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

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Presentation Outline

• Some highlights of 2010 economic performance.
• Recent political events and implications.
• Major channels for economic impact of political adjustment.

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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).

Source: IMF

Estimated GDP growth by sectors, 2004-2010

4 2.5 2.7 2.9 3.1 3.3 3.5 1.5 1.7 1.9 2.1 2.3 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

Sudan Offical Exchange rate (period average); Jan 2010-Jan 2011 SDG to USD (left scale) SDG to Euro (right scale)

Source: CBoS

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.

2.508 2.238

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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; rising international food prices  Currency devaluation leads to yet even higher prices for imported food.

21.8 15.4 16.7 32 19.7 19.8 5 10 15 20 25 30 35

J- 08 F- 08 M- 08 A- 08 M- 08 J- 08 J- 08 A- 08 S- 08 O- 08 N- 08 D- 08 J- 09 F- 09 M- 09 A- 09 M- 09 J- 09 J- 09 A- 09 S- 09 O- 09 N- 09 D- 09 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

Overall Inflation

Food Price Inflation Sudan National Inflation Rate (% change from the same month of the previous year) Jan 2008-Jan 2011

Source: CBS

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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
• verwhelming 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.

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External debt and associated arrears constrain normal relations with many development partners

Sudan’s external debt, end 2010 (preliminary)

Multilaterals $6 bn Private Creditors $6 bn Paris Club $12 bn Non-Paris Club $14 bn Bilaterals $25 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.

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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.

 Target deficit is 3.2 percent of GDP (5.1 percent in 2010); aggressive tightening assumes external financing to cover major portion of deficit (2.7 percent

• f GDP).
• The reality of an impending secession led GoNU to

announce austerity measures in January 2011. A revised budget may be necessary by mid-year

 Fiscal policy package announced to National Assembly, including: reduced public expenditures (mostly on goods and services), increased revenues (through reduced subsidies on petroleum products and

• n sugar) and several safety net measures.

Implementation status of some measures is not clear.

• 9%
• 6%
• 3%

0% $- $30 $60 $90 $120 $150 2007 2008 2009 2010 Overal Fiscal Deficit(% of GDP) Average Export Price (Nile, $ per bbl)

GoNU Overall Fiscal Deficit and Average Export Price

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Transmission Channels: Fiscal

The World Bank is conducting simulations of the fiscal impact of possible negotiation

• utcomes
• 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

• n-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

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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.

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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.

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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.