Sudan
Article IV Consultation: Staff Report; Debt Sustainability Analysis; Staff Statement; Public Information Notice on the Executive Board Discussion; Statement by the Executive Director

Sudan has been adversely affected by the global crisis through a sharp decline in oil receipts. Executive Directors welcomed the Staff-Monitored Program (SMP), which aimed to reduce the fiscal deficit, tighten monetary stance, and increase exchange rate flexibility. Directors urged the authorities to maintain prudent macroeconomic policies and to accelerate fiscal and financial sectors as well as structural reforms. Directors agreed that progress on debt relief under HIPC for Sudan is essential to remove the debt overhang and regain access to concessional financing for development and social projects.

Abstract

Sudan has been adversely affected by the global crisis through a sharp decline in oil receipts. Executive Directors welcomed the Staff-Monitored Program (SMP), which aimed to reduce the fiscal deficit, tighten monetary stance, and increase exchange rate flexibility. Directors urged the authorities to maintain prudent macroeconomic policies and to accelerate fiscal and financial sectors as well as structural reforms. Directors agreed that progress on debt relief under HIPC for Sudan is essential to remove the debt overhang and regain access to concessional financing for development and social projects.

I. Introduction

1. Sudan has been adversely affected by the global crisis through a sharp decline in oil receipts. As a result, the fiscal and external current account deficits widened and GDP growth decelerated. The discussions focused on fiscal, monetary and exchange rate policies to ensure macroeconomic stability and to rebuild foreign exchange reserves. Sudan has cooperated with the Fund over the last decade, as evidenced by generally good performance under successive SMPs and by making payments in excess of obligations falling due.

2. Parliamentary and presidential elections were held in April 2010. President Al-Bashir was reelected. No major changes are expected in economic policy due to the elections. The elections constituted a key component of the 2005 Comprehensive Peace Agreement (CPA). A referendum is scheduled for January 2011 in the South to decide on whether Sudan is to remain as a unitary state. The United Nations has recently lowered the security phase for Khartoum to level II.

II. Recent Economic Developments and Performance Under the SMP

3. Economic growth weakened in 2009 as a result of the global recession. Overall real GDP growth is estimated to have decelerated to 4.5 percent compared to nearly 7 percent in 2008, with the non-oil growth dropping by half to about 5 percent. The deterioration was broad-based, with the exception of a small increase in oil production. Average inflation fell to about 11 percent, from over 14 percent in 2008.

4. The underlying fiscal performance improved in 2009, albeit to a lesser extent than programmed. The non-oil commitment primary deficit narrowed from 7.6 percent of non-oil GDP in 2008 to 6.6 percent in 2009. This adjustment was nonetheless 1.5 percentage points lower than what was envisaged under the program. Tax revenues improved significantly as expected, reflecting stronger revenue collection effort by the tax and customs administration. However, non-oil non-tax revenue remained constant in relation to GDP due to weaker than expected parastatal profits. Most expenditures remained within the program ceilings, with the notable exception of transfers and fuel subsidies as well as some elections related outlays.

5. Monetary policy was expansionary in 2009. Reserve and broad money increased by 28 percent and 23.5 percent, respectively. These increases were higher than the program targets due to increased credit to the government, and as the authorities aimed to ensure sufficient credit to the private sector to partially offset the impact of the liquidity shortage created by global financial crisis. However, despite the increased credit from the central bank to commercial banks for onward lending, credit to the private sector increased by about 20 percent (slightly higher than nominal GDP but lower than envisaged under the program).1

The Comprehensive Peace Agreement

The Comprehensive Peace Agreement (CPA) was signed between the Government of the Republic of Sudan and the Sudan People’s Liberation Movement/Sudan People’s Liberation Army in January 2005. The CPA provided for a six year interim period with the elections, followed by a referendum to determine the future of the South. It included arrangements for sharing power and revenue from oil and jurisdiction over the collection and sharing of various types of taxes and duties during the interim period. According to these arrangements, the Government of Southern Sudan (GoSS) is allocated half of the net revenue of oil produced in the South and is granted representation at the federal level in the Government of National Unity (GoNU).

A number of initiatives envisaged in the CPA have been implemented. A new national currency was introduced and a dual banking system was adopted (Islamic banking in the North and conventional banking in the South). In addition to sharing the oil revenue, the local governments, including the GoSS, were also allowed to retain half of the federal taxes collected in their regions and to borrow at home and abroad subject to certain conditions to safeguard overall macroeconomic stability.

The Fund will continue to provide technical assistance to both the federal government and the South. The Fund has provided technical assistance, mainly to develop and improve financial and fiscal sectors’ performance. For example, it has recently provided assistance on central bank modernization, debt and cash management, and budget classification at both the national and sub-national levels. Both the GoNU and the GoSS look forward to an increase in such assistance. They believe that the substantial required capacity building in Sudan, including in the South, are crucial regardless of the outcome of next year’s referendum. They particularly place emphasis on the need for institution building to improve revenue collection, strengthen expenditure management, and enhance availability of statistics.

Figure 1.
Figure 1.

Sudan: Selected Economic Indicators, 2004–10

Citation: IMF Staff Country Reports 2010, 256; 10.5089/9781455204168.002.A001

Source: Authorities and fund staff estimates.

6. The balance of payments position deteriorated in 2009 due to the global crisis. The current account deficit reached 11.5 percent of GDP as the decline in imports (by about 6 percent) was not sufficient to compensate for the fall in oil receipts. In addition, weaker-than-expected remittances and foreign direct investment kept the foreign exchange position under pressure. Moreover, delayed policy response to the external shock in late 2008 and continued support to the exchange market contributed to the decline in reserves. The guinea depreciated by 13 percent against the U.S. dollar through August but subsequently appreciated as the central bank increased the sale of foreign exchange to the market. As a result, the overall depreciation of the guinea against the U.S. dollar in 2009 was about 3 percent. The central bank’s net international reserves (NIR) remained low.2

7. Financial sector indicators showed some improvement but continue to reflect underlying risks. Gross nonperforming loans (NPLs) declined to 20 percent of total loans at end-2009, from 22 percent at end-2008, partly owing to a reduction in domestic government arrears, and provisioning to NPLs increased from 20 to 24 percent. The average capital adequacy ratio declined to 7 percent at end-2009, compared to 11 percent at end-2008. However, this was on account of a change in the methodology used to calculate risk. Banks with about half of the total banking sector loans requiring closer monitoring. In particular, the financial position of Omdurman National Bank—which accounts for nearly half of the NPLs and 25 percent of bank lending—remains difficult.3

8. Three quantitative targets for end-2009 were missed partly due to the slow global recovery. The domestic financing of the central government was higher than the program’s ceiling due to the larger than expected deficit and the significantly lower foreign financing. Moreover, the central bank’s NIR target was missed by a large margin, mainly due to a smaller than envisaged decline in imports and large sales of foreign exchange. The net domestic assets of the central bank were also higher than programmed due to central bank financing to commercial banks for onward lending to the private sector. On the other hand, the clearance of domestic arrears was significantly higher than the target, and the targets on payments to the Fund and on contracting of non-concessional loans were also met.

9. Important structural reforms were completed in 2009, though some with delay. In the fiscal area, several measures were implemented to improve tax compliance and strengthen fiscal management and administration. These included modernization of the taxation chamber, centralization of taxpayers identification numbers, and the extension of GFS 2001 budget classification to 5 Northern states. However, the comprehensive review of the tax policy regime is expected to be completed by July 2010. A restructuring plan for Omdurman National Bank was prepared in February 2010, in line with the recommendations of an independent auditor.

III. Policy Discussions

A. Macroeconomic Policies

10. Growth prospects are likely to remain strong in the period ahead, although there are downside risks. Real GDP growth is projected to be in the 5–6 percent range during 2010–15. This is contingent on strong non-oil growth as oil output is projected to moderate. The focus of the growth enhancing efforts over the medium-term will be on increasing agricultural production, whose potential remains largely untapped (see MEFP, ¶11). The authorities have already embarked on a plan to invest about $5 billion through 2012 to develop this sector. The emphasis is on attracting strategic foreign investors by providing better infrastructure, removing structural rigidities and distortions, liberalizing investment and the labor market, and reforming the legal system, including to enhance property rights and land leasing arrangements. Inflation is expected to remain in single digits. The external current account deficit is projected to stabilize in the range of 6–7 percent of GDP, and the fiscal deficit at about 4.5 percent of GDP. Such outcome appears achievable, but will require maintaining the momentum of fiscal reforms to offset the projected gradual decline in oil revenue.

Sudan’s Agriculture: Potential Engine for Growth and Poverty Reduction

Agriculture plays a key role in employment and output generation in Sudan. It currently accounts for about one third of GDP and employs about 80 percent of the labor force. Sudan’s main agricultural products are cotton, wheat, sorghum, sugar cane, gum Arabic, and live stock. Prior to the rise of the role of oil in Sudan, agriculture was the main source of foreign exchange earnings, mainly from cotton exports. In 2009, agricultural exports accounted for 90 percent of all non-oil exports.

The substantial untapped potential of the sector can contribute importantly to growth. Approximately one third of the area of Sudan, the largest country in Africa, is suitable for agricultural development (www.fao.org). However, only an estimated 15–20 percent of Sudan’s arable land is under cultivation. Half of this cultivated land is rain-fed, mostly producing subsistence crops. The sector has been growing by a mere average of 2.5 percent annually over the past decade. This has been due to inadequate infrastructure, lack of access to capital, low-level technical efficiency, and conflict and security problems. The sector has also been affected by the severe drought of the past couple of years.

The authorities are placing renewed emphasis on improving the performance of the sector. These efforts include the completion of three dams in 2009, including the $1.7 billion Merowe dam. Public-private partnership ventures are being established with both domestic and foreign partners. The National Agricultural Revival Program, which was originally launched in 2005, is gaining renewed momentum. It aims at implementing large irrigation schemes, encouraging development of the agro-industry, including by establishing a number of sugar factories, improving infrastructure, and increasing spending on irrigation, land preservation, fertilizers, and credit services. Liberalization is also making progress with the recent termination of the monopoly of the state-owned Gum Arabic Company on the production and export of gum Arabic. In addition, the legal system is also being strengthened, including by introducing more liberal rules on the leasing of agricultural land to foreign investors.

11. The downside risks to this favorable growth outlook arise from the high dependence on oil, the debt overhang, and the difficult (albeit somewhat improved) political and security situation. The production of oil, the main source of foreign exchange earnings, is expected to moderate over the medium term. Oil receipts account for over 90 percent of foreign exchange earnings. In addition, any wavering in reforms, in response to deterioration in the political or security situation, would jeopardize the major gains achieved thus far.

12. The main parameters for the 2010 SMP include: (i) reducing the fiscal deficit from 4.7 percent of GDP in 2009 to 3.4 percent of GDP, (ii) increasing the NIR by $560 million; (iii) containing broad money and reserve money growth to about 20 percent, and (iv) limiting the contracting of nonconcessional borrowing to $700 million.

Fiscal policy

13. The program seeks to maintain macroeconomic stability and to meet social and infrastructure as well as CPA-related expenditures. The authorities’ approved budget was based on conservative assumptions on oil prices, but optimistic ones on foreign financing (MEFP, ¶14).4 The program caps the wage bill at 5.4 percent of GDP, similar to the outcome of 2009, and preserves outlays for elections/referendum and goods and services in the approved budget. Considerable tax efforts will be required to enhance revenues. Tax revenues are projected to increase by 0.3 percent of GDP (or about 0.8 percent of non-oil GDP) relative to the 2009 outturn on account of the lagged effects of revenue-enhancing measures introduced in that year and the anticipated implementation of additional measures to strengthen tax collection (see MEFP, ¶18). Staff also highlighted the pressing need to increase tax revenues through tightening VAT and personal income tax (PIT) exemptions. However, given the presidential and parliamentary elections in 2010 and referendum in 2011, such reforms may not be possible during the current year. The authorities plan to adopt these and other recommendations of the ongoing comprehensive tax policy review in the 2011 budget (MEFP, ¶17).

14. A steady improvement in the non-oil primary balance is needed over the medium term. Oil production is expected to gradually decline below current levels after 2013. Staff highlighted that this will be an important challenge, notwithstanding an automatic reduction in oil-related spending associated with the gradual decline in oil production and the elimination of all domestic arrears in 2010. A medium-term perspective is, therefore, needed to reduce dependence on oil and to reduce vulnerability to its price volatility. The authorities recognized the various medium-term challenges, including the large social expenditure needs that are likely to be identified in the context of the PRSP process (which is expected to be completed in late 2010). They stressed that they intended to develop a three-year budget framework and use the non-oil primary balance to GDP ratio as a key indicator in budget preparation (MEFP, ¶21).

Monetary and exchange rate policies

15. A cautious monetary stance should be maintained. While aware of the need to rebuild reserves and lower pressure on inflation, the authorities stressed that it was important to have enough liquidity available to the private sector. They, however, agreed with staff’s recommendation to adopt a cautious monetary stance to keep inflationary pressures in check. Staff stressed that the monetary targets should be consistent with single-digit inflation while allowing for credit needs of the private sector. The program targets broad and reserve money growth at 21 percent and 19 percent, respectively, in 2010 (MEFP ¶22). The authorities are working to further develop indirect monetary instruments, strengthen the inter-bank market, and improve liquidity forecasting and management.

16. Rebuilding international reserves from the currently low level will be a priority in 2010. The current account deficit is expected to improve to about 7.2 percent of GDP in 2010 (from 11.5 percent in 2009). This is mainly due to higher oil price projections. Accordingly, the SMP targets an increase in net international reserves to $950 million at end-2010 (MEFP ¶23). In this context, the exchange rate will be allowed to move in line with fundamentals to rebuild and safeguard the foreign exchange reserve position. Sale of foreign exchange will be limited to meeting genuine market needs and smoothing short-term volatility.

17. The exchange rate level appears to be near equilibrium. The macroeconomic balance approach and the equilibrium real effective exchange rate approach suggest that Sudan’s real exchange rate is slightly overvalued but that this is temporary and is within the margin of error. The pressures on the exchange rate seem to be largely associated with political uncertainties and concerns about the low level of foreign exchange reserves. Sudan maintains an exchange restriction and a multiple currency practice arising from the imposition of a 100 percent cash margin for letters of credit on most imports and an exchange restriction arising from the limitation on amount of foreign currency purchases for travel purposes, which were approved by the Board until end-June 2010 in light of the authorities’ intention to eliminate these restrictions. The authorities are committed to remove these restrictions by end-June 2010, provided that their NIR position improves.

Financial Sector Development and Soundness

Sudan’s financial system has been growing, but remains relatively small by regional standards. The banking sector comprises of 32 banks, including 5 foreign and 4 state-owned banks. Deposits and credit to the private sector have doubled during 2005–09. Nonetheless, their ratio to GDP stood at 16 percent and 12 percent, respectively, at end-2009. Although both soundness and efficiency indicators are generally weaker than in other countries in the region, they differ widely across banks. Sudan remains under-banked, with banking and other financial institutions concentrated around Khartoum.

uA01fig01

M2 and credit to the Private Sector (In percent of GDP) Selected African Countries, 2009

Citation: IMF Staff Country Reports 2010, 256; 10.5089/9781455204168.002.A001

Competition in the sector is reduced by the large presence of public banks. Public banks account for about 50 percent of total banking sector assets. A phased divestiture of the public sector share in the sector would help create healthier competition and improve the financial system.

Systemic risk is limited due to the small size of the sector and low level of intermediation. However, nonperforming loans (NPLs) are high and provisioning is low. The NPLs are concentrated mainly in the Omdurman Bank. Capital adequacy ratios are below the required levels for bulk of the banking system.

uA01fig02
Note: Data for Tunisia and Gabon is as of December 2008; the other data is for the latest available month in 2009.

Non-bank financial institutions and markets are very small and underdeveloped. These institutions and markets can play an important role in the mobilization of savings and allocation of investments. There is a clear need to modernize the insurance sector, develop the thin securities markets, and promote microfinance institutions. In this regard, it would also be crucial to develop the prudential framework and supervisory skills specific to these institutions.

The authorities have taken steps to strengthen the financial system in line with the 2005 FSAP recommendations. Both supervision and the legal and regulatory framework have been improved. Other remaining priority reforms include (i) improving further banking supervision and inspection and their enforcement; (ii) rehabilitating Omdurman Bank (with 40 percent of its loan portfolio nonperforming) and lowering the public sector’s share in financial institutions; and (iii) adopting and enforcing international best practice accounting and audit standards.

A restructuring plan was developed for Omdurman National Bank in February 2010 based on the findings of an independent audit. The plan includes measures that aim at preventing further deterioration of the bank’s financial position, its recapitalization by current shareholders (other than the central bank), and its eventual privatization. The authorities plan to begin the privatization proceedings by end-2011.

Exchange Rate Assessment

Staff estimates suggest that the Sudanese guinea is near equilibrium in real effective terms.

Macroeconomic Balance (MB) approach: The CGER-type panel regression, using data for low income oil exporting countries covering the period 1970 to 2009, suggests that the real exchange rate is near equilibrium. The norm for Sudan, according to this approach, is a current account deficit of about 6 percent of GDP in 2014. This compares with a projected deficit of about 7 percent of GDP. There was some overvaluation in 2006 and early 2007, largely due to sizable capital inflows, an expansionary fiscal policy, and a real appreciation of guinea. However, the decline in international oil prices has put pressure on the current account balance and the gap widened in 2009. Accordingly, a slight overvaluation reemerged, but remains within the margin of error and appears to be temporary. Since then, fiscal policy has been tightened and oil price improved. These factors are expected to help the current account balance to return to a level consistent with the norm starting in 2010.

The equilibrium real effective exchange rate (EREER) approach indicates a possible small diversion compared to the medium-term estimated equilibrium. The divergence between the actual and equilibrium REER appears to have temporarily widened in 2009 due to the sharp decline in oil prices. This divergence, however, is projected to narrow in 2010 and remain small, within the margin of error over the projection period. The above estimation uses the standard set of variables in this methodology, including a set of macroeconomic fundamentals, fiscal balance, openness, and the real oil price.

Figure 1.
Figure 1.

Sudan: Implied and Actual Current Account Based on the Macreconomic Balance Approach (as percent of GDP)

Citation: IMF Staff Country Reports 2010, 256; 10.5089/9781455204168.002.A001

Figure 2.
Figure 2.

Sudan: Actual and Estimated Real Effective Exchange Rate

Citation: IMF Staff Country Reports 2010, 256; 10.5089/9781455204168.002.A001

B. Structural Reforms

Fiscal reforms

18. The authorities intend to undertake a wide range of structural reforms with the goal of enhancing revenue collections and improving the quality of government spending. A comprehensive review of the tax policy regime will be completed by July 2010. Based on the results of the review, the authorities will identify policy measures to be incorporated in the 2011 budget, with the objective of reducing VAT exemptions, raising personal income tax collections, resolving tax jurisdiction issues with sub-national governments, and optimizing the government’s net take from the oil sector. In the area of revenue administration, the authorities intend to widen the tax base through establishing a database to allow information sharing on registered taxpayers, with a view to identifying and incorporating entities currently outside of the tax system, and implement WTO consistent customs evaluation system (MEFP, ¶17–19).

Structural Fiscal Reforms

The authorities are taking a wide range of structural measures over 2010 to reinforce the substantive progress in fiscal reforms in recent years (see MEFP ¶17–21). The main objectives of these measures are to widen the tax base, enhance revenue administration, improve the quality of government spending (both national and subnational levels), and strengthen medium-term budgetary planning.

A number of structural measures have been introduced to improve tax compliance, although considerable scope still exists to strengthen revenue administration. Key reforms already undertaken in this area include: (i) establishing a database to allow information sharing on registered taxpayers with a view to identifying entities currently outside of the tax system and bringing them into the tax net; (ii) undertaking a review of tax exemptions granted under the Investment Encouragement Act to identify entities that are no longer entitled to exemptions; (iii) implementing a WTO-consistent evaluation system for customs; and (iv) upgrading customs stations with ASYCUDA World software.

A key step in the tax policy reform is the completion of a comprehensive review of the tax policy regime. This review will help identify concrete policy measures to broaden the tax base and enhance the system’s efficiency. Specifically, it will help in: (i) reducing VAT exemptions granted to certain domestic sectors and final goods imports; (ii) reforming the personal income tax; and (iii) clarifying tax jurisdiction issues with subnational governments. Policy measures based on this review are expected to be incorporated in the 2011 budget.

Expenditure policy reforms will be geared toward improving the quality and targeting of government spending. This should help protect priority areas as fiscal consolidation effort is further advanced. The authorities have recently eliminated electricity subsidies, but the reform on restraining fuel subsidy has been pushed back to 2011. As a prerequisite for the gradual adjustment of the petroleum price formula, the authorities plan to develop a targeted social safety net based on the household survey, which is expected to be completed in mid-2010.

uA01fig03

Sudan: Selected Fiscal Indicators, 1999–2009

(In percent of non-oil GDP)

Citation: IMF Staff Country Reports 2010, 256; 10.5089/9781455204168.002.A001

In the area of public financial management, adopting a medium-term budget planning system, using non-oil indicators is crucial. The recent improvement in Sudan’s primary balance, which was driven by higher oil prices, has disguised an underlying deterioration in the non-oil balance. To better monitor the performance of the non-oil primary balance, the authorities plan to develop a three-year budget framework, including projections for non-oil revenue and non-oil primary balance to GDP ratios, and use this framework on a rolling basis in budget preparation. At the subnational level, plans are underway to extend the GFS 2001 budget classification to another 4 Northern states in order to support better fiscal management and reporting. To further enhance resource transparency, public oil companies will be required to transfer their profits directly to Ministry of Finance and National Economy (MoFNE) rather than to Sudan Petroleum Company.

Strengthening the financial system

19. Progress has been made in strengthening the financial sector, but further efforts are needed. The authorities have taken steps to improve further the legal and regulatory framework, including in the areas of provisioning, risk management, and corporate governance. They recognize the need to strengthen the prompt enforcement of corrective actions to ensure full compliance with prudential regulations and to address NPLs. For the Omdurman National Bank, a restructuring plan has been prepared aimed at preventing any further deterioration of its financial position and preparing for its eventual privatization. As part of the plan, the bank’s loss-making branches will be closed, loss-making companies that are fully-owned by the bank will be liquidated, and shareholders will be required to raise capital (MEFP ¶26). The authorities plan to begin the privatization process by end-2011.

C. External Debt and Relations with Creditors

20. Sudan’s external debt overhang remains a serious concern. The end-2009 stock of public and publicly-guaranteed debt is estimated at $35.7 billion, up from $33.7 at end-2008. The bulk of the increase reflects primarily a further buildup of interest arrears. It also includes new drawings from Arab multilateral and bilateral creditors, as well as from China and India. A debt sustainability analysis based on the joint Bank-Fund Low-Income Country Debt Sustainability Framework was prepared and discussed with the authorities. The results suggest that, Sudan will remain in debt distress in the foreseeable future even under a benign global environment and the implementation of appropriate policies (see Sudan—Staff Report for the 2010 Article IV Consultation and First Review Under the 2009–10 Staff-Monitored Program—Debt Sustainability Analysis at www.imf.org). The authorities concurred with the assessment (MEFP, ¶28). The authorities expressed concern that, despite their cooperation on policies and payments for nearly a decade, no concrete progress has been made on alleviating Sudan’s external debt burden, severely limiting the prospects for meeting the Millennium Development Goals (MDGs) and CPA commitments.

Sudan’s performance Under the SMPs (1997–2009)

Sudan has been implementing reforms under successive SMPs over the past twelve years. Performance under these programs has been generally good.

Reforms: Key structural reforms were completed during the last decade in the fiscal and financial sector, and data quality has improved significantly. In the fiscal area, major reforms were implemented in tax policy and revenue administration and in public financial management. On the revenue side, VAT was introduced, exemptions on income tax were streamlined, excise was imposed on petroleum products, the customs tariff structure was improved, and the granting of new tax exemptions was stopped. Improvements were also made in budget classification, cash management, and fiscal reporting. In the financial sector, major reforms included currency unification and issuance of a new currency, strengthening banking regulation and supervision, and improving data reporting by adopting international standards. Most of these reforms were part of structural conditionalities under the SMPs and were supported by technical assistance from the Fund.

Economic performance: The above reforms have contributed to restoring macroeconomic stability and buoyant economic growth.

  • Real growth averaged over 7 percent during the past decade, which was higher than most countries in the region. Non-oil real growth averaged 6 percent.

  • Inflation came down from triple digit to single digit throughout most of the period, except for 2008 and 2009. Higher inflation in the past two years was mainly due to the increase in the international prices of food and basic commodities.

  • The fiscal deficit was contained within reasonable limits and averaged 1 ¼ percent of GDP during 2000–09. This was despite the high volatility in oil revenue and the rigidities in outlays that are related to peace agreements’ commitments and some other current expenditure items. While tax revenue generally increased in relation to non-oil GDP, the surplus of parastatals fluctuated. The non-oil commitment fiscal deficit narrowed as a percent of non-oil GDP. The wider than envisaged overall fiscal deficit in 2009 and the lack of external financing have led to missing the target on government domestic borrowing.

  • The balance of payments position, however, remained under pressure and foreign exchange reserves remained low. This was mainly due to international sanctions and limited access to grants and borrowing. The authorities have resorted to reserves as the first line of defense to absorb external shocks. This has led to the breach of the NIR target.

Repayments to the Fund: Sudan continues to pay more than its new obligations falling due. Despite this, remaining arrears (including interest arrears and penalties), are about SDR 1 billion. Sudan has paid the Fund more than SDR 390 million since 1997, and over SDR 575 million since 1984 (since it last received Fund financing).

21. The authorities are aware of the risks of nonconcessional borrowing. They emphasized that contracting of such loans had been limited in recent years and that such loans were generally tied to specific and vital development projects, especially in infrastructure and the oil sector. They, however, reiterated that the lack of access to concessional finance and pressing expenditure priorities associated with development needs and the various peace agreements left nonconcessional borrowing as a necessity.5 In 2009, the contracting of such borrowing amounted to $693 million, mainly from China. These loans, which are earmarked for infrastructure projects such as roads and power transmission grids, have a long maturity and appear to have a grant element due to their generally moderate interest rate. The authorities agreed to limit contracting of such borrowing to a program ceiling of $700 million in 2010 (MEFP, ¶29).

22. Resolving Sudan’s overdue financial obligations remains a high priority for the government. Sudan has reduced repayments to other creditors in light of the difficult NIR position and has requested from its main creditors a rescheduling of debt services falling due in 2010. The authorities intend to pay the Fund at least $10 million in 2010 but stressed that such payments cannot on their own resolve Sudan’s obligations to the Fund (MEFP, ¶30). They believe that debt relief under HIPC and MDRI initiatives will play a crucial role in helping Sudan improve its relations with the Fund and other multilateral and bilateral donors.

IV. Data Issues and Technical Assistance

23. Sudan’s economic data are sufficient for surveillance and program monitoring, but need further improvement. The quality of Sudan’s economic data has improved in recent years—due in part to participation in the Fund’s General Data Dissemination System. Monetary and financial sector statistics are comprehensive and generally timely. Significant progress is also being made on fiscal reporting, helped by the adoption of GFSM 2001 classification starting from the 2008 budget. While considerable improvement has been made in the CPI by expanding its coverage and using new weights in the basket, national accounts data need further improvements.

24. Sudan’s technical assistance needs are substantial and the authorities place high weight on continued technical assistance from the Fund. Priorities in the area of monetary and financial sector include technical assistance on banking supervision and developing indirect monetary instruments. The authorities also reiterated their desire for an FSAP update as soon as possible. In the fiscal area, technical assistance is needed in tax administration, including oil revenue management and tax policy. In addition, further assistance in improving public financial management, with particular emphasis on fiscal reporting and budget processing, and setting up multi-year budget planning, will be required. To improve national accounts statistics, the authorities requested a peripatetic expert to help introduce the 1993 System of National Accounts. The authorities asked for continued technical assistance in the South, given the significant need to build capacity. In particular, they requested a diagnostic mission to identify the specific needs in the fiscal, monetary, and banking sectors (MEFP, ¶32).

V. Staff Appraisal

25. Sudan has implemented important reforms under the 2009–10 SMP. In particular, important steps were taken to rein in tax exemptions, widen the tax base, and improve tax administration. Moreover, several key financial management reforms (such as restructuring of the MoFNE, setting up of committees to enhance interdepartmental coordination, and initiating Government Resource Planning) were recently implemented. Efforts are also under way to address vulnerabilities in the financial sector, including through developing a restructuring plan for Omdurman National Bank. These efforts have contributed to a narrowing in the non-oil primary deficit, albeit to a lesser extent than what was originally envisaged under the authorities’ program, and to a broad improvement in financial soundness indicators.

26. The challenges facing Sudan remain immense and complex. Sudan needs to continue its efforts to create fiscal room to meet its social and development needs as well as its obligations under the peace agreements. Rebuilding foreign exchange reserves is also an immediate priority. In the medium-term, Sudan must strengthen its revenue and non-oil export base and develop its financial system to sustain strong growth.

27. It is important to contain fiscal pressures in the run up to the January 2011 referendum. Continued fiscal prudence will be key to maintaining low inflation and macroeconomic stability more generally. In particular, it would reduce the need for bank financing of the budget and mitigate pressure on the balance of payments and the exchange rate.

28. Structural fiscal reforms are critical to maintain economic growth and meet social and development objectives. Sudan’s dependence on oil revenues, together with the high correlation between government expenditure and volatile oil prices, underline the importance of adopting a multi-year budget planning system using non-oil indicators. Reforms on these fronts need to be focused on a steady improvement in the non-oil primary balance. It is critical to adopt a medium-term fiscal adjustment strategy. Staff welcomes the authorities’ intention to replenish the oil stabilization account to guard against the risk of falling oil prices or a deceleration in oil production.

29. With the narrow tax base and rigid expenditure profile, fiscal adjustment needs to focus on widening the tax base. Staff urges the authorities to complete the comprehensive review of the tax policy regime, and to establish clear commitments to identify policy measures in the context of the 2011 budget, with a view to reduce VAT and PIT exemptions, and resolve tax jurisdiction issues with sub-national government. Moreover, staff encourages the authorities to move expeditiously toward the introduction of a targeted safety net and begin the process of gradually phasing out fuel subsidies.

30. The monetary stance needs to be tightened in the period ahead. Monetary aggregates have exceeded program targets, contributing to pressures on inflation and the exchange rate. There is, however, a need to ensure sufficient credit to private sector to sustain growth. It will be important to closely monitor price developments and adjust monetary policy as appropriate.

31. CGER-based econometric regressions indicate that the exchange rate level is broadly in line with the estimated norm. It will be important to enhance competitiveness through measures to improve the business environment and boost productivity. These include addressing shortcomings related to labor market rigidities, investor protection, enforcement of contracts, and obtaining credit. It is noteworthy that the authorities have identified these same shortcomings in the context of their initiative to promote the agricultural sector.

32. Greater exchange rate flexibility is needed to mitigate the impact of external shocks and build foreign exchange reserves to a more comfortable level. Reserves fell sharply with the decline in oil price through the first quarter of 2009. This was mainly due to insufficient adjustment to the fall in oil prices. The reserves remained low in the remainder of the year despite the increase in oil prices due to continued sales of foreign exchange. In this context, staff urges the authorities to rebuild reserves and limit the sales of foreign exchange to smoothing short term volatility.

33. It would be important to strengthen the financial sector. The staff welcomes the authorities’ renewed emphasis on increasing enforcement of prudential regulations by taking prompt corrective actions in cases of shortfalls. The authorities are encouraged to continue to take measures to reduce NPLs, and to increase provisioning and capital. The staff urges the authorities to fully implement measures included in the restructuring plan for Omdurman National Bank and to prepare it for eventual privatization. The authorities are encouraged to continue their efforts to enhance financial intermediation, including through developing nonbank financial institutions by putting in place an appropriate legal and supervisory framework. Also, efforts are needed to further improve the operation of the credit information bureau.

34. Sudan is in debt distress and its arrears continue 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 to the extent possible the contracting or guaranteeing of nonconcessional debt, as such borrowing would further weaken debt sustainability. Staff urges the authorities to make payments to the Fund on a regular basis to ensure meeting the payments target for 2010.

35. The staff believes that the SMP continues to meet the standard of upper-credit-tranche conditionality, except for the proposed level of nonconcessional borrowing. The SMP is a valuable tool to support reform momentum. It contains important actions to maintain fiscal discipline and promote financial sector development. It also provides a framework within which donors can support the peace process and provide aid, including in the afflicted areas.

36. While Sudan’s economic prospects are good, downside risks remain. The main risk would be a weakening of the resolve to maintain macroeconomic stability and advance critical reforms if the political or security situation worsens. The impact of the global financial crisis is likely to continue to affect the recovery of the already low level of investment and remittances. In addition, volatile oil revenue and a deceleration in oil production in the coming years highlight the need to maintain prudent policies and move ahead with structural reforms to sustain growth.

37. 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, 2006–10

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Sources: Sudanese authorities; and Fund staff estimates.

CPI inflation for 2008 onward is based on a new base.

Includes estimated capital spending by state governments.

In calculating the base non-oil balance, oil revenues and grants were removed from revenues, while pipeline fees (recorded under goods and services) and oil-related subnational transfers were deducted from expenditures.

In percent of non-oil GDP.

In percent of exports of goods and services.

Table 2.

Sudan: Central Government Operations, 2007–101/

(In millions of SDG)

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Source: Sudanese authorities; and Fund staff estimates.

The exact characterization of Sudan’s reporting basis is neither accrual nor cash. Revenues and most expenditures are still reported on a cash basis; however, goods and services spending (the main source of domestic arrears) are recorded on a payment-order due basis (starting January 2008) in the context of the switch to the GFS 2001 system.

In calculating the base non-oil balance, oil revenues and grants were removed from revenues, while pipeline fees (recorded under goods and services spending) and oil-related subnational transfers were deducted from expenditures.

In percent of nominal GDP.

In percent of non-oil GDP.

Table 3.

Sudan: Monetary Authorities’ Accounts, 2006–10

(In millions of Sudanese guineas)

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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 4.

Sudan: Monetary Survey, 2006–10

(In millions of Sudanese guineas)

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Sources: Sudanese authorities; and Fund staff estimates.
Table 5.

Sudan: Balance of Payments, 2006–10

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

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Source: Fund 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.

SDR 125.8 million allocation are not included.

Table 6.

Sudan: Medium-Term Macroeconomic Scenario, 2007–15

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

Includes estimated capital spending by state governments.

cash basis. In calculating the base non-oil balance, oil revenues and grants were removed from revenues, while pipeline fees (recorded under goods and services) and oil-related subnational transfers were deducted from expenditures. In augmented versions, interest and net NFA acquisition were deducted from expenditures to yield the primary and operating balances, respectively.

As a percent of non-oil GDP.

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

Table 7.

Sudan: Indicators of Debt Service Capacity, 2004–09

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

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Sources: Fund staff estimates.

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

As percent of Eight Review Quota.

3/ Domestic fiscal revenue, net of transfers to states.
Table 8.

Sudan: Financial Soundness Indicators for the Banking Sector, 2005–09

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Source: Central Bank of Sudan.

Data for December 2006 refer only to 27 of the 30 existing banks (exclude Sudanese Argiculture Bank, Capital Bank, and Industrial Development Bank).