19 April 2011

Sudan: IMF Says North Sudan Must Undertake Measures to Avoid Post-Secession "Shock"

Washington — The International Monetary Fund (IMF) this month drew out the possible scenario for North Sudan's economy following the breakaway of the South next July and urged the government in Khartoum to implement swift measures to cushion its impact.

The oil-rich South voted last January almost unanimously to split from the Arab-Muslim dominated North but the new state becomes official only at the end of the interim period next July.

However, a number of key issues remains outstanding particularly the post-secession sharing formula for the oil wealth that is stationed mostly in the South.

There has been conflicting signs on how much the South is willing to offer the North from its oil exports. Most recently, the South Sudan International Cooperation minister Deng Alor dismissed any talk of oil sharing after independence.

The Comprehensive Peace Agreement (CPA) states that the North and South shall equally split the revenue from oil exports during the six years following the signing of the accord.

While most of Sudan's proven daily output of 500,000 oil barrel is extracted from oilfields in the south, the pipelines infrastructure and refineries are based in the north. The South will therefore be required to pay a fee to transport its oil and ship it abroad from Port Sudan terminal.

But it is all but certain that the North will receive far less than the 50-50 split currently in place. The loss will cause a drop in inflow of foreign currency, impact public finances and balance of payments which could lead to additional pressure on the fiscal deficit and the country's foreign exchange reserve which already at record lows.

The IMF said that North Sudan may lose 75% of oil revenues in a worst case scenario that would result in domestic and external imbalances.

"With oil revenue constituting more than half of government revenue and 90 percent of exports, the economy will need to adjust to a permanent shock, particularly at a time when the country has little access to external financing. The size and nature of the necessary adjustment could have significant implications for growth and macroeconomic stability", said the report dated last January but released this month.

Under that scenario, it is also assumed that North Sudan will witness a 10% decline in non-oil GDP to reflect the share of the South in total non-oil economic activity as well as a decline in oil related services; an increase in service receipts to reflect the transportation fees charged for the transportation of South's share of oil; a decline in both transportation payments and investment income payments to reflect lower oil production; a decline in imports of goods to reflect the shares of the oil sector and the South; an increase in imports of petroleum products to reflect the shortfall in domestic production..

To confront this scenario, the IMF stressed that North Sudan will need to reduce spending, lift fuel subsidies, reduce tax exemptions and enhance revenue administration.

Earlier this year, the Sudanese government approved an austerity package that partially removed subsidies on sugar and petroleum products with further cuts expected to follow.

The IMF welcomed these measures saying that it will narrow the gap between world and domestic prices and free up critically needed fiscal resources. It also recommended future subsidy reductions in the form of a gradual increase in the price of the crude oil delivered to the local refineries, in order to make the subsidy "more explicit and transparent".

The report revealed that Khartoum plans to issue a supplementary budget during the second quarter of this year that would take into account agreements reached between the North and South on post-referendum issues particularly oil revenue sharing which remains under negotiations.

The Washington-based body pointed out that Sudan's economic growth slowed down in 2010 to around 5% from 6% a year before.

Inflation rate on the other hand increased sharply from 10.0% in November 2010 to 15.4% the following month. The IMF attributed this to the surge in food prices, uncertainties in the run-up to the referendum, depreciation of the Sudanese pound and high money growth, as well as early speculation about possible removal of subsidies on petroleum products, sugar and other products.

Foreign exchange reserves held by Sudan declined significantly in 2010 due to heavy intervention by the Central Bank of Sudan (CBOS) to a little over $500 million last October.

Over the last year the Sudanese pound has dropped dramatically versus the dollar and black market flourished as a result while banks and Forex bureaus have been unable to meet demand. CBOS move to inject hard currency into the market did little to halt the trend.

In face of this, the authorities introduced the premium concept to encourage holders of Forex to come forward and sell their holdings at a generous rate close to that of the black market. The margin was initially set at 16.29% above the official price.

The IMF welcomed the de-facto depreciation by the Sudanese authorities but warned that this mechanism as opposed to an outright depreciation "could create some market distortions and could undermine transparency in the CBOS policy implementation".

Further steps taken by Khartoum to curtail demand for foreign exchange such as imposing import limits "are likely to add price distortions and are unlikely to yield the intended objectives", the IMF said in its report.

Sudan's debt on the other hand reached $36.8 billion by December 2010 and will need relief soon from creditors in order to tackle this chronic problem. The figure is slightly lower than earlier projections of $37.8 billion.

"In the meantime, the authorities should minimize to the extent possible the contracting or guaranteeing of nonconcessional external borrowing, which would further weaken debt sustainability,".

The splitting of national debt is also a subject of discussion between North and South Sudan.

The North insists that the South should bear a portion of the debt saying that part of the money was used for development project in the semi-autonomous region.

But the South says that the money was borrowed to finance the northern army to fight southerners in the civil war.

The IMF said that the South pointed out that in case of debt apportionment, the debt should be allocated geographically, according to the ultimate beneficiary principle.

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