Sudan: Staff Report for the 2019 Article IV Consultation—Debt Sustainability Analysis
Author: International Monetary Fund. Middle East and Central Asia Dept.
Publication Date:
10 Mar 2020
eISBN:
9781513536712
Language:
English
Keywords:
ISCR; CR; government; debt; fund; exchange rate depreciation; government assets; Sudanese authorities; reform package; debt relief; Exchange rates; Energy subsidies; Currencies; Global; Middle East; burden ratio; debt data; dynamics equation; sustainability framework; debt path; Debt service; Debt sustainability analysis; debt carrying capacity
Download PDF (827.5 KB)

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Sudan

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Sudan

Background and Recent Developments

1. Sudan’s economy has never fully adjusted to the secession of South Sudan in 2011, which resulted in a sharp decline in its oil exports and fiscal revenues. Sudan lost about 75 percent of oil production, 66 percent of exports, and half of fiscal revenues after the secession.1 Despite the U.S. revocation of commercial sanctions in October 2017, Sudan remains on the U.S. list of state sponsors of terrorism, (SSTL), which hinders external investment, progress toward HIPC debt relief and the clearance of large arrears, including to the Fund and the World Bank. The economy is shrinking, fiscal and external imbalances are large, inflation is high, the currency is overvalued, and competitiveness is weak. The humanitarian situation is dire with large numbers of internally displaced people and refugees. The new civilian-led government have shown willingness to reform and stabilize the shrinking economy and reengage Sudan with the international community, but the social situation remains fragile.

2. Economic performance deteriorated in 2019. The economy contracted by 2.5 percent in 2019 after contracting by 2.2 percent in 2018. Inflation rose significantly after currency devaluation and reached 73 percent in end-2018. Following a decline in January 2019 due to base effects, inflation has continued to rise, reaching 60 percent in November 2019, reflecting loose fiscal and monetary policies and exchange rate depreciation. The fiscal deficit continued widening in 2019 to 10.8 percent of GDP, mainly financed through monetization.2 The external current account deficit (cash basis) remained large at 7.8 percent of GDP in 2019. International reserves however increased to $1.4 billion (2 months of imports) in October 2019 due to support from Gulf countries.

3. Prospects for debt relief. Sudan has yet to meet all the requirements for reaching the decision point and qualify for HIPC debt relief. The normalization of relations with external creditors, including multilateral institutions and bilateral creditors, is a key precondition for debt relief. The Sudanese authorities have requested a Staff Monitored Program (SMP) with the IMF which would be contingent on the finalization of the authorities’ reform package and on sufficient external financing assurances from donors. Outreach to the donor community to raise the needed funds has intensified as has the dialogue with creditors to garner support for debt relief. In addition, given the significant debt statistic gaps, IFIs and private sector representatives are working with the authorities to reconcile external debt data.

Structure of Debt

4. Sudan’s debt data quality and coverage remain limited.3 Historical debt data were provided by the Sudanese authorities, complemented by information obtained during the 2011 external debt reconciliation exercise, as well as Fund and World Bank staffs’ estimates. The External Debt Unit at the CBOS produces comprehensive quarterly and annual report on external debt and data are collected by using primary information from both the MOFEP and the lenders, but they are not always verified with actual cash flows in the corresponding bank accounts. The external debt reports are not consistent with other related fiscal report as well. There are considerable information gaps between the IMF maintained dataset and the external debt report, mostly due to difficulties in obtaining data on the terms of the loans and breakdown of existing debt. In case of data discrepancies projections were based on a prudential approach, to avoid underestimation of debt. Debt data covers mainly central government, as state and local government are not allowed to borrow according to the Constitution, while other public entities in general government are still not captured in the debt coverage. Letter of guarantees (LG) are issued by the central bank on request of the Ministry of Finance and Economic Development (MOFEP) as a hybrid financing instrument used mainly to fund development projects. However reporting issues of LGs were identified by the IMF technical assistance (TA) mission, where the central government budget recorded the full amount of LG as debt when they were issued only as commitment.4 External debt is defined based on currency.

article image

The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the

5. Sudan’s PPG external debt remains very high. External debt amounts to about $55 billion, or193 percent of GDP at end-2019, rising from 176 percent of GDP in 2018 due to large currency depreciation from SDG45/$ to SDG72/$ on a weighted average basis.

6. The structure of external debt has been stable over the last decade (Figures 1 and 2). About 85 percent of the external debt was in arrears in 2019. The bulk is public and publicly guaranteed (PPG) debt ($54.6 billion, of which 85 percent are in arrears), mainly owed to bilateral creditors and roughly equally divided between Paris Club ($20.5 billion) and non-Paris Club ($20.8 billion) credit. About $1.8 billion is private debt owed to suppliers. The principal of PPG in arrears is about $10. 9 billion, and the rest are interests in arrears.

Figure 1.
Figure 1.

Sudan: Stock of PPG External Debt, 2010–19

Citation: IMF Staff Country Reports 2020, 072; 10.5089/9781513536712.002.A002

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

Sudan: Structure of PPG External Debt

Citation: IMF Staff Country Reports 2020, 072; 10.5089/9781513536712.002.A002

Figure 3.
Figure 3.

Sudan: Structure of Public and Publicly Guaranteed External Debt

Citation: IMF Staff Country Reports 2020, 072; 10.5089/9781513536712.002.A002

Source: Sudanese authorities; and IMF staff estimates.

7. Sudan’s total public debt reached 211.7 percent of GDP by end-2019. The bulk of the public debt is external debt. Domestic debt only accounts for 10 percent of GDP. Total external debt will continue to dominate public debt in Sudan. Despite very limited access to new external financing, the total debt burden continues to grow at a very high rate due to the continued depreciation of the SDG and to rising outstanding interest and fee payments and charges maturing on the existing debt in arrears.

Debt Carrying Capacity

8. Sudan’s debt carrying capacity remains weak even after the introduction of a composite indicator in the new LIC-DSF to replace the World Bank CPIA scores.5 The Sudan’s Composite Indicator (CI) index, has been calculated based on the October 2019 WEO and the World Bank’s 2018 CPIA, is 1.882, indicating that the county’s debt-carrying capacity is weak in the revised LIC-DSA framework. Corresponding thresholds changes are noted in the text table. PV of debt-to-exports threshold was increased compared to the previous DSF, from 100 to 140 percent. Debt service-to-export and to-revenue thresholds were lowered respectively from 15 to 10 percent and from 18 to 14 percent. Total public debt benchmark has been reduced from 38 percent to 35 percent of GDP.

Sudan: Debt Carrying Capacity and Thresholds

article image

Debt Sustainability Analysis

A. Underlying Assumptions

9. The macroeconomic assumptions underlying this DSA have been updated based on developments in 2019 (Box 1). The baseline scenario assumes a deteriorating fiscal deficit mainly due to weak revenue mobilization, continue depreciation of the exchange rate and ballooning fuel subsidies. As in the past, this DSA does not assume arrears clearance, possible external debt relief, or debt apportionment between Sudan and South Sudan in its baseline or alternative scenarios.

Macroeconomic Assumptions 2019–39

Natural resources. Oil is increasingly less important for the Sudan economy. Production is at 72 thousand barrels/day in 2019, showing a continued decline. Ageing oil fields along with moderate exploration keep oil production flat over the medium term. Price projections are guided by the IMF’s latest World Economic Outlook (WEO). The price of Sudan’s crude oil is projected to average $60/barrel in the medium term. The limited production results in increasing imports of crude oil and corresponding higher costs of fuel subsidies also due to the fuel import exchange rate being fixed at SDG 6.7/$ (the official exchange rate is currently at SDG 45/$ and the dominant parallel market at SDG 85/$ in December 2019).

Real sector. Real GDP growth rate is expected to contract by 2.5 percent in 2019 driven by weak competitiveness, poor business environment and the results of social turmoil. Real growth is expected to further contract by 1.2 and 0.6 percent in 2020 and 2021, respectively. Absent reforms, growth will turn positive only after 2021, reaching 1.5 percent in 2025, and remaining subdued in the longer term. The projections mainly reflect the baseline scenario assumptions, in which no active policy measures will be taken as the new civilian government is still working on a comprehensive reform plan. With an overvalued exchange rate, weak business environment, loose fiscal policies financed by money creation, macro imbalances will continue to widen, further compromising growth prospects. Inflation is projected to increase from about 51 percent in 2019 to about 86 percent in 2025. The nominal exchange rate will continue to depreciate dramatically.

Fiscal sector. The baseline fiscal deficit is projected to deteriorate over the medium term to 18.6 percent in 2025, reflecting a combination of revenue losses arising from the substantial use of the overvalued official exchange rate for government transactions and tariff collection, dwindling revenues, and rising fuel subsidy spending. Over the longer run and through 2039, the primary deficit is expected to stabilize at about 18.8 percent of GDP. Under these assumptions, the domestic debt-to-GDP ratio is projected to continue to rise and debt to remain unsustainable.

External sector. The current account deficit is expected to remain elevated over the medium term, at about 5.2 percent of GDP by end-2025, reflecting the effects of the large fiscal deficit and overvalued exchange rate. In the long run, imports are expected to contract and the trade balance to slowly improve in absolute terms, even if it is projected to remain elevated. The deficit will be financed by foreign direct investment and modest external debt accumulation.

External debt. Reflecting continued limited access to international finance and a deteriorating debt service capacity, disbursements of new loans are expected to continue to be limited, at about 0.12 percent of GDP during 2019–39. In line with the latest newly 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. Consequently, the effective interest rate is declining because the interest payment decrease overtime while the stock of debt continues to grow. In addition, the projected financing gaps are added to the external debt stock.

Financing assumption. Given the large external arrears and limited depth in domestic financial market, staff assumes that the bulk of government’s financing comes from the central bank’s direct monetization in the medium term, while financing from other domestic creditors will increase in the longer term. Staff also applied the latest available market interest rate (which in real terms is negative) on government bonds in the projections as commercial banks have limited investment options and investing in government bonds will help reduce losses relative to holding cash.

B. External Debt Sustainability

10. Sudan’s external debt stock remains unsustainable under the baseline scenario (Figure 1 and Table 1). All PPG external debt indicators continue to breach their indicative thresholds throughout the 20-year projection period. The present value (PV) of PPG external debt is at about 163.4 percent of GDP at end-2019—more than threefold the 30 percent threshold for weak policy performers—and is projected to stay above the threshold through the projection period.6 Similarly in 2019, the PV of debt-to-exports is about 1193.3 percent, well above the respective threshold. Debt service to exports and debt service to revenue will continue to increase steadily over the long term. In particular, debt service will increase by $512 million due to the scheduled interest payment to Saudi Arabia and U.A.E in 2022. Under the reform scenario the debt path improves but remains unsustainable without debt relief.

Table 1.

Sudan: External Debt Sustainability Framework, Baseline Scenario, 2016–2039

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r – g – ρ(1+g)]/(1 + g+ ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.3/ 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.4/ Current-year interest payments divided by previous period debt stock5/ Defined as grants, concessional loans, and debt relief.6/ 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).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

11. Sudan’s external debt outlook is vulnerable to a range of shocks (Figure 1 and Table 3). The PV of debt-to-GDP is most vulnerable to combined shock, while the PV of debt-to-exports and debt service-to-exports ratios are most vulnerable to an export shock. In the combined shock scenario, key variables including real GDP growth, primary balance, exports, other flows are adjusted by 0.5 standard deviation from their historical averages and exchange rate depreciates by 51 percent, the PV of debt-to-GDP ratio would increase from 163 percent to 196 percent.

Table 2.

Sudan: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–2039

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt: The central, state, and local governments, government-guaranteed debt. Definition of external debt is Currency-based.2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ 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 and other debt creating/reducing flows.5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.

Sudan: Sensitivity Analysis for Key Indicators of Public and publicly Guaranteed External Debt, 2019–2029

(In Percent)

article image
Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.

C. Overall Risk of Public Debt Distress

12. Public debt remains unsustainable and the public DSA continues to mirror the trends and results of the external DSA (Figure 2 and Table 2). Sudan has a full Islamic banking system, where profit margins (i.e. the traditional interest rate) are set based on the underlying project’s return and it remains at 12–15 percent even after inflation rose to about 70 percent in 2019. Even though, the debt ratios remain at relatively high levels in the long term. The present value of public debt is about 212.9 percent of GDP at end of 2019 and will remain above the threshold through the projection period reaching 420 percent of GDP by 2039. Similarly, the PV of public debt to revenue will increase from its current already very high level of 2718.7 percent by end of 2019 to an extreme level of about 9465.9 percent by 2039. The rapidly rising historical scenario is in large part due to the structural break caused by the separation of South Sudan which led to negative historical averages.

13. The public DSA bound tests show that public debt path is most vulnerable to real GDP growth. (Table 4).

Table 4.

Sudan: Public Sector Debt Sustainability Framework, Baseline Scenario, 2019–2039

(In percent)

article image
Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

14. There is a significant difference in the projections in the current DSA compared to the previous DSA (Figure 3 and Table 4). The main driver of the difference is due to the large depreciation of parallel market exchange rate and mounting inflation. Additionally, reduced fiscal space further compressed debt repayment capacity which contributed to increased arrears and worsening debt carrying capacity. It is to be expected that being the DSA 2013 compiled with the older model could have also impacted some discrepancies in the results of the analysis.

15. The realism tools highlight the magnitude of the fiscal adjustment and uncertainty around the baseline (Figure 4). The realism tool shows any adjustment that is greater than 2.5 percent of GDP over a 3-year period in the top quartile of adjustments within the sample. A significant large fiscal adjustment of 4 percent of GDP may be needed to stay within financing constrains and enhance confidence during the reform episode. While the magnitude of the fiscal adjustment is large, the authorities will have to implement a similarly large fiscal adjustment as part of the policy reform package. The large fiscal consolidation might create a temporary drag on growth, but on the other hand continued monetization of the costs deriving from huge implicit fuel subsidies by the central bank also led to severe decline in growth. The large residual highlights the difficulty in capturing the multiple distortions currently affecting the Sudanese economy, especially the multiple currency practices and continued depreciation of the parallel market exchange rate and the poor quality and timeliness of data, especially related to fiscal and balance of payment accounts. The authorities’ published national account is outdated with a base year of 1981/82, and data on investment and consumption lack of accuracy. Therefore, staff is not able to provide a proper analysis of contribution of investment to real GDP and its developments.

Figure 4.
Figure 4.

Sudan: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2019–2029

Citation: IMF Staff Country Reports 2020, 072; 10.5089/9781513536712.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.

Conclusions

16. Sudan’s external debt remains in distress and unsustainable. The normalization of relations with external creditors, including multilateral institutions and bilateral creditors, is a key precondition for debt relief. The results of this DSA are broadly unchanged from previous DSAs, as no major policy correction has been undertaken and no debt relief has been granted to Sudan. The economy continues to shrink, fiscal and external imbalances widen, inflation is high, the currency is overvalued, and competitiveness is weak. Under these conditions it is impossible for Sudan to service its disproportionate debt. 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 the long term, all public and public-guaranteed external debt burden ratios remain well above their respective indicative thresholds. Public debt remains unsustainable, driven mostly by external debt dynamics.

17. Further efforts are needed for Sudan to obtain much-needed debt relief and regain access to external financing. Sudan needs to: (i) continue to 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; (iii) renew the commitment to develop a full-fledged PRSP; 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. Furthermore, the major shortcomings in macroeconomic data, in terms of quality and timeliness, need to be addressed as they impair economic analysis and creates uncertainty on the potential reform outcome.

18. Authorities’ views. The authorities concurred with staff that absent reforms, debt restructuring and access to debt relief, the current economic prospects appear bleak and debt will remain unstainable. They are engaged in designing a reform plan which will address the main sources of imbalances and boost inclusive growth, including: liberalization of the exchange rate, revenue measures and phasing out of fuel subsidies, accompanied by an expansion of social safety nets to mitigate the impact of adjustment on vulnerable groups and measures to fight corruption, improve governance and the business environment. The authorities continue to engage with creditors and are intensifying outreach efforts to the donors’ community to pave the way toward debt relief They have been petitioning key donors for the de-listing of Sudan from the SSTL and have requested an IMF Staff Monitored Program to help reestablish macroeconomic stability and create conditions for stronger, broad-based economic growth.

Figure 5.
Figure 5.

Sudan: Indicators of Public Debt under Alternative Scenario, 2019–2039

(In percent)

Citation: IMF Staff Country Reports 2020, 072; 10.5089/9781513536712.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 6.
Figure 6.

Sudan: Driver of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2020, 072; 10.5089/9781513536712.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low -income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 7.
Figure 7.

Sudan: Realism Tools

Citation: IMF Staff Country Reports 2020, 072; 10.5089/9781513536712.002.A002

1

Sudan and South Sudan also reached the so-called “zero option” agreement in September 2012, whereby Sudan would retain all external liabilities after the secession of South Sudan, provided that the international community gave firm commitments to the delivery of debt relief within two years. Absent such a commitment, Sudan’s external debt would be apportioned with South Sudan based on a formula to be determined. The two parties have agreed to extend this agreement on several occasions.

2

The difference between the on-budget and true fiscal deficits is the implicit subsidies not reported in the budget but financed through monetization by the central bank.

3

External debt data were partially updated in December 2019 during the Article IV consultation mission.

4

The breakdown of individual components is not available.

5

The CI captures the impact of the different factors through a weighted average of the country’s real GDP growth, remittances, international reserves, and world growth and the CPIA score. The details on the methodology can be found in the new LIC-DSF guidance note: https://www.imf.org/en/Publications/Policy-Papers/Issues/2018/02/14/pp122617guidance-note-on-lic-dsf

6

Ratios in terms of GDP are calculated using a weighed exchange rate between the official and the parallel market rate.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Sudan: 2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Sudan
Author: International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2020: Issue 072
Publisher:
International Monetary Fund
ISBN:
9781513536712
ISSN:
1934-7685
Pages:
78
DOI:
https://doi.org/10.5089/9781513536712.002

Sudan: Stock of PPG External Debt, 2010–19

Sudan: Structure of PPG External Debt

Sudan: Structure of Public and Publicly Guaranteed External Debt

Sudan: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2019–2029

Sudan: Indicators of Public Debt under Alternative Scenario, 2019–2039

(In percent)

Sudan: Driver of Debt Dynamics – Baseline Scenario

Sudan: Realism Tools