I. Introduction

1. Our South Sudanese authorities appreciate the candid discussions with Fund staff during the Article IV and second Staff-Monitored Program (SMP) review missions. They broadly share staff’s assessment and policy recommendations.

2. Since re-engaging with the Fund in 2020, the authorities have been focused on rebuilding economic systems and establishing a reform track record. Extremely difficult reforms have already been undertaken under the SMP, which, alongside two Rapid Credit Facility (RCF) disbursements and the general SDR allocation, helped the authorities restore some macroeconomic stability and unify exchange rates, ending a long-standing system of multiple exchange rates. Successful exchange rate reforms ensured the authorities were able to minimize disruption and sustain the reform outcomes, with the benefit of important technical support and guidance from the MCM Department and mission staff. The authorities managed to complete these reforms under especially difficult conditions. They found the SMP provided vital support for their macroeconomic reform and stabilization efforts, building a track record of sound policy, and providing an important bridge towards a future Fund-supported program, which is key to catalyze concessional support and grant resources. They request that discussions for the final SMP review be combined with negotiations for an Extended Credit Facility (ECF).

3. South Sudan is one of the poorest countries in the world, with extremely high poverty rates where 70 percent of the population currently suffer acute food insecurity in the wake of rising global food prices. Three years of climate shocks with severe flooding have also eroded agricultural output further compromising livelihoods and exacerbating the humanitarian crisis.

4. A timely UCT program later in the year is critical to stem further macroeconomic deterioration, and we hope the Board can be supportive in this regard. The authorities have advanced in the implementation of Fund recommendations and continue to deepen their engagement with the Fund. They desire a UCT program to enable them to safeguard macroeconomic stability and deepen their reform agenda in line with their revised National Development Strategy (NDS) 2021-2024, which aims to consolidate peace and revive the economy.

5. The authorities have continued to make significant progress in the implementation of the Revitalized Peace Agreement and while capacity constraints have slowed some measures, the authorities are now working towards the population census and draft constitution that are needed ahead of 2023 elections. Key milestones of the Agreement that have been achieved include formation of State and National Governments and the Transitional National Legislative Assembly (TNLA), a unified command structure in the National Army, and improved security in the country, among others. The Political Parties and Elections Bills are with Cabinet ahead of their submission to the TNLA, along with the political roadmap that charts the way forward. Meanwhile the authorities continue to ensure that any risks to the peace agreement are addressed, and measures are taken to reduce uncertainty and create a conducive environment for investment and growth. They intend to hold elections by end-2023 after conducting the census.

II. Recent Economic Developments and Outlook

6. The pandemic and climate change impacts (specifically floods) have reversed the recovery achieved under the 2018 Revitalized Peace Agreement, with real GDP now estimated to have contracted by 5 percent in FY2020/21 (after growing by 13.2 percent in FY2019/2020). While the recent increase in the global oil price implies a boost to economic output, a third consecutive year of severe flooding caused losses in oil production. Going forward, two more years of recession are projected in an economy that is already under significant economic and social strain.

7. Following successful exchange rate unification, inflation has declined significantly from 43.5 percent in 2021 to about 2 percent in 2022, benefitting from tight monetary conditions and relative stability in the exchange rate. More recently, however, high oil and food prices present upside risks to inflation. The current account balance is expected to improve despite a rising import bill, reflecting the positive impact on the trade balance of the increase in oil prices. International reserves remain low, and the authorities are making greater efforts to build FX reserve buffers despite constrained inflows.

8. The economy remains open as the people of South Sudan adjust to life with COVID. South Sudan has so far had a comparatively low caseload and fatality rate. Nevertheless, recognizing that there is some undercounting, the authorities plan to accelerate vaccinations with goal of reaching herd immunity. Currently, only a small percentage of the population is fully vaccinated. As South Sudan benefits from the COVAX facility, the focus is now on overcoming severe logistical challenges that are hampering the distribution of vaccine doses.

III. SMP Performance

9. All quantitative targets under the SMP for end-October 2021 have been met, except for the clearance of domestic salary arrears, where corrective measures have been taken with a view to clearing them by August 2022. In line with SMP commitments, the authorities have refrained from monetary financing of deficits for the past 2 years, kept reserve money growth well within the ceiling of 6 percent between March and October 2021, and maintained a stable, unified exchange rate while eliminating a system of multiple currency practices. Given the removal of nearly all foreign exchange restrictions, market participants can now buy and sell foreign exchange at market clearing exchange rates.

10. The authorities remain committed to expenditure rationalization and improving budget execution. The FY2021/22 budget was approved by the national assembly (TNLA) in March 2022, marking the first time that South Sudan has had a Parliament-approved budget since the end of the civil war in 2018. The draft budget for FY2022/23 has already been submitted to TNLA for approval and is consistent with the authorities’ commitment to fiscal prudence and the objective of supporting sustainable and inclusive growth without reliance on non-concessional external financing.

11. The authorities are undertaking significant measures to strengthen Public Financial Management (PFM), with partners’ support, including under the SMP where notably, fiscal management has been strengthened through the establishment of a Cash Management Unit (CMU) at the Ministry of Finance and Planning (MoFP). The CMU is developing a preliminary annual cash plan on monthly basis for FY2022/23 based on the resource envelope approved by the Council of Ministers, with assistance from Fund TA. The debt stock as of December 2021 was also published on the MoFP website by amounts, currency, and creditor, as a prior action for the second SMP review. The MoFP also issued a circular to Ministries, Departments, and Agencies (MDAs) to formalize payment of salaries of their staff through bank accounts (rather than in cash) as of July 1, 2022; and progress is being made towards implementing the Treasury Single Account (TSA).

12. To ensure prudent debt management, the authorities are operationalizing the reconstituted MoFP Loan Committee (LC). In line with the legal framework set out in the Constitution and the PFM Act of 2011, the LC will be responsible for approving any external debt contracts before they are sent for final approval to the Cabinet of Ministers and the National Assembly, as per the responsible borrowing guidelines. This new framework will help to ensure more robust recording and disclosure of debt regardless of the source agency.

13. Staff has extended the SMP through November 30, 2022, to allow for verification by the independent international auditor of the published stock of external debt and guarantees as of December 2021.

IV. Macroeconomic Policies

The authorities’ goal is to pursue prudent macroeconomic policies that ensure stability and debt sustainability, while enhancing social spending, improving governance, and building resilience, including with infrastructure investments that support adaptation to withstand natural disasters and that help diversify the economy.

Fiscal Policy and Debt Management

14. Fiscal policy is focused on maintaining macroeconomic stability and debt sustainability while mobilizing domestic revenue and reenforcing budget discipline. Higher revenues reflecting firming global oil prices and a significant improvement in the collection of non-oil revenue by the National Revenue Authority, are providing fiscal space to meet priority spending. The authorities will continue to phase out exemptions, digitalize collections, and increase customs rates in line with East Africa Community commitments, while enhancing the efficiency of spending on road investments.

15. With oil prices expected to be higher than projected over the medium term, the authorities plan to save part of the windfall revenues in the Future Generation and the Oil Revenue Stabilization Funds, in line with the Petroleum Act 2012. They are also committed to increasing priority social spending, while enhancing human capital development, but note that debt service costs leave them with limited space to maneuver. They cleared the Transitional Financial Arrangement with Sudan and are working to bring the associated share of receipts onto the national budget to create more fiscal room.

Monetary, Exchange Rate, and Financial Sector Policies

16. The authorities continue to implement reserve money targeting, which has helped bring inflation down to single digit levels, and they will refrain from any new monetary financing of the deficit. They will continue to implement this framework, in line with SMP commitments, while conducting regular foreign exchange auctions to maintain a market clearing rate and publishing auction data on the Bank of South Sudan (BoSS) website in a timely manner, to foster confidence among market participants.

17. Active liquidity management continues, helping to contain inflation. The authorities have introduced a new term deposit facility as a first step in expanding the monetary policy toolkit and will refine the auction mechanism and terms of the facility to ensure a viable means of managing liquidity. They are also considering introducing BoSS bills, as an added liquidity management instrument, and plan to strengthen coordination with the MoFP to improve their capacity for liquidity monitoring and forecasting, to better track market developments and effectively respond to them.

18. The authorities continue to work to ensure financial sector stability, improve bank supervision, and increase financial inclusion. This includes plans to promote adequate capitalization of domestic banks, be it through raising capital, finding new investors, mergers, applying for voluntary liquidation, or enforcing liquidation where justified. Given limited experience with bank resolution, the authorities have requested urgent technical assistance in this area from the IMF, and a mission is scheduled for August 2022. Going forward, the authorities also plan to reduce the current heavy reliance on cash for transaction purposes and will pursue relevant measures, including increased use of the banking system in settling government obligations.

19. The BoSS has now published audited financial statements up to 2020 and will proceed to enforce the timely publication of audited financial statements by commercial banks. A risk-based supervision policy has been drafted and will be approved by the BoSS Board of Directors, by end-2022. The publication of quarterly Financial Soundness Indicators will help to strengthen financial sector transparency.

20. The BoSS is committed to implementing the 2021 IMF safeguards assessment recommendations. Reforms have been initiated with a view to fully addressing the recommendations in the second half of 2022. They are developing a detailed strategy to tackle remaining vulnerabilities. Measures include finalizing and publishing the FY2021/22 audited financial statements, signing a MoU with the Auditor General to ensure the timely appointment of an international external audit firm for audits of FY2022/23 onwards, co-sourcing of internal audit services, and strengthening currency operations, among others.

Structural Reforms and Capacity Development

21. The authorities share staff’s concern on the need for investment in climate resilient infrastructure given the country’s vulnerability to climate shocks and the need to prevent agricultural land degradation, and support food security. The authorities will need donor support, including to unlock climate financing as a complement to support engagement under the Resilience and Sustainability Trust (RST). Measures are also needed to advance economic diversification and broaden sources of growth to non-oil sectors such as agriculture. In the meantime, the people of South Sudan need further urgent humanitarian support as they work with the staff to leverage the CES to address the underlying drivers of economic fragility.

22. Work is also underway to strengthen transparency in the management of oil resources. To this end, the authorities plan to select by end-September 2022, an internationally recognized auditor to certify the annual financial reports of Nilepet, starting with the 2022 annual report. They have also committed to publish the audit reports on Nilepet’ s website, and on a government website. By end-September 2022 a membership application will also be submitted to the Extractive Industries Transparency Initiative (EITI). Quarterly reports on the oil sector and public financial audited reports will be published on a government website.

23. As they continue to pursue improved governance, and transparency, the authorities have implemented their commitments under the RCF letter of intent and ensured transparency in the use of COVID-related resources. The Auditor General (AG) has completed the audit of spending financed from disbursements under the first RCF and the results were posted online. The authorities are now implementing the audit recommendations. The AG is also expected to complete the audit of the second RCF in July 2022. The authorities’ debt stock has been published, and they aim to publish the report of the independent auditor that is verifying the external debt stock by mid-November 2022. Relatedly, the recent SDR allocation was prudently used, with $184 million allocated to bolster FX reserves, while $150 million was devoted to supporting the budget.

24. To strengthen the credibility of the financial system, the authorities are implementing AML/CFT reforms in coordination with the Financial Action Task Force (FATF). They have applied for membership in the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) and have been approved as an observer. In August 2022, the ESAAMLG delegation is due to assess whether the country meets requirements to join as per the MoU with ESAAMLG. Importantly, the authorities have established the Financial Intelligence Unit and will continue to strengthen its functions and technical expertise, including by hiring new staff. To address the legal issues in the FATF Action Plan, they will work closely with the technical assistance team from the IMF Legal Department. The country is committed to the Action Plan agreed with FATF and expect to be removed from the grey list upon satisfactory completion of requirements under the Action Plan.

25. The authorities appreciate the technical assistance support on PFM reforms, revenue mobilization, revenue administration, operationalizing the money targeting framework, liquidity forecasting, and macroeconomic statistics. Traction of CD has improved and in-person technical assistance delivery, provided through a longer-term program of hands-on support activities, has delivered tangible benefits. As such, the authorities express a strong preference for this approach.

V. Conclusion

26. Our South Sudanese authorities reaffirm their commitment to pursuing prudent macroeconomic policies needed to ensure macroeconomic stability and to lay a strong foundation for sustainable inclusive growth. They value Fund engagement and look forward to deepening relations with the Fund, including with an ECF program later this year that they hope the Board will support, to anchor their current efforts to ensure external balance, support the recovery, raise medium-term growth, and catalyze donor support.