3 percent—due in large part to a continued recovery in agriculture, and vibrant activity in construction, trade, and services. Average inflation was 7.2 percent. However, there was a steep rise in end-period inflation to 15.7 percent—stemming from the government’s decision to reduce subsidies on domestic fuel products. Reflecting strong capital inflows, the dinar rose by some 12 percent in nominal terms vis-à-vis the US dollar. Given the surge in inflation in the second half of the year, the dinar rose by some 21 percent in real effective terms during 2006.

5. Despite a substantial rise in oil production, the external current account position deteriorated. Exports of crude oil in 2006 increased by roughly 70 percent in volume terms over 2005, due almost entirely to production from new fields. In dollar terms, however, oil exports increased by only 24 percent. Marketing problems and the low quality of a new crude (Dar blend, which has a high level of acidity) resulted in a substantial discount relative to prevailing international prices and lower than expected export receipts. Nonoil exports, meanwhile, declined by some 11 percent in dollar terms—with notable declines in cotton, gum arabic, and livestock products. Imports—particularly shipments of capital goods—surged over the course of the year, reflecting a strong increase in foreign investment. As a result, the external current account deficit expanded from 8 percent of GDP in 2005 to roughly 13 percent in 2006. Net international reserves of the central bank declined by almost one-third, although this mainly reflected increased foreign exchange sales to mop up excess dinar liquidity associated with fiscal expansion and the injections into state-owned Omdurman Bank.

6. Fiscal performance in 2006 was weaker than programmed. The overall deficit is estimated to have widened to over 4 percent of GDP (2 percentage points higher than targeted in the revised 2006 SMP). This was in large part due to shortfalls in oil production and government oil revenue. Although total production (at some 132 million barrels) was substantially higher than in 2005, it was still much less than had been anticipated in formulating the budget. Low prices for Dar blend also had a negative impact, as did lower than projected non-oil revenues. Overall expenditures were in line with program commitments. Excess capital expenditures was compensated for by restraint in current spending. The higher fiscal deficit was financed by depletion of resources in the oil savings account, issuance of government bonds and promissory notes, central bank credit, and accumulation of domestic arrears.

7. Broad money growth (on an annual basis) remained around 40 percent through most of the year. Credit to the private sector grew at a rapid pace through much of the first half of 2006—peaking at just over 80 percent on a 12-month basis in July. The second half of the year was marked by a deceleration of this expansion. Broad money growth declined sharply to 27.4 percent by end-December, with a similar drop in growth of private sector credit, to about 45 percent. These sharp declines, which took place largely in the last quarter, were due to corrective actions by the central bank (principally foreign exchange sales to mop up domestic liquidity), a decline in deposits linked to the Omdurman Bank, and the emergence of government arrears which impacted banks’ balance sheets. Reserve money growth was broadly in line with program targets at about 28 percent.

8. Important structural reforms were completed in the past year. Of particular importance has been ongoing work on fiscal management and transparency with respect to the oil sector. During 2006, the fiscal framework of the national government was converted to GFSM 2001 format, and presented to parliament for information—a critical step forward in public financial management. Also key was the compilation and public release of data on oil production, trade, and related transfers to the Government of Southern Sudan. Finally, a difficult but necessary reduction in domestic fuel subsidies was accomplished in August.

B. Developments in 2007

9. A number of the challenges that emerged in the final months of 2006 carried over into the first part of 2007—highlighting the need for a comprehensive approach to resolve emerging imbalances while simultaneously maintaining macroeconomic stability. Revenues in the first quarter were below the levels hoped for in the budget. While a weak first quarter performance in non-oil revenue (particularly tax revenue) is not unusual, oil revenues again failed to meet anticipated levels. Production and export of Dar blend crude were hampered by technical problems related to completion of a new pipeline and marine terminal. Prices for Dar blend in the first few months of the year were also lower than expected, running at an average of US$19 per barrel during January-March. Government expenditures, meanwhile, remained in line with budget allocations. As a result, the overall government deficit in the first quarter reached SD 143.6 billion (1.5 percent of annual GDP).

10. While inflation has remained in single digits and the exchange rate has been steady, monetary growth has decelerated. The 12-month rate of broad money growth fell to about 8 percent by April, due in large part to continued monthly declines in net foreign assets and less credit to the private sector. Given the expansion in government spending and imports, the use of foreign exchange reserves to mop up domestic liquidity and bring the exchange rate to a soft landing was seen by the central bank as the most prudent option.

III. Medium-Term Outlook and Challenges

11. Meeting Sudan’s medium-term challenges will require macroeconomic stability, a strong commitment to reform, and flexibility in dealing with a rapidly changing economic landscape. We would highlight in this context that Sudan has only recently emerged from a long period of civil conflict. The demands of implementing the Comprehensive Peace Agreement (CPA), the Eastern Peace Agreement (EPA), and the Darfur Peace Agreement (DPA) are substantial, and the commitments made under these agreements must be met regardless of whether the international community fulfills earlier pledges of support. The demands in this area are likely to increase given the need to proceed with demobilization, as well as providing support to the joint AU-UN peacekeeping force. Meeting these obligations while simultaneously undertaking critical infrastructure and pro-poor spending limits our maneuverability on economic policies. The situation would be improved considerably with greater donor support and recognition of our accomplishments.

12. The medium-term macroeconomic framework envisages growth of about 9-10 percent, based on prudent macroeconomic policies designed to ensure single digit inflation and a rebuilding of international reserves. Increasing production of oil will provide one source of growth, but we also anticipate robust activity in non-oil sectors—including construction, manufacturing, transport, and services. We will also seek to boost the performance of our agricultural sector through market reforms and removal of transport, finance, and input bottlenecks.

13. Structural reforms and flexibility in labor and capital markets will be essential to maintain competitiveness over this period. The external position is likely to improve over time, with the external current account (cash basis) projected to stabilize at a deficit of 4-5 percent of GDP. Fiscal policy will focus on the difficult task of balancing expenditure needs with maintaining a fiscal stance consistent with macroeconomic stability. Monetary policy will continue to target a broad money growth rate consistent with inflation and growth objectives. Financial sector stability and development, in conjunction with prudent regulation and oversight, will be critical components in enhancing the prospects for medium and long-term growth of the Sudanese economy.

14. In addition to targeting high and sustainable levels of growth, the government’s medium-term policies will focus on poverty alleviation and development. To this end, we have developed a work plan to prepare a national Poverty Reduction Strategy Paper (PRSP). A request for funding under the Technical Assistance Facility is pending. We expect the final PRSP to be ready by March 2008. The PRSP will place heavy emphasis on relevant and flexible policies to ensure a macroeconomic framework consistent with post-conflict challenges, decentralization, an enabling environment for private sector growth, and capacity and institution building. We are also pleased to report that the Bank of Sudan, in cooperation with the World Bank, has initiated a microfinance unit. The unit will focus on creating financial access for the poor, setting up the legislative and organizational framework for microfinance work, and establishing an information network for microfinance providers.

IV. Policies for 2007-08

15. Recognizing the seriousness of imbalances which emerged in the latter half of 2006 and the first quarter of 2007, the government has already implemented several corrective actions. On expenditure management, starting in June, the Bank of Sudan is coordinating payments for priority expenditures (wages, expenditures already committed and financed by standing orders, guarantees, and development sanadats), via direct transfer from current revenues. Remaining expenditures are based exclusively on remaining cash revenues, and will be executed by a committee including the State Minister of Finance, the Under Secretary of Finance (as co-chair), the Director of the Budget, and the Director of the Chamber of Accounts.

A. Real Sector

16. The program envisages real economic growth of 11.2 percent in 2007 and 10.7 percent in 2008. Oil GDP is expected to grow by about 39 percent in 2007 (reflecting the additional output from Blocks 3 and 7), and by nearly 12 percent in 2008 as production stabilizes. Non-oil growth is expected to moderate somewhat in 2007, but remain at a robust level of 8 percent in real terms. The moderation in growth will reflect fiscal consolidation, the need to tighten monetary policy to stem reserve outflows, weakness in the financial system during the first part of the year, and more moderate growth in agriculture and livestock production—which grew sharply in 2005–06.

B. Monetary/Exchange Rate Policy

17. With respect to monetary policy, the central bank will—in the context of a managed float exchange rate system—maintain a focus on price stability as its central mandate. The pound will be allowed to move in line with fundamental forces, and sales of foreign exchange will focus primarily on serving government and market needs. Given the lumpiness of foreign exchange movements related to oil production and FDI flows, occasional limited intervention may be needed to smooth short-term volatility. However, in light of the need to rebuild foreign exchange reserves to prudent levels, the room for further intervention will be limited. The central bank will avoid resisting sustained and fundamental pressures on the pound. We will also remove, by end-December 2007, the floor on cash margins for sight letters of credit and import credits.

18. The program will target a broad money growth rate of 24 percent in 2007, and 25 percent in 2008, 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 increase in foreign exchange reserves will allow for an appropriate growth of credit to the private sector. The conduct of monetary policy will be challenging given the changing economic landscape, but will seek to be flexible in the face of shifting FDI and other capital flows, volatility in oil-related foreign exchange movements, and aid disbursements. Accordingly, we will closely monitor monetary developments during the program period to ensure that the broad money growth rate remains in line with the inflation objective.

19. The conduct of monetary policy will increasingly rely on open market operations, with an emphasis on indirect monetary policy instruments. In the coming months, the central bank will acquire government securities from the banking system in order to increase its stocks of indirect monetary policy instruments. The trading of these instruments could in future be used to meet liquidity management objectives, rather than relying on sales of foreign exchange.

C. Fiscal Policy

20. The fiscal deficit for 2007 will be contained to no more than SD 359 billion on a cash basis, and to no more than SD 326 billion (2.9 percent of GDP) in 2008. The 2008 budget parameters will be reviewed later in 2007, as the preparation of the 2008 budget advances. All standing orders, guarantees, sanadats, and other obligations coming due will be paid, and no new arrears will be created in 2007 and 2008. Fiscal revenues are expected to reach SD 1,748 billion in 2007. This revenue will include some SD 56 billion (US$280 million) in license fees and payment of past obligations from Mobitel. Oil revenues are projected to reach 9.7 percent of GDP in 2007. The increase in oil revenues will reflect a rise in government share, as well as a narrowing discount on Dar blend relative to international prices. Total central government expenditures are programmed to be SD 2,107 billion in 2007. The government is fully aware of the risks associated with oil revenue projections given the volatility of international oil prices, and the uncertainties with respect to production and shipment. Flexibility and frequent review of expenditures and commitments will thus be required to ensure that the deficit stays at or below the agreed level. Specifically, if oil revenues are lower-than-programmed, we will (to the extent that such resources are available) compensate for the revenue shortfall by drawing from the Oil Saving Account (OSA), or otherwise reduce spending to maintain the fiscal deficit unchanged. If oil revenues exceed programmed levels, the additional revenue will be deposited in the OSA.

21. To meet the programmed revenue targets and to raise revenues over the medium-term, fiscal reform measures we intend to undertake in 2007-08 are as follows:

  • The VAT rate was raised from 10 percent to 12 percent effective June 1, 2007.

  • Reduce VAT exemptions granted by ministerial decree to achieve an additional SD 15-20 billion in revenue on an annual basis, effective December 2007.

  • The Ministry of Finance will prepare a program by October 2007 to progressively reduce income tax holidays for new investments under the IEA.

  • Recommendations of the above program will be incorporated and implemented as part of the 2008 budget.

  • Implement an accelerated depreciation mechanism, and agree to adopt a single profit tax rate in 2009.

  • Existing exemptions will be grandfathered, but eliminated at the time of expiration (no renewal).

  • Continue to suspend the granting of any new VAT or income tax exemptions.

  • Improve tax administration through introduction of self-assessment for business income tax (BIT) for taxpayers covered under the Large Taxpayer Office (LTO) by end-January 2008.

22. Fiscal expenditure has risen significantly in recent years, reflecting priority reconstruction needs and increases in transfers to states in an effort to support greater decentralization. While continuing to support these objectives, expenditure policies for 2007-08 will focus on maintaining a tighter balance between spending and available resources. Specific actions we will undertake in this regard are as follows:

  • To further bolster expenditure management and preclude the emergence of domestic arrears, the ministry of finance will implement a zero-balance Treasury Single Account (TSA) by August 15 2007.

  • Implement commitment controls that limit expenditures by line ministries to monthly or quarterly cash plans, which reflect likely cash availability rather than budgeted allocations.

  • The MOFNE will issue a decree by July 15, 2007 establishing that line ministries cannot undertake spending commitments without the permission of the MOFNE. Reports will also be prepared on a quarterly basis for accounting data on expenditure committed and expenditure paid, by main budgetary items and chapters.1

  • Formulate contingency measures for expenditure cuts in the event that projected revenues (oil and non-oil) fail to materialize.

23. Critical to the effective implementation of fiscal policy is a renewed commitment by the government to transparency and sound public financial management. The resort to nontraditional forms of financing in 2006-07 complicated both fiscal and monetary management and made analysis of the true fiscal position difficult. To address this problem and to increase transparency, we intend to take the following measures:

  • Halt the use of sanadats, standing orders, and other nontraditional forms of finance, and to carefully monitor the existing stock of such instruments with a view to their eventual extinction. Issuance of letters of guarantee in the second half of 2007 will not exceed SD 20 billion.

  • Establish in MOFNE a centralized domestic debt unit by September 2007 that will compile and monitor on a monthly basis the stock of domestic debt, and on a quarterly basis the stock of domestic arrears (payments due for over 3 months) by debt instrument and provide on a quarterly basis accounting data on expenditure committed and expenditure paid, by main budgetary items and chapters.

  • Adopt for the 2008 budget the full economic and functional classifications of the Government Financial Statistics Manual (GFSM) 2001.

D. Balance of Payments / External Debt

24. The external current account deficit (cash basis) is expected to narrow significantly to some 9 percent of GDP, compared with a deficit of 13 percent in 2006. The improvement mirrors a sharp increase in oil exports, as difficulties with oil production and shipment are expected to be resolved by mid-year. Critically, Dar blend crude appears to have found broader acceptance in international oil markets, and thus prices are likely to be more stable in the future. Transfers are also expected to rise. Imports are expected to rise by about 6 percent—mainly in the form of materials and capital goods required for the implementation of large scale projects financed by loans from official creditors and FDI. With the net increase in foreign exchange inflow, we anticipate being able to rebuild net international reserves of the central bank to a level of about US$1.3 billion (1.4 months of imports) by the end of 2007 and US$1.8 billion (1.7 months of imports) by end-2008.

E. Financial Sector

25. We will continue our plans to restructure and strengthen the banking system. A strategy for resolving recent problems with Omdurman Bank is being implemented. An audit of the bank will be started by December 2007 by a local affiliate of one of the internationally recognized auditing firms. The audit will be consistent with international good practices and follow international audit standards. Based on the findings of the audit, we will prepare a plan for resolution/restructuring of the bank by June 2008. Similarly, rehabilitation plans for Saudi Sudanese Bank will be implemented. The CBOS will actively enforce prudential standards and ensure that banks comply with existing regulations. Commercial banks will submit to the central bank by end-December 2007 well-specified action plans to achieve full compliance with existing regulations on capitalization and provisioning.

F. Other Reforms

26. With the rise in oil production has come greater demands for oil sector transparency. A number of positive steps have been made in the last year with respect to publication of oil sector and oil revenue data, but much remains to be done. With a view to increasing the level of cooperation and transparency, the government will provide to the IMF the 2004 and 2005 audits of Sudapet by October 2007. The government will also publish (on the MOFNE website) data on volume of oil production, total volume of crude oil exports, volume of government oil exports, volume of input to refineries, volume of petroleum product production, and import/export of petroleum products.

V. Relations with the Fund and Other Creditors

27. External debt issues. In 2007, Sudan’s debt service capacity will be constrained by revenue shortfalls, the need to rebuild foreign exchange reserves, the burden of implementing the various peace agreements, and the need to address critical poverty and reconstruction requirements. Further shortfalls or delays in donor assistance or a significant negative shock to oil prices would further limit our capacity to service our obligations. Based on the available data, the end-2006 stock of public and publicly-guaranteed debt is estimated at over US$27 billion in nominal terms, up by about US$9 billion since end-2000. This increase largely reflects a US$6.3 billion buildup in arrears to official bilateral (Paris Club and non-Paris Club) creditors, and new drawings of some US$520 million from Arab multilateral and bilateral creditors as well as from China and India. Sudan has been making debt service payments to almost all multilateral creditors and selected bilateral creditors that have provided new financing in recent years. We wish to convey to the international community that Sudan has made every effort at cooperation on policies and payments for many years, and in that context met all the conditions and requirements for debt relief. We remain hopeful that the international community will recognize our track record, and take concrete action on debt relief for Sudan comparable to that provided to numerous other countries.

28. External financing. Sudan continues to suffer from limited access to concessional loans because of the difficulties in resolving our debt and arrears situation. We are unable to put critical infrastructure, reconstruction, and social development projects on hold indefinitely, however. These projects are an essential component of our strategy to unite the country after the signing of multiple peace agreements. Consequently, we have had to make recourse to nonconcessional financing in recent years. We are keenly aware of the concern of other creditors regarding this borrowing, and of the risks it may pose over the medium- and long-term. We will therefore seek to limit the contracting of such obligations as much as possible. For 2007, we will limit such contracting to US$700 million, and will impose a similar limit for 2008.

29. Payments to the Fund. In addition to cooperation with the Fund on matters of economic policy, Sudan’s payments to the Fund have exceeded program levels under the SMP, and in this context we achieved a small reduction in the stock of external obligations. Payments to the Fund have continued in the first half of 2007, even in the absence of a staff-monitored program. The Fund’s preferred creditor status will be maintained by ensuring that our payments continue in the remaining months of 2007 and 2008 by ensuring that our payments continue to exceed obligations falling due. To demonstrate our continued cooperation, we will make minimum payments of US$50 million in 2007 and at least US$50 million in 2008. Further, it is our intention to move to a monthly payment basis. We would hasten to point out, however, that these payments—while demonstrating our good intentions—are not a solution to Sudan’s arrears to the Fund. We appeal to the international community in this context to recognize our accomplishments, act in accordance with the principle of equal treatment, and work toward a rapid resolution of Sudan’s debt and arrears problem.

VI. Program Targets and Monitoring

30. The proposed semi-annual quantitative targets for the periods up to end December 2007, end-June 2008, and end-December 2008 are set forth in Table 1, and the structural benchmarks are detailed in Table 2. We will closely monitor financial and economic developments in coming months and will implement any measures that may be needed to safeguard macroeconomic stability in consultation with the Fund staff. It is proposed that there will be semi-annual staff assessments of the program.

Table 1.

Sudan: Quantitative Targets for 2007 and 2008

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Sources: Sudanese authorities; and Fund staff estimates.

The 2006 figures—except for domestic financing of central government, domestic arrears, external nonconcessional debt, payment to the Fund, and government oil export revenues—are displayed as end of period stocks.

Cumulative flow during 2007 and 2008.

Any new domestic arrears incurred during January - June should be cleared by end-June, and those incurred during July - December should be cleared by end-December. Arrears are defined as overdue financial obligations of the central government outstanding for 90 days or more.

Subject to an adjuster (asymmetric) to take account of oil production and/or prices being more than assumed in the program.

Table 2.

Structural Measures Under the SMP

(July 2007 to December 2008)

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Unless otherwise specified, measures are for end-month.

31. To ensure the effective monitoring of the program, the relevant ministries, the CBOS, and the Central Bureau of Statistics will compile and share with the Fund staff all economic and financial data necessary, on a timely basis, as specified in the attached TMU.

Attachment III. 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 2007-08 staff-monitored program (SMP).

2. The SMP relies on six quantitative indicative targets for up to end-March and end-September and an equal number of quantitative targets for end-December 2007, end-June 2008 and end-December 2008. 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; (v) floors for payments to the Fund; and (vi) change in domestic arrears. Broad money, reserve money, and total government revenues from crude oil exports 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, promissory notes (ie, standing orders, letters of guarantee, and sanadats), and revenues from privatization and changes in government cash deposits of the BOS. 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 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. The limit 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.1

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). Oil revenue for use in the 2007 and 2008 budgets is estimated at a projected international average quarterly price of oil as indicated in Table 1 (benchmark prices).2 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 2007 is zero.

Table 1.

Sudan: Government oil revenues from crude exports

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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 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 (subject to these resources being available) to ensure that cumulative oil revenues for use in the budget match the cumulative amounts planned in the fiscal program. If such resources are not available from the OSA, the government will undertake appropriate expenditure adjustment to ensure that the deficit does not exceed the targeted level of SD 359 billion in 2007 and SD 326 billion in 2008.

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

Core inflation (excluding food and transport) rose from 11 percent at end-2005 to 13.3 percent by end-2006, but declined to 6.3 percent by June 2007.

2

By May-June, the discount on Dar blend relative to dated Brent had narrowed from about US$34 per barrel (at the beginning of the year) to US$25 per barrel.

3

The World Bank fielded a mission to Southern Sudan during June to help the GOSS assess the revenue shortfall and the short-term outlook, as well as options to improve budget formulation.

4

Omdurman Bank represents about 44 percent of total bank lending, and about 40 percent of total deposits.

5

The Bank of Sudan does not envisage further injections of liquidity into Omdurman Bank.

6

The program’s assumptions on production are somewhat conservative, and include an adjustor so that oil revenues in excess of program would accrue to the OSA. If oil revenues are below program levels, the shortfall will be compensated (to the extent that such resources are available) by drawing from the OSA, or otherwise through a reduction in spending so as to maintain the fiscal deficit unchanged.

7

To meet the overall expenditure envelope, the authorities will restrain spending on goods and services (0.3 percent of GDP), other current spending (0.4 percent of GDP), transfers to states (0.3 percent of GDP), and capital spending (0.6 percent of GDP).

8

Staff will follow-up on a resumption of the tariff reduction program in the context of discussions on the 2008 budget.

9

Preliminary data indicate that the central bank began to accumulate reserves in June 2007.

1

These two measures will help ensure that line ministries will not be able to independently commit amounts under their allocations, and that they would be bound by actual measures under the cash plan.

1

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.

2

The projected prices for 2008 will be revisited in the context of preparing the 2008 budget, based on the latest information available regarding international prices and the discounts applied to Nile blend and Dar blend.

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Cover IMF Staff Country Reports
Sudan: 2007 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 2007: Issue 343
Publisher:
International Monetary Fund
ISBN:
9781451833799
ISSN:
1934-7685
Pages:
95
DOI:
https://doi.org/10.5089/9781451833799.002
  • Figure 1.
    View in gallery
    Figure 1.

    Sudan: Broad Money Growth and Contribution

    (12-month growth, percent)

  • Figure 2.
    View in gallery
    Figure 2.

    Claims on Private Sector of Commercial Banks

    (12-month growth, percent)

  • Figure 3.
    View in gallery
    Figure 3.

    Sudan: Net International Reserves

  • Figure 1.
    View in gallery
    Figure 1.

    Sudan: Real Effective Exchange Rates

    (2002=100)

  • Figure 2.
    View in gallery
    Figure 2.

    Sudan: REER and Exports of Non-Oil Products (real)

    (2002=100)

  • Figure 3.
    View in gallery
    Figure 3.

    Oil Prices (Real, US$) and REER, 2000-Q2 2007

    (Natural Logarithm, quarterly)

  • Figure 4.
    View in gallery
    Figure 4.

    REER Deviation and Non-oil Exports, 2000-Q1 2007

    (Natural Logarithm, quarterly)

Figure 1.

Sudan: Broad Money Growth and Contribution

(12-month growth, percent)
Figure 2.

Claims on Private Sector of Commercial Banks

(12-month growth, percent)
Figure 3.

Sudan: Net International Reserves
Figure 1.

Sudan: Real Effective Exchange Rates

(2002=100)
Figure 2.

Sudan: REER and Exports of Non-Oil Products (real)

(2002=100)
Figure 3.

Oil Prices (Real, US$) and REER, 2000-Q2 2007

(Natural Logarithm, quarterly)
Figure 4.

REER Deviation and Non-oil Exports, 2000-Q1 2007

(Natural Logarithm, quarterly)