A. Poverty Reduction Growth Trust and IDA Status

6. Sudan is eligible for support from the IMF under the Poverty Reduction and Growth Trust and is an International Development Association (IDA)-only country. As such, it meets the HIPC Initiative income eligibility criterion.

7. Sudan has embarked on a home-grown reform agenda in the context of an IMF SMP, which was endorsed by the IMF Executive Board as meeting the Upper Credit Tranche (UCT) conditionality standard on September 23, 2020. It is expected that with a satisfactory implementation of the SMP, the government of Sudan will build the strong track record of macroeconomic reforms for the minimum 6-month period required to reach the Decision Point. IMF members are mobilizing the financing resources needed to clear Sudan’s arrears to the Fund and quota payment related to the 14^th quota increase, which are estimated at SDR 964.36 million and SDR 115.13 million, respectively. With an established track record and financing assurances in place, Sudan could re-gain access to a Fund-supported financing arrangement and reach Decision Point in the near future. The expected new Fund arrangement would aim to support the authorities’ efforts to transition towards economic stability, with an enhanced social safety net and governance and transparency, to attract needed foreign investments, and obtain faster and more inclusive growth.

8. Sudan is an IDA-only country with a gross national per capita income of US$590 in 2019.¹¹ The World Bank Group (WBG) Country Engagement Note (CEN) aims to help Sudan stabilize its economy and support progress towards the clearance of arrears to IDA and access to HIPC debt relief.¹² The CEN has two focus areas: re-engagement and contributing to a renewal of the social contract. It also has a cross-cutting theme: promoting inclusion and citizen engagement. The CEN’s immediate focus comprises priority support for macroeconomic reforms, complementary social impact mitigation and helping the country clear IDA arrears and reach the Decision Point. The latter would unlock much larger volumes of external financing, including from the WBG itself, which are critical to providing meaningful support for Sudan’s transition. Under the CEN, IDA has provided financing to Sudan for the first time since 1991 through exceptional pre-arrears clearance grants (PACGs) for the Sudan Family Support Program (SFSP).¹³ The CEN also envisages exceptional support from the IDA19 arrears clearance set aside to help finance the Reengagement and Reform Development Policy Financing (DPF) in grant terms which will facilitate the clearance of Sudan’s arrears (standing at US$1.1 billion) in March 2021. The clearance of Sudan’s arrears to IDA is the first step of a coordinated approach to unlock critical financing to support recovery and sustainable growth. In addition, the DPF package will also include a request for Turn Around Allocation support. A WBG Country Partnership Framework (CPF) is expected to be developed in the coming months once reengagement with Sudan is complete.

B. Background, and Political and Poverty Developments

9. Sudan’s history has been marked by political instability, conflict and isolation from the world economy. Sudan has suffered from political instability and conflict for most of the period since its independence in 1956 with only a period of relative calm between 1972–1983. Two civil wars between the northern and southern parts of Sudan culminated in the secession of South Sudan in 2011. Sudan’s conflicts are grounded in structural and regional imbalances, with a Khartoum-based economic and political power “center” dominated by mostly Arab groups, and more “peripheral” areas in the west, east, and south. In 1993, Sudan was added to the United States (U.S.) State Sponsors of Terrorism List (SSTL). From 1997 to 2017, Sudan was under comprehensive economic, trade, and financial U.S. sanctions and, since 2005, under sanctions from the United Nations (U.N.) involving an arms embargo, travel bans, and asset freeze for selected individuals and entities. These sanctions resulted in disengagement from the international community. Sudan started accumulating arrears towards the international financial institutions (IFIs) and almost all other external creditors in the 1980s with a resultant ballooning of external debt.

10. The contraction of Sudan’s economy during the last decade reflects in part a failure to adjust to the secession of South Sudan in May 2011. Following the loss of over 75 percent of oil production to South Sudan, Sudan maintained an overvalued exchange rate and commodity subsidies, mostly for fuel, that it could no longer afford. Internal conflicts and massive displacement of citizens also took a toll on growth. Between 2012–2017 the pace of GDP growth slowed to under 2 percent, while government revenues declined sharply in the absence of oil receipts. Despite some attempts, Sudan failed to reduce the enormous commodity subsidies that progressively destabilized the economy. Fuel subsidies alone grew to 11.8 percent of GDP more than 100 percent of government revenues plus grants in 2019, and more than twice all tax revenues. An overvalued official exchange rate was maintained, together with a system of multiple exchange rates for rationing existing forex to fuel and other priority imports. The annual inflation rate averaged over 50 percent in 2018–2019. High inflation (269 percent as of December 2020) was driven by the monetization of large fiscal deficits and the financing of commodity subsidies.

11. Economic woes, structural bottlenecks and weak governance have discouraged the needed investments to adjust to the new reality of becoming a non-oil economy. Despite significant opportunities,¹⁴ private investments have remained at bay in the last decade. Foreign direct investment (FDI) has been hampered by decades of macroeconomic and political instability, pockets of civil conflicts and US sanctions until October 2017, as well as years of economic mismanagement and governance shortcomings. Sudan’s inclusion in the U.S. SSTL and the associated reputational risks have deprived the country of much-needed access to external financing and thwarted hopes for foreign investment and corresponding banking relationships. Unlocking private investment has also been hindered by a number of structural bottlenecks, including a non-level playing field (due to a discretionary tax regime), limited access to finance, energy and infrastructure (e.g., power, ports & logistics, digital connectivity), as well as a cumbersome and costly investment climate (e.g., labor market distortions and skills mismatch). Domestic investment has also suffered from the absence of medium-term financing options and the absence of conventional banking, limiting access to credit to well established firms.

12. Following the secession of South Sudan, Sudan agreed to retain all external debt of the former Sudan under the so-called “zero-option.” The agreement, reached in September 2012, stipulated that 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. It also stipulated that, 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 extended this agreement on several occasions. A new extension of the agreement until October 2022 is expected to be signed by both parties in the coming weeks.

13. A largely agrarian country, Sudan is significantly impacted by climate change and recently has been battered by frequent shocks. These include floods and droughts. In addition, as of February 20, 2021, there have been 28,038 recorded cases of COVID-19, including 1, 864 fatalities, while limitations to combat the pandemic put further stress on the economy. Moreover, there are approximately 1.9 million internally displaced people in need of urgent assistance and over 1.0 million refugees and asylum-seekers, exacerbated by new conflict in the neighboring Tigray region of Ethiopia.¹⁵

14. Sudan has a once-in-a-generation window of opportunity to put itself on a path of economic and social renewal. Sudan’s transition process is one of the most important recent developments providing an opportunity for sustainable peace and transformation in the Horn of Africa. The 2019 revolution led to the establishment of a technocratic transitional government with a mandate to carry out sweeping reforms to reverse decades of economic, social, and political decline. The transitional government is due to govern for 39 months following the October 3, 2020, peace agreement, by which time Sudan is to conduct elections that will yield a new democratically elected government. In February 2021, a new government cabinet was formed marking a major political shift in Sudan. For the first time in the country’s history, and in line with the October Peace Agreement, representatives of Sudan’s vast peripheries (including Darfur, South Kordofan, Blue Nile states) as well as various other areas are now part of the central governance structure. The transitional government has had success in several areas, most prominently in reaching a peace agreement in October 2020 with almost all internal armed opposition groups to end 17 years of conflict. It has also committed to reversing economic distortions, including by agreeing to an IMF SMP that meets UCT conditionality standard and reforms supported by the IDA Reengagement and Reform DPF, which included phasing out costly fuel subsidies essential for macroeconomic stabilization and adjustment of the exchange rate. Notwithstanding a difficult first year in office, the transitional government retains the support of the country’s major political forces, including security elements.

15. The U.S. formally delisted Sudan from the SSTL on December 14, 2020. This acknowledges the efforts undertaken by the Sudanese government to ensure the success of the political transition and removes an important barrier in the path toward Sudan’s reengagement with the international community.

16. Economic challenges are intertwined with a historically fragile social contract characterized by long-standing tensions between the center and the periphery, and exclusionary governance. While support for the transitional government continues, there is widespread frustration with the economic hardship and a fragile equilibrium among key political interests. Furthermore, political contestation over power sharing arrangements remains acute. Even though large-scale violence subsided in 2019, localized violence between ethnic groups in parts of Darfur, as well as South and West Kordofan remains a concern. It is critical for Sudan to take advantage of a still favourable political economy to tackle its macroeconomic imbalances and put itself on a sustainable development trajectory.

17. Sudan’s current poverty level is unknown as data from the latest household survey (2014/15) do not reflect the impact of the recent economic decline, high inflation, and COVID-19. According to the 2014/15 survey, the incidence of extreme poverty—the percentage of population living below US$1.90 a day—was 13.5 percent (Table 1). However, when the lower-middle income countries poverty line (US$3.20 a day) is used, the incidence of poverty raises to 46.1 percent—slightly higher than the 2015 average poverty rate of 44.3 percent for Lower Middle-Income Countries (LMICs).¹⁶ Data from the 2014/15 survey shows that poverty was particularly high in rural areas, with 15.7 percent living in extreme poverty (compared to 9.5 percent in urban areas). Extreme poverty incidence varied significantly across states, with much higher rates observed in regions in the west, south and east.¹⁷

^{Table 1.}

Sudan: Key Poverty and Social Indicators

Sources: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices, World Development Indicators, March 2020 Debt Sustainability Analysis, United Nations Development Programme Human Development Index.

^{Table 1.}

Sudan: Key Poverty and Social Indicators

Indicator	Value	Year
Extreme Poverty Rate ($1.9 in 2011 PPP) (%)	13.5	2014
Lower Middle-Income Poverty Rate ($3.2 in 2011 PPP) (%)	46.1	2014
School Enrollment, Primary (% gross)	65	2019
School Enrollment, Primary, Female (% gross)	69	2019
School Enrollment, Primary, Male (% gross)	63	2019
Human Capital Index	160	2020
Human Development Index, Global Ranking	170	2020
Under-five mortality (per 1,000 births)	60	2018
Life expectancy at birth (years)	65.1	2018
Labor Force participation rate (%)	53.0	2014
Unemployment rate (%)	11.0	2014
Extreme Poverty Rate ($1.9 in 2011 PPP) (%)	13.5	2014
Lower Middle-Income Poverty Rate ($3.2 in 2011 PPP) (%)	46.1	2014

Sources: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices, World Development Indicators, March 2020 Debt Sustainability Analysis, United Nations Development Programme Human Development Index.

View Table

^{Table 1.}

Sudan: Key Poverty and Social Indicators

Indicator	Value	Year
Extreme Poverty Rate ($1.9 in 2011 PPP) (%)	13.5	2014
Lower Middle-Income Poverty Rate ($3.2 in 2011 PPP) (%)	46.1	2014
School Enrollment, Primary (% gross)	65	2019
School Enrollment, Primary, Female (% gross)	69	2019
School Enrollment, Primary, Male (% gross)	63	2019
Human Capital Index	160	2020
Human Development Index, Global Ranking	170	2020
Under-five mortality (per 1,000 births)	60	2018
Life expectancy at birth (years)	65.1	2018
Labor Force participation rate (%)	53.0	2014
Unemployment rate (%)	11.0	2014
Extreme Poverty Rate ($1.9 in 2011 PPP) (%)	13.5	2014
Lower Middle-Income Poverty Rate ($3.2 in 2011 PPP) (%)	46.1	2014

Sources: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices, World Development Indicators, March 2020 Debt Sustainability Analysis, United Nations Development Programme Human Development Index.

18. Poverty projections for 2021 are yet to be finalized as the situation remains fluid and the full impact of COVID-19 remains unknown. The rising level of inflation, shortage of certain basic commodities and COVID-19 have negative effects on living conditions. According to the Sudan High Frequency Monitoring Survey on COVID-19, in June 2020, about 40 percent respondents reported either a reduction or total loss in income due to COVID-19; 67 percent respondents had to stop working because of lockdown measures imposed to contain the pandemic. Only 29 percent reported having received their full salary, while 43 percent reported having received only part of their salary and 28 percent reported having received no payment altogether. More than 20 percent of the households were unable to buy bread and cereals as well as milk and milk products; about 45 percent of the respondents said they were worried about having enough food to eat, and many modified their eating habits. Only 10 percent of households with children who attended school before the COVID-19 outbreak were engaged in learning activities during school closures. By September 2020 one-third of respondents had stopped working and over 20 percent of households were unable to buy bread and cereals as well as milk and milk products as price increases were felt by most households. To obtain a more accurate estimate of poverty, a new household survey is urgently needed.

19. In addition to monetary poverty, most Sudanese households suffer other poverty-related deprivations. Sudan posts very poor human development indicators for its level of GDP. In the 2020 update of the World Bank’s Human Capital Index (HCI), Sudan ranked 160 out of 174 countries. ¹⁸ According to the 2020 Human Development Index (HDI),¹⁹ Sudan ranks 170 out of 189 countries. Furthermore, Sudan did not meet the 2015 Millennium Development Goals (MDGs), and its progress lagged behind LMICs averages (Table 1). Education and health indicators remain low and vary markedly across states, gender, and income level. The primary school enrolment rate was only 65 percent in 2019 (below the target of universal coverage), with substantial disparities across states, richer and poorer, urban/rural areas, and gender. The under-five mortality rate of 60 deaths per 1,000 births in 2018 is still higher than the 2015 MDG target of 41 per 1,000 births (the average for LMICs was 59 in 2014), meaning that significant efforts are needed to achieve the 2030 SDG target of 25 deaths per 1,000 births. Lack of access to basic water and sanitation is a key contributor to the low HDI. More than 40 percent of the population still lacks access to safe drinking water, and more than 60 percent lacks basic sanitation.

20. Sudan has one of the world’s lowest rankings for gender equality. When the HDI is disaggregated by sex, Sudan’s Gender Development Index (GDI) is 0.837,²⁰ placing it in the group of countries furthest from achieving gender parity.²¹ Factors contributing to this outcome include: low levels of women’s political participation (28 percent); unequal participation in the labor market (24.5 percent); unequal education attainment of adult women relative to adult men (15.3 percent); lack of inclusion and participation in official peace building and conflict resolution initiatives. Recent legislative changes to increase women’s personal freedom and criminalize female genital mutilation are steps in the right direction; however, more targeted, affirmative measures will be needed to bring about gender parity and inclusion.

21. Unemployment of women and youth is a concerning issue in Sudan. Sudan’s labor market is characterized by low overall labor force participation, in which women and youth are particularly disadvantaged. The labor force participation rate in 2014 was 76 percent among men, compared to 33 percent among women.²² The overall unemployment rate for women is more than twice that of men (19 percent and 8 percent, respectively), and being a young woman is even more detrimental: 27 percent of young women are unemployed, compared to 20 percent of young men. Unemployment rates have a direct link to poverty with households with an unemployed head being nine-percentage point more likely to be moderately poor than those with identical characteristics.

C. Macroeconomic and Structural Reform Track Record

22. The Government of Sudan (GoS) has launched a comprehensive package of structural reforms. These aim at addressing major inherited economic imbalances, fighting corruption, increasing social support to the population, and providing a foundation for sustainable growth. Following the loss of most oil reserves with the secession of South Sudan in 2011, Sudan maintained large commodity subsidies, mostly for fuel, that it could no longer afford and overvalued official exchange rates. This has been the primary cause of accumulating macroeconomic imbalances, which led to high inflation and pressures for currency depreciation. Over time, the neglect of public investment in human and physical capital also took a progressive toll on economic growth, while the combination of low social spending and high inflation reduced real incomes and increased poverty.²³

23. Critical reforms that underlie the current IMF Staff Monitored Program and the IDA Reengagement and Reform DPF operation include:

• The sharp reduction and elimination of fuel subsidies. Fuel subsidies alone grew to account for almost 100 percent of Government revenues by 2019. In March 2019, the Government introduced a dual pricing system for diesel and gasoline that began allocating a portion of fuel to the population at higher prices. These “commercial prices” were increased to market rates in October 2019. The Ministry of Finance and Economic Planning (MoFEP) passed two decrees (Decree No.66 and Decree No.94) in the fourth quarter of 2020 that effectively ended subsidies on retail diesel and gasoline, which had formerly accounted for an enormous share of budgetary spending. In January 2021, residential electricity rates on large consumers were also increased by around 500 percent as part of a four-year program to stabilize electricity subsidies. Government spending on fuel subsidies decreased in 2020 to 3.8 percent of GDP from 10.5 percent in 2019. The 2021 budget programs fuel subsidy spending at 0.3 percent of GDP. The reduction/elimination of fuel subsidies also helps moderate consumption and promotes alternative, clean sources of energy that can have long-lasting beneficial effect on the climate and the environment.

• Exchange rate liberalization. The authorities agreed under the SMP that all but the customs exchange rate would be unified, and that banks and foreign exchange bureaus would be permitted to set exchange rates in line with market conditions. This reform was implemented on February 21, 2021 (Central Bank of Sudan Circular No. 1/2021). The customs exchange rate is expected to be unified with the market rate in mid-2021.

• Social protection. Social spending increased as a percentage of GDP in 2020 and is expected to increase significantly in 2021 with the rollout of the SFSP. Social protection through an expansive cash transfer program is an essential element for the expansion and modernization of Sudan’s social safety net system. As part of this approach, it is envisioned that the SFSP will provide 12 months of consistent support to beneficiaries, eventually transitioning recertified eligible beneficiaries to longer-term permanent social safety net support. The SFSP will also help to establish the key building blocks of a modern social protection system by laying the digital infrastructure for mobile payments and strengthening the national registry – both goals will encourage greater inclusion and the empowerment of women. Critically, the SFSP will pave the way for a future shock-responsive national safety net programs by facilitating rapid identification of potential beneficiaries for expanded coverage. This can support improved efficiency of interventions and greater coordination in social service delivery beyond the existing social safety net.

• Public finance management (PFM) and anti-corruption. The creation of an effective and transparent PFM system is a high priority of the Transitional Government. It is critical to ensure efficient fiscal policy implementation and minimize fiscal risks. In 2020, the authorities published the central government budget on the Ministry of Finance website. Starting in 2021, the central government budget will be published on the website within one month after its approval by the Legislative Council, and quarterly budget execution reports within one month after the end of each quarter (Decree No.92). The 2020 Public Expenditure and Financial Accountability (PEFA) review (Box 1) forms the foundation for a comprehensive reform strategy going forward. As part of this, significant progress has already been made in compiling a list of all SOEs, with work ongoing to clarify ownership. The government is seeking assistance from the World Bank and other development partners to launch PFM reforms as part of its poverty reduction strategy.

• Tax reform. Over the last decade, Sudan never developed an effective tax system to replace its previous reliance on oil revenues. Consequently, tax revenues to the central budget were only 3 percent of GDP in 2020, preventing the government from executing core government functions in a sustainable way. In addition, the tax system was plagued by large, often individualized, exemptions that lacked transparency. A major initiative is underway for the sharp reduction in exemptions, consistent with the goal to build a transparent, modern, and fair tax system. All ministerial-granted tax exemptions have been abolished as of 2020, no new special exemptions can be granted. As part of the 2021 budget, the authorities plan to introduce: a progressive personal income tax starting in 2021; a higher VAT on telecommunications; liberalization of the exchange rate on oil revenue and grants leading to improved revenue via valuation effects; the removal of income tax exemptions for all the companies that currently benefit from these exemptions; and improvements in tax administration to widen the tax base and curb tax evasion.

24. The Government also seeks to implement other critical reforms over the short- and medium-term. These are civil service reforms, fiscal federalism, removing administrative barriers to business and investment, and power sector restructuring. In particular, the Government recognizes the importance of creating favorable conditions for private sector-led growth to power economic recovery and build stability. The IFC and the World Bank, together with donors, have been supporting the authorities’ efforts to improve the investment climate, foster Public-Private Dialogue, strengthen the legal and institutional framework for Public-Private Partnerships (PPPs), and support MSME development, focusing on access to finance, business entry and taxation, innovation and entrepreneurship. Going forward, the authorities’ top reform priorities are foundational for effective private sector development (e.g., institutional, legal, and regulatory framework of the investment climate).

25. The strong policy commitments contained in the IMF SMP and the IDA Reengagement and Reform DPF reflect the transitional government’s determination to reverse years of economic mismanagement that has led to an economic crisis. The global pandemic and the record flooding further complicated their task in 2020. Implementation under the SMP started out slow, reflecting the fragile political environment, but implementation of structural reforms has picked up while quantitative performance has been more mixed. On the structural side, subsidies on the retail sale of imported gasoline and diesel were eliminated and a price adjustment mechanism adopted last November; this was extended to domestically produced gasoline and diesel in December. The Ministry of Finance published the revised 2020 budget; January – November monthly budget execution; and a partial inventory of SOEs on its website in December. Several pieces of important legislation are well underway, including the Anti-Corruption National Committee Law and revised Central Bank Act (October and December 2020 structural benchmarks). IMF staff has provided comments and conducted follow up drafting session with the authorities, but these laws have not yet been passed by the Joint Council. The unification of the official and market exchange rates with the move to a band to limit undue volatility took place on February 21, 2021, and the unification of the customs exchange rate is expected to take place end-June. The IDA DPF supported policy actions aiming at addressing fuel subsidies and the exchange rate, which are central to macroeconomic stabilization and to laying the foundations for economic growth. The DPF also supported efforts to rollout the SFSP and improve public sector transparency.

^{Table 2.}

Sudan: Selected Economic and Financial Indicators, 2017–2021

Sources: Sudan authorities; and IMF staff estimates and projections.

^{Table 2.}

Sudan: Selected Economic and Financial Indicators, 2017–2021

		2017	2018	2019	2020	2021
			est	est.	proj.	proj.
Output
	Real GDP growth at market prices (%)	0.7	-2.3	-2.5	-3.6	0.9
Inflation
	Period average (%)	32.4	63.3	51.0	163.3	191.4
	End of period (%)	25.2	72.9	57.0	269.3	111.4
Central government finances
	Revenue and grants (% of GDP)	6.9	8.9	7.8	4.8	11.7
	Expenditure (% of GDP)	13.1	16.7	18.7	10.8	14.4
	Fiscal balance (% of GDP)	-6.2	-7.9	-10.8	-5.9	-2.7
	Public debt (% of GDP)	152.9	185.6	200.3	249.1	203.5
Money and credit
	Broad money (% change)	68.8	111.8	60.1	88.0	77.0
	Credit to the private sector (% change)	38.4	69.3	45.8	78.8	80.0
Balance of payments
	Current account (% of GDP) (cash basis)	-6.9	-8.7	-11.4	-13.2	-6.0
	FDI (% of GDP)	1.7	3.1	2.9	2.7	2.5
	Reserves (in months of imports)	0.3	0.2	0.2	0.3	0.4
Exchange rate
	REER (% change)	-13.2	-24.5	-12.5	…	…

Sources: Sudan authorities; and IMF staff estimates and projections.

View Table

^{Table 2.}

Sudan: Selected Economic and Financial Indicators, 2017–2021

		2017	2018	2019	2020	2021
			est	est.	proj.	proj.
Output
	Real GDP growth at market prices (%)	0.7	-2.3	-2.5	-3.6	0.9
Inflation
	Period average (%)	32.4	63.3	51.0	163.3	191.4
	End of period (%)	25.2	72.9	57.0	269.3	111.4
Central government finances
	Revenue and grants (% of GDP)	6.9	8.9	7.8	4.8	11.7
	Expenditure (% of GDP)	13.1	16.7	18.7	10.8	14.4
	Fiscal balance (% of GDP)	-6.2	-7.9	-10.8	-5.9	-2.7
	Public debt (% of GDP)	152.9	185.6	200.3	249.1	203.5
Money and credit
	Broad money (% change)	68.8	111.8	60.1	88.0	77.0
	Credit to the private sector (% change)	38.4	69.3	45.8	78.8	80.0
Balance of payments
	Current account (% of GDP) (cash basis)	-6.9	-8.7	-11.4	-13.2	-6.0
	FDI (% of GDP)	1.7	3.1	2.9	2.7	2.5
	Reserves (in months of imports)	0.3	0.2	0.2	0.3	0.4
Exchange rate
	REER (% change)	-13.2	-24.5	-12.5	…	…

Sources: Sudan authorities; and IMF staff estimates and projections.

26. The World Bank and the IMF are coordinating their support. In particular, policy actions supported through IDA DPF, and other operations, and benchmarks under the SMP are fully aligned. The World Bank and the IMF are also providing complementary technical assistance (TA) on a wide range of fiscal policies and public financial management, including promoting transparency and anti-corruption measures. Areas supported by the World Bank include policy support and TA in social protection (the SFSP and targeted assistance programs), PFM (diagnostic exercises, tax administration, open procurement, wage policy), and the energy sector (addressing fuel subsidies, reforming the power sector). The IFC, in strong collaboration with the World Bank, has been supporting the Government’s private sector development reform agenda (including new investment and PPP laws, improving the business and regulatory environment, private sector analytics, SMEs development). Most of this work has been supported by IDA PACGs and a multi-donor trust fund. The CPF to be developed in the coming months will lay out a full WBG program of support in the coming years, including in areas covered by the Completion Point triggers through regular IDA financing – following the clearance of arrears – and TA. Fund staff is providing technical assistance to the authorities to strengthen PFM, fiscal reporting and statistics (GDP, prices, monetary reporting); to monitor fiscal risks related to SOEs); and to improve the legal framework through desk reviews of the Central Bank Act, Banking Business Act, and Anti-Corruption Law to ensure they meet international standards. Capacity development is also being provided through a governance diagnostic exercise which will build a roadmap for strengthening governance across various sectors of government. For the period ahead, technical assistance is envisioned in the areas of debt management, macroeconomic modeling, import tariff reform, the monetary policy framework and financial stability.

27. Several development partners are engaged in Sudan beyond the Bank and the Fund. The current aid landscape in Sudan is mainly humanitarian and dominated by off-budget flows. A substantial part of external support is currently not channeled through the government, with U.N. and humanitarian agencies being designated as executing agencies for the assistance. In this context, partnership with U.N. agencies has been critical in early recovery activities, especially in regions emerging from conflict where the U.N. has a strong comparative advantage. The AfDB Group is providing grant support to Sudan in agriculture, women and youth empowerment and capacity building as well as emergency support for flood and COVID 19 response (about US$155 million in performance-based allocation – PBA – grants are expected to be committed over 2020–22, these will be supplemented with resources from the Transitional Support Facility – TSF) supplementing the PBA resources. The United Kingdom, European Union and United States provide support on macro-fiscal reforms and institutional strengthening. France provides support on public financial management, tax administration, political economy analysis, and citizen engagement aspects. The African Legal Support Facility (ALSF) has provided assistance on commercial claims litigation. Sustained dialogue with partners on program implementation is critical. At the global level, the Friends of Sudan group (FoS – see Box 2) provides a useful vehicle for building consensus on priority areas of support and mobilizing donor resources, including in support for the SFSP. In May 2020, the FoS adopted the Mutual Partnership Framework (MPF) capturing key Government and donor commitments in support of Sudan’s economic reform agenda and debt relief process.

A. Macroeconomic Outlook

28. The successful implementation of policy measures under the SMP will lay the foundation for sustained, inclusive growth. The elimination of market distortions through exchange rate unification and subsidy reform, together with legislative changes aimed at improving the business climate and addressing long-standing governance and transparency issues will support greater private sector investment. Sudan’s removal from the U.S. SSTL adds to this support. The removal of subsidies and customs exchange rate reform will provide much needed fiscal space for greater social spending. These reforms will need to be complemented by a range of growth-enhancing structural reforms across the economy, including in agriculture, private sector development, energy and human capital. A decade of slow growth in the context of social upheaval, large macroeconomic imbalances, and high transaction costs due to strained foreign economic relations culminated in three years of economic recession. This speaks for the enormous potential to accelerate growth in the context of stabilization, growth-enhancing reforms, and the restoration of normal foreign economic relations.

29. The outlook, assuming HIPC Decision Point is attained, is positive, as macroeconomic stability is restored following the difficult adjustments to fuel prices, exchange rate unification, and the policy actions under the SMP. It is expected that 2021 will finally bring Sudan positive growth and progress in stabilization. However, the economic and social situation in the country remains challenging, and downside risks are high.

30. Following three years of contraction (2018–20), growth is expected to pick up slowly weighed by the still-unsettled economic and political environment, and the impact of COVID-19. In the medium term, growth should increase as the economy stabilizes, the business climate improves, and foreign inflows increase. Sudan is projected to reach its 2017 level of GDP in 2024, and to sustain strong growth rates into the medium term in the 4–5 percent range. The accelerated growth will reflect Sudan’s initial dividend from the achievement of internal peace, the correction of distortions, improvements in the investment climate, a depreciated exchange rate, and the realization of some low-hanging fruit in public investment. Sudan’s longer-term prospects will depend not only on maintaining macroeconomic stability and a favorable climate for private business and investment, but on policies to reverse decades of neglect in social spending and public infrastructure.

31. Recent reforms provide Sudan with a strong chance to stabilize the economy in 2021. Budget savings from the sharp reduction in fuel subsidy spending and inflows of foreign grants, expected to be 4 percent of GDP higher in 2021 than in 2020, will underpin Sudan’s plan for major fiscal consolidation to slow the pace of monetary expansion and inflation. While the rate of inflation exceeded 300 percent in early 2021, inflation should moderate significantly during the year, bringing the annual rate of inflation for 2021 down to 111 percent at end-year. In 2022, inflation is expected to be less than 30 percent, and should steadily decline in the following years. This reflects the government’s commitment to keep fiscal deficits under control, as well as expanded future opportunities for deficit finance that will be less inflationary.

32. The reduction in subsidies and unification of the customs rate will also provide fiscal space for much needed social spending which is supported by significant donor grants in the near- to medium-term. As a result, deficit monetization is expected to decline significantly, bringing inflation to below 20 percent a year. While exports return to pre-COVID levels, import demand, including for social programs and investment, remains strong leaving the current account in sizable deficit financed by FDI and public and private investment flows. Over time, improved competitiveness and higher investment will boost export growth, strengthening the external position and halving the (cash) current account deficit in the medium-term. Foreign grants are expected at an exceptionally high level of 4.2 percent of GDP in 2021, the majority of which are earmarked for the rollout of the Sudan Family Support Program of transfers to the population.

33. Much improved domestic revenue mobilization and tax administration will underpin debt sustainability. In 2021, the major expected increase in inflows of foreign grants relative to 2020 and higher tariff revenues from the adjustment of the customs exchange rate will give a particular boost to government receipts. Improvements in tax administration and tax policy reforms aimed at broadening the tax base by eliminating various exemptions under the VAT and personal income tax, and harmonizing the corporate income tax rate, will increase tax revenue by about 3 percentage points of GDP in the medium term. In the long run, continued improvements in tax administration could add another 1–2 percentage points of tax revenue. On the expenditure side, better budget execution and the redistribution of government revenues toward social spending and infrastructure projects will not only significantly reduce the fiscal deficit, but also support poverty reduction and inclusive growth. The primary fiscal balance will turn positive in the medium- to long-run, markedly improving debt sustainability. Over time, as the size of foreign grants decreases, tax revenues are expected to increase, as would opportunities for the non-monetary financing of budget deficits, thereby giving Sudan a possibility to sustain a fiscal and financial position consistent with economic stability.

34. Risks to the macroeconomic outlook are significant. On the upside, removal of Sudan from the SSTL, improvements in macroeconomic management, governance and transparency and the strengthening of the business climate could attract a surge in foreign investment and donor flows. On the downside, failure to implement the envisioned policy measures or a reversion to old policies (subsidies, multiple currency practices, lack of transparency/governance) will not only hamper economic growth but put at risk an inclusive outcome. The Government has shown a strong resolve to implement the necessary reforms, but there is still lack of consensus in some important areas. Given the current dangerously high rate of inflation, achieving stabilization in 2021 will not be easy, and money demand could be easily destabilized. Other risks include the continued fragility of the internal peace process and the fact that Sudan is prone to flooding and other natural disasters. While the Government has an important source of legitimacy as part of the transition process to inclusive policies and democracy, the continued deterioration of the economic situation is testing the patience of a significant part of the population, and social uprisings are becoming more common. Slow progress on governance and transparency reforms to strengthen the investment climate and continued political instability—or, worse yet, a disruption to peace—could lead to a flight to quality and a halt to donor support and foreign investment. Significant risks will persist even if the HIPC Decision Point is reached as planned. Nevertheless, many of these risks are mitigated by an increasing awareness in the government and the country that backtracking on reforms and stabilization efforts at this point could only lead Sudan to a mounting crisis and instability. The active engagement of the IMF, World Bank, and international community will also help mitigate such risks.

B. Poverty Reduction Strategy

35. The Government of Sudan is in the process of completing a Poverty Reduction Strategy Paper (PRSP).²⁴ The PRSP will reflect the shared view of key stakeholders on a national roadmap to alleviate poverty and identify the budgetary resources and priority sectors to achieve this objective. The document will provide an overall assessment of the macroeconomic framework and the poverty profile of Sudan and the suitability of the macroeconomic reforms to release necessary budgetary resources for poverty reduction. Furthermore, the document will elaborate on the process for identifying and prioritizing sectors, cross-cutting areas and activities. It will also discuss issues of cooperation and partnerships required to achieve the PRSP objectives and outline the PRSP monitoring and evaluation framework.

36. The PRSP document is expected to be finalized by end-April 2021. A draft document has already been prepared identifying five preliminary pillars, namely promoting: (i) macroeconomic stability; (ii) inclusive economic growth; (iii) human and social development; iv) peace; and v) the strengthening of governance and institutional capacity. These pillars reflect consultations conducted in March 2019,²⁵ and a second round of consultations conducted in February/March 2021. The consultation process, involving stakeholders nationwide and with the international community, is documented in the PRSP document. The draft document will be sent to the Bank and Fund in mid-March 2021. The final version is expected for end-April 2021. A Joint Staff Advisory Note (JSAN) will be prepared upon its submission.

A. Debt Reconciliation Status

37. A preliminary DRA has been prepared jointly by the Sudanese authorities and staffs from the Bank and the Fund. The DRA is based on Sudan’s external public and publicly guaranteed (PPG) debt disbursed and outstanding as of end-December 2019.^26,27 As of end January 2021, Sudan’s debt to multilateral creditors was largely reconciled and the reconciliation of bilateral debt was advanced.²⁸ The reconciliation was performed jointly by the authorities and staffs from the Bank and Fund.

B. Structure of External Debt

38. Sudan’s external PPG debt was estimated at US$49.8 billion in nominal terms at end-December 2019 (Table 3). Given large arrears, this corresponds to a similar level in NPV terms. Multilateral creditors account for about 11 percent of the total debt stock in nominal terms. Major multilateral creditors include IDA, the IMF, and the Arab Fund for Economic and Social Development (AFESD). Together these creditors account for close to three-quarters of Sudan’s multilateral debt. Official bilateral debt accounts for about 77 percent of the total debt stock (equally divided between Paris Club and non-Paris Club creditors, each accounting for about 38 percent). Major Paris Club creditors include Austria, France and the United States, which represent more than 64 percent of the debt owed to this group of creditors. Among non-Paris Club creditors, the top three (China, Kuwait, and Saudi Arabia) account for more than 86 percent of debts in this category. Commercial creditors claims are estimated to represent about 12 percent of the nominal debt stock, about two-thirds of claims from these creditors correspond to the London Club.

^{Table 3.}

Sudan: Estimated External Public and Publicly Guaranteed External Debt

(As of end-2019)

Sources: Sudanese authorities and staff estimates.

^1/Includes arrears.

^2/Applied discount rates are the average Commercial Interest Reference Rates (CIRRs) published by the OECD over the 6-month period prior to December 2019. The SDR discount rate is calculated using the CIRRs for all SDR basket currencies except the Chinese yuan. The OECD does not publish a CIRR for the Chinese yuan, therefore it is calculated based on the China bond yield curve for bonds with a 7-year maturity increased by 100 basis point, per the standard CIRR methodology.

^3/Assumes a stock-of-debt operation on Naples terms at end-December 2019 and comparable action by other official bilateral and commercial creditors on eligible debt. The NPV reduction resulting from the application of traditional debt relief varies from creditor to creditor depending on the composition of the debt owed to each creditor (pre-cutoff date vs. post-cutoff date, ODA vs. non-ODA), which determines the applicability of Naples terms and the granted terms.

^4/Other multilateral creditors include: the Arab Monetary Fund (AMF), the European Commission, the Islamic Development Bank (IsDB), the International Fund for Agricultural Development (IFAD) and the OPEC Fund for International Development (OFID).

^5/Paris Club cutoff date is January 1, 1984.

^{Table 3.}

Sudan: Estimated External Public and Publicly Guaranteed External Debt

(As of end-2019)

							Stock NPV terms
			Nominal Stock 1/		Arrears		Before traditional debt relief 1/2/		After traditional debt relief 1/2/3/
			US$ billion	Percent of total	US$ billion	Percent of total	US$ billion	Percent of total	US$ billion	Percent of total
Total			49.8		42.6		49.7		26.4
	Multilateral		5.6	11.3%	3.0	6.9%	5.7	11.4%	5.7	21.5%
		IDA	1.4	2.9%	1.0	2.4%	1.4	2.8%	1.4	5.3%
		IMF	1.3	2.7%	1.3	3.1%	1.3	2.7%	1.3	5.1%
		AfDB Group	0.5	1.0%	0.4	0.9%	0.5	1.0%	0.5	1.9%
		AFESD	1.4	2.8%	0.0	0.0%	1.4	2.8%	1.4	5.4%
		Other 4/	1.0	2.0%	0.2	0.5%	1.0	2.1%	1.0	3.9%
	Bilateral		38.2	76.7%	33.7	79.1%	38.1	76.6%	18.6	70.6%
		Paris Club 5/	19.1	38.3%	17.6	41.3%	19.1	38.3%	8.2	31.0%
		Non-Paris Club	19.1	38.4%	16.1	37.8%	19.0	38.3%	10.4	39%
	Commercial		6.0	12.0%	6.0	14.0%	6.0	12.0%	2.1	7.9%

Sources: Sudanese authorities and staff estimates.

^1/Includes arrears.

^2/Applied discount rates are the average Commercial Interest Reference Rates (CIRRs) published by the OECD over the 6-month period prior to December 2019. The SDR discount rate is calculated using the CIRRs for all SDR basket currencies except the Chinese yuan. The OECD does not publish a CIRR for the Chinese yuan, therefore it is calculated based on the China bond yield curve for bonds with a 7-year maturity increased by 100 basis point, per the standard CIRR methodology.

^3/Assumes a stock-of-debt operation on Naples terms at end-December 2019 and comparable action by other official bilateral and commercial creditors on eligible debt. The NPV reduction resulting from the application of traditional debt relief varies from creditor to creditor depending on the composition of the debt owed to each creditor (pre-cutoff date vs. post-cutoff date, ODA vs. non-ODA), which determines the applicability of Naples terms and the granted terms.

^4/Other multilateral creditors include: the Arab Monetary Fund (AMF), the European Commission, the Islamic Development Bank (IsDB), the International Fund for Agricultural Development (IFAD) and the OPEC Fund for International Development (OFID).

^5/Paris Club cutoff date is January 1, 1984.

View Table

^{Table 3.}

Sudan: Estimated External Public and Publicly Guaranteed External Debt

(As of end-2019)

							Stock NPV terms
			Nominal Stock 1/		Arrears		Before traditional debt relief 1/2/		After traditional debt relief 1/2/3/
			US$ billion	Percent of total	US$ billion	Percent of total	US$ billion	Percent of total	US$ billion	Percent of total
Total			49.8		42.6		49.7		26.4
	Multilateral		5.6	11.3%	3.0	6.9%	5.7	11.4%	5.7	21.5%
		IDA	1.4	2.9%	1.0	2.4%	1.4	2.8%	1.4	5.3%
		IMF	1.3	2.7%	1.3	3.1%	1.3	2.7%	1.3	5.1%
		AfDB Group	0.5	1.0%	0.4	0.9%	0.5	1.0%	0.5	1.9%
		AFESD	1.4	2.8%	0.0	0.0%	1.4	2.8%	1.4	5.4%
		Other 4/	1.0	2.0%	0.2	0.5%	1.0	2.1%	1.0	3.9%
	Bilateral		38.2	76.7%	33.7	79.1%	38.1	76.6%	18.6	70.6%
		Paris Club 5/	19.1	38.3%	17.6	41.3%	19.1	38.3%	8.2	31.0%
		Non-Paris Club	19.1	38.4%	16.1	37.8%	19.0	38.3%	10.4	39%
	Commercial		6.0	12.0%	6.0	14.0%	6.0	12.0%	2.1	7.9%

Sources: Sudanese authorities and staff estimates.

^1/Includes arrears.

^2/Applied discount rates are the average Commercial Interest Reference Rates (CIRRs) published by the OECD over the 6-month period prior to December 2019. The SDR discount rate is calculated using the CIRRs for all SDR basket currencies except the Chinese yuan. The OECD does not publish a CIRR for the Chinese yuan, therefore it is calculated based on the China bond yield curve for bonds with a 7-year maturity increased by 100 basis point, per the standard CIRR methodology.

^3/Assumes a stock-of-debt operation on Naples terms at end-December 2019 and comparable action by other official bilateral and commercial creditors on eligible debt. The NPV reduction resulting from the application of traditional debt relief varies from creditor to creditor depending on the composition of the debt owed to each creditor (pre-cutoff date vs. post-cutoff date, ODA vs. non-ODA), which determines the applicability of Naples terms and the granted terms.

^4/Other multilateral creditors include: the Arab Monetary Fund (AMF), the European Commission, the Islamic Development Bank (IsDB), the International Fund for Agricultural Development (IFAD) and the OPEC Fund for International Development (OFID).

^5/Paris Club cutoff date is January 1, 1984.

39. Most of Sudan’s estimated external PPG debt (about 86 percent) was in arrears at end-December 2019, much of which corresponds to arrears on interest payments and penalties (Figure 1). Arrears on Sudan’s external PPG debt at end-December 2019 are estimated at US$42.6 billion. This includes arrears to IDA (US$1.0 billion), the IMF (US$1.3 billion) and the AfDB Group (AfDB, US$0.4 billion). By end-2019 arrears had accumulated to all multilateral creditors with the exception of the International Fund for Agricultural Development – IFAD),^{29, 30} representing about 52 percent of Sudan’s debt owed to multilateral creditors. Arrears are estimated to represent close to 90 percent of the debt owed to official bilateral creditors and 100 percent of the debt owed to commercial creditors.

Sudan: Composition of Estimated External PPG Arrears at end-2019

(In percent)

Citation: IMF Staff Country Reports 2021, 066; 10.5089/9781513575155.002.A002

Source: Staff Estimates

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Sudan: Composition of Estimated External PPG Arrears at end-2019

(In percent)

Citation: IMF Staff Country Reports 2021, 066; 10.5089/9781513575155.002.A002

Source: Staff Estimates

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Sudan: Composition of Estimated External PPG Arrears at end-2019

(In percent)

Citation: IMF Staff Country Reports 2021, 066; 10.5089/9781513575155.002.A002

Source: Staff Estimates

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C. Possible Assistance Under the HIPC Initiative

40. Sudan would qualify for debt relief under the HIPC Initiative’s “export window.”³¹ After full application of traditional debt relief mechanisms,³² Sudan’s NPV of external PPG debt at end-2019 is estimated at US$26.4 billion. This represents 495 percent of the country’s exports of goods and services, significantly exceeding the 150 percent threshold set for this indicator in the context of the HIPC Initiative framework.³³

41. Reducing Sudan’s NPV of debt-to-exports ratio from 495 percent to the 150 percent threshold would require US$18.4 billion of HIPC Initiative debt relief in end-December 2019 NPV terms (Table 4). This implies a common reduction factor of 70 percent. Based on proportional burden sharing, the amount of HIPC debt relief from multilateral, bilateral and commercial creditors is estimated at US$3.9, US$13.0 and US$1.4 billion, respectively.³⁴

^{Table 4.}

Sudan: HIPC Initiative Debt Relief – Preliminary Estimates Based on End-2019 Data

(US$ billion, unless otherwise indicated)

Sources: Sudanese authorities and staff estimates.

^1/Assumes a stock-of-debt operation on Naples terms at end-December 2019 and comparable action by other official bilateral and commercial creditors on eligible debt.

^2/Percent reduction to be applied by each creditor to its exposure in NPV terms after traditional debt relief as of the debt cutoff (i.e., end-December 2019 for the preliminary HIPC debt relief estimates in this document).

^3/Three-year average of Sudan’s exports of goods and non-factor services for 2017 through 2019.

^{Table 4.}

Sudan: HIPC Initiative Debt Relief – Preliminary Estimates Based on End-2019 Data

(US$ billion, unless otherwise indicated)

		Stock of Debt at end-2019		HIPC debt relief (NPV terms as of end-2019) (A) – (B)
		After traditional debt relief 1/ (A)	After HIPC debt relief (B)
Total		26.4	8.0	18.4
	(as percent of exports)	494.8	150.0	344.8
of which:
	Multilateral	5.7	1.7	3.9
	Bilateral	18.6	5.6	13.0
	Commercial	2.1	0.6	1.4
Memorandum items
	Common reduction factor (percent) 2/	69.7
	Exports 3/	5.3

Sources: Sudanese authorities and staff estimates.

^1/Assumes a stock-of-debt operation on Naples terms at end-December 2019 and comparable action by other official bilateral and commercial creditors on eligible debt.

^2/Percent reduction to be applied by each creditor to its exposure in NPV terms after traditional debt relief as of the debt cutoff (i.e., end-December 2019 for the preliminary HIPC debt relief estimates in this document).

^3/Three-year average of Sudan’s exports of goods and non-factor services for 2017 through 2019.

View Table

^{Table 4.}

Sudan: HIPC Initiative Debt Relief – Preliminary Estimates Based on End-2019 Data

(US$ billion, unless otherwise indicated)

		Stock of Debt at end-2019		HIPC debt relief (NPV terms as of end-2019) (A) – (B)
		After traditional debt relief 1/ (A)	After HIPC debt relief (B)
Total		26.4	8.0	18.4
	(as percent of exports)	494.8	150.0	344.8
of which:
	Multilateral	5.7	1.7	3.9
	Bilateral	18.6	5.6	13.0
	Commercial	2.1	0.6	1.4
Memorandum items
	Common reduction factor (percent) 2/	69.7
	Exports 3/	5.3

Sources: Sudanese authorities and staff estimates.

^1/Assumes a stock-of-debt operation on Naples terms at end-December 2019 and comparable action by other official bilateral and commercial creditors on eligible debt.

^2/Percent reduction to be applied by each creditor to its exposure in NPV terms after traditional debt relief as of the debt cutoff (i.e., end-December 2019 for the preliminary HIPC debt relief estimates in this document).

^3/Three-year average of Sudan’s exports of goods and non-factor services for 2017 through 2019.

42. Assumptions for timing and modalities for the delivery of HIPC debt relief. For the purposes of this DRA, it is assumed that Sudan reaches the Decision and Completion points by June 2021 and in June 2024, respectively.³⁵ Below are the assumptions on the modalities for the delivery of HIPC debt relief by Sudan’s external creditors. These assumptions underpin the illustrative scenarios presented in Section IV.G of this document.

• IDA assistance under the HIPC Initiative and the MDRI is estimated at about US$1.2 billion in end-2019 NPV terms.³⁶ This is equivalent to a reduction of close to 85 percent in the NPV of Sudan’s debt to IDA as of that cutoff. It is estimated that 93 percent of IDA’s debt relief would be delivered through the arrears clearance operation to be concluded in March 2021 entirely financed with grants.³⁷ HIPC Initiative debt relief from IDA would be delivered in full through the arrears clearance operation. Therefore, based on these preliminary estimates, IDA would not provide additional HIPC debt relief through a reduction in debt service payments after Decision Point. At Completion Point, Sudan would benefit from IDA’s MDRI debt relief. Estimates on IDA’s nominal debt relief are provided in Table A7.

• IMF assistance under the HIPC Initiative is estimated at US$929 million in end-2019 NPV terms. Of this amount, US$5.9 million represents the concessional element associated with the subsidization of PRGT interest during the interim period.³⁸ After approval of the Decision Point by the Boards of the IMF and the IDA, it is expected that the IMF would provide HIPC interim assistance on eligible debt service falling due prior to Completion Point, subject to Sudan maintaining satisfactory progress under the new Fund arrangement to be approved at Decision Point (Table A8). These obligations would mainly include GRA charges on credit outstanding under the EFF arrangement.³⁹

• AfDB Group’s debt relief under the HIPC Initiative is estimated at US$341 million in end-2019 NPV terms and would be entirely delivered through the arrears clearance operation in concessional terms expected to take place in April 2021.

• Other multilateral creditors’ debt relief under the HIPC Initiative is estimated at about US$1.7 billion in end-2019 NPV terms. Creditors are assumed to provide this debt relief through the concessional debt restructuring (forgiveness, rescheduling or refinancing,) of Sudan’s debt towards these creditors (including accumulated arrears). These operations are assumed to take place at Completion Point, except when the provision of interim debt relief is required for the full delivery of a creditor’s share of HIPC Initiative debt relief.

• Paris Club creditors’ expected debt relief under the HIPC Initiative is estimated at about US$5.7 billion in end-2019 NPV terms.⁴⁰ These creditors are assumed to provide interim HIPC debt relief through a Cologne flow operation to take place shortly after Sudan’s Decision Point.⁴¹ The remaining HIPC debt relief would be delivered through a stock of debt operation shortly after Sudan’s Completion Point.

• Non-Paris Club bilateral and commercial creditors’ expected debt relief under the HIPC Initiative is estimated at US$8.7 billion in end-2019 NPV terms. It is assumed that these creditors would provide terms comparable to those of the Paris Club.⁴² The Sudanese authorities have confirmed their intention to approach these creditors and pursue the provision of such treatment as soon as the terms have been confirmed.

43. A successful implementation of the HIPC Initiative will depend on full participation of all creditors in an equitable manner. As in previous HIPC cases, Bank and Fund staff will encourage creditors to deliver their expected debt relief and provide relevant information to facilitate discussions on the provision of debt relief.

D. External Arrears Clearance Strategy

44. The scale of Sudan’s arrears distinguishes it from previous HIPC cases and a large share of HIPC debt relief is expected to be delivered through concessional arrears clearance operations. Most of Sudan’s external debt was in arrears at end-December 2019, including to IDA, the IMF and the AfDB Group. Most of the arrears are expected to be cleared in concessional terms. Sudan’s discussions on the clearance of arrears to non-Paris Club creditors will be undertaken as part of the negotiations for the provision of HIPC debt relief; these negotiations are expected to accelerate once the terms of the Paris Club Decision Point treatment have been confirmed. Consistent with HIPC Initiative methodology, the grant element embedded in arrears clearance operations will be counted towards a creditor’s contribution to debt reduction under the HIPC Initiative.⁴³

45. Sudan’s arrears to IDA will be cleared in March 2021, through a bridge loan provided by a bilateral donor. The clearance of arrears will restore Sudan’s access to IDA financing. Sudan will use up to US$1,160 million of the proceeds of the Reengagement and Reform DPF to repay the bridge loan. The portion of the DPF used to repay the bridge loan will be financed with a combination of an exceptional allocation from the IDA19 arrears clearance set aside and the country’s regular IDA allocation. Access to exceptional support from the IDA19 arrears clearance set aside will be in accordance with IDA’s systematic approach to arrears clearance.⁴⁴

46. Arrears to the IMF are expected to be cleared in 2021 through a bridge loan from bilateral donors, which remains to be secured. This could place the IMF in a position to approve a new financing three-year Fund-supported arrangement for Sudan.⁴⁵ The new Fund arrangement will be front-loaded given the large upfront balance of payments need; the authorities plan to use the proceeds to repay the bridge loan.

47. The clearance of arrears to the AfDB Group is expected to take place in April 2021, also facilitated by a bridge loan from a bilateral donor. The operation will proceed in accordance with the framework of the AfDB’s Transition Support Facility (TSF), which has a dedicated arrears clearance pillar. This framework calls for burden sharing of arrears clearance costs: a beneficiary country or donors acting on its behalf must meet up to a maximum of one-third of its arrears clearance obligations and the AfDB Group a minimum of two-thirds. Precise proportions are determined on a case-by-case basis.⁴⁶

48. The Sudanese authorities are in discussions on the clearance of arrears with other multilateral creditors. Discussions on the timing and modalities for the clearance of arrears to these creditors are ongoing. The DRA in this document assumes that arrears to these creditors are cleared on terms consistent with Sudan’s limited repayment capacity. Following the Board’s informal discussion of the Preliminary HIPC document, Bank and Fund staff will communicate the preliminary CRF and the outcome of the DRA to all multilateral creditors. Staff will also indicate the intention of IDA and the IMF to provide HIPC Initiative debt relief, and request confirmation by these creditors of their plans to clear arrears and provide debt relief consistently with the HIPC Initiative framework.

49. The clearance of arrears to the Paris Club is expected to take place through an exceptional treatment, based on the precedents of Liberia and Somalia. In the context of the adoption of a new Fund arrangement at Decision Point, Paris Club creditors are expected to agree to grant an exceptional treatment to Sudan, beyond the standard Naples terms that would typically be applied to arrears on pre-cutoff non-ODA debt and the standard terms for post-cutoff debt. Sudan will seek comparable treatment from all its non-Paris Club official bilateral and commercial creditors.

E. Sudan’s Debt Service Payments Following the HIPC Decision Point

50. Based on the assumptions outlined in the two sections above, a large share of HIPC debt relief from multilateral creditors (about 37 percent) would be delivered through concessional arrears clearance operations ahead of Decision Point. The remaining debt relief is assumed to be delivered through the concessional restructuring of debt, including debt in arrears, starting from Decision Point.⁴⁷ Repayment of the IMF arrangement to be approved at Decision Point would induce a sharp increase in principal payments over the period 2026–2031.⁴⁸ However, most of the increase in debt service payments would be netted out by beyond-HIPC relief from the IMF at Completion Point.

51. During the interim period, the direct effect of debt relief on the GoS budget will lead to an increase in actual debt service payments. Sudan has not been servicing most of its external debt, and after arrears clearance, the government must resume paying debt service. The DRA estimates that, in a scenario of enhanced HIPC assistance and multilateral arrears clearance, debt service payments will average close to US$128 million annually during calendar years 2021–24 (roughly the period covered by the interim period – Table A3). While this will represent a drain on the fiscal space available for development spending, the impact will be mitigated by the anticipated increase in external financial support once Sudan has normalized relations with the IFIs, and overall, the fiscal resource envelope is expected to expand.

52. Following the Decision Point, IDA will provide strong financial support to Sudan in terms consistent with its risk of debt distress and the IDA grant allocation framework. Sudan’s outstanding obligations to multilateral creditors excluding arrears are estimated at US$2.7 billion at end-December 2019. Under the before-HIPC debt relief scenario, debt service payments associated to these obligations are estimated to average about US$240 million during the calendar years covered by the interim period, this is equivalent to 7 percent of projected fiscal revenues. It is expected that IDA will maintain strongly positive net flows to Sudan, including through DPF operations.⁴⁹ Other creditors, including the AfDB are also expected to provide additional grant financing.

F. Possible Assistance Under MDRI and Multilateral and Bilateral Assistance Beyond HIPC

53. On reaching the Completion Point, Sudan would qualify for debt relief under the MDRI from IDA and the AfDF. MDRI debt relief by IDA and the AfDF would be provided through cancellation of all outstanding debt disbursed prior to end-December 2003 and end-December 2004, respectively, that is still outstanding at Completion Point.⁵⁰ MDRI debt relief would result in the cancellation of all remaining debt from Sudan to these two institutions at Completion Point . If Sudan reaches the Completion Point by the assumed Completion Point date (June 2024), preliminary estimates indicate that MDRI debt relief could amount to US$316 million in end-2023 NPV terms. Of this amount, US$230 million would be provided by IDA (Table A7, and US$86 million by the AfDF).

54. At Completion Point, Sudan would also qualify for beyond-HIPC debt relief from the IMF through the PRG-HIPC Trust Fund. Sudan has no debt eligible for MDRI relief from the IMF.⁵¹ At Completion Point, the IMF – through the PRG-HIPC Trust Fund – would provide beyond-HIPC assistance that Sudan would use to reduce the portion of the pre-Decision Point financing that is not already covered by debt relief under the HIPC initiative. This would include any Fund financing disbursed immediately after Sudan clears its arrears to the IMF and before Decision Point, consisting of the initial disbursement under the new IMF arrangement.⁵²

55. Most Paris Club official creditors would provide debt relief under bilateral initiatives beyond the HIPC Initiative. Pending Sudan’s successful implementation of the HIPC Initiative process, most Paris Club creditors are expected to provide further relief and cancel 100 percent of their claims against Sudan after it reaches the Completion Point (see Table A9). This additional assistance is estimated to amount US$2.7 billion in end-2023 NPV terms).

G. Expected Impact of Debt Relief and Sensitivity Analysis

56. Simulations under a baseline and two alternative scenarios – lower exports and lower growth – were conducted to test the sustainability of Sudan’s external debt after the provision of debt relief (Tables A5 and A6, Figures 3 and 4). Results under the three scenarios are presented below.⁵³ In all three scenarios, debt indicators reflect the conditional HIPC, MDRI and IMF and bilateral beyond-HIPC debt relief.⁵⁴

• Baseline. Under this scenario, the pace of reform implementation is consistent with reaching the Decision Point and Completion points by June 2021 and in June 2024, respectively—as detailed in the next section. The assumptions underpinning this scenario are described in Box 3. Under this scenario, Sudan’s NPV of debt-to-exports ratio is projected to decline from 894 percent at end-2019 to 61 at end-2024, driven mostly by debt relief. This ratio would continue to decline gradually thereafter to stabilize at around 33 percent in the outer years of the projection period. The reduction in the debt service-to-exports ratio—relative to a before debt relief scenario— would be relatively modest, mainly due to the rescheduling of the country’s large arrears and the resumption of debt service payments. The ratio would peak at 4.7 percent in 2027 and is expected to decline thereafter, stabilizing at around 2.0 percent in the outer years of the projection period.

• First alternative scenario – climate shock. This scenario highlights the sensitivity of debt indicators to temporary lower exports levels driven by two consecutive years of a climate-related shock affecting livestock and agricultural production. Specifically, exports are hit by two years of consecutive uncorrelated climate related shocks (i.e., drought, flooding, animal disease, locust infestation) which reduce output and exports. As a result, the fiscal deficit widens temporarily due to financial support for the sector and lower tax revenue, as does the current account deficit before returning to their medium-term paths. Under this scenario, Sudan’s NPV of debt to exports ratio deteriorates, sharply increasing by 38 and 82 percentage points during the two years of the shock, with an attendant deterioration of the debt service-to-exports ratio. The difference with the baseline scenario then narrows and real GDP bounces back to the baseline level in 2025.

• Second alternative scenario – limited progress in strengthening the business climate. This scenario highlights the sensitivity of debt indicators to permanently lower growth relative to the baseline. The assumed lower growth would be consistent with a slower-than-envisioned improvement in the business climate and private investment, perhaps as a result of a continued challenging security environment. Under this scenario growth remains subdued over the full medium term, lagging population growth, and only starts on a path toward potential as the business climate slowly begins to improve. By the end of the projection period, dollar GDP is only 65 percent of its baseline level. Lower fiscal revenue combined with greater social spending pressures push the fiscal deficit higher; lower domestic production reduces exports, while lower capital imports are partially offset by buoyant basic and humanitarian imports, leading to a larger current account deficit which only gradually narrows over the longer term. As a result, the NPV of debt to exports is, on average, about 32 percentage points higher over the 2022–2030 period than in the baseline, and on average about 16 percentage points higher over the long-term. The debt service-to-exports also deteriorates significantly under this scenario, reaching its peak in 2027 at about 7 percent.

A. Possible Timing for Decision Point

57. Sudan could reach the HIPC Initiative Decision Point by June 2021 – at the time of IMF Board consideration of the new Fund arrangement. This indicative timing reflects the assumption that the authorities maintain satisfactory performance under the current SMP and meet the required minimum 6-month satisfactory implementation track record upon completion of the second review based on an end-March 2021 test date. The IMF Executive Board is expected to pronounce on the track record in June 2021.⁵⁵ Sudan has also to clear its arrears to IDA, the IMF, and the AfDB; and arrears to other external creditors should be cleared or Sudan has to have a plan for clearing them. As detailed earlier in the document, arrears to IDA and the AfDB will be cleared in March and April 2021, respectively. The IMF has yet to secure the financing package for arrears clearance.⁵⁶ The indicative timing assumes that satisfactory financing assurances have been secured to cover the IMF’s portion of Sudan’s debt relief and that the authorities have submitted its PRSP to the Bank and Fund and agreed on acceptable Completion Point triggers.

B. Possible Floating Completion Point Triggers

58. The set of possible triggers for Sudan’s floating Completion Point in this document support transformative reforms. In addition to the standard triggers on satisfactory implementation of the poverty reduction strategy and maintenance of macroeconomic stability, Sudan’s possible triggers include actions in several areas (Box 4). This preliminary set reflects a shared understanding with the authorities on possible areas for the triggers. Discussions are currently underway with the authorities for the agreement of more concrete triggers in these areas. Following the informal discussion of this document by the Executive Boards, and consistently with the HIPC framework, staff will continue to engage with the authorities and relevant stakeholders to ensure a final set of concrete triggers for approval at Decision Point. These final triggers will be specific and focus on the actual implementation of reforms, and will be carefully calibrated to balance ambition, capacity constraints and planned capacity building support from the IMF, World Bank, and other development partners.

59. The possible triggers build on reforms achieved to date. The triggers also complement the reform objectives that are expected to be outlined in the new IMF arrangement. The policy anchors for the new Fund arrangement are likely to involve achieving macroeconomic stability and reforms to strengthen the business climate and inclusive growth, including governance and transparency, PFM, debt management, as well as improvements in statistics for policy making and program monitoring. They also complement and are natural next steps for prior actions in IDA’s Reengagement and Reform DPF, most notably the prior actions under pillar 2 (strengthening social protection and financial inclusion) and pillar 3 (improving transparency and accountability of government).

60. The possible floating Completion Point triggers are critical for enhancing growth, improving fiscal sustainability, and reducing poverty. This includes sustaining a macroeconomic policy mix that is consistent with overall stability. The emphasis on public financial and expenditure management reflects the vital importance of this area for ensuring efficient management of public resources and the avoidance of future debt problems. The list of possible triggers in Box 4 includes triggers that would help to ensure that the Government strengthens domestic revenue mobilization, public procurement, debt management, social protection and statistics. It also includes triggers aiming at improving the business environment, attract investment and promote growth.

• The public financial and expenditure management triggers are natural milestones on the path to inclusive, accountable governance and foundational steps toward fiscal sustainability and pro-poor expenditure. They aim at ensuring a sound public finance and asset management framework, and increased transparency. A strengthened budget process would further institutionalize gender budgeting and reporting. This will facilitate the analysis of budget-policy linkages, value for money considerations, tracking of PRSP progress, and more effective engagement with the public. This is important to generate trust and a renewed social contract in which the government demonstrates responsiveness to citizens in process and through investment in services and social outcomes. The SOE trigger will strengthen governance and financial oversight over the vast SOE sector including those owned by the military-security complex. Publication of audits, starting with the largest SOEs, will demonstrate the exercise of government oversight and allow for public scrutiny.

• The triggers on debt management aim to enhance debt transparency and strengthen debt management capacity. Comprehensive, reliable, and timely debt data is a pre-requisite for effective debt and fiscal management, and to effectively evaluate the sustainability of public debt and monitor emerging risks. This is complemented by actions that will reduce the fragmentation of debt management functions and support fiscal policy makers through the provision of accurate and timely debt service data and will help sound decision-making on the granting of guarantees.

• To help mitigate the impact of future shocks, the trigger on social protection aims to lay the foundations for an adequate social protection system by Completion Point. It also aims to increase the use of digital payment methods, which will have lasting positive implications for the effectiveness of social policy, social protection and financial inclusion. Both efforts are gender-sensitive and will encourage women’s financial literacy, inclusion, and empowerment.

• The trigger on AML/CFT aims to help Sudan strengthen its compliance with the international standards in this area in advance of an upcoming AML/CFT mutual evaluation. Money laundering, terrorist financing, and related activities threaten the integrity of the financial system, discourage foreign investment, discourage and distort international capital flows, hinder the establishment of new – and maintenance of existing – corresponding banking relationships, and may also drain resources from more productive economic activities. A National Risk Assessment (NRA) allows a country to identify, assess, and understand its money laundering and terrorism financing risks and so is the foundation for applying a risk-based approach to mitigate those risks.

• Reform of the electricity sector is critical to Sudan’s future. Despite dependence on thermal power, Sudan has had some of the lowest electricity prices in the world, and, consequently, the highest electricity consumption per household in Africa. This is true even if most of the population is not connected to the grid. Both direct and indirect subsidies to the power sector have crippled public finance, while overconsumption of energy has had negative environmental consequences. The financial unviability of the sector has resulted in the deterioration of electricity service since mid-2020, resulting in the unprecedented power crisis with large scale power rationing and damaging Sudan’s economic recovery. Sudan has accordingly prioritized in its agenda reform of the electricity sector, moving toward a viable and effective power sector, cost-recovery tariffs, and the development of alternative renewable sources of energy. Together with the phasing out of fuel subsidies, this promises to have the additional benefit of significantly reducing Sudan’s carbon emissions.

61. For the purpose of the DRA in this document, the technical assumption used by Bank and Fund staffs is that Sudan reaches its Completion Point in June 2024. Risks around this indicative timing (notably weak capacity) are significant and would be mitigated by the authorities’ strong reform commitment demonstrated under the IMF SMP, and supported by the World Bank’s engagement, and technical assistance from the IMF and World Bank, together with other development partners.

C. Monitoring Public Spending Following Provision of HIPC Assistance

62. Securing the effective use of public spending for poverty reduction and inclusive growth is a key objective of the HIPC Initiative. The authorities will continue their ongoing efforts to strengthen the programming, management and control of public expenditures, and to improve service delivery in key sectors. Within this framework, technical assistance from IDA, IMF, AfDB and other partners will be needed as it will be important to continue to strengthen public financial management capacity.

63. The GoS maintains the practice of having a national plan with strategic programs and key projects; but links with budget formulation remain weak. Key government entities also produce strategic sectoral plans; however, the budget process remains incremental and is not linked to these strategies. In addition, the absence of macroeconomic and fiscal forecasting, coupled with the absence of a MTEF, impacts effort to direct resources strategically as budget allocations lack anchors in medium- and long-term strategic priorities. Additionally, the reporting on the implementation of the plans is limited to technical statistics without links to financial reporting. This reduces the monitoring of budget results, reduces accountability vis-a-vis the objectives and limits the feedback needed to enhance the efficiency of planning and budgeting.

64. An incomplete Integrated Financial Management Information System (IFMIS) impacts the MoFEP capacity to produce adequate expenditure reporting.⁵⁷ Expenditure is recorded through the Government Resource Planning (GRP) System, which is used by all federal entities but is not linked to financial systems at the local level.⁵⁸ Some expenditures, mainly donors’ funded, are incurred off budget. The Electronic Payment System (E15) is used to electronically collect all Government’s duties, fees, and payments. This system is operated by the Chamber of Accounts; however, the General Directorate of Revenue is not part of the system, hence the controlling and planning part is absent. Moreover, the MoFEP Development Department keeps records of projects carried out at the national level and those carried out by the local governments with federal government transfers. The GRP system is capable of supporting budget preparation and execution by economic, administrative, and functional classification. The system, however, is underutilized which leads to inconsistencies between budget allocation and reporting. There are no budget execution data by ministry, program-head or function. This hampers the monitoring and tracking of health, education, and other poverty-related spending, and renders producing such reports difficult without significant manual efforts.

65. Accounting policies and standards need to be aligned with international good practice. Sudan has a fair accounting system and the Chamber of Accounts prepares the final accounts. There is no backlog, generally, but there is a delay in submitting the accounts to the National Audit Chamber (NAC).⁵⁹ The NAC has sufficient legal independence, applies INTOSAI standards and also submits its audit reports to the legislature/sovereign council within three months after receipt of annual financial statements. It also has a good audit follow-up mechanism. Nonetheless, executive implementation of audit recommendations has been an issue. Audit coverage mandate appears to be wide, covering all budgeted institutions, but the extent of coverage of extra-budgetary units and SOEs is unknown as there is no data on extra-budgetary units.

66. The GoS is looking to develop a PFM reform strategy. The strategy will be informed by diagnostics currently underway (PEFA and Tax administration and policy assessments) and will be elaborated in consultation with development partners. The MoFEP is aware of the PFM challenges and weaknesses and of the capacity to effectively manage public finances. The SMP discussions and Bank diagnostics underway present a good opportunity for the development of a PFM roadmap. The government has expressed commitment to tackling the weaknesses and carrying out the needed reform with support from development partners. The main PEFA and Tax diagnostic findings have informed the government strategic documents such as the PRSP. The HIPC Completion Point triggers on PFM are integral to a comprehensive PFM reform road map the government intends to develop and implement.