Sudan: Staff Report for the 2016 Article IV Consultation—Debt Sustainability Analysis

Sudan is a low-income fragile country facing significant domestic and international constraints and large macroeconomic imbalances despite notable progress toward macroeconomic stability and growth. Following the shock of the secession of South Sudan five years ago, policy adjustments helped to contain the fiscal deficit, slow money growth, reduce inflation, and support economic recovery. Institutional reforms strengthened tax collections and public financial management, and social spending increased. Despite these efforts, however, large macroeconomic imbalances-triggered by the loss of three-quarters of oil exports-continue to constrain growth prospects, along with weak policies, internal conflicts, and U.S. sanctions. Domestic and international efforts to end internal conflicts have yet to bear fruit, and the humanitarian situation remains difficult. Sanctions and the withdrawal of correspondent bank relations weigh on trade, investment, and growth. Absence of progress toward debt relief limits access to official external financing.

Abstract

Sudan is a low-income fragile country facing significant domestic and international constraints and large macroeconomic imbalances despite notable progress toward macroeconomic stability and growth. Following the shock of the secession of South Sudan five years ago, policy adjustments helped to contain the fiscal deficit, slow money growth, reduce inflation, and support economic recovery. Institutional reforms strengthened tax collections and public financial management, and social spending increased. Despite these efforts, however, large macroeconomic imbalances-triggered by the loss of three-quarters of oil exports-continue to constrain growth prospects, along with weak policies, internal conflicts, and U.S. sanctions. Domestic and international efforts to end internal conflicts have yet to bear fruit, and the humanitarian situation remains difficult. Sanctions and the withdrawal of correspondent bank relations weigh on trade, investment, and growth. Absence of progress toward debt relief limits access to official external financing.

Background and Recent Developments

1. The economy of Sudan has yet to adjust fully to the secession of South Sudan in 2011, which took away the bulk of its oil exports and fiscal revenues. In addition, a heavy debt burden, U.S. sanctions, and volatile domestic and regional political environments continue to weigh on economic performance. Although a series of stabilization and reform measures helped the economic adjustment, large imbalances persist.

2. Economic performance in 2015 was mixed. Good harvests boosted economic growth to close to 5 percent, and inflation dropped from 26 percent in December 2014 to 13 percent in December 2015. However, limited progress with raising domestic revenue to replace shortfalls in oil-related revenues weakened public finances. The external current account deficit widened and international reserves remained low. As the official exchange rate was kept virtually unchanged, the parallel exchange rate premium soared above 80 percent in December 2015 and to 125 percent at end-June 2016. The outlook is mixed with risks to the downside.

3. Prospects for debt relief. Debt relief prospects are predicated on obtaining assurances of support from creditors, normalizing relations with international financial institutions, and establishing a track record of cooperation with the IMF on policies and payments. In 2014, the Sudanese authorities agreed with South Sudan to extend the deadline for the “zero-option” until October 2016.2 They also agreed to continue to reach out to creditors to garner support for debt relief.

Structure of Debt

4. Sudan’s external debt remained high as of end-2015.3 In nominal terms, it amounted to about $50 billion (61 percent of GDP) including an estimated $1.6 billion deposited in the Central Bank of Sudan by official creditors in 2015. 4 About 84 percent of the external debt was in arrears in 2015. The structure of external debt has not changed over the last decade. The bulk is public and publicly guaranteed (PPG) debt ($48.2 billion, of which 86 percent in arrears), mainly owed to bilateral creditors and roughly equally divided between Paris Club and non-Paris Club creditors (Figures 1 and 2). Only a small fraction is private debt owed to suppliers ($1.7 billion).

Figure 1.
Figure 1.

Stock of External Debt, 2001–15

Citation: IMF Staff Country Reports 2016, 324; 10.5089/9781475543933.002.A003

Sources: Sudanese authorities, World Bank, and IMF staff estimates
Figure 2.
Figure 2.

Structure of 2015 PPG External Debt

Citation: IMF Staff Country Reports 2016, 324; 10.5089/9781475543933.002.A003

Sources: Sudanese authorities, World Bank, and IMF staff estimates

Stock of External Debt

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Sources: Sudanese authorities; and IMF staff estimates.

Structure of Public and Publicly Guaranteed Debt

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Sources: Sudanese authorities; and IMF staff estimates.

5. External public borrowing has been limited in recent years. Sudan has been largely cut off from access to external financing due to its arrears with the creditors. It has been only able to contract new debt—below 1 percent of GDP per year in 2012–15—with a limited number of multilateral and non-Paris Club bilateral creditors. The newly contracted debt has been mainly used to finance projects in the agriculture, services and energy sectors. In 2015, $262 million of new debt (0.3 percent of GDP) was contracted, including $166 million from a multilateral creditor and $96 million from bilateral creditors. There has not been any new private external debt in decades. In addition, official creditors deposited an estimated $1.6 billion in the Central Bank of Sudan in 2015 and $0.5 billion in the first quarter of 2016 (these amounts were added to outstanding debt). So far in 2016, only one bilateral loan was contracted to finance projects in water harvesting.

New External Debt Contracted (2012-16)

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Sources: Sudanese authorities; and IMF staff calculations.

6. Sudan’s total public debt reached 72.9 percent of GDP by end-2015. The bulk of the public debt is external debt. Domestic debt reached 13 percent of GDP by end-2015. Domestic debt has been on the rise due to increased domestic financing of the budget, albeit to a still relatively low level.

Debt Sustainability Analysis

A. Underlying Assumptions

7. The macroeconomic assumptions underlying this DSA have been updated based on developments in 2014–15. The differences compared to the 2014 DSA are driven by higher growth and lower inflation outturns in 2014–15 relative to previous projections, and by the revised policy and international environment outlook detailed in Box 1. As in previous DSAs, this update does not include arrears clearance, possible external debt relief, or debt apportionment between Sudan and South Sudan in its baseline or alternative scenarios.

Sudan: Macroeconomic Assumptions 2016–36

Natural resources. The outlook is informed by discussions with the Sudanese authorities. Oil production is projected at 101 thousand barrels/day in 2016, somewhat below 2015 production level. Ageing oil fields and a low international oil price outlook combine for only moderate expansion of further exploration and production to 108 thousand barrels/day in 2021. Meanwhile, non-oil GDP is projected to grow by about 3.6 percent per year by 2021 and remain stable afterwards. Price projections are guided by the IMF’s latest World Economic Outlook (WEO). The price of Sudan’s crude oil is projected to average US$47/barrel in the medium term.

Real sector. The real GDP growth rate is expected to stabilize at 3.5 percent through 2021 and remain unchanged over 2022–36. Medium-term real GDP growth mainly reflects strengthening of non-oil sectors (mainly agriculture and mining), macroeconomic stabilization, and reforms of the business environment.1 Inflation, as measured by the GDP deflator, is projected to be moderate in the near to long term averaging 12.6 percent in 2016–36.

Fiscal sector. The fiscal deficit is projected to stabilize over the medium term, reflecting a combination of gradual improvements in tax revenue collection, stable oil revenues, and containment of current spending, including a gradual phasing out of fuel subsidies and recent unification of the wheat exchange rate with the official exchange rate which lowered wheat subsidies. Over the long run, the fiscal accounts are expected to continue to improve owing to (i) gradual increases in tax revenues, against the backdrop of stable oil revenues and (ii) moderate increases in capital spending. Under those assumptions, the domestic debt-to-GDP ratio is projected to be sustainable.

External sector. The current account deficit is expected to improve slightly over the medium term, to below 4 percent of GDP by end-2021, reflecting a stabilizing fiscal deficit as well as slight growth in oil and strengthening non-oil exports. In the long run, it is projected to decline to about 2 percent of GDP as oil exports stabilize while non-oil exports continue to gain ground. The deficit will be financed by foreign direct investment and continued accumulation of external debt arrears. Sizable financing gap are assumed to be covered by external debt throughout the projection period.

External debt. Reflecting continued limited access to international finance and a deteriorating debt service capacity, disbursements of new loans are expected to be limited, at about 0.3 percent of GDP during 2016-36. In line with the recent portfolio of new contracted debt, the share of new concessional loans is assumed at around one-third. It is assumed that Sudan will continue not to service obligations arising from the stock of arrears, but will service in full in 2022 obligations associated with the deposits at the central bank referred to in paragraph 5. In addition, the projected financing gaps are added to the external debt stock.

1/ For more information on sources of growth in Sudan, see IMF Country Report No. 14/364, Annex II.

B. External Debt Sustainability

8. Sudan’s external debt stock remains unsustainable under the baseline scenario (Figure 1 and Table 1). All PPG external debt level ratios continue to breach their indicative thresholds throughout the 20-year projection period. The present value (PV) of PPG external debt is at about 93 percent of GDP at end-2015—three times of the 30 percent threshold for weak policy performers—and is projected to stay above the threshold through the projection period.5 Similarly, in 2015, the PV of debt-to-exports is above 1400 percent and the PV of debt-to-revenue ratio is about 872 percent, well above their respective thresholds. Although these ratios are projected to improve based on the macroeconomic assumptions and limited external borrowing over the medium to long run, such improvements are insufficient to bring debt to sustainable levels.

Figure 1.
Figure 1.

Sudan: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2016–36 1/

Citation: IMF Staff Country Reports 2016, 324; 10.5089/9781475543933.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2026. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock
Table 1.

Sudan: External Debt Sustainability Framework, Baseline Scenario, 2013–361/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - p(l+g)]/(l+g + p+gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

9. In addition, Sudan’s debt outlook is vulnerable to a range of shocks (Figure 1 and Table 2). The PV of debt-to-GDP, debt-to-revenue and debt service-to-revenue ratios are most vulnerable to a one-time depreciation shock, whereas the PV of debt-to-exports and debt service-to-exports ratios are most vulnerable to an export shock. A standard one-time 30 percent depreciation shock in 2017 would increase the PV-of-debt to 96 percent of GDP in that year and then bring it below its 2017 baseline value only in 2020.6

Table 2.

Sudan: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2016–36

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

C. Public Debt Sustainability

10. Public DSA results mirror those of the external DSA (Figure 2 and Table 3). The debt ratios, albeit declining remain at relatively high levels in the long term. The PV of public debt-to-GDP ratio is projected to stay above the indicative benchmark throughout the projection period. Similar to the external DSA, the public DSA bound tests show that public debt path is most vulnerable to a one-time 30 percent real depreciation (Table A4).

Figure 2.
Figure 2.

Sudan: Indicators of Public Debt Under Alternative Scenarios, 2016–361/

Citation: IMF Staff Country Reports 2016, 324; 10.5089/9781475543933.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2026.2/ Revenues are defined inclusive of grants.
Table 3.

Sudan: Public Sector Debt Sustainability Framework, Baseline Scenario, 2013–36

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Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Conclusions

11. Sudan remains in debt distress. The results of this DSA are broadly unchanged from those in previous DSAs, as no debt relief was granted to Sudan in the meantime. External debt remains unsustainable. In addition, the debt burden increases over time as the amounts needed to close projected financing gaps are added to the outstanding debt stocks. In nominal terms, in 2026 the debt stock is 2.5 times the amount in 2015. In the long term, all public and public-guaranteed external debt burden ratios remain well above their respective indicative thresholds. Public debt is also unsustainable, driven mostly by external debt dynamics.

12. Debt relief—along with sound policies—is necessary to bring debt back on a sustainable path and regain access to external financing. Sudan needs to: (i) step up outreach efforts to its creditors to garner broad support for debt relief; (ii) continue to cooperate with the IMF on economic policies and payments with a view to establishing a track record of sound macro policies; and (iii) minimize new borrowing on non-concessional terms, since it further increases the future debt burden, and instead secure foreign support on highly concessional terms to finance necessary development and infrastructure expenditures.

13. The authorities generally agree with the results and assessments of the DSA. They agree that external debt is at unsustainable levels, debt service burdens are beyond Sudan’s debt servicing capacity, and as a result Sudan continues to accumulate external debt arrears. They agree that non-concessional borrowing is costly and therefore should be minimized. They reiterate that debt relief is urgently needed for economic development, and remain hopeful that the international community will provide debt relief in the near future. In this regard, the authorities are committed to continue reaching out to creditors.

14. The authorities are developing a national debt strategy. In February 2016, they held a donor-sponsored workshop to formulate a national debt policy. The workshop included a high-level seminar exploring the experience of Ethiopia in receiving HIPC and MDRI debt relief and was followed by a trip to Addis Ababa. The resulting national debt strategy is awaiting approval by the government. Given uncertain prospects for debt relief, the strategy focuses on domestic debt markets to finance development projects. The authorities consider that technical assistance on external debt management, external debt statistics, macroeconomic policies, and financial programming would be helpful to advance their debt strategy.

Table 4.

Sudan: Sensitivity Analysis for Key Indicators of Public Debt 2016-36

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Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.