Realizing the Potential For Diversified Development Public Launch - - PowerPoint PPT Presentation

Sudan Country Economic Memorandum: Realizing the Potential For Diversified Development

Public Launch

Khartoum 25 September 2016

Michael Geiger

Outline

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• What is structural transformation and where does Sudan

stand?

• What kind of growth and diversification methodology could

be applied to Sudan

• Key findings
• Key recommendations

What is structural transformation and where does Sudan stand?

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What is structural change? A shift of economic activities and employment from low to high productivity activities

Agriculture  Manufacturing Agriculture  Services Within sectors Firm  Firm Informal  Formal

Process

Traditional Non-Traditional

East Asian Model (Korea, China, Hong Kong, Vietnam) India, Bangladesh, Mozambique, Rwanda Most countries

Example

Low

productivity activities

High

productivity activities

Structural Change Goal

Source: Own visualization, based on McMillian et al. (2014): Globalization, Structural Change, and Productivity Growth, with and Update on Africa; Page (2012) - Can Africa Industrialize?; Zeufack et al. (2015): Structural Transformation and Productivity Growth in Africa: Uganda in the 2000s; Ghani & O’Connell (2014): Can Service Be a Growth Escalator in Low Income Countries?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Agriculture Industry Manufacturing Services

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But Sudan still stands at the beginning of structural transform- ation

Sudan’s sectoral decomposition of GDP, 1980-2013

Source: World Bank, World Development Indicators (2015).

Services Agriculture Manufacturing Industry, incl. extractives 50% 8% 14% 28% 53% 7% 7% 33%

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At the same time others have advanced in structural transformation

Selected countries’ sectoral decomposition of GDP, 1980-2013

Source: World Bank, World Development Indicators (2015).

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Sudan (1990) Sudan (2013) Kenya (1980) Kenya (2013) Vietnam (1980)Vietnam (2013) Agriculture Industry Manufacturing Services

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Growth decomposition of production factors in Sudan, 1989-2012

• 10.0
• 5.0

0.0 5.0 10.0 15.0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Growth rate (percentage points) Total Factor Productivity Human Capital per Labor Labor Capital Stock Real GDP Growth

• 1. Labor and TFP Growth
• 2. Physical capital dominates

– labor/TFP very low

• 3. Negative

TFP growth

• Avg. growth 5.1%
• Avg. growth 6.7%
• Avg. growth

1.5%

The long-term historical growth performance underscores the lack of lasting structural change in Sudan

Source: World Bank, World Development Indicators (2014). Note: TFP is a measure of total output growth relative to the growth in traditionally measured inputs of labor and capital (in other words: Output = TFP + Capital input + Labor input).

What kind of growth and diversification methodology could be applied to Sudan?

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There are two approaches to diversify an economy: direct and indirect

Goal Structural Transformation / Diversification

Approach ‘Direct Approach’ ‘Indirect Approach’

Interventions in economic sectors Foundation for any economic activity to flourish

Examples

Export promotion Tax holidays Fertilizer subsidies Targeted import substitution Macroeconomic policies Human capital and infrastructure Business enabling environment

Source: Own visualization, based on World Bank (2014): Diversified Development.

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Agriculture will be the key sector in the economy until 2030 and any diversification effort needs to recognize the sector

50 100 150 200 250 300 Agriculture Gold Petroleum Manufacturing Other industry Private Services Public Services Agriculture Gold Petroleum

CEM Simulation: Aggregated sector GDP (Index; 2012=100)

Source: World Bank staff own calculations using the MAMS Sudan Model.

46.5 38.4 29.4 34.2 37.4 35.8 31.4 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 2012 Base Crop+ TofT+ Aid+ Debt- Normal

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Development of the agriculture sector is also particularly poverty reducing

Simulating an increase in agriculture productivity by 2 percent every year

CEM Simulation: Poverty Rate in 2012 and Various Scenarios

Source: World Bank staff own calculations using the MAMS Sudan Model. Notes: TofT+ simulates increased terms of trade; Aid+ simulates additional inflows of aid; Debt- simulates debt relief; Normal simulates the combined effects of normalization of relations with the rest of the world.

Key Findings

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Key finding 1: No lasting structural change

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Manufacturing provides an almost negligible number of jobs in Sudan

Employment by sector, 2009

500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 Rural men Urban men Rural women Urban women Agriculture Other industry Manufacturing Services

Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009).

Key finding 2: High and volatile inflation, linked to budget financing

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Sudan has a history of high, volatile inflation, which further increased after 2011

Average annual inflation in Sudan, 1999-2014

• 10%

0% 10% 20% 30% 40% 50% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: World Bank staff own compilation, based on data from Central Bank of Sudan, and IMF..

Food inflation Core inflation Overall inflation Average overall inflation (1980-2012)

Key finding 3: Weak resource revenue management, budget deficits and low savings

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Oil revenues contributed more than 50 per-cent to total fiscal revenues at its peak during the oil years, but this changed in 2011

Fiscal revenues and composition (SDG mn)

5,000 10,000 15,000 20,000 25,000 30,000 35,000 2008 2009 2010 2011 2012 2013 Tax revenues Oil revenues Other non-tax, non-oil revenues

Source: World Bank staff own compilation, based on data from Central Bank of Sudan; IMF; and World Bank WDI.

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Sudan’s budget has been in deficit since 1991 and only

• ccasionally balanced during the oil-driven investment boom

Overall budget deficit, 1991-2013

• 25
• 20
• 15
• 10
• 5

5 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Percent of GDP Budget surplus Budget deficit

Source: World Bank (2015 forthcoming): Sudan Country Economic Memorandum.

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Financing the deficit is one of the key challenges now, but

• ptions for foreign financing are limited given Sudan’s debt crisis

Domestic savings matter for Sudan’s economic transition and savings are low

• 40
• 30
• 20
• 10

10 20 30 19911994199720002003200620092012

• 40
• 30
• 20
• 10

10 20 30 19911994199720002003200620092012 Gross public savings Gross private savings National Savings in Sudan, 1991-2014 Private and Public Savings, 1991-2014

Source: World Bank staff own compilation, based on data from Central Bank of Sudan; IMF; and World Bank WDI.

Key finding 4: Long history of overvalued real exchange rate

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Sudan’s Real Exchange Rate (RER) has been greatly overvalued

• ver most of the past 40 years

Sudan’s RER misalignment, 1970-2011

• 0.8
• 0.7
• 0.6
• 0.5
• 0.4
• 0.3
• 0.2
• 0.1

0.1 0.2 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 Misalignment Undervaluation above red line Overvaluation below red line

Source: World Bank staff own calculations, based on data from PENN World Tables. Note: The real exchange rate is the nominal exchange rate adjusted for the effects of inflation. The RER measures real purchasing power of the Sudanese Pound; this equals international competitiveness of a country’s exports.

NB: Across all countries and time, each 10 percent RER undervaluation increases exports by 0.6 and GDP growth by 0.9 percentage points

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RER changes have a particularly large effect on agriculture exports in Sudan

CEM Simulation: Real exchange rate and export quantity (index base = 100)

100 110 120 130 140 150 160 100 105 110 115 120 125 Export quantity index RER index (SDG/Foreign currency) Agriculture Mining Manufacturing Private services Total

Source: World Bank staff own calculations using the MAMS Sudan Model.

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Undervaluation is a distinct feature of export success in other countries: China

• 0.8
• 0.6
• 0.4
• 0.2

0.2 0.4 0.6 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Undervaluation Export growth Undervaluation above red line Overvaluation below red line

Undervaluation and export growth, China

Misalignment

Source: World Bank staff own calculations, based on data from PENN World Tables.

• 0.7
• 0.6
• 0.5
• 0.4
• 0.3
• 0.2
• 0.1

0.1 0.2 0.3 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Undervaluation Export growth

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Undervaluation also observable in India since the mid-1990s

Undervaluation above red line Overvaluation below red line

Undervaluation and export growth, India

Misalignment

Source: World Bank staff own calculations, based on data from PENN World Tables.

Key finding 5: Extremely low productivity in agriculture

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The story of agriculture in Sudan is by and large a story of low productivity: wheat yields are indicative of the problem

Source: World Bank staff own calculations, based on data from Central Bank of Sudan; the Ministry of Agriculture and Irrigation; and selected other country authorities. Note: Pavlovda and Kzylorda are places in Kazakhstan where climate is very extreme.

Sudan’s wheat yields in perspective (kg/feddan), selected countries

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 2012 2013

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Low fertilizer usage is a key issue behind low productivity; centr- alized marketing and choice of grains are additional factors

Source: World Bank (2015): Sudan Country Economic Memorandum.

Some facts about low fertilizer usage

• In 2009 the average fertilizer use per hectare of cropland was 7.3 kg.
• Ethiopia, Sudan's poorer neighbor, used 17 kg.
• Sudan used as much as 80 kg/ha in the mid-1970s, and 70 kg/ha in the 1980s.
• Reasons for low usage today are unclear.
• But it seems that the decline in agriculture is associated to fertilizer usage.

Additional factors

• Strong policy push for wheat and sugar production, which are foreign crops to
• Sudan. Seasonality and water availability impair productivity.
• Centralized marketing of agriculture products through state agencies leads to

low prices for farmers and low productivity. Gum Arabic and Cotton benefitted much from relaxations since 2009.

Key finding 6: Very concentrated export markets

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Sudan’s export basket is very concentrated – especially for it has coastal access and proximity to multiple large markets

Herfindahl-Hirschman Index at the products level, Sudan and selected countries

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 Average 2000-2006 Average2007-2012 Egypt, Arab Rep. Ethiopia Ghana Indonesia Kenya Morocco Mongolia Uganda Sudan

Source: World Bank staff own calculations, based on data from UN COMTRADE. Note: The HH index is calculated as the sum of the squared market shares for all products.

Maximum concentration Maximum diversification

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Export concentration is much lower when looking at non-oil exports, but has increased in 2012 with the emergence of gold

Export concentration in terms of products, excluding oil

5% 8% 51% 8% 10% 54% 20 40 60 80 100 120 140 160 0% 10% 20% 30% 40% 50% 60% 2006 2011 2012 Share of Top 3 Products Share of Top 5 Products Number of Products

Source: World Bank staff own calculations, based on data from UN COMTRADE.

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Yet, Sudan’s export concentration is also evident in the high share of its top destinations in overall exports

Sudan’s export concentration in terms of destination markets

90% 88% 94% 93% 85% 86% 87% 88% 89% 90% 91% 92% 93% 94% 2006 2011 Share of Top 3 Markets Share of Top 5 Markets

Source: World Bank staff own calculations, based on data from UN COMTRADE.

Main Recommendations

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Main recommendation #1: Remove exchange restrictions to unify official and black-market rate

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The official and black-market rates show an increasing spread confirming the overvaluation of the Sudanese pound

Sudan's official and market exchange rate (SDG/USD), 2009-2014

1 2 3 4 5 6 7 8 9 10 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Official Exchange Rate Market Exchange Rate

Source: World Bank staff own compilation, based on data from Central Bank of Sudan.

Principle Considerations

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Big Bang Gradual

Definition: Large, one-off devaluation overnight. Definition: Incremental devaluations over a period.  Economic disruptions: Sudden change in relative prices, cheaper exports and more expensive imports.  Value of foreign debt: Sharp devaluation to raise value of foreign currency denominated debt in domestic currency.  Inflation: Sudden changes in import prices to lead to spikes in inflation. Challenges If further devaluation is expected:  Possible ‘hoarding’ of foreign exchange thereby creating a black market and worsening foreign exchange shortages.  Speculative outflows could increase devaluation pressure. If perceived as a one-off event, no further expectation of devaluation. Advantage Incremental changes in relative prices:  Important if high levels of external debt; and/or  Large reliance on imports

How to unify the exchange rates? Big Bang and Gradual devaluations

Summary of Empirical findings

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Big Bang Gradual

Gradual devaluation preferred as it is associated with significant

• utput increases and improvements in the trade balance

GDP Investment Consumption Trade balance Manufacturing Logistics Central bank ind. Poor vs. rich country Small vs. big country Negative Negative Negative Negative POSITIVE POSITIVE (less) No impact No impact No impact Poor countries do better Small countries do better

Variable Effect t0 t+1 t+2

GDP Investment Consumption Trade balance Manufacturing Logistics Central bank ind. Poor vs. rich country Small vs. big country No impact POSITIVE No impact No impact POSITIVE No impact No impact No impact Poor/rich does not matter Small/big does not matter

Variable Effect t0 t+1 t+2

Data and definitions: Country level panel data for 221 Countries and 233 Episodes between 1960 and 2015. Big Bang: More than 20% one-off nominal devaluation --- Gradual: Between 5 and 20% devaluation for at least 3 consecutive years. Poor country: 98 --- Rich country: 123 Small country: 115 --- Rich country: 106

10 most successful gradual devaluations with initial (first-year) devaluation

Most Successful gradual devaluations started with a larger initial devaluation in year one followed by several smaller ones

Year Country First-year initial nominal devaluation Initial RER

• vervaluation

Cumulative devaluation 1981 Bhutan 9.6% 61.1% 45.3% 2009 Sierra Leone 12.7% 29.2% 37.8% 1996 Cabo Verde 7.2% 70.5% 44.3% 1971 Korea 13.0%

• 17.3%

36.0% 1988 Bhutan 7.1% 11.5% 45.3% 1989 Solomon Islands 9.6% 15.8% 42.6% 1987 Chile 12.9% 14.7% 59.3% 1980 Mauritius 19.7% 36.3% 89.5% 1981 Norway 15.0% 4.2% 55.4% 1982 Nepal 7.1% 37.3% 54.3%

Average 11.4% 26.3% 49.7%

Data and definitions: Country level panel data for 221 Countries and 233 Episodes between 1960 and 2015. Cumulative devaluation for gradual devaluation period; length varies across countries

Keep core inflation low through lower budget deficits and less reliance on domestic deficit finance  Real exchange rate will continue to appreciate as long as inflation is being driven by deficit financing and excess liquidity More resilient investment financing through higher domestic savings  Facilitate domestic savings through low inflation and positive real interest rates Limit use of financial sector interventions for sector promotion  Development banks/agriculture lending. Instead, increase access to finance for all sectors and businesses.

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Exchange rate adjustment needs to be accompanied by complementary macro-policies to ensure success

Source: World Bank (2015): Sudan Country Economic Memorandum.

Main recommendation 2: Increase agriculture productivity through a set of key (policy) changes

Agriculture policy changes

• Rethink centralized marketing of agriculture products and learn from gum

Arabic and cotton experience

• Gradually decrease subsidy on domestic wheat production (capitalizing on

the recent reform to abolish the preferential wheat exchange rate)

• Diversify wheat imports to lower the wheat import bill (next slide)

Agriculture investments

• Promote fertilizer usage
• Establish modern state-level grain storage
• Prepare for rehabilitation of the Gezira scheme

Pilot the move from agriculture to agro-processing

• Pilot gum Arabic spray-drying in combination with increasing the value of

raw material

• Apply lessons from pilot for other successful raw exports such as sesame,

cotton, and livestock.

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Increase agriculture productivity through a set of key (policy) changes

Source: World Bank (2015): Sudan Country Economic Memorandum.

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Sudan’s wheat import price is relatively high and there is scope to lower the wheat import bill by rationalizing the sources

Sudan’s wheat import price in perspective (US$/ton)

Source: World Bank (2015): Sudan Country Economic Memorandum.

372 414 397 445 50 100 150 200 250 300 350 400 450 500 2010/2011 2011/2012 2012/2013 2013/2014 Sudan Import Price All US Grades US (Kansas City) US (Texas Gulf) Argentina

Agriculture policy changes

• Rethink centralized marketing of agriculture products and learn from gum

Arabic and cotton experience

• Gradually decrease subsidy on domestic wheat production (capitalizing on

the recent reform to abolish the preferential wheat exchange rate)

• Diversify wheat imports to lower the wheat import bill (next slide)

Agriculture investments

• Promote fertilizer usage
• Establish modern state-level grain storage
• Prepare for rehabilitation of the Gezira scheme

Pilot the move from agriculture to agro-processing

• Pilot gum Arabic spray-drying in combination with increasing the value of

raw material

• Apply lessons from pilot for other successful raw exports such as sesame,

cotton, and livestock (next slide)

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Increase agriculture productivity through a set of key (policy) changes (ctd).

Source: World Bank (2015): Sudan Country Economic Memorandum.

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Focusing on Sudanese exports with larger world market shares could be a good way to pilot the move towards agro-processing

Sudanese products with larger world market shares, 2013

• 5%

0% 5% 10% 15% 20% 25% 30% 35% 40% Sheep: 35% Gum Arabic: 30% Sheep meat: 4% Sesame seeds: 15% Waste and scrap of primary cells: 4%

Source: World Bank staff own calculations, based on data from UN COMTRADE.

Main recommendation 3: Improve the management of natural resource rents

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Establish a more realistic medium-term outlook on oil production

Projected domestic crude oil production, bpd

• 20,000

40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 Base High Low

Source: Ministry of Petroleum (2013); and Wood Mackenzie (2013). Note: The High estimate equals the Government’s estimate.

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More broadly on natural resources, a strategic outlook is required to efficiently utilize the remaining resource wealth

Contribution of oil and minerals to Sudan’s economy: still important, but less dominant

Source: World Bank (2015): Sudan Country Economic Memorandum.

Main recommendation 4: Address broader business constraints

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Address broader business constraints to create space for structural transformation

Regulate economic activity better: Sudan’s ranking in selected Doing Business Indicators

25 50 75 100 125 150 175 Ease of Doing Business Starting a Business Registering Property Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts DB2014 (out of 189 economies) DB2008 (out of 178 economies)

Source: World Bank Doing Business Report, 2008 and 2014.

Main recommendation 5: Build human capital to support structural change

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Build human capital to support skills-intensive modern services and reduce spatial disparities – increase education levels

Education levels by gender and location

1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 9,000,000 10,000,000 Rural Men Urban Men Rural Women Urban Women No Education At Most Primary At Most Secondary Post-Secondary

Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009).

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Labor force non-participation is far higher for women than men; many educated women never enter the labor market

Employment and labor force participation by cohort

Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009).

Rural men Urban men Rural women Urban women Employed Employed Non- participation Non- participation

Summary of findings and recommendations

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Six key findings lead to five interlinked recommendations to support diversification in Sudan

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Summary of key findings and main recommendations

1) No lasting structural change 2) High and volatile inflation 3) Weak resource revenue management, budget deficits and low savings 4) Long history of overvalued real exchange rate 5) Extremely low productivity in agriculture 6) Highly concentrated export markets

Findings

 Remove exchange restrictions to unify official and black-market rate and enhance policy consistency  Increase agriculture productivity through a set of key (policy) changes  Improve the management of natural resource rents  Address broader business environment constraints  Build human capital to support structural change

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