This selected issues paper on Sudan was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on September 7, 2012. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Sudan or the Executive Board of the IMF.

Abstract

This selected issues paper on Sudan was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on September 7, 2012. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Sudan or the Executive Board of the IMF.

V. Growth and Employment in Sudan1

Over the past three decades, Sudan’s growth performance improved gradually, but could not provide enough jobs for a rapidly growing labor force, especially for youth and women. A number of factors may help understand the weak link between growth and job creation, including a heavy reliance on the oil sector, underdeveloped private sector, and a mismatch between education and skill levels among the unemployed and labor market demand. Looking ahead, an effective strategy would need to aim at fostering productivity gains and higher private sector investment as the basis for growth and employment.

A. Introduction

1. During the past three decades, Sudan’s growth performance improved gradually but could not provide enough jobs for a rapidly growing labor force. Notwithstanding a history of relatively high inflation, official estimates show that real GDP increased since the 1980s. With a rapidly growing population, the average real per capita income remained low by regional standards. Growth performance could not keep pace with a growing labor force, leading to persistent unemployment of about 20 percent, particularly affecting youth and women, notwithstanding significant employment in the informal sector (Box V.1).2

Why Is Youth Unemployment High in Sudan 1/

The magnitude and persistence of youth unemployment are a major concern to the Sudanese authorities. Both supply and demand as well as institutional factors impact youth participation and unemployment rates in Sudan.

Supply factors include:

  • (i) Sudan’s high population growth rate, which has resulted in a relatively young population and a high proportion of youth in the working-age group at a time when fewer jobs are being created.

  • (ii) Greater geographic mobility of youth than other cohorts. The high rate of youth urbanization (about 41 percent, against 31 percent for adults) is partly due to labor migration in search of better livelihood in cities and partly due to population displacement caused by past conflicts in the country.

  • (iii) The return, after the signature of the 2005 Comprehensive Peace Agreement (CPA), of ex-combatants, many of whom were below 30 years of age.

  • (iv) The low level of initial schooling and lack of matching mechanisms that smooth the school-to-work transition. High school graduates often lack of basic knowledge and skills for gainful employment, which diminishes the prospects for their participation in the labor force.

Demand factors include:

  • (i) Strong oil-driven growth in Sudan over the past decade has been accompanied by growing unemployment due to limited investment in the non-oil sector. The surge in aggregate demand following the oil boom was largely met through increased imports with limited spillovers to the rest of the economy. Agriculture, which provided employment for an estimated 45 percent of youth in 2011, has become less competitive and agricultural exports declined significantly owing to the overvalued exchange rate, reducing incentives especially for young farmers.

  • (ii) Weak demand for labor in the formal sector. In the absence of unemployment insurance and declining jobs in the formal sector, many of the unemployed end up in the informal sector where productivity and wages are very low.

  • (iii) The unemployed youth are disadvantaged due to their relative inexperience and lack of relevant skills, leading some employers to resort to foreign workers who are efficient and have the needed skills.

Youth unemployment is also driven by other factors including lack of employment information, career orientation, and ineffective labor market institutions. Job opportunities are not frequently advertised through the labor market, and hiring, often done through the labor market and the informal sector, relies completely on family connections and personal networks for recruitment.

1/ See, for example, UNDP (2012), and Sudan Central Bureau of Statistics (2010).

B. Growth Performance

2. Macroeconomic developments had been volatile until the early 1990s and depended mainly on agriculture (Figure V.1). Real GDP growth alternated from a maximum of about 17 percent (1976) to a minimum of -6.5 percent (1985). The inflation rate had been on an upward trend, reaching about 133 percent in 1996, mainly due to the monetization of large fiscal deficits (figure V.2). Furthermore, already in the 1970s large trade imbalances started to build up as the imports of consumer- (mainly food), intermediate- (petroleum, chemicals), and capital goods (machinery and transport equipment) largely exceeded the exports of agricultural products. Even though remittances and foreign aid could help to narrow the financing gap, the remaining amount of capital had to be raised in the form of foreign medium- and long-term loans. These chronic deficits resulted in a rapid accumulation of debt arrears, which represent over 80 percent of total debt stock.

V.1.
V.1.

Real GDP Growth 1969–2010

(In percent)

Citation: IMF Staff Country Reports 2012, 299; 10.5089/9781616355722.002.A005

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

CPI Inflation, 1964–2010

(In percent)

Citation: IMF Staff Country Reports 2012, 299; 10.5089/9781616355722.002.A005

3. In response to the deteriorating economic situation, the authorities issued a three-year National Salvation Program in June 1990. The program aimed to reduce the fiscal deficit, increase the role of the private sector, and privatize public enterprises. It also provided for a removal of controls on prices, profits, and exports. Poor implementation of reforms and continued expenditure pressures resulted in a growing monetization of the fiscal deficit, depreciating domestic currency and raising inflation. With the re-engagement of the IMF in the context of staff monitored programs (SMPs), starting in 1997, the macroeconomic outlook improved significantly and a stabilization process set in. Although agriculture was still the backbone of the Sudanese economy with a share of about 45 percent of GDP in 1999 and over 70 percent of the workforce, the focus had somewhat shifted away to the oil sector at the end of the millennium.

4. The advent of oil in 1999 has led to a shift in the composition of GDP. The increasing share of oil in GDP almost doubled the contribution of the industrial sector to GDP, from 13 percent in 1990–98 to about 25 percent for the period 1999–2010 (Figure V.3). At the same time, the share of agriculture declined from about 42 percent in 1990–98 to about 35 percent for the period 1999–2010. While the direct contribution of oil to GDP was limited, oil resulted in induced growth mostly in construction, trade, hotels and restaurants.

V.3.
V.3.

Sector Contribution to GDP

Citation: IMF Staff Country Reports 2012, 299; 10.5089/9781616355722.002.A005

5. Oil has also been contributing notably to sustained economic growth. The real growth rate picked up at about 3 percent and remained above 5 percent until 2009 (Figure V.3). On average this yielded a growth rate of about 7 percent per year during 1999–2009 compared to 3 percent per year during 1980–98. The 2008 global financial crisis hit Sudan hard mainly through falling oil revenues, declining FDI and reduced remittances inflows. Real GDP growth fell to 4.5 percent in 2009 and an estimated 5 percent in 2010. While the GDP per capita only slightly increased until 1999, it improved significantly since then from about US$334 in 1999 to an estimated US$533 in 2010 (Figure V.4).

V.4.
V.4.

Non-Oil GDP Per Capita 1970–2010

(In Constant 2000 U.S. Dollars)

Citation: IMF Staff Country Reports 2012, 299; 10.5089/9781616355722.002.A005

Sources: Sudanese authorities; and staff calculations.

C. Main Sources of Growth: A Growth Accounting Exercise

6. Over the past two decades, the rate of gross investment (gross capital formation relative to GDP) hovered around 20 percent despite negligible FDI inflows until the mid-1990s. The investment effort has been an important source of growth, as evidenced by the high contribution of capital to GDP growth (Table V.1). However, during this period, despite the strong capital accumulation effort, relatively modest investment efficiency occurred in Sudan, as evidenced by the decline in capital productivity.1 One explanation for this could be that a significant component of investment in Sudan after the advent of oil in 1999 was directed to public investment and infrastructure. Normally such investments do not yield quick returns.

Table V.1.

Determinants of Growth, 1980–2011

article image
Source: Sudanese authorities; and IMF staff estimates.

Defined as output per employee.

Defined as output per unit of utilized capital.

7. Since the mid 1990s, Sudan made notable progress in education and the quality of human capital (Figure V.5). However, these achievements were not fully translated into commensurate labor productivity gains. As shown in Table V.1, labor productivity increased slightly from 3.2 percent in the 1990s to about 3.6 percent in the last decade.

Figure V.5.
Figure V.5.

Human Development Indicators in Sudan

Trends 1980–2011

Citation: IMF Staff Country Reports 2012, 299; 10.5089/9781616355722.002.A005

D. The Growth-Employment Nexus

8. Unemployment in Sudan has remained high and persisted at about 20 percent despite respectable growth rates (5–6 percent). A number of factors may help understand the disconnect between growth and employment (Figure V.6).

Figure V.6.
Figure V.6.

Unemployment and Growth, 1981–2011

(In percent)

Citation: IMF Staff Country Reports 2012, 299; 10.5089/9781616355722.002.A005

Sources: Authorities; and staff estimates.
  • Sudan’s demographic structure: High population growth rates are exerting enormous pressures on labor markets as new generations prepare to enter the workforce. Sudan’s population stood at about 32 million in 2011, growing at about 2.8 percent a year in the past decade. This has generated a labor force estimated at 12 millions in 2011, a rate of about 3 percent a year during the past decade. Youths (ages between of 15 and 24) account for about 20 percent of the total population, participate about 30 percent in the labor force, and about 42 percent of them are unemployment (Text table and Figure V.7).

  • Limited sources of growth: The performance of the agricultural sector, which accounts for over 35 percent of GDP and continuously over 70 percent of job creation, is subject to weather fluctuations. The oil sector contributed around 13 percent of GDP over the past decade, but is capital-intensive and generates relatively few jobs. Also, oil price fluctuations have had a significant effect on growth rates in the past. Furthermore, the loss of three quarters of oil production as a result of South Sudan’s secession is undermining growth prospects, as reflected in a weaker investment climate.

  • Oversized public sector: As in some MENA countries, government institutions in Sudan are overstaffed and government employees enjoy more benefits than in the private sector. In the long run, high levels of government employment limit economic growth by trapping workers in less productive public-sector jobs and deterring investment in the private sector.

  • Underdeveloped private sector: Sudan has undergone a wave of privatization over the past two decades. But many key economic sectors remain under direct or indirect state control. The private sector is still subject to numerous constraints and distortions, and is not growing fast enough to absorb the large number of first-time job seekers.

  • Labor market inefficiencies: Weak and inefficient regulations and institutional settings for organizing the labor market, and its rigidity and lack of dynamism limit employers’ appetite to hire. These include unsustainable practices such as lifetime job security programs in the public sector; large regional imbalances between labor supply and demand; a serious mismatch between the specialization of young university graduates on the one hand and the skills needed by labor markets on the other; and a serious information deficit that limits awareness of emerging job opportunities across the labor force.

  • The North-South conflict: The civil war not only led to displacement of many workers and job losses, but also meant large spending on defense and security issues rather than prioritizing investment in social development and the creation of more employment opportunities; this has in turn contributed to increase in unemployment problems in Sudan.

Labor force participation rate per age groups

(in percent)

article image
Source: CBStat, 2009
Figure V.7.
Figure V.7.

Labor Force: Size, Gender, Composition and Participation Rate, 2011

Citation: IMF Staff Country Reports 2012, 299; 10.5089/9781616355722.002.A005

Source: International Labor Organization, LABORSTA.

E. Medium-Term Unemployment Scenarios

9. This section presents stylized scenarios on the evolution of unemployment over the medium term (2012–17) using ILO (2011) projections of the economically active population based on demographic projections2 and alternative measures of employment-GDP elasticities.3 The main advantage of using this methodology is that it takes into consideration demographic trends that affect the medium-term evolution of the economically active population. However, this approach ignores the impact of changes in economic activity on workers’ decisions to enter or exit the labor force.4

10. The results of the analyses suggest that in the absence of reforms aimed at improving the responsiveness of labor market conditions to changes in economic activity, unemployment is likely to remain high over the medium term.

11. The employment-output elasticity was estimated using time series regressions of the following equation:

Ln(Et)=α+ρ1*Ln(Et-1)+β*Ln(Yt)+ωt,

Et is the level of employment at time t, Yt the level of non-oil GDP at time t, α a constant, and ωt an error term. Official data sources and staff estimates were used to derive employment and GDP series for the period 1980–2011.

12. The baseline scenario shows that using an estimated employment-GDP elasticity of 0.6, and assuming an average growth rate for non-oil GDP of 3 percent (the projected average growth rate for 2012–17) would lead to an increase in unemployment of about 6 percentage points over the medium term: from 19.6 percent estimated for 2011 to about 25 percent in 2017. A more favorable growth performance of the non-oil sector (of about 5 percent) would keep unemployment in 2017 at the level estimated for 2011 (19.6) percent by 2017 (Figure V.8).

Figure V.8.
Figure V.8.

Unemployment Rate Projections

(In percent)

Citation: IMF Staff Country Reports 2012, 299; 10.5089/9781616355722.002.A005

Sources: Sudanese authorities; and staff estimates and projections.

13. The reform scenario shows that assuming employment-GDP elasticity of 0.8 and an average growth rate for non-oil GDP of 3 percent, the implementation of labor market reforms aimed at improving the responsiveness of unemployment to economic activity (higher employment-GDP elasticity), would lead to an increase in unemployment of 3 percentage points, which is still better than the baseline scenario with 0.6 elasticity), from 19.6 estimated for 2011 to about 22.5 percent in 2017. This scenario also shows that a more favorable growth performance of the non-oil sector (of about 5 percent), in addition to reforms that increase the elasticity to 0.8, would reduce the unemployment rate to about 15 percent by 2017 (Figure V.8).

F. Conclusion and Policy Recommendations

14. Sudan’s growth performance improved gradually in the past two decades but could not provide enough jobs for a rapidly growing labor force, especially for youth and women. A number of factors may help understand the weak link between growth and job creation. These include a heavy reliance on the oil sector, with insufficient investment devoted to the rest of the economy, an underdeveloped private sector, and a mismatch between education and skill levels among the unemployed and labor market demand.

15. Formulating detailed policy recommendations for a comprehensive growth and labor market strategy in Sudan is beyond the scope of this chapter. In broad terms, an effective strategy would need to aim at fostering productivity gains and higher private-sector investment as the basis for growth and employment, and would therefore need to place emphasis on several factors, including: (i) accelerating the implementation of the reform program that would improve the business environment and allow the private sector to expand; (ii) removing existing rigidities in the labor market; (iii) strengthening and restructuring the educational and vocational training systems, with the objective of alleviating mismatches between workers’ skill and education levels and job openings; and (iv) reforming labor market regulations so as to increase mobility and flexibility.

References

  • Sudan Central Bureau of Statistics, (2010), “The Fifth Sudan Population and Housing Census”.

  • United Nations Development Program, (2011), Human Development Report.

  • United Nations Country Team in the Republic of Sudan (2012), Country Analysis, Draft report, January.

  • Sudan Ministry of Finance and National Economy, (2011), “The Sudan Economy in Figures,” different series (1995–2011).

1

Prepared by Jemma Dridi.

2

Caution must be exercised when interpreting the findings of this chapter in view of the serious data limitations. Concerning GDP, while some improvements have been made to the estimates, data from national accounts data do not meet international standards in terms of quality, frequency, and dissemination practices. Furthermore, the impact of the informal sector on employment or GDP remains unknown, although this sector is deemed to be growing in importance. With regard to labor market data, only public administration sector employment and wages are available. Employment and wage data for public enterprises and the formal private sector are not available.

1

Capital productivity is defined as the output per unit of utilized capital.

2

The labor force series for the period 2012–17 were derived by applying the changes projected by the ILO to the 2011 estimates provided by the authorities.

3

An alternative method would be to project the evolution of unemployment over the medium term using the estimated elasticities between the unemployment rate and GDP. However, this methodology does not take into account demographic trends which can affect participation rates over the medium term.

4

The analysis uses the 2012 IMF “Template for Analyzing and Projecting Labor market Indicators”.

Sudan: Selected Issues Paper
Author: International Monetary Fund. Middle East and Central Asia Dept.