Introduction

1. Our South Sudanese authorities appreciate the constructive engagement during the recent Article IV Consultation and welcome the resumption of onsite surveillance by the Fund. They broadly agree with the staff’s assessment of economic challenges and the key policy recommendations.

2. South Sudan is emerging from a protracted internal conflict which created significant institutional capacity gaps, and huge development challenges. At the same time, the country continues to face significant humanitarian challenges. The continued decline in international oil prices since 2014 has undermined fiscal and export revenues, thereby generating exchange rate and inflationary pressures. Although a pathway towards re-establishment of lasting peace has been laid, the country remains fragile and requires support to implement economic reforms to resuscitate activity in key productive sectors. The signing of the Revitalized Agreement on the Resolution of the Conflict in South Sudan (R-ARCSS) in September 2018 has, however, improved prospects for peace, and created an environment for increased oil production.

3. To address prevailing macroeconomic challenges, the authorities are directing their efforts towards restoring economic stability, rebuilding international reserves, improving the management of oil resources, enhancing public financial management, and regaining access to external support from development partners. These reform measures are consistent with the key objectives of the National Development Strategy (2018–21), which aims to consolidate peace and unlock the country’s economic growth potential.

Recent Economic Developments and Outlook

4. While economic activity declined in 2017/18, real GDP is estimated to grow by 3.4 percent in 2018/19, following the cessation of hostilities and reopening of damaged oil wells. Oil production increased from 120, 000 barrels per day in 2017/2018 to 145,000 barrels per day in early 2019. Going forward, economic growth is expected to further accelerate to 8.1 percent in 2020 conditional on the peace dividend, increased oil production and public investment projects.

5. From a peak of 550 percent in 2016, inflation declined to 40 percent in December 2018, largely reflecting the discontinuation of central bank financing of the budget deficit. Looking ahead, inflation is expected to decline further to 26.4 percent in 2019 as the authorities continue to implement a tight monetary policy stance.

6. While the current account deficit is expected to continue to worsen, reaching 6.4 of GDP in 2018/19, going forward, improved export performance is expected to narrow the deficit of 1.8 percent of GDP in 2019/2020. Consequently, gross reserves will modestly increase from 0.1 months of import in 2018/2019 to 0.2 months of import in 2019/2020.

Fiscal Policy and Public Financial Management (PFM) Reforms

7. The authorities remain committed to restoring fiscal discipline, mobilizing domestic revenues to address fiscal pressures and containing expenditures. The establishment of the National Revenue Authority (NRA) in 2018 has greatly improved collections of non-oil revenues. At the same time the operationalization of a Treasury Single Account (TSA) early in 2019, is expected to enhance fiscal discipline. Going forward, greater focus will be placed on efforts to broaden the tax base, improve tax administration, automate corporate taxes, and complete the functionality of NRA by hiring adequately qualified staff. To this end, the recruitment of Commissioners and deputies of the NRA is ongoing.

8. To further enhance fiscal discipline, the authorities are committed to stop oil advances and improve transparency in the management of oil revenues. In this regard, a strategy to deal with and limit oil advances has been prepared and submitted to Cabinet for approval. Furthermore, the authorities intend to sell oil at the spot market prices with gross proceeds transferred directly to the Treasury Oil Account at the Central Bank.

9. Containing expenditures consistent with the available resources remains high on authorities’ reform agenda. In this connection, the authorities are undertaking measures to rationalize expenditures, while prioritizing social, peace-related, and growth-enhancing development expenditures. At the same time, they are planning to advance efforts to clean the civil service payroll, downsize diplomatic missions, limit foreign travel, and develop a credible arrears clearance plan. The Cash Management Committee, which comprises senior officials from Ministry of Finance and Planning (MoFP), Bank of South Sudan (BSS) and other bodies, continues to make progress in implementing spending controls, including prioritizing expenditure.

10. As part of an effort to place public debt on a downward trajectory, the authorities have made a budget provision for the clearance of arrears owed to the Qatar National Bank, and to fully pay the Transitional Financial Arrangement (TFA) fees to Sudan by 2021/2022. In addition, the Council of Ministers has established an Arrears Clearance Committee to ascertain the stock of arrears and restructure arrears to commercial banks. They have also removed fuel subsidies to Nilepet, the main oil company operating in South Sudan. The removal of the remaining subsidies on public transport and hospitals is not viewed as an immediate priority.

Monetary, Exchange Rate, and Financial Sector Policies

11. The BSS has continued to maintain a tight monetary policy stance, which is consistent with its disinflationary efforts. Going forward, the authorities remain committed to strengthening the monetary policy toolkit, including reserve requirements, voluntary term deposits, and FX intervention. Relatedly, they will continue to ensure that commercial banks meet minimum reserve requirements which remain at 20 percent of deposits.

12. The foreign exchange market has witnessed supply shortfalls in recent times. These shortages reflect capital flow reversals, declining remittances, and limited sales by the Central Bank in view of low reserves. Although the authorities recognize the resultant disparity between the official and parallel exchange rate, the rates in both markets are expected to converge with the implementation of the peace agreement and renewed foreign exchange inflows from oil revenues. As part of an effort to build foreign exchange buffers, the authorities are preparing to establish a foreign exchange auction based-system, which will include input from Fund TA. They also plan to review the operations of the Special Accounts Scheme to create more transparency in the FX market.

13. The authorities are committed to improving financial risk management and regulatory oversight. Already, the BSS has issued a circular on new minimum capital requirements effective end-December 2019: $30 million for foreign banks and $15 million for domestic banks. Further, the BSS is finalizing the bank resolution framework for troubled banks. Meanwhile, all 14 commercial banks which are non-compliant with the BSS minimum statutory requirements have been presented with the options to either: (i) raise capital, (ii) merge with others or (iii) be liquidated. While plans are underway for the BSS to adopt comprehensive banking resolution regulations, desk officers have been deployed to monitor activities at the commercial banks.

14. The BSS will continue to enhance onsite supervision while laying the foundation for risk-based supervision. Realizing the elevated NPLs, the authorities are encouraging commercial banks to address these vulnerabilities, including through strengthening lending practices and implementing recovery efforts.

Structural Reform Measures

15. The authorities recognize the importance of improving governance. In this respect they plan to complete the outstanding BSS and Nilepet financial audits through to 2018. To enhance financial stability, the authorities have appointed a Commissioner for the Financial Intelligence Unit (FIU) to facilitate implementation of the 2012 Anti-money Laundering Act. Relatedly, they are taking steps to strengthen institutions and address governance vulnerabilities, including enhancing the asset declaration process.

16. As part of an effort to enhance infrastructure development, the government has ring-fenced a portion of oil proceeds for the development of roads. The plan is to build roads that connect urban with rural areas to facilitate the transportation of agricultural produce. This is envisaged to address the huge infrastructural gaps and reduce the cost of doing business.

17. The authorities view economic diversification as part of their medium-term agenda. In this respect, policy efforts will be geared towards promoting increased activity in the agriculture, mining, fishing and construction sectors.

Conclusion

18. Our South Sudanese authorities view the signing of the R-ARCSS as an important milestone towards improved growth and peace prospects. They recognize the enormity of the attendant challenges as well as the important role of the international community in providing resources to finance the country’s huge development and humanitarian needs. Further, they value Fund policy advice, and look forward to completion of the 2019 Article IV Consultation.