Sudan: Unlocking the Economy Strengthens Sudan's Transition

analysis

Transitioning from authoritarian rule to democracy ultimately depends on the civilian-led government's ability to address Sudan's continued economic crisis.

Sudan is in the international spotlight on 17 May at a high-level conference in Paris hosted by President Macron in support of its fledgling democratic transition. This important moment is intended to signal Sudan's reintegration into the international community, following its removal from the US list of State Sponsors of Terrorism (SST) in 2020. It is also an opportunity for Sudan to rebrand itself and tell the world that it is open for business.

Yet the difficulties of transitioning from authoritarian rule to democracy are enormous. Success ultimately depends on the civilian-led government's ability to address the continued economic crisis, which has caused widespread daily hardship for millions of Sudanese, as well as hindering sustainable development and the implementation of peace. To achieve these goals Sudan will need to rely heavily on its international partners.

The challenges of transition

Sudan's democratic transition is moving in the right direction, though more slowly than had been hoped by many Sudanese, particularly the women and youth who drove the revolution and those who have suffered from decades of war, displacement and marginalization in Sudan's conflict zones.

To increase foreign investor confidence, further reforms are needed to improve governance and resilience in the banking sector

One of the government's top priorities is to stabilize the economy. Over the past three years, Sudan has seen a stark economic deterioration, with the doubling of poverty, crippling inflation reaching more than 300 per cent, continuing shortages of essential commodities such as fuel, electricity and medicines and frequent power outages. These challenges have been exacerbated by the COVID-19 pandemic.

Another priority is achieving comprehensive peace. However, the implementation of the Juba Peace Agreement (JPA) is moving slowly due to a lack of resources and spoilers from the old regime who want Sudan's transition to fail.

Prime Minister Abdallah Hamdok is treading a fine line between responding to the demands of the street to accelerate change and accommodating the interests of the military, with whom civilian leaders cohabit the transitional government. He has stressed the need to make the civilian-military partnership work but it is also vital to form the Transitional Legislative Assembly as soon as possible to provide accountability and oversight.

The government is further constrained by having inherited a civil service and other institutions that are dominated by sympathisers of the Bashir regime. The killing of two young peaceful protestors and injuring of others by security forces just before Eid has caused great anger. Dismantling the Islamist deep state, reforming the civil service and security sector and delivering on the demands for justice are a must if the government is to have the institutional capacity and popular support needed to implement its transformative agenda.

Stabilizing the economy

One of the government's most urgent tasks is to address the continuing shortages of basic commodities - which have led to frequent demonstrations across the country - and are caused by a variety of problems, including a lack of foreign exchange to pay for essential imports, years of underinvestment in basic infrastructure and suspected manipulation of the distribution network by supporters of the old regime.

Delivering rapid and tangible socio-economic benefits to the Sudanese people, together with better public communication of the government's concrete plans for remedial action, is essential to create the political space and time required to implement the structural economic reforms needed to set Sudan on the path to inclusive economic growth.

In accordance with an IMF Staff Monitored Programme (SMP), important reforms have been introduced to promote economic stabilisation and to create fiscal space for more social spending - including the removal of fuel subsidies, unification and liberalisation of the exchange rate and an increase in electricity tariffs. Fuel subsidies had encouraged large-scale smuggling and were a huge drain on the budget, contributing to a large fiscal deficit that had to be covered by printing of money, thereby causing high inflation.

The impact of subsidy cuts has been cushioned by the Family Support Programme, a social safety net scheme which aims to give cash payments to 80 per cent of the population. This ambitious scheme has attracted significant donor support, with efforts to roll it out and expand access ongoing.

Since the formation of the new cabinet in February, the pace of economic reform has quickened. Exchange rate unification has reduced the scope for corruption, opened the door for international aid transfers and encouraged Sudanese in the diaspora to begin channelling their remittances through the formal banking system, thereby helping to build up the country's foreign exchange reserves.

Steps have also been taken to improve transparency by publishing more economic data, including the names of 600 state-owned enterprises, and bringing military-owned companies involved in civilian activities under the oversight of the Ministry of Finance.

Moving towards debt relief

Sudan, which has more than $50 billion in external debt, is making progress in implementing key reforms under the IMF SMP and could be eligible for debt relief under the Highly Indebted Poor Countries (HIPC) Initiative. If it maintains a credible track record of reform and clears its arrears to the international financial institutions, Sudan could reach the HIPC decision point to start the debt relief process by June 2021.

Thereafter it is likely to take two or three years to reach completion point for full debt relief, subject to continued reforms. This would enable Sudan, the largest country to qualify for HIPC relief, to clear almost all its external debt and access large-scale funding for infrastructural and social spending.

Thanks to bridging loans from the US, UK, Sweden and Ireland, Sudan has already cleared its arrears to the World Bank and the African Development Bank (ADB), giving it access to $2 billion of conditions-based funding over two years from the World Bank and over $200 million in ADB grants. With help from France, the clearance of Sudan's debts to the IMF is expected to be announced at the Paris conference.

The government is also trying to create a more enabling business environment, having enacted laws on investment and public private partnership and the establishment of an anti-corruption commission. Sudan used to be one of the few countries with an entirely Islamic banking system, but Sudanese banks are now able to operate a conventional banking window, which will make lending cheaper and widen the range of banking products available. To increase foreign investor confidence, further reforms are needed to improve governance and resilience in the banking sector.

Ensuring inclusive economic growth

Sudan has huge untapped potential, including ten per cent of the world's unused arable land, the waters of the Blue and White Niles, abundant extractive resources, including gold, and proximity to important markets such as the Gulf. But the economy has major structural problems caused by thirty years of economic mismanagement and corruption, a lack of investment in the productive sectors and weak competitiveness, resulting in a large balance of payments deficit. There is huge scope for modernizing agriculture and increasing value-added production and a need for significant investment in integrated infrastructure in strategic areas, such as digital transformation and renewable energy.

International support for Sudan has not yet translated into the level of external financing needed to meet its development and peace implementation challenges

To ensure growth is inclusive and equitable, however, much will depend on governance reform and a more balanced development and investment strategy that addresses inequalities between the centre and the regions and facilitate nodes of growth across Sudan. The JPA crucially calls for significant fiscal decentralisation and increased development support for the peripheries, while an upcoming national governance conference will define the powers of the new regional system.

A poverty reduction strategy, which is under preparation as part of the HIPC process, should increase spending on much needed basic services, particularly health and education, and direct more resources to vulnerable groups. The government will also need to live up to its commitments to increase women's political participation and to give greater priority to women's economic empowerment as well as expanding educational and employment opportunities for youth who make up two-thirds of Sudan's population.

The Paris conference will provide a taster of the business opportunities available in Sudan. International support for Sudan has not yet translated into the level of external financing needed to meet its development and peace implementation challenges. But if the economic reform programme remains on track - together with the debt relief process and growing interest from foreign investors - this could prove to be a game-changer in underpinning Sudan's democratic transition.

Dame Rosalind Marsden, Associate Fellow, Africa Programme

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