Current Date:

Monday, 05 February 2018

The Sudan Interim Poverty Reduction Strategy Paper (6)

A Joint World Bank Group and Sudan’s Ministry of Finance and Economic Planning Assessment on the Sudan (IPRSP)

Interim Poverty Reduction Strategy Paper. The importance of the IORSP that it is one of the basic conditions for foreign debt relief under the HIPC (Heavily Indebted Poor Countries) Initiative. In the first two parts of this review, the focus was on the issues of creating an enabling political and economic environment, agriculture as an engine of growth, human resources and education. In this part the attention is on health, water and sanitation, social welfare, security and protection, governance and other relevant issues.

Doha Document for Peace in Darfur

Another important peace agreement signaling Government’s willingness to resolve conflict and permit development to re-start is the 2011 Doha Document for Peace in Darfur. A credible window of opportunity for sustainable peace has opened in Darfur since the signing of the Doha Document
for Peace in Darfur (DDPD). The establishment of the Darfur Regional Authority (DRA), the start of voluntary returns, and the engagement of the Government of Sudan in implementing the DDPD present an important opportunity to the international community to support recovery
and development efforts. For the first time in a decade, these developments offer opportunities to transition away from the current humanitarian strategy (which costs about US$10 billion over the last 10 years), which development partners now recognize to be unsustainable and cost ineffective, towards engagement in early recovery and development. This can positively impact the lives of millions of people in dire poverty and enhance chances for sustainability by building institutional capacity

Political Dialogue

In January 2014, the President of Sudan initiated an internal “National Dialogue” to address issues of war, peace, national identity and the economic and political situation. The dialogue was initiated as an inclusive process for all political parties and all rebel groups. A group of “7+7 Committee” consisting of government ruling parties and opposition parties was formed and has set a roadmap for the procedures and modalities of the dialogue. The elections which took place during April 2015 interrupted the process. The dialogue resumed in October 2015 and the Government declared its intention that all the process will be inside the country. A two-month ceasefire was unilaterally declared by the Government, and was reciprocated by the rebel movements; amnesty was also given for arms bearers who will join the process and the Government offered guarantees to rebel delegations during the national conference to allow them to leave the country if no agreement is reached. The major rebel movements and some of the political parties boycotted the dialogue but a committee from the participating political parties was formed to convince the holdout political forces to join the process.

Adverse Conditions Facing Sudan Affecting the Ability of the Government to Reduce Poverty

Several adverse conditions face Sudan. The country is facing the combined difficulties of the economic shock created by the oil revenues loss as a result of the secession of South Sudan, the absence of debt relief and consequently low level concessional financing, and the economic sanctions. These constraints have had adverse impact on the economic stability; trade; banking and business climate; private sector economic activity and employment; and poverty reduction.

South Sudan Secession

The South’s secession and the loss of the oil revenues has had fundamental repercussions on Sudan as evidenced by significant stresses in the macrofiscal situation, the structure of the economy, and the political economy. Between 2010 and 2012, annual oil production dropped from 168 million barrels to 38 million barrels, budgetary oil revenues from 11.5 percent of GDP to 1.5 percent of GDP, and oil exports from US$11 billion to US$2 billion
These losses affected all sectors of the economy and resulted in slower growth, inflation rising to high double digits, and deteriorating fiscal and current account balances. The shock led to the economy contracting by 0.3 percent in 2011 (compared to positive growth of 7.1 in 2010) and by a further 2.2 percent in 2012. The productive sectors of the economy, mainly agriculture and industry, after a decade of neglect and unfavorable exchange rate, were not able to offset the fall in oil production. Gold production and export almost tripled, but only partially compensating for
the loss of oil. The trade balance deteriorated, going from a substantial surplus to a large deficit of US$700 million in the first quarter of 2012. The current account balance also recorded a deficit of US$900 million in the same period. The market exchange rate dropped first from 3 SDG/US$
to around SDG 5 and then later to SDG 7.1, following the official exchange rate devaluation (of about 66 percent) in June 2012. Prices skyrocketed, inflation reaching an annual average of 37 percent in 2013 (three-fold the pre-secession rate of inflation of 13 percent in 2010). would contribute just over US$3.028 billion over three and a half years to cover another one third of the gap through TFA; and c) The two countries would make a joint request to the international community for approximately US$3 billion in resources to cover the remainder of the gap. The Government has implemented economic measures that filled the one third of the gap, and South Sudan started to actually transfer the amounts due in fulfillment of the TFA. However, there was no positive response from the international community.
Before fully adjusting to South Sudan secession implications, Sudan confronted another shock of reduction in the oil fees from South Sudan. The decline of the oil revenues from South Sudan were the result of the decline in production due to the conflict in the South and decline in international oil prices. South Sudanese conflict erupted in December 2013 affecting the oil sector. Oil flow from the South through Sudan’s pipelines declined to about 165,000 barrels per day compared to 245,000 barrels per day before the conflict. The situation was aggregated further by the sharp drop in international oil prices. The fairly stable oil prices during 2010 until mid-2014 at US$110/b started to decline until it reached its current low level of US$48/b.
Consequently the transfers of oil fees and the TFA dropped and revenues payments by South Sudan amounted to only US$900 million by mid-2015 compared to a target of US$3.0 billion.

External Debt Burden

The external debt burden remains a contentious issue. Sudan is highly indebted country that has accumulated sizable arrears and the external debt burden weighs heavily on Sudan’s development. As of end-2014, its public and publicly-guaranteed debt stood at US$45 billion of which about 85 percent was in arrears. The structure of external debt has not changed over the last decade. Sudan’s creditors include multilateral institutions (15 percent), Paris Club (37 percent), non-Paris Club (36 percent), and private creditors (14 percent). Arrears with IDA amounted to US$700 million whereas arrears with IMF reached US$2 billion. According to the IMF report (Debt Sustainability Analysis 2013) Sudan remains in debt distress, all external debt ratios were well above the indicative thresholds with the Net Present Value of debt to GDP of 166 percent (compared to a threshold of 36 percent), and debt service to exports of 36 percent (compared to a threshold of 15 percent). The 2013 DSA showed deterioration in all indicators following a significant decline in GDP, exports and government revenue, underscoring the need for debt relief beyond traditional mechanisms.

US Sanctions

American sanctions on Sudan began in 1997 when President Clinton issued Executive Order 1306 that imposed a comprehensive trade embargo on Sudan and blocked assets of the Government of Sudan.
Comprehensive and far reaching as it is, the sanctions regime harmed, and continued to harm, Sudan dearly. Moreover, the sanctions regime started to intensify by the year as pressure from the US Office of Foreign Assets Control (OFAC) on countries, business entities, and international financial institutions to comply with the American embargo. Many governments and business entities would rather abandon doing business with Sudan, even for goods that are exempted under the sanctions regime like food and medicine, rather than risk being scrutinized by the American Treasury, or face the danger of financial transactional blockage or even confiscation. This created what has been referred to as “reputational sanctions” meaning that business with Sudan is attached to bad fame and should be avoided even if it is allowed under the sanctions regime.

Sanctions affected Sudan’s access to debt relief and consequently access to concessional loans needed for infrastructure, basic services such as health, education, and food security. Sanctions affected foreign direct investments, which contribute to growth and employment opportunities. Remittances of Sudanese abroad to their families’ which are fundamental informal safety net mechanisms in Sudan were also affected. The Sudanese Government’s ability to monitor illicit flows directed to finance terrorism, drug trade, money laundry and human trafficking is increasingly hampered by the sanctions of commercial corresponding banks leading most Sudanese to move money in cash.
A recent devastating development for the Sudanese economy as a result of the sanctions was the breakdown of the relations with correspondent foreign banks.
As observed by the IMF, this was a result of the prosecution by the U.S. of BNP Paribas in early 2014 for breaking U.S. sanction against Sudan and other countries under sanctions and was fined US$8.9 billion by the U.S. authorities. As a result, trade and foreign exchange situation deteriorated in Sudan.
Furthermore, importers are unable to obtain trade financing or transfer payments and the impacts are sweeping. This situation will devastate the economy where; as noted by the IMF: “(i) growth will be affected because exports and imports will decline. The lower imports of foodstuffs, intermediate goods, and raw materials will result in lower domestic consumption and production; (ii) inflation will rise as a result of shrinkage of supplies and higher cost of imports; and (iii) shortage of foreign exchange will contribute to depreciation of the exchange rate on the parallel market, thereby fueling inflation and undermining macroeconomic stability. These adverse developments will impact the poor and the most vulnerable segments of the population and will most likely increase poverty rates in Sudan.

Further studies are required to improve the understanding of the devastating impacts of sanctions on the Sudanese.