Statement by Moeketsi Majoro, Executive Director for Sudan, September 21, 2012

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.

The secession of South Sudan on July 9, 2011 has taken a toll on the macroeconomic stability of Sudan owing to significant loss of oil revenues and foreign currency reserves, which in turn have precipitated unprecedented economic challenges, amidst an unsustainable debt situation, which the international community is yet to come forward to help resolve. My authorities face protracted balance of payments problems with a widening current account deficit, growing pressure on the exchange rate and inflation, a high fiscal deficit, and a growing debt burden. The loss of a significant part of oil sector activity calls for urgent search for alternative sources of growth and employment, against the backdrop of persistent border security tensions, constrained access to international financial resources, and high levels of poverty and unemployment, especially among the youth. My authorities are committed to undertaking necessary policy adjustments and structural reforms to restore and sustain macroeconomic stability, as well as enhance growth. In this regard, they seek technical and financial support from development partners to facilitate an adequate and timely response to this evolving and permanent shock to the economy.

Economic growth and diversification

Sudan’s economic activity is expected to remain weak in the near term. However, my authorities have put together the Five-Year Strategic Plan 2012-2017 aimed at enhancing growth and development in the context of loss of significant fiscal resources. The target is to achieve 6 percent growth by 2016 supported by increased private sector participation. In addition, to enhance youth employment, the plan targets to build capacity through training programs and expanded microfinance. Moreover, the plan articulates a Three-Year Emergency Program that spells out the policy adjustment and reforms required to restore macroeconomic stability.

Plans are underway to diversify the sources of growth away from oil production. A key focus is to enhance agricultural production to meet domestic consumption needs especially of wheat and cooking oil, and to expand exports of cotton and animal products. As a result, there has been an increase in the size of cultivated land both in irrigated and rain-fed areas. Also efforts are underway to enhance agricultural productivity through strategic partnerships with China, Brazil and Australia. Furthermore, my authorities have extended and annexed the Green Revolution Plan 2008-11, a plan dedicated to diversify economic activity into agriculture, as part of the Five-Year Strategic Plan.

My authorities are increasing investments in the oil sector to enhance production through increased prospecting and expanded refining activity. Their target is to increase oil production from the current 115,000 to 180,000 barrels per day by end 2012 from new discoveries and use of more efficient technology. There are also plans to expand three refineries in Khartoum, Elobayed, and Port Sudan to serve the domestic market. Further, efforts are being made to enhance exploration and mining of gold, with three companies, Hassai Gold Mine, Dalgo Gold Mines, and Ariab Mining Company, currently involved in production and plans are advanced to set up a gold refinery and establish a commodity market for gold in the near future.

Fiscal policy and reforms

My authorities have revised the FY2012 budget and decided on revenue and expenditure measures to reduce the budget deficit. In preparing the budget, my authorities had initially taken into account expected flows of oil transit fees meant to finance one third of the budget but with delays in finalizing the negotiations on oil revenue sharing with South Sudan, it became difficult to fill the significant budget hole. The measures spelt out in the revised budget include, on the expenditure side, a cut in the number of constitutional posts, a reduction in privileges and entitlements of constitutional post holders, prioritizing government spending, tightening government procurement while encouraging purchases from the local market, rationalizing allocation of fuel to government departments, and continuing with liquidation and privatization of government companies. Revenue measures include an increase in development tax on imports from 10 to 13 percent except for capital commodities, production inputs, and some essential commodities, an increase in VAT from 15 to 17 percent and an increase in business profit tax from 15 to 30 percent.

To cushion the impact of these measures on the vulnerable population, the budget proposes to lift fuel subsidies gradually, reduce customs duty levied on dry milk and edible oil, retain tax and duty exemptions on imported wheat, flour, sugar, pharmaceutical drugs and food additives, and increase the number of poor households benefiting from the direct government support from 500,000 to 750,000.

My authorities recognize that gold and agricultural sectors are potential sources of raising tax revenue. However, at the moment, they fear that imposing taxes may result in smuggling of gold, and consequently loss of foreign reserves, as the sector is presently dominated by small artisans. In addition, imposing agricultural tax is not considered appropriate as it would mean taxing the poor who derive their livelihood from agriculture.

Last month my authorities reached an agreement with South Sudan on the outstanding issues around oil transit fees and transitional financial assistance. The transit fee has been set at US$11 per barrel for the crude oil from Unity state and US$9.10 for Upper Nile state oil for a period of three and half years. In addition, a payment of US$3 billion was agreed upon as part of the transitional financial assistance expected to cover one third of the authorities’ budget for the oil revenue lost in the first six months of FY2012. However, implementation of the deal is dependent on Sudan and South Sudan agreeing on the remaining issues under the CPA 2005, especially border security.

Monetary policy

Inflationary pressure has recently increased but my authorities are committed to take policy measures to rein in inflationary expectations. Inflation increased from 30 percent in May 2012 to 37 percent in June and 42 percent in July. My authorities attribute this sharp increase to imported inflation mainly because of the heavily depreciated parallel exchange rate that is used widely in payments of international transactions. They also view the purchase of gold by the Central Bank of Sudan (CBOS) at the parallel rate, and selling at the official rate as a key channel of injecting liquidity and increasing inflationary pressure. CBOS is taking various measures to reduce money supply including by raising banks’ cash reserves and undertaking open market operations.

My authorities are committed to a flexible exchange rate regime but prefer a gradual and comprehensive approach to avoid escalating inflation. The first quarter of 2012 saw the parallel exchange rate depreciate significantly as a result of deterioration in the balance of payments, increased speculative activities, and foreign currency substitution needs. Various measures have been taken to stabilize the exchange rate including by rationing imports and increasing exports of gold and agricultural products. My authorities have also received foreign deposits from friendly partners aimed to build official foreign reserves. Further, to align the official exchange rate with the parallel rate, both the indicative rate and the commercial banks trading rate have depreciated significantly.

Debt relief

My authorities have made significant progress on the technical aspects of the debt relief process. In addition to successful debt reconciliation, the IPRSP has now been passed by parliament and is ready for sharing with the IMF and World Bank. Further, my authorities have continued to demonstrate their commitment to normalizing their relationship with the Fund by continually making payments to clear their arrears with the Fund, albeit with a reduction in the amounts paid mainly because of the challenging economic situation. Despite the progress made so far and the continuing commitment to engage with the Fund through the Staff Monitored Program, there are growing concerns on the feasibility of reaching the decision point of debt relief before the expiry of the “Zero Debt Option” in July 2013, and the implications that this would have on the goal for “Two Viable States”. My authorities are keen to see political issues surrounding the debt relief resolved as soon as possible.

Relationship between Sudan and South Sudan

With regard to the Comprehensive Partnership Agreement (CPA) 2005, there are outstanding issues between Sudan and South Sudan that are yet to be agreed upon. They include security arrangements, border demarcations, the final status of the contested Abyei area, cross-border trade, and the status of nationals residing in both countries. My authorities are committed to a successful and timely conclusion of these issues to ensure peaceful coexistence and improved trade relations which are critical for viability of the two states.

Conclusion

My authorities are facing critical challenges in restoring macroeconomic stability and revamping economic growth. While they have shown commitment to policy adjustment and implementation of the reform agenda, maintaining the momentum is threatened by limited access to external resources. Furthermore, the failure to move quickly to decision point in the debt relief process is constraining needed development financing. My authorities are thankful for the continued policy advice and technical support from the Fund, and are seeking your support in overcoming the considerable challenges facing the country.