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.
June 23, 2010
We thank staff for their well balanced reports and their candid dialogue with the authorities. We would also like to convey the authorities’ appreciation to Management and Executive Directors for their constructive dialogue and supportive engagement over the years, particularly on the important issue of normalization of relations with the Fund. My Sudanese authorities broadly agree with the staff’s assessment of economic performance, prospects and challenges going forward, and consent to the publication of the reports.
Sudan has posted impressive economic performance, despite the difficult global economic environment and complex internal challenges. Spillovers from the global economic crisis impacted the economy particularly through reduced oil and other export earnings, remittances, and FDI. Nevertheless, my authorities’ prudent macroeconomic policies and expeditious responses to the crisis have allowed them to maintain a reasonably high level of economic growth and macroeconomic stability, while continuing to tackle the numerous challenges of implementing the peace agreements. Program developments have been broadly positive and most of the quantitative targets under the SMP were met. However, the need to mitigate the negative impacts of the external crisis on the economy and society has moderated the authorities’ achievements in the fiscal area and contributed to a low level of foreign exchange reserves.
Challenges
Sudan is at a crucial juncture. Having carried out presidential, gubernatorial, legislative and local elections in April 2010, a referendum to determine the nation’s destiny is slated for early 2011. The country faces enormous challenges of building peace while addressing the demands for post-conflict reconstruction, broad based development and poverty reduction. The high dependency on oil revenues creates additional vulnerability, given its high price volatility and nonrenewable nature. Consequently, my authorities have placed the normalization of relations with the Fund and realization of debt relief high on their strategic agenda, as these are important factors in securing peace and achieving meaningful development.
Normalization of relations with the Fund and debt relief
My authorities have established an impressive, and arguably the longest, track record of good performance under thirteen years of SMP. They have assiduously engaged the Fund, implemented agreed policies and measures under their programs, and made payments commitments to the Fund. Sudan’s SMPs continue to meet upper-credit-tranche conditionality and the country has long satisfied the requirements for arrears clearance and the start of the HIPC process.
My authorities have continuously engaged Management and Executive Directors to seek support for the long overdue process towards debt relief. The authorities reiterate the importance of debt relief to Sudan’s stability and development. They wish to underline the development and peace-building challenges facing Sudan and the need to deliver on the debt relief promises made by the international community to the people of Sudan within the framework of the Comprehensive Peace Agreement. They consider the resolution of the debt issue as an important element in the implementation of the various peace agreements. They are concerned that if the issue is not resolved soon it may end up complicating the ongoing political process in the Sudan.
My authorities, therefore, expect the Fund to take the lead and use its leverage and good offices to facilitate expeditious arrears clearance. The authorities’ sustained and proactive engagement with the Fund, their impressive performance record, and their commitment to reform and development demand that the Fund and the international community avail to Sudan the necessary support.
Enhancing and broadening economic growth
One of the major challenges facing Sudan is enhancing and broadening growth to address the overdependence on oil revenues. At present, the value added of the oil sector is only about 10 percent of GDP, compared to 35 percent for agriculture and 50 percent for services. However, its contribution to the country’s external and fiscal balances has been of critical importance, accounting for about 95 percent of exports and more than half of government revenue. The authorities are cognizant of the inherent problems of such dependency, particularly in view of the expected depletion of the currently known reserves. Consequently they have been accelerating programs aimed at diversifying the sources of growth, with keen appreciation of the fact that the non-oil sector, particularly agriculture, is performing below potential. The authorities are implementing a broad agricultural development program incorporating irrigated and rain-fed farming, livestock development, and expansion of nontraditional products and exports under the Revitalization of Agriculture Program. The program hinges on utilization of the opportunities created by the new Merowe dam, rehabilitation and reclamation of old irrigation infrastructure, and provision of improved seeds.
The authorities are undertaking broad-ranging reforms to encourage private sector investment, including FDI and public private partnerships. The business environment is being improved through a number of reform measures, including streamlining business registration procedures and establishing a one-stop shop. Fiscal and monetary policies have been geared to respond to the critical requirements and bottlenecks of diversification. For example, the fiscal space afforded by higher oil and tax revenues was used to support higher-than-programmed capital expenditure, particularly infrastructure. The central bank is focusing on increasing financing access to farmers and has already established channels for microfinance to the agricultural sector. Despite these efforts, however, the lingering impact of the global crisis and the external political perception of the country continue to constrain the pace of development.
Recent developments and program performance
In the five years up to 2008, the Sudanese economy was one of the fastest growing economies in SSA, with an average annual growth of 8 percent. However, due to the spillover effects from the global crisis, real GDP growth rate decelerated to 4.5 percent in 2009. Average inflation on the other hand, declined. Developments in the other key areas were mixed. The authorities determined effort led to substantial improvements in tax revenues, in line with the program target. However, higher-than-programmed expenditure, as well as repayments of domestic arrears, resulted in the overall deficit being higher than programmed. Nonetheless, the authorities adhered to the limit on non-concessional borrowing. Monetary policy focused on mitigating the impact of the external shocks on the economy by, inter alia, ensuring sufficient credit to the private sector to partially offset the impact of liquidity shortages. The substantial decline in oil prices in the first half of 2009 led to a widening of the current account deficit and deterioration in the overall balance of payments position.
Important structural reforms were completed in 2009. Tax compliance and fiscal management and administration were improved. The comprehensive review of the tax policy regime is ongoing, and is expected to be completed in July 2010. The Ministry of Finance and National Economy (MOFNE) was reorganized, benefiting from Fund advice, and capacity enhancing measures to improve its operations are on track. In the financial sector, a restructuring plan for Omdurman National Bank was completed, in line with the recommendations of an independent auditor.
Macroeconomic policies in 2010
The authorities recognize that the challenges to economic and financial management will remain complex in view of the expected slow recovery in the global economy and ongoing implementation of the various peace agreements. The preparation for the 2011 referendum and, hopefully, the implementation of the recent Doha agreement on Darfur may add to the already high financial obligations. The authorities expect to continue to experience low foreign exchange earnings from oil exports, foreign direct investment, and remittances. In the current circumstances, they fully recognize the need to proceed without delay with their reform efforts. They intend to place emphasis on maintaining macroeconomic stability, safeguarding and rebuilding foreign exchange reserves, and enhancing economic growth.
In this regard, the fiscal and monetary policies agreed with staff reflect the authorities’ commitment to these objectives. The authorities intend to contain the overall fiscal deficit at 4.2 percent of GDP in 2010, with a number of new tax and expenditure measures. These measures constitute the bulk of the program targets and structural benchmarks incorporated in the SMP.
The authorities are engaged in a comprehensive effort to build and upgrade public sector capacity both at the central and state levels. They have identified the gaps and weaknesses in the relevant public institutional infrastructure and prioritized their technical assistance needs. They have discussed their priorities with the staff.
In the financial sector, my authorities attach high importance to strengthening the supervision, improving the regulatory framework, and addressing the problems and vulnerabilities of the sector. They have developed an action plan to resolve the problems of the banking sector within a realistic timeframe, benefiting from the FSAP recommendations.
Conclusion
The authorities’ prudent policies have enabled Sudan to weather the ongoing global crisis and maintain reasonably high economic growth. Sudan continues to make progress in realizing national political and social objectives but faces difficult and complex challenges. In this context, and in the thirteenth year of an SMP, the authorities continue to show strong commitment to strengthening their engagement with the Fund and the international community. They seek Fund support for arrears clearance and ascending to the path of debt relief.