Sudan after the Referendum Economic Update and Challenges - PowerPoint PPT Presentation

Sudan after the Referendum Economic Update and Challenges Presentation to the USIP Meeting Bill Battaile 10 February 2011 Washington, DC

Presentation Outline  Some highlights of 2010 economic performance.  Recent political events and implications.  Major channels for economic impact of political adjustment. 2

Growth  Real GDP growth dampened to about 5 percent in 2010 (estimated).  Political uncertainties caused a “wait and see” attitude among some economic agents.  There was contraction in the oil sector.  Need for non-oil sources of growth (World Bank CEM). GDP growth by sectors, 2004-2010 Estimated Source: IMF 3

Exchange rate  Sharp depreciation in spite of CBoS interventions; reserves are critically low.  Market has (partially) internalized downside risks.  The Central Bank has imposed import controls in an attempt to lessen foreign exchange pressures and safeguard the foreign exchange reserve position. Sudan Offical Exchange rate (period average); Jan 2010-Jan 2011 2.5 3.5 Source: CBoS 2.508 SDG to USD (left scale) 2.3 3.3 2.238 2.1 3.1 SDG to Euro (right scale) 1.9 2.9 1.7 2.7 1.5 2.5 J-10 F-10 M-10 A-10 M-10 J-10 J-10 A-10 S-10 O-10 N-10 D-10 J-11 4

Inflation  Inflation rate in December 2010 at double-digits again, 16.7 percent in January 2011  Domestic food prices at 19.7 percent in December 2010, at 19.8 percent in January 2011. Recent factors influencing food prices are:  Rising speculation about impending cut in subsidies in December; announced in January.  Sudan is a net food importer; Sudan National Inflation Rate 35 (% change from the same month of the previous year) Jan 2008-Jan 2011 rising international food prices 32 30  Currency devaluation leads Food Price Inflation Source: CBS to yet even higher prices 25 for imported food. 19.7 19.8 20 21.8 16.7 15 15.4 10 5 Overall Inflation 0 J- F- M- A- M- J- J- A- S- O- N- D- J- F- M- A- M- J- J- A- S- O- N- D- J- F- M- A- M- J- J- A- S- O- N- D- J- 08 08 08 08 08 08 08 08 08 08 08 08 09 09 09 09 09 09 09 09 09 09 09 09 10 10 10 10 10 10 10 10 10 10 10 10 11 5

Recent political developments are the trigger for economic challenges ahead Recent developments and their future impact  The self-determination referendum was held on schedule during January 9-15, 2011 with overwhelming results in favor of secession for the South were finalized on February 7, 2011.  The outcome of on-going negotiations will determine the post-CPA economic landscape, including.  Oil  Debt  Currency  Borders  The secession outcome will most likely put significant strain on economic stability in the North. The economic effects of secession would be transmitted largely through the fiscal and external accounts. 6

External debt and associated arrears constrain normal relations with many development partners Sudan’s external debt, end 2010 (preliminary) Private Paris Club Creditors $6 bn $12 bn Bilaterals Non-Paris $25 bn Multilaterals Club $6 bn $14 bn  Sudan’s external debt is US$ 36.8bn with US$ 30.8bn in arrears  Arrears continue to constrain access to concessional financing.  The World Bank is co-leading a Debt Technical Working Group, together with the IMF, comprised of Sudan's major creditors. 7

Transmission Channels: Fiscal Fiscal outlook adjusting to political reality  The federal budget was passed in November 2010, based on a unity scenario and reflecting significant fiscal tightening. GoNU Overall Fiscal Deficit and Average Export Price  Target deficit is 3.2 percent of GDP (5.1 percent in $150 -9% 2010); aggressive tightening assumes external Overal Fiscal Deficit(% of GDP) Average Export Price (Nile, $ per bbl) financing to cover major portion of deficit (2.7 percent $120 of GDP). -6% $90  The reality of an impending secession led GoNU to $60 announce austerity measures in January 2011. A -3% revised budget may be necessary by mid-year $30  Fiscal policy package announced to National $- 0% Assembly, including: reduced public expenditures 2007 2008 2009 2010 (mostly on goods and services), increased revenues (through reduced subsidies on petroleum products and on sugar) and several safety net measures. Implementation status of some measures is not clear. 8

Transmission Channels: Fiscal The World Bank is conducting simulations of the fiscal impact of possible negotiation outcomes  The analysis presents indicative impact for a range of hypothetical scenarios on new oil revenue sharing arrangement.  The analysis primarily simulates:  oil revenue losses to GoNU in 2011 and 2012 in different hypothetical scenarios on the outcome of on-going oil revenue sharing negotiation, and  their subsequent effects on fiscal balances of the post-CPA interim period by linking the oil revenue simulation results with simplified assumptions on key fiscal variables.  Four scenarios on oil revenue share proportions:  Baseline Scenario (Status Quo) : 50 (GoNU % share) / 50 (GoSS % share)  Hypothetical Scenarios on New Revenue Sharing Scheme : 35/65, 25/75, 15/85; this range approximates many possible modalities of an eventual agreement 9

Transmission Channels: Fiscal  Necessary shift in expenditure paradigm toward long-term fiscal framework looking at long- term oil revenue prospect and fiscal sustainability (i.e., new fiscal path).  Fiscal shock will be large and permanent. Authorities need to look across at revenue and expenditure measures. Revisit 2011 budget based on new fiscal environment. MoFNE’s recent fiscal measures are a move in the right direction.  Need to increase non-oil revenue to reduce high oil dependency, including at state level.  On the expenditure side, need to do more with less (i.e., efficiency). Need to protect pro- poor spending and keep investment focused on promoting non-oil growth.  Transfers to Northern States are vulnerable, especially given past budget performance. 10

Transmission Channels: External  Exchange rate mechanism (discussed earlier).  Drop in oil exports will limited the foreign exchange needed to finance imports.  Foreign direct investment uncertain; possible boost as political uncertainties wane.  North/South supply/trade linkages uncertain. Define North-South relations so that the new border will be an opportunity for rather than an obstacle to trade – on both sides. 11

Medium/Long Term: Economic growth and the non-oil sector Need for a new driver of growth  Political uncertainties have translated into economic dimensions:  Potential economic downside for the North under a secession scenario.  Renewed urgency for non-oil sector as new driver of growth (confirming call for new growth strategy in the World Bank’s 2010 Country Economic Memorandum).  Need for recovery and sources of new growth in the agricultural sector, the crucial role of the private sector and the provision of efficient services to facilitate real sector development.  Real GDP growth reached about 5 percent in 2010 (projected):  Non-oil sector has taken over role as main contributor to growth, led by the rising importance of agricultural sector. Agriculture contributed 1/3 to GDP growth in 2010 (projected), up from 1/4 in 2008.  With 5-10 percent of overall trade, non-oil exports represent only a fraction of exports.  Currency depreciation has the potential to positively affect non-oil exports, but productivity is paramount. 12