Republic of South Sudan: Staff Report 2023 Article IV Consultation, and First and Second Reviews Under Staff-Monitored Program With Board Involvement—Debt Sustainability Analysis
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REPUBLIC OF SOUTH SUDAN

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REPUBLIC OF SOUTH SUDAN

STAFF REPORT 2023 ARTICLE IV CONSULTATION, AND FIRST AND SECOND REVIEWS UNDER STAFF-MONITORED PROGRAM WITH BOARD INVOLVEMENT—DEBT SUSTAINABILITY ANALYSIS

May 20, 2024

Approved By:

Catherine Pattillo (IMF, AFR), Guillaume Chabert (IMF, SPR), and Manuela Francisco (WB, MTI) and Hassan Zaman (WB, IDA)

Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA)

Joint Bank-Fund Debt Sustainability Analysis

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The baseline in this Debt Sustainability Analysis update (DSA) reflects minor changes with respect to the previous DSA of February 2023, including updating the current year and first year of projections from 2022 to 2023 as well as updates in macroeconomic projections with respect to changes in global macroeconomic assumptions. The financing assumptions, including the debt agreements, are mostly unchanged. South Sudan's debt remains assessed to be sustainable with a high risk of debt distress for both external and overall public debt.1 Three of the four key indicators of public and publicly guaranteed external debt breach the threshold in the short/medium term. The present value of overall debt-to-GDP ratio decreases below the benchmark starting in FY2028/29. The ratios of debt service-to-exports and to revenue continue to slightly exceed the threshold until FY2029/30. There are several downside risks to the sustainability assessment, including global external financing conditions, decreased oil revenues from drops in production due to climate-related disasters, the war in Sudan, damages to the oil pipeline, disruption in maritime traffic due to the Red Sea crisis, volatility in global oil prices, slow implementation of reforms, in particular on public financial management, and a breakdown in the peace process and the resumption of large-scale civil conflict.

Background

1. The DSA is limited to central government debt, as data access and availability remains weak. Debt data collection and compilation present serious weaknesses in South Sudan. SOEs are omitted from the DSA as information about SOE debt and government guarantees is incomplete or unavailable.2 External debt is defined using the currency criterion. The analysis for the contingent liability stress test includes SOE debt, financial market shocks, and a 5 percent shock to GDP to include the potential repayment of salary arrears to embassies' staff, and other potential arrears or financing shocks.

Text Table 1.

Republic of South Sudan: DSA Coverage of Public Debt

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1/ The default shock of 2% of GDP will be triggered for countries, whose government-guaranteed debt is not fully captured under the country's public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE's debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

2. South Sudan’s total public debt was estimated at US$3,722.9 million (51.2 percent of GDP) as of June 2023, with external public debt representing about two thirds of the total (Text Table 2). Debt to the World Bank amounted to US$93.2 million on IDA terms, while debt to the African Development Bank (AfDB) amounted to US$18.6 million. Debt to the IMF includes the three disbursements under the Rapid Credit Facility (RCF) of November 2020, April 2021 and March 2023, and the use of US$150 million from the SDR allocation for budget support in 2021 Q3.3 The debt stock with Afrexim Bank was estimated at US$435.4 million. Bilateral creditors include China Exim Bank through two different facilities with a total remaining debt estimated at US$367 million.4 Amongst commercial creditors, the outstanding liability to the Qatar National Bank was estimated at US$540.8 million as of end-June 2023. The debt stock also included an outstanding debt of US$550 million owed to oil companies, and US$89 million owed to National Investment and Development Bank (NIDB) at the end of FY22/23. Domestic debt is mostly owed to the central bank but also includes a relatively small share of debt due to local commercial banks (around 20 percent).

Text Table 2.

Republic of South Sudan: Decomposition of Public Debt by Creditor FY 22/23-FY 24/251/

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1As reported by country authorities according to their classification of creditors, including by official and commercial. Debt coverage is the same as the DSA. 2Multilateral creditors” are simply institutions with more than one official shareholder and may not necessarily align with creditor classification under other IMF policies (e.g. Lending Into Arrears). 3Debt is collateralized when the creditor has rights over an asset or revenue stream that would allow it, if the borrower defaults on its payment obligations, to rely on the asset or revenue stream to secure repayment of the debt. Collateralization entails a borrower granting liens over specific existing assets or future receivables to a lender as security against repayment of the loan. Collateral is "unrelated" when it has no relationship to a project financed by the loan. An example would be borrowing to finance the budget deficit, collateralized by oil revenue receipts. See the joint IMF-World Bank note for the G20 "Collateralized Transactions: Key Considerations for Public Lenders and Borrowers" for a discussion of issues raised by collateral. 4Guaranteed debt is included in public debt.

3. Preliminary information suggests that the domestic salary payments from November 2023 to April 2024 are in arrears, amounting to about 2.7 percent of GDP. Accumulation of salary arrears reflect both cash constraints and changes in the procedure for salary payments that includes approval by special committees for every government agency in an effort to minimize payment to ghost workers. There are also outstanding payments to foreign missions, which amount to approximately USD 150 million (roughly 2 percent of GDP). Nevertheless, the Ministry of Finance and Planning (MoFP) is ensuring the payment of salaries for employees in foreign missions and is working towards settling these outstanding balances. An extra 5 percent of GDP has been allocated to the contingency liability test to accommodate the repayment of salary arrears to diplomats in foreign missions and other potential obligations, including the discovery of additional legacy debts or arrears related to goods and services.

4. While the T ransitional Financial Arrangement (TFA) between South Sudan and Sudan was concluded in February 2022, South Sudan continued to transfer the same quantity of crude oil or cash to Sudan as before, resulting in an accumulation of credit. The amount of credit accumulated with Sudan reached about US$658.7 million as of end-June 2023 (about 9 percent of GDP), and the amount of oil lifted by Sudan without payment in excess of transit fees is projected to be about 5.2 percent of GDP in FY2023/24. The schedule for Sudan's repayment of the accrued credit is currently unknown.

5. The Bank of South Sudan (BoSS) has been taking steps to develop the domestic financial market. In the spring of 2022, BoSS introduced a term deposit facility (TDF). Following initial experiments and consultations with banks, the facility successfully absorbed 24 billion SSP in four consecutive auctions from early September to late November 2022, with average annualized interest rates below 10 percent. This uptake by banks indicates an improvement in private-sector confidence in the authorities' macroeconomic management, and there is significant interest in BoSS extending the range of maturities under the TDF beyond the 14-day and 28-day maturities. Accordingly, as of the first quarter of 2023, BoSS has begun the implementation of auctions with 84-day maturities. Furthermore, as of September 2023, the BoSS has introduced auctions with maturities of 336 days. This represents a crucial step toward reintroducing treasury bills as a potential source of domestic financing.

Underlying Assumptions

6. This DSA presumes that financing gaps will be addressed through non-concessional external loans. Representing a worst-case scenario5 in which concessional financing does not materialize, this analysis projected non-concessional external borrowing throughout the projection period to fulfill financing requirements. From CY2023 onwards, this analysis projects new disbursements from bilateral, non-Paris Club lenders with an 8-percent interest rate, 7-year maturity, and 2-year grace period. Additionally, it is assumed that medium-long term domestic debt will be issued contingent upon maintained macroeconomic stability and an enhanced fiscal position. As seen in previous instances, the remaining financing gaps are assumed to be addressed using non-concessional loans with an 8-percent interest rate, 5-year maturity, and 1-year grace period. The assumptions regarding the terms of non-concessional borrowing from unidentified external sources align with existing debt instrument terms and the global tightening of borrowing conditions. Were non-concessional borrowing to be collateralized by future oil revenue, continued high volatility in oil production would adversely affect the terms and availability of future external borrowing.

7. The medium-term outlook is for modest economic growth amidst elevated levels of uncertainty (Text Table 3). Real GDP growth is forecast to contract by 8.5 percent in FY2023/24 as damages to the oil pipeline that transports South Sudan’s crude oil exports through Sudan have reduced oil production since February 2024 to less than one-third relative to their previous level. This decline in oil production would more than offset the strong recovery in non-oil GDP, which is projected to grow by about 7.1 percent in real terms relative to FY2022/23, due to a continued expansion of the harvest area after the historic floods in 2021-22. Growth from FY2024/25 onward will be driven by continued recovery in oil production once the pipeline gets repaired and better agricultural production as domestic security conditions improve.

Text Table 3.

Republic of South Sudan: Key Macroeconomic Assumptions Comparison with the Previous Debt Sustainability Analysis

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Sources: South Sudanese Authorities and IMF staff projections.

8. Import projections are anticipated to be marginally lower in terms of GDP than previously estimated in the short term and continue to decline in the medium term. The ongoing payments to Sudan exceeding the TFA agreement are expected to diminish the government's fiscal capacity in the short to medium term, affecting the resources accessible for supporting imports. This is further influenced by the Ukraine conflict's impact on international aid and the potential consequences of reduced aid on food and other commodity imports. Export levels, after reaching their peak in FY2024/25 due to increased forecasted oil prices, are expected to gradually decrease. This decline is attributed to the assumption of lower global oil prices in the medium term and outer years.

9. Oil price estimates have been adjusted slightly upwards compared to the previous DSA analyses, to align with the most recent oil market predictions. Over the medium term, oil prices are anticipated to be marginally higher, owing to a more favorable price for South Sudan's crude oil than previously projected. Prior estimations also assumed a discounted price for South Sudan's oil relative to global benchmarks.

10. Non-oil revenue estimates in FY2025/26 and FY2026/27 have been adjusted to be in line with the tax-to-GDP targets in the South Sudan Revenue Authority (SSRA) 5-year strategic plan. The SSRA recorded 4.1 percent tax-to-GDP ratio in FY2022/23, surpassing their 2.9 percent target. The ratio is projected to reach 5.8 percent in FY2023/24, which is one year earlier than the targeted year. The updated estimates assume that the SSRA targets will be achieved as planned by FY2026/27 and non-oil revenue grows at the pace of non-oil GDP growth from FY2027/28 onwards.

11. Inflation is anticipated to experience a temporary surge, rising to an average of 42.2 percent in FY2023/24, primarily due to the recent depreciation of the SSP. However, over the medium term, inflation is projected to gradually decline to single digits. This is contingent on the BoSS stabilizing money growth at below 10 percent per year, in line with proposed PMB quantitative targets and the stated BoSS policy.

12. The fiscal adjustment realism tool highlights the decline in the primary balance, with a three-year adjustment higher than 4 percentage points of GDP. This is partly due to decline in oil revenue as a share of GDP and recording of transfers to Sudan above the line as higher transit fee expenditure from FY2024/25 onwards. The oil-for-infrastructure project is assumed to continue until 2024/25, with other capital spending growing proportionally with nominal GDP. After the project's completion, budgetary capital spending is expected to increase and stabilize around 5 percent of GDP in the long run. Assumptions also include disbursements related to the peace process, although these expenditures are not expected to persist beyond 2024. Downside risks include the breakdown of the peace process and the resumption of large-scale conflict.

13. The fiscal multiplier realism tool suggests an upward trend in growth. This trajectory is expected to be slightly affected by fiscal adjustments since the enhancements in the primary balance are largely due to cutting down on low-multiplier spending. For instance, the reduction of excessive transfers to Sudan has been a significant factor in these improvements.

Country Classification and Determination of Stress Tests

14. SSD’s debt carrying capacity remains classified as weak (Text Table 4). The Composite Indicator (CI) score for South Sudan is currently assessed at 1.39, reflecting a slight increase from the previous score observed in the last vintage DSA update. The CI score is derived from a combination of factors, including the World Bank's Country Policy and Institutional Assessment (CPIA), real GDP growth, and foreign exchange reserves' import coverage. This most recent evaluation of South Sudan's CI score is based on data from the October 2023 World Economic Outlook (WEO) and 2022 CPIA.

Text Table 4.

Republic of South Sudan: Debt Carrying Capacity and Thresholds

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15. This DSA incorporates a tailored stress test for reduced oil prices and an additional 5 percent of GDP in the contingent liability test. The commodity price stress test involves a one standard deviation decrease in oil prices and a 6-year timeframe for closing the emerging financing gap. The market financing tailored test is not yet applicable to South Sudan and therefore not included in this DSA. The contingent liability stress test has been adjusted to incorporate an extra 5 percent of GDP to account for arrears owed to diplomats in foreign missions, estimated to be around US$150 million, and other potential obligations such as the discovery of more legacy debt or confirmation of arrears on goods and services (see IB). The arrears to diplomats and those on goods and services do not prompt an in-debt distress assessment: although a repayment schedule has not yet been confirmed, the government has begun clearing these arrears and is providing salaries to employees in foreign missions.

External Debt Sustainability Analysis

16. The risk of external debt distress for South Sudan is assessed as high given the baseline projections with the current borrowing assumptions. The PV of external-debt-to-GDP ratio under the baseline scenario breaches the threshold until FY2027/28 when it falls below it (Figure 1, and Tables 1 and 3). The PV of debt-to-exports ratio remains below the threshold throughout the period in the baseline analysis. The debt service-to-revenue ratio and debt service-to-exports ratio indicators breach the thresholds in the medium term (Figure 1, and Tables 1 and 3). In the baseline scenario, the external debt service-to-exports ratio surpasses the threshold from FY2024/25 until FY2025/26 and continues to exceed the threshold from FY2028/29 until FY2029/2030. The debt service-to-revenue ratio remains above the threshold until FY2029/30.

17. The external debt indicators for South Sudan are highly sensitive to fluctuations in commodity prices and contingent liability shocks. The most severe shock within the tests is a decline in commodity prices, particularly the price of oil, which significantly impacts the South Sudanese economy. The debt-service-to-exports and debt-service-to-revenue indicators are the most vulnerable under this scenario, as the majority of exports and revenues are derived from oil. Moreover, the historical scenario surpasses the threshold in three out of four external debt indicators, emphasizing the importance of maintaining policies that ensure macroeconomic stability and promote strong, inclusive growth for South Sudan's debt sustainability. Indicators of external debt are also sensitive to the commodity price and contingent liabilities shocks.

Public Debt Sustainability Analysis

18. The risk of public debt distress for South Sudan is assessed as high. The PV of the total public debt-to-GDP ratio is projected to surpass the benchmark until FY2026/27 under the baseline scenario, as depicted in Figure 1 and Table 4. The indicator is anticipated to exceed the threshold at 71 percent in FY2022/23, before gradually declining to 37.5 percent in FY2026/27 and 32.8 percent in FY2027/28.

19. The results of the bound tests highlight the need to shore up and diversify revenues. The most severe scenario amongst the bound tests is the primary balance scenario, in which the PV of debt-to-GDP ratio breaches the benchmark through FY2032/33.

Risk Rating and Vulnerabilities

20. South Sudan’s debt remains assessed as sustainable, however there are substantial downside risks to the baseline scenario. Under the baseline scenario, all debt indicators are projected to fall below their respective thresholds after FY2029/30 in the external analysis. The external debt service-to-revenue ratio, which remains above the benchmark through FY2029/30, is partly attributable to the costly debt service repayments in the medium term and conservative assumptions regarding financing terms to address the estimated financing needs. The nation's debt financing outlook heavily relies on mobilizing non-concessional financing from external sources, presenting a significant risk in the context of increasing global borrowing costs, expanding risk premiums, and capital flow volatility. Efforts are currently underway to enhance debt management, public financial management practices, domestic revenue mobilization, and the development of a domestic market. This includes an external debt stock-take by an international auditor as a one-time exercise, with Fund and World Bank technical assistance supporting the strengthening of debt management within the MoFP. Authorities are recommended to conduct and publish an internal stock-take on a quarterly basis. These reforms are crucial to avoid high-cost loans, enable currently non-viable financing options such as domestic borrowing, and improve debt-carrying capacity over time. Furthermore, limiting the monetization of the deficit and maintaining prudent money growth is essential for gradually reducing inflation to single digits. Maintaining these reforms in the medium term, along with other ongoing macro-fiscal reforms to establish fiscal discipline, is critical for the debt sustainability assessment. Improvements in data quality will also be important due to continued weaknesses in data access and availability, as well as non-negligible residuals in projections.

21. The deterioration in global conditions presents further challenges to South Sudan's debt sustainability. The ongoing conflicts in Ukraine and the Middle East have resulted in increased food and refined fuel prices, exacerbating the already precarious food access situation in the fragile nation. Furthermore, the wars in Ukraine and Middle East are likely to adversely impact international aid, which South Sudan heavily relies on, as donors may reallocate funds and reduce aid due to constrained domestic fiscal conditions. The conflict in Sudan poses a significant risk, as demonstrated by the damage since mid-February 2024 to oil pipeline that two-thirds of South Sudan’s oil to international markets. A potential flaring up of the Red Sea crisis that has disrupted commercial shipping in recent months and has led to an increase in maritime rates, poses substantial risks for South Sudan oil exports. The tightening of global financial conditions could also create difficulties for South Sudan in obtaining external financing, consequently making debt service more costly. Alongside these factors, weak governance over reforms and expenditures, as well as climate-related natural disasters, heightens the potential for social unrest, civil conflict, and escalating violence. These elements are particularly concerning as South Sudan approaches its 2024 election process, which could be a critical juncture for the nation's stability and ongoing peace efforts. In summary, South Sudan has minimal capacity to withstand such shocks and remains at a high risk of debt distress.

Authorities' Views

22. The authorities concurred with the DSA's evaluation. They acknowledged the significance of maintaining up-to-date debt payments, ceasing oil advances, steering clear of excessively non-concessional loans, and implementing prudent fiscal and monetary policies as outlined in the staff report to enhance South Sudan's debt sustainability.

Figure 1.
Figure 1.

Republic of South Sudan: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, FY2023-20331

Citation: IMF Staff Country Reports 2024, 160; 10.5089/9798400279096.002.A003

Table 1.

Republic of South Sudan: External Debt Sustainability Framework, Baseline Scenario, FY2022-2043

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections. 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - p(1+g)]/(1+g+p+gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = growth rate of GDP deflator in U.S. dollar terms. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 9/ The fiscal year runs from July to June, i.e., 2021 refers to FY20/21 ending in June 2021.
Table 2.

Republic of South Sudan: Public Sector Debt Sustainability Framework, Baseline Scenario, FY2022–2043

(In percent of GDP, unless otherwise indicated)

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Figure 2.
Figure 2.

Republic of South Sudan: Indicators of Public Debt Under Alternative Scenarios, FY2023-2043

Citation: IMF Staff Country Reports 2024, 160; 10.5089/9798400279096.002.A003

Table 3.

Republic of South Sudan: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, FY2023-2043

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Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the threshold. 2/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms) non-interest current account in percent of GDP, and non-debt creating flows. 3/ Includes official and private transfers and FDI.
Table 4.

Republic of South Sudan: Sensitivity Analysis for Key Indicators of Public Debt FY2023-2033

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Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the benchmark. 2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. 3/ Includes official and private transfers and FDI.
Figure 3.
Figure 3.

Republic of South Sudan: Drivers of Debt Dynamics—Baseline Scenario1

Citation: IMF Staff Country Reports 2024, 160; 10.5089/9798400279096.002.A003

Figure 4.
Figure 4.

Republic of South Sudan: Realism Tools

Citation: IMF Staff Country Reports 2024, 160; 10.5089/9798400279096.002.A003

1

South Sudan's debt-carrying capacity remains rated "weak" with composite indicator score of 1.39 according to the latest vintage of World Economic Outlook (October 2023) and the Country Policy and the 2022 Institutional Assessment index of the World Bank.

2

Addressing the lack of coverage of SOE will require significant effort in terms of data gathering and possibly technical support. There are only a few SOEs in South Sudan with significant economic activity, the largest being Nilepet—the state-owned National Oil and Gas Company of South Sudan.

3

The authorities used US$150 million from the SDR allocation to finance spending, mostly to reduce salary arrears. This amount, consistent with the Guidance Note of August 2021 on the treatment and use of SDR allocations, has been included in the external debt stock starting in FY2021/2022 for the purposes of this DSA.

4

One facility with a remaining debt of US$135 million was included in the previous DSA. Another facility with a remaining debt estimated at US$237 million at end-December 2021 came to light during the debt stocktaking exercise conducted by an international auditing firm.

5

The Program Monitoring with Board Involvement (PMB) has a zero target on new non-concessional external borrowing.

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Republic of South Sudan: 2023 Article IV Consultation, and First and Second Reviews under the Staff-Monitored Program with Board Involvement-Press Release; Staff Report; and Statement by the Executive Director for Republic of South Sudan
Author:
International Monetary Fund. African Dept.
  • Figure 1.

    Republic of South Sudan: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, FY2023-20331

  • Figure 2.

    Republic of South Sudan: Indicators of Public Debt Under Alternative Scenarios, FY2023-2043

  • Figure 3.

    Republic of South Sudan: Drivers of Debt Dynamics—Baseline Scenario1

  • Figure 4.

    Republic of South Sudan: Realism Tools