February 9, 2011

My authorities have demonstrated their commitment to peace and democracy by ending many years of internal conflict and holding the referendum on Southern Sudan self-determination on schedule. Despite the significant challenges, they have been able to achieve a strong track record of sound economic policy implementation and structural reforms as demonstrated by a series of successful Staff Monitored Programs (SMPs) over the past decade which improved economic management capacity. My authorities have also continued to cooperate with the Fund on policy implementation and clearing of arrears. In this regard, they have benefitted from IMF technical advice and have continued to make payments to the Fund broadly in line with their commitments.

While the strong engagement with the Fund has helped the authorities restore macroeconomic and financial stability, my authorities are disappointed at the slow pace of full normalization of relations with the Fund. They particularly regret that the good cooperation has not led to external debt relief which is critical for economic normalcy. Sudan’s debt burden is not sustainable without debt relief and with limited access to concessional financing, my authorities have had to borrow on non concessional terms, further compounding the debt problem. With the economy struggling to regain its growth momentum after the global downturn and the uncertainties surrounding the outcome of the recent referendum, more challenges are expected in macroeconomic management. Without the full support of the international community, it would be difficult to consolidate the peace and maintain the economic successes of the past decade. Going forward, my authorities are committed to continue their engagement with the Fund as they strive to address these issues.

Economic growth prospects

Currently, my authorities are implementing their Medium Term 5 Year Plan (2007-2011) through the FY 2011 budget designed under the assumption of a unitary state. However, my authorities are aware that the near-term economic outlook would need to reflect recent political developments following the final announcement of the referendum results and the success in resolving outstanding issues spelt out in the CPA (2005) in the transition period. In this regard, many committees for various clusters of the post referendum issues are addressing the implications of possible secession including on the macro economy. A supplementary budget is expected to capture the ensuing changes. In the medium term, development financing needs are expected to be enormous requiring significant support by the international community including resolving the external debt issue. Not only do the authorities foresee diversification of sources of growth as critical, but also promoting private sector led growth. My authorities have supported diversification by increasing government financing to the agricultural sector through the Green Mobilization Program (2008-2011) whose key objective it to revitalize the agricultural sector. They are also committed to addressing key factors in creating an enabling business environment, weak market institutions, inadequate infrastructure and cumbersome administrative barriers. The government of Southern Sudan (GOSS) is also prioritizing development of governance institutions and structures and, to that end, is in need of substantial technical and financial support.

Monetary policy

My authorities recognize the challenges of conducting monetary policy in the context of limited foreign financing, uncertainty in oil revenues and declining foreign reserves. However, they are committed to a prudent monetary policy and they consider containing inflation as the primary objective of monetary policy. Thus, liquidity management including interventions in the foreign exchange market are all aimed at restraining inflation. In managing foreign reserves, my authorities’ strategy is to rationalize demand of foreign exchange through judicious restraint on non-priority imports and also promoting non-oil exports as well as working towards encouraging non-debt creating flows, such as foreign direct investment. It is in this context that the authorities introduced measures to curb demand for foreign currency during the FY 2010 in an effort to build foreign reserves. My authorities are taking a cautious move towards a flexible exchange rate. In this regard, they intend to achieve exchange rate stability by pegging the Sudanese currency to a basket of currencies.

Fiscal policy

My authorities have implemented various measures to enhance mobilization of tax revenue and are committed to strengthen public finance management. Various tax measures have been put in place since 2000 including the introduction of VAT, a petroleum excise tax and improvements in the import tariff structure. Reducing tax exemptions and evasion as well as expanding the tax base remain an important fiscal policy objective. They have discontinued the practice of providing ad hoc exemptions under the Investment Encouragement Act (IEA) and are considering bringing a large section of the agricultural sector into the tax base. This notwithstanding, the growing services sector which mainly consists of small and medium-sized enterprises has not contributed significantly to overall tax collection while a large and growing informal sector and unrecorded transactions especially among the self-employed in rural agricultural sector and urban centers are complicating tax compliance. With the review of the tax policy completed, the authorities look forward to further deepening their tax reforms.

Significant reforms in public finance management (PFM) have been implemented including establishment of a modern budget management system, but a lot more needs to be done. Going forward, my authorities will focus on deepening PFM reforms which is complicated by limited fiscal decentralization, as most state and local authorities lack the technical skills and information technology needed to mobilize revenue from local sources. They will be seeking support in these areas from the Fund and other development partners.

Overdue financial obligations and debt

My authorities have continued to meet their overdue obligations to the Fund with payments in 2010 exceeding obligations falling due and authorities’ commitments. As a result overdue obligations have declined. It is their expectation that the Technical Working Group on Debt will finalize the debt stock reconciliation soon so that the process of resolving debt obligations is completed in the transition period. My authorities are optimistic that they will reach an agreement on how to share the debt obligations with the GOSS. They call upon the donors to support them in the efforts to qualify for debt relief and to create the necessary macroeconomic space to pursue concertedly economic growth and poverty reduction objectives.

The post-referendum period

The final official announcement of the referendum results will be made on February 14, 2011. The authorities are assessing the macroeconomic implications of a possible secession by Southern Sudan. Independence of the South would mean significant loss of oil revenue for the North, resulting in domestic and external imbalances which would require strong donor support to address, while the South would also require assistance in building the institutions to run the country and manage the economy. A balanced approach by the international community to assist both the North and the South would be critical in maintaining peace and stability of the region. In accordance with the CPA (2005), some key outstanding issues, including wealth and debt sharing, currency, nationality and borders, must be resolved in the transition period in order to maintain stability and progress. My authorities have committed to respect the outcome of the referendum and to support viability of the Southern Sudan economy. They are committed to providing needed technical assistance to the GOSS given that it faces various challenges including limited capacity in its civil service. The GOSS is also expected to use the Sudanese pound until their legal tender is in place. Further, the GOSS expects to tap into the Fund’s technical assistance in setting up its monetary system including a new currency, exchange rate regime and financial systems. My authorities are committed to continue with their membership and retain their quota at the IMF while the GOSS will possibly be making an application for admission for membership of the IMF in due course and are counting on the Executive Board’s support.