Introduction
1. Our South Sudanese authorities appreciate the constructive engagements with Fund staff, and they broadly concur with the staff’s appraisal.
2. South Sudan is facing a dire humanitarian situation—with large flows of refugees and returnees—and macroeconomic challenges compounded by the spillovers from conflicts in the region and beyond as well as adverse climate-related shocks. Notwithstanding these challenges, the authorities have persevered with agreed reforms to keep the Program Monitoring with Board Involvement (PMB) arrangement broadly on track, and they view continued Fund support and flexibility as critical to restoring and anchoring long-term inclusive growth and stability. They also remain focused on securing political stability under the UN-backed September 2018 Revitalized Agreement on the Resolution of the Conflict in the Republic of South Sudan (R-ARCSS), brokered by Intergovernmental Authority on Development (IGAD). Our authorities appreciate the short-term arrangements the Fund has extended to South Sudan since the country became a member of the Fund in April 2012—including the current PMB arrangement. They believe that the current program has supported implementation of critical reforms and also helped to build a firmer track record to warrant access to a UCT quality arrangement based on the country’s balance-of-payment (BOP) needs.
Performance Under the PMB
3. Mostly due to the shock stemming from the disruption in the country’s oil production and export, only two out of seven end-June 2024 quantitative targets were met, including the zero ceiling on contracting non-concessional debt and the floor on net international reserves. However, the authorities have taken corrective actions to strengthen performance and achieve the program objectives—as outlined in their Memorandum of Economic and Financial Policies. Specifically, in September 2024, the authorities presented to Parliament a draft budget for FY2024/25 that aligns with the objectives of the program. Relatedly, they are working on policy measures to address salary arrears and payment of current salaries. The authorities are also pursuing prudent debt management with a focus on concessional loans and directing scarce oil-for-infrastructure resources to essential spending. Going forward, they have committed to further reducing monetary financing of the budget while prioritizing investment spending and enhancing non-oil revenue collection. They have also dedicated to introducing orderly reforms to ensure exchange rate flexibility.
4. All the end-June 2024 structural targets were met albeit with a delay against the backdrop of challenging circumstances and capacity constraints.
5. Considering the program performance under extremely difficult circumstances and the strong commitment demonstrated with the implementation of necessary corrective actions, our authorities request the completion of the third and final review under the PMB arrangement.
Recent Economic Developments and Outlook
6. Economic activity has remained subdued, reflecting an interplay of domestic and external shocks. Real GDP contracted by 5.8 percent in FY 2023/24 after a reduction of 1.0 percent in FY2022/23, owing mainly to severe decline in oil output. That said, growth is poised to rebound to 41.5 percent in FY2025/26 before it normalizes to around 5 percent in the medium-term, driven by increased oil production as well as dividends of economic diversification efforts. In the meantime, the authorities have commenced aggressive policies to spur economic diversification which have contributed to a decline of the share of oil GDP to 57.9 percent in FY2023/24 from 67.5 percent in FY2023/22. Looking forward, the positive growth outlook is premised on resumption of oil exports through Sudan as well as steadfast policy reforms to foster economic diversification— away from oil—in agriculture, fishing, mining, and services sectors.
7. A confluence of unfavorable factors has resulted in a surge in inflation. Key drivers include rising food prices with irregular rainfall constraining supply, heightened global food prices, and monetary financing of government operations. As a result, inflation accelerated to 52.2 percent in FY2023/24 from 0.9 percent in FY2021/22. In the medium term, inflation is expected to decline to single digits, reflecting improved harvests, elimination of monetary financing, and resolution of the current transportation constraints.
8. The current account deficit worsened to 11.6 percent of GDP in FY2023/24 from 4.6 percent of GDP in the previous fiscal year, reflecting the impact of subdued oil exports amid increasing cost of imports owing to significant exchange rate (ER) depreciation. Going forward, as oil exports recover, a surplus in the current account is expected—which will support a healthy flow of FX and boost the central bank’s reserve buffers to 3.6 months of import cover by FY2027/28 from the current 0.3 months. In the meantime, against a backdrop of depleted official reserves and noticeable speculative behaviors, the authorities pay close attention to the dual exchange market and associated parallel market premium.
Fiscal Policy and Debt Management
9. Despite the challenging macroeconomic environment, the authorities remain committed to prudent fiscal management underpinned by determined domestic revenue mobilization efforts, cautious spending, and prioritization of concessional external debt to mitigate potential fiscal risks.
10. In a bid to diversify the domestic revenue base, our authorities have developed a strategy to bolster non-oil revenue. Specifically, the National Revenue Authority (NRA) has already implemented a higher exchange rate for customs valuation, as well as instituted other revenue administration measures—including hiring of new staff and digitalization of tax and customs processes. Going forward, new measures are contemplated including (i) a new gaming tax on casino operations; (ii) higher taxes on alcohol, tobacco, and cigarettes; and (iii) revenue administration measures—a new cargo tracking system, tighter tax compliance and fee collection controls, and centralization of tax collection from districts. The authorities also plan to contain exemptions and close the gap between the official and parallel market exchange rate (ER) to further enhance customs revenue. They also plan to transition to a VAT regime—with the IMF technical assistance (TA).
11. On the expenditure side, our authorities remain committed to spending rationalization with priority on social spending and clearance of salary arrears for civil servants. Strengthening the payroll management and public investment management is essential to improve the efficiency of public spending. To this end, our authorities have instituted public finance management (PFM) reforms—including strengthening procurement and payment processes and expanding the scope to the Treasury Single Account (TSA). Considering the centrality of the oil revenues in the budget, they have also continued to strengthen reporting and management of their oil-for-infrastructure framework. Moreover, the authorities have prioritized the timely payment of current salaries, gradual clearance of salary arrears, and allocation of adequate resources to critical needs in the health, education, and humanitarian sectors.
12. The authorities reiterate their commitment to ensuring medium-term debt sustainability. The country’s external debt remains relatively low—38.3 percent of GDP in June 2024. Nonetheless, our authorities are implementing a debt management strategy which focuses on concessional loans for financing. They also have hastened implementation of the debt management action plan, including the adoption of the debt management strategy with the view to notably develop a domestic debt market.
Monetary, Exchange Rate, and Financial Sector Policies
13. The Bank of South Sudan’s (BoSS) primary objective remains price stability. However, the subdued FX flows, oil pipeline destruction and regional conflict spillovers have undermined the smooth functioning of the FX market and forced the authorities to resort to central bank financing of emergency budgetary needs—leading to elevated inflation and exchange rate depreciation pressures. Going forward, the authorities have committed, in consultation with staff, to refrain from further monetary financing to contain exchange rate-fueled inflationary pressures and anchor inflation expectations. Concurrently, our authorities are introducing reforms to improve monetary policy transmission. Areas of focus include modernization of the monetary policy framework, strengthening of coordination of monetary and fiscal policies, and accelerated development of the domestic debt markets. Fund technical assistance in these areas is of the essence.
14. On the FX market, the exchange rate premium remains a concern and reform efforts to enhance exchange rate flexibility are at the core of the authorities’ priorities. Importantly, the authorities are committed to advancing ER flexibility and undertaking an orderly elimination of the parallel FX market premium. They view the ER unification as a contributor to the expansion of fiscal space. The unification would, indeed, see the ER tend towards the parallel market rate, bolstering FX related fiscal revenues.
15. On the financial sector, the average capital adequacy ratio for all banks stood at 10.1 percent at end of June 2024, while the bulk of banks income is from non-interest income. Against this background, the BoSS has taken steps to support financial stability. Specifically, the amendment to the 2012 Banking Act approved in November 2023 allows BoSS to undertake consolidated supervision of bank and non-bank institutions, including microfinance and insurance companies. BoSS is also building its capacity with support from Fund TA, which is complemented by peer-to-peer learning at central banks in neighboring countries.
Structural and Governance Reforms
16. Our authorities continue to put a high premium on improving transparency with focus on fiscal and monetary policy transparency and central bank governance. They have started to publish quarterly budget execution reports as well as data on FX auctions outcomes, key monetary indicators and oil production data on a regular basis. The BoSS is in the process of implementing recommendations of the IMF Safeguards Assessment (SA) albeit at a slow pace.
17. On the AML/CFT, the authorities are making progress towards aligning their frameworks with international standards. They have completed their first National Risk Assessment (NRA)—and are a party to relevant UN Conventions—although they remain on the FATF grey list. That notwithstanding, the authorities remain focused on making progress towards incorporating the current FATF standards into the AML/CFT Act— with IMF technical support. They are also finalizing the governance and operational rules for the Financial Intelligence Unit. Relatedly, the anti-corruption law was amended in December 2023 and the Anti-Corruption Commission has been given significant funding under the FY2024/25 draft budget to ensure the effective accomplishment of the entity’s mandate. In addition, the authorities are committed to more efforts to strengthen governance and transparency of the oil-for-infrastructure scheme.
Conclusion
18. Our South Sudanese authorities look forward to Executive Directors’ favorable consideration of their request for the completion of the third and final review under PMB arrangement. Having kept the PMB arrangement broadly on track under especially difficult circumstances, the authorities view continuing IMF support as vital to successfully sustaining their reform momentum. Fund technical assistance continue to be vital to help cope with limited capacities in the fragile and conflict-affected country. Going forward, the authorities are seeking a deeper engagement with the Fund through a UCT-standard arrangement. Agreement under the Extended Credit Facility (ECF) would help the country tackle protracted BOP needs more effectively and catalyze much-needed additional donor support.