Sudan
Staff Report for the 2012 Article IV Consultation

Staff Report for the 2012 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on July 23, 2012, with the officials of Sudan on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on September 7, 2012. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

Abstract

Staff Report for the 2012 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on July 23, 2012, with the officials of Sudan on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on September 7, 2012. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

Introduction

1. Deep-seated security issues have for years posed serious challenges to Sudan’s economic prosperity. Sudan has experienced an alternation of civilian and military governments and two protracted North-South wars that took a heavy toll on human life and economic resources. The Comprehensive Peace Agreement (CPA), signed on January 9, 2005 by the government of Sudan and the Sudan People’s Liberation Movement/Army (SPLM/A) and the secession of South Sudan in 2011, have created a window of opportunity for peace and stability. However, further efforts are needed to address ongoing conflicts in bordering states.

2. The 2012 Article IV consultation is taking place at a unique juncture in the history of Sudan, following South Sudan’s secession in July 2011. The secession resulted in Sudan losing some three-quarters of its oil production, half of its fiscal revenues, and about two-thirds of its international payment capacity (Figures 1 and 2, and Box 1). Adjusting to a permanent shock of such magnitude is a daunting challenge and requires a strong policy response at a time when international financial support is very limited (Figure 6). Sudan’s unstable security situation adds to this challenge.

Figure 1.
Figure 1.

Sudan: Oil Sector Contribution to GDP

Citation: IMF Staff Country Reports 2012, 298; 10.5089/9781475548341.002.A001

Sources: Sudanese authorities; and staff calculations.
Figure 2.
Figure 2.

Sudan: Oil Production and Revenues

Citation: IMF Staff Country Reports 2012, 298; 10.5089/9781475548341.002.A001

Sources: Soudanese authorities; and staff estimates and projections.

Impact of the Secession of South Sudan

The secession of South Sudan is having a significant impact on the Sudanese economy. While Sudan’s economy is relatively diversified and open, it has developed since 1999 a marked dependency on the oil sector that has substantially increased its vulnerability to external and fiscal shocks. The oil sector’s contribution to GDP has been modest, hovering around 15 percent. However, it provided sizeable budget revenues and contributed a major share of the country’s foreign exchange receipts. The economic and financial losses related to South Sudan’s secession are substantial and have affected all the sectors of the economy.

Main Impacts of the Secession on Sudan’s Economy

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Sources: Authorities; and staff calculations and estimates.
  • Real sector: The loss of output is concentrated in the oil sector and estimated at 75 percent, compared with 5–10 percent in the rest of the economy. In terms of value-added, the overall loss is about SDG 50 billion (26¼ percent of 2012 GDP), of which about 19 percent of GDP in the oil sector.

  • Fiscal sector: The revenue loss for the government is estimated at SDG 12 billion (6¼ percent of GDP), corresponding to the foregone oil revenues net of the transfers to South Sudan and the savings on wages of South Sudanese civil servants.

  • External sector: The main impact is related to the loss of oil exports estimated at about US$6.6 billion (12.9 percent of GDP) in 2012.

  • Monetary sector: The July 2011 data indicate that the secession led to a downward adjustment of Sudan’s official reserves by 17 percent (US$0.5 billion), and that of the stock of bank credit to the private sector by 7 percent (0.9 of GDP) corresponding to the amount of credit outstanding provided by the southern branches of Sudanese banks.

Figure 3.
Figure 3.

Sudan: Credit to the Government; Inflation; and Reserve Money, 2009–12

(Change in percent)

Citation: IMF Staff Country Reports 2012, 298; 10.5089/9781475548341.002.A001

Source: Sudanese authorities.
Figure 4.
Figure 4.

Sudan: Official and Parallel Exchange Rates, 2007–12

(SDG per U.S. dollars)

Citation: IMF Staff Country Reports 2012, 298; 10.5089/9781475548341.002.A001

Source: Sudaneseauthorities.
Figure 5.
Figure 5.

Sudan: Selected Economic Indicators, 2005–12

Citation: IMF Staff Country Reports 2012, 298; 10.5089/9781475548341.002.A001

Sources: Authorities; and staff estimates and projections.
Figure 6.
Figure 6.

Sudan: Comparison 2012 and 2010 Article IV Staff Reports

Citation: IMF Staff Country Reports 2012, 298; 10.5089/9781475548341.002.A001

Sources: Sudanese authorities; and staff estimates and projections.

3. After a year of uncertainty, the authorities approved in late June 2012 a comprehensive reform program to address the deterioration of the country’s economic and financial situation. The program—which builds on the authorities’ Three-Year Emergency Program1—includes an exchange rate devaluation of about 66 percent, an increase in key taxes, a sharp reduction in fuel subsidies, cuts in non-priority spending, and a strengthening of the social safety nets.

4. The response to past IMF advice has been broadly satisfactory. Sudan implemented reforms under a series of 13 Staff-Monitored Programs (SMPs) between 1997 and 2011. Notable achievements include progress in restoring macroeconomic stability, liberalizing the economy, and improving economic management capacity. However, weaknesses persist in financial management, revenue mobilization, and monetary management. The Fund continues to support the authorities reform efforts through technical assistance and policy advice (Box 2).

The Fund’s Role in Sudan Since South Sudan Secession

Since the secession of South Sudan, Fund support to Sudan has consisted of the following:

  • Intensive economic advice and technical assistance on policies to address the impact of the South’s secession.

  • Co-chairing with the World Bank the Technical Working Group on Sudan’s external debt (see paragraph 49).

  • Providing economic advice to the African Union High Implementation Panel (AUHIP) in charge of mediating between Sudan and South Sudan.

  • Setting-up of an inter-departmental working group to ramp-up the Fund’s work on Sudan prior to the secession of South Sudan.

Performance Under SMPs, 1997–2011

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Sources: Sudanese authorities; and staff estimates.

Starting in 1999.

5. The political situation remains fragile owing to persisting, albeit low intensity, protests following the announcement of government reforms, and the volatile security environment. Since South Sudan’s secession, tensions and military skirmishes between the two countries have persisted. African Union–sponsored negotiations have recently led to a tentative agreement on oil-related issues. Implementation of this agreement is, however, contingent on reaching an agreement on borders security issues (Box 3).

Oil-Revenue Agreement Between Sudan and South Sudan

Sudan and South Sudan reached in early August 2012 a preliminary agreement on oil-revenue sharing. Implementation of this agreement is, however, contingent on reaching an agreement on borders and other security issues. The agreement covers a period of 3 ½ years, starting from the resumption of oil production in South Sudan. It includes both a transitional financial arrangement (TFA)—a transfer from South Sudan—and pipeline-related fees. Under the agreement South Sudan will:

  • Provide a TFA payment that totals US$3.028 billion over 3½ year period. The TFA payment is expressed in per barrel terms, as US$15/bl, based on the South Sudan’s projection of an average of 150,000 bl/day of oil production. If production is higher, payments will be made at the rate of US$15/bl until cumulative payments reach US$3.028 billion.

  • Pay pipeline-related fees averaging US$9.7/bl. These fees were also negotiated for this 3½ year period. Although—unlike the TFA payments—these will continue after the 3 ½ year period, after being renegotiated.

In addition, it was agreed that Sudan and South Sudan would initiate a joint outreach campaign to the international community, with four objectives:

  • mobilize financing to compensate for Sudan’s loss of oil revenue;

  • garner support for debt relief for the two Sudans, in the context of the Zero Option (see paragraph 50);

  • encourage financing for South Sudan’s development needs; and

  • lifting of sanctions on Sudan

Recent Development, Outlook and Risks

A. Developments in 2011 and the First Half of 2012

6. Sudan’s economic conditions deteriorated considerably in 2011 in the aftermath of South Sudan secession. Nonoil real GDP growth decelerated to 3.4 percent and inflation picked up at about 18.5 percent (Figure 5 and Table 1). The overall fiscal deficit reached 1.3 percent of GDP (Table 3) and was mostly financed by the banking system, which resulted in reserve money growing 28 percent; credit to the economy was subdued at 8 percent (Tables 4 and 5). There was a contraction in the balance of payments with exports declining by 13 percent, reflecting the drop in oil exports which was only partially offset by the increase in gold exports. Imports declined by about 8 percent. This restructuring of the trade balance resulted in a current account deficit of about 0.5 percent of GDP (Table 2).

Table 1.

Sudan: Selected Economic Indicators, 2008-13

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Sources: Sudanese authorities; and staff estimates and projections.

In the calculation of the growth rates: 2010 aggregates are related to unified Sudan; 2011 aggregates include South Sudan for the first half of the year; and 2012 aggregartes are related to post-secession Sudan.

Table 2.

Sudan: Balance of Payments, 2008–17

(In Millions of US Dollars)

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Sources: Sudanese authorities; and staff estimates and projections.
Table 3.

Sudan: Government Operations, 2008–17

(In Millions of SDGs)

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Sources: Sudanese authorities; and staff estimates and projections.

Nonoil balances exclude oil revenues, grants, transfers to South, oil related transfers to Northern states and pipelines fees paid by the government.

Table 4.

Sudan: Monetary Survey, 2008–13

(In Millions of SDGs)

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Sources: Sudanese authorities; and staff estimates and projections.