Introduction

1. Our South Sudanese authorities appreciate support from the Fund management and staff as well as constructive engagements during the final Staff-Monitored Program (SMP) review, and negotiations for Food Shock Window under the Rapid Credit Facility (RCF-FSW) and Program Monitoring with Board Involvement (PMB). They broadly share staff’s assessment of macroeconomic developments and policy priorities.

2. The South Sudanese authorities are requesting support under the RCF-FSW amounting to about 35 percent of the quota to meet urgent BOP needs created by climate, pandemic, and geopolitical shocks. They view emergency Fund support as important to alleviate food shortages, and arrest further deterioration in the humanitarian situation given that two thirds of the population is currently facing acute food insecurity. The devastating floods that adversely affected crop production, coincided with high global food prices, and undermined food self-sufficiency. Despite the challenging circumstances, the authorities are determined to consolidate reform gains made under the SMP and pursue further measures to maintain macroeconomic stability to support durable and inclusive growth. To this end, they view a PMB as key to help achieve the overarching objectives of their Revised National Development Strategy (R-NDS, 2021–2024) and help concretize their policy track record to lay strong foundations for deeper Fund engagement.

3. The authorities have delivered on their LOI commitments, including by releasing the audit report of the RCF-1 spending in September 2021. Further, the Auditor General (AG) completed the audit of RCF-2 spending and published the report on the government website in December 2022. Importantly, they developed an ambitious action plan to implement the AG’s audit recommendations. The AG will also complete, by end-September 2023, an audit of all spending funded from this third disbursement and publish the final report. Going forward, the authorities will work with the World Bank to audit RCF-FSW spending for the states, in line with the need to ensure transparency and accountability.

Performance Under the SMP and PMB Request

4. Two QPCs on arrears clearance and reserve accumulation were met, while the QPCs on central government cash deficit, central bank borrowing, reserve money growth, and sovereign guarantees were missed. However, the new economic team has taken appropriate measures to tackle these temporary setbacks. Specifically, they have strengthened fiscal discipline by adopting more stringent cash management practices and halting recourse to central bank borrowing. Consequently, the exchange rate and prices have stabilized in recent months. The authorities are also taking steps to progressively reduce salary arrears to diplomatic personnel. Additional actions to consolidate these gains will be taken in the context of the requested PMB.

5. One structural benchmark (SB) on the signing of the MOU for appointment of an international external audit firm for the third review was met. The missed SBs were met with a delay, following corrective actions taken to address them. In this connection, they published findings and recommendations of the audit of the spending of the April 2021 RCF disbursement in December 2022; published budget execution reports for FY2020/21 and FY2021/22 in January 2023. Further, the independent external auditor conducted a comprehensive stock-take of all outstanding external loan agreements and guarantees by submitting the report to the authorities in December 2022 and the authorities published it in January 2023.

6. Considering the satisfactory SMP performance under difficult circumstances, and the authorities’ plan to deepen Fund engagement through a UCT-quality program, they request a PMB. They consider the PMB as vital to support their macroeconomic and stabilization efforts and build a track record of sound policies towards a future UCT-quality program, which would catalyze additional donor support and help address protracted BOP challenges.

Recent Economic Developments and Outlook

7. Real GDP contracted by 3 percent in FY2021/22, reflecting the dampening effects of the floods on agricultural and oil production. As a result, oil production declined from historical averages of 170 thousand bpd to 150 bpd in FY2022/23. Declining oil production will also offset the projected growth in agriculture, leading to a projected real-GDP contraction of 0.4 percent in FY2022/23. Nonetheless, growth is expected to recover from FY2024 onwards on the back of recovery in oil and agricultural production. Meanwhile, average inflation, which dropped to 0.9 percent in FY2021/22 from 43.5 percent in FY2020/21, is expected to increase to 16.5 percent in FY2022/23, underpinned by the depreciation of the exchange rate and higher global commodity prices occasioned by recent geopolitical developments. Looking ahead, the authorities expect inflation to gradually decline to single digits, benefitting from policies in place to contain monetary growth.

8. Reserves remain below one month of import cover, on the back of the projected decline in international oil prices and diminishing international aid in the wake of the pandemic and the war in Ukraine. Considering the depleted reserve coverage, Fund financial support, including under the RCF-FSW, would be vitally important to replenish reserves. The larger portion of the FSW disbursement will be used to boost reserves. The balance will be channeled via the World Food Programme and International Organization for Migration to leverage their credible systems to provide immediate humanitarian assistance and address food insecurity.

Fiscal Policy and Debt Management

9. The authorities remain committed to fiscal consolidation to ensure fiscal and debt sustainability. They are deepening revenue administration and customs reforms, which are yielding significant gains in non-oil revenues. To support the National Revenue Authority’s (NRA) efforts, the Council of Ministers approved in September 2022 the first Strategic Plan for NRA for the next five years. Specifically, they have reinvigorated efforts to strengthen tax systems, and digitalize tax proceeds.

10. Steadfast implementation of fiscal reforms remains key to efforts aimed to sustain ongoing adjustment. Under the SMP reform implementation, the authorities cleared all domestic salary arrears, which stood at 5 months in January 2021. Concurrently, they introduced revenue and customs administration reforms that culminated in a significant increase in non-oil revenue collection. The authorities have also enhanced fiscal transparency, including by publishing budget implementation reports for the FY2020/21, FY2021/22, and the first quarter of FY2022/23 in January 2023.

11. The authorities adopted an ambitious and comprehensive action plan to address the findings in the AG’s audit report and to implement its recommendations. The plan includes a progressive rollout of the payment of salaries for all central government employees through commercial banks, with a view to complete the rollout by end-June 2023. Further, the plan puts in motion a process to issue biometric identification cards to central government employees and organized forces, in collaboration with the Ministry of Public Service and World Bank technical support. The Ministry of Finance (MoFP) will submit monthly progress reports to the PFM Oversight Committee regarding implementation of these reforms.

12. The authorities are addressing several factors which are constraining fiscal space. They are attaching prominence to ensuring that Sudan starts paying for crude oil in excess of the agreed transit fees. Currently, even though South Sudan’s obligations to Sudan under the Transitional Financial Agreement (TFA) ended in March 2022, Sudan continues to lift without payment the same amount of crude oil during the time that the TFA was in place. The accumulated amount that Sudan owes to South Sudan exceeds US$300 million (about 4 percent of GDP) as of end-2022. This together with debt service obligations from past non-concessional borrowing created a large financing gap in FY2022/23. The authorities plan to bridge the gap by adjusting the exchange rate used for assessing taxes on imports; increasing the customs duty rates for some products; and reviewing tax exemptions, with a view to rescind those in noncompliance with the agreement, and to phase out the remaining ones, while ringfencing social outlays.

13. Budget discipline and expenditure rationalization remain paramount to our authorities’ efforts to exercise fiscal restraint. They plan to reduce the amount of crude oil allocated for the oil-for-road infrastructure scheme from 20,000 to 15,000 bpd. Further, they will not transfer the 10 percent and 15 percent share of oil revenue to the Future Generation Fund and the Oil Stabilization Account, while ensuring timely payments of salaries, which are key in reducing poverty. The authorities are confident that the planned public wage increases will align with regional standards and be fully offset by revenue and expenditure measures. To contain spending commitments within the available cash, the MoFP is authorizing spending based on cash projections prepared by the Cash Management Unit (CMU) and approved by the Cash Management Committee (CMC) while the spending limits in their upgraded IFMIS are regularly aligned with the approved cash plans. The MoFP will also ensure that all transactions arising from the RCF-FSW are recorded in the IFMIS. Relatedly, they are strengthening expenditure controls and improving the transparency of government operations. To avoid the recurrence of salary and other expenditure arrears, they are strengthening cash management and monitoring.

14. The authorities are committed to prudent debt management and to refrain from monetary financing in the FY2022/23 budget. They will also avoid any further non-concessional borrowing unless: (i) debt management operations improve key liquidity or solvency debt burden indicators without adversely affecting the risk rating; or (ii) loans to finance critical investment projects with high social and economic returns that are integral to their national development program, and for which concessional financing is unavailable. Consistent with the Cabinet of Ministers’ Resolution of October 2020, they will continue to refrain from contracting oil-backed loans and consult with the IMF staff prior to contracting or guaranteeing any new non-concessional debt. They have resolved to remain current on their debt payments and adhere to prudent borrowing practices.

Monetary, Exchange Rate, and Financial Sector Policies

15. The authorities halted monetary growth and are operationalizing the reserve money targeting framework to rein in inflation. Given the underdeveloped financial sector and the policy levers at the Bank of South Sudan’s (BoSS) disposal, the authorities view reserve money targeting as appropriate to effectively bring down inflation. They will continue to target annual reserve money growth rate at 10 percent or lower. They will continue to conduct regular FX auctions to aid price discovery and publish auctions data on the BoSS website in a timely manner to foster confidence among market participants. In addition, they introduced a Term Deposit Facility in October 2022, with initial maturities of 14-day and 28-days. This is a first step towards expanding their policy toolkit to promote domestic market development and act as a precursor to restoration of treasury bills.

16. The authorities are committed to maintaining unified exchange rates that has eliminated previous distortions. Since August 2021, they liberalized the foreign exchange (FX) market and unified the exchange rates, eliminating a premium of over 200 percent between the official and parallel market exchange rates at the beginning of the SMP. The Bank also publicizes the results of weekly FX auctions to banks and bureaus.

17. To restore financial stability, the authorities plan to address bank undercapitalization by promoting mergers where possible and enforcing liquidation. Further, they plan to revoke licenses for some inactive banks that exceeded the 6-month threshold, and leveraging IMF TA, they have prepared a draft strategy to review the licenses of banks that have ceased operations. This strategy will be approved by the BoSS Board by end-March 2023. To this effect, they took actions in December 2022 to revoke licenses of two inactive banks, in line with their commitment to implement the recommendations from the safeguards assessment.

18. The external auditor is finalizing the audited financial statement for 2021 which will be published shortly. In parallel, the BoSS signed a Memorandum of Understanding with the AG’s office to ensure the appointment of a reputable international audit firm to audit BoSS financial statements from FY2022 onwards. They will also request banks to supply BoSS with granular data on deposits, to aid planning for the introduction of a deposit insurance scheme as part of their commitments to further integration within the EAC. Leveraging IMF TA, they have compiled new quarterly Financial Soundness Indicators (FSIs) in line with current best practices and have published them on the BoSS website for end-September 2022. They will continue to frequently publish the FSIs going forward.

Structural and Governance Reforms

19. The authorities are committed to improving governance, and accountability, including by ensuring transparency over resource management. To this end, the Petroleum Reports through FY2020/21 are now available from the Ministry of Petroleum’s (MoP) website. The authorities will also publish the summary of oil sharing agreements under the three existing agreements in the annual Petroleum Reports and post them on the website.

20. As part of the 11 PFM key priority areas, the authorities are operationalizing the Public Procurement and Disposal Asset Authority (PPDA). To this end, the government appointed the Board of Directors to the PPDA on February 17, 2023, which is a critical step towards operationalizing the PPDA, meeting of stated objectives and indicates a real sign of progress, and of political commitment by all the parties to the Revitalized Peace Agreement. In parallel, they are taking decisive steps to improve the process of assessment, approval, and contracting of external loans and guarantees, while enhancing public investment spending efficiency. Therefore, the steps taken so far under the SMP and those committed to under the PMB on how to improve governance and the transparency demonstrate the authorities’ commitment.

21. The authorities plan to implement by end-March 2023 the remaining recommendations from the 2021 safeguards assessment. They have made progress implementing the AML/CFT reforms, including by establishing and resourcing the Financial Intelligence Unit (FIU), increasing its staffing levels, and obtaining approval for full membership of the ESAAMLG in September 2022. To address legal issues in the action plan, including by drafting a revised AML/CFT Act to incorporate the FATF standards, they will immediately leverage TA from the IMF Legal Department, to facilitate a diagnostic mission in early 2023. They also requested TA from donors to structure and ensure full and independent functionality of the FIU, while conducting the national risk assessment. They will also request a mutual evaluation by ESAAMLG in future.

22. The authorities are also making substantial progress in implementing the Revitalized Peace Agreement and enhancing security across the country. The planned general elections are scheduled to be held by end- 2024. Broadly, the revised Roadmap of key milestones which has been agreed upon by stakeholders and ratified by Parliament, including with respect to economic and public financial management reforms in Chapter IV of the agreement, also mitigates downside risks.

Conclusion

23. Our South Sudanese authorities reaffirm their commitment to implement sound macroeconomic policies. They look forward to Executive Directors’ support for their request for emergency financing under the FSW and future monitoring of policies under the PMB, to anchor the authorities’ current efforts to support the recovery and unlock medium-term growth potential.