March 2014 - Khartoum, Sudan - UNDP€¦ · Gama'a Avenue, House 7,Block 5 P.O.Box 913 Postal Code...

Update on Macroeconomic Developments in Sudan

March 2014 - Khartoum, Sudan

UNDP Sudan

Gama'a Avenue, House 7,Block 5

P.O.Box 913

Postal Code 11111

Khartoum – Sudan

Phone: (+249) 187120000

Fax: (+249) 183783764 (+249) 183773128

Sudan Talks Series

Authors:

Getachew Tahir, Economic Advisor

Abdalatif Hassan, Economic Analyst

| Update on Macroeconomic Developments in Sudan i

Table of Contents

Title Page

Table of Contents i

List of Tables ii

List of Figures ii

List of Annexes ii

List of Acronyms iii

Note on the Paper iv

Executive Summary v

Summary by Chapter vi

I. Trends in Real Sector (GDP) and Inflation

1.1. Developments in Real GDP

1.2. Trends in Inflation

1

1

5

II. Fiscal Situation 8

III. Exports and the Balance of Payment (BOP) Situation 13

IV. The External Debt Situation 17

V. Poverty Status and Human Development 19

VI. Employment/Unemployment Situation 21

VII. Private Sector Development and Business Environment 23

VIII. Conclusions & Observations 25

| Update on Macroeconomic Developments in Sudan ii

List of Tables

Table Page

Table 1: Trends in growth and Structure of GDP (%) 2

Table 2: Trends in Annual General Inflation Rate (%) by Rural and Urban Areas 7

Table 3: Trends in Inflation Rate (%) by selected Item Groups 7

Table 4: Recent Trends in Public Revenue and Expenditure Performance 9

Table 5: Recent Trends in the Balance of Payments 14

List of Figures

Figure Page

Figure 1: Trends in Overall Real GDP Growth Rate 2

Figure 2: Trends in Per Capita GDP 4

Figure 3: Monthly Trend in General Inflation (National) in 2013, January-October,

2013

6

Figure 4: Trends in Annual General Inflation 7

Figure 5: Trends in Domestic Revenue and its components 10

Figure 6: Trends in Public Expenditure and its Components 10

Figure 7: Trends in Total Revenue and its components as a ratio to GDP (%) 11

Figure 8: Trends in Public Expenditure and its Components as a ratio to GDP (%) 11

Figure 9: Trends in Annual Average Exchange Rate (SDG/$USD) 15

Figure 10: Trends in Sudan Human Development Indices (HDI) relative to SSA and

LDCs

20

Figure 11: Trends in Unemployment Rate in Sudan 22

List of Annexes

Annexes Page

Annex Table 1: Time Series Data on Selected Macroeconomic Indicators 30

Annex 2: Economic Reform Package, June 2012 32

| Update on Macroeconomic Developments in Sudan iii

List of Acronyms

BoP Balance of Payment

CPA Comprehensive Peace Agreement

CPI Consumer Price Index

EIU Economist Intelligence Unit

FDI Foreign Direct Investment

GDP Gross Domestic Product

GNI Gross National Income

HDI Human Development Index

HDR Human Development Report

HIPCs Heavily Indebted Poor Countries

IDPs Internally Displaced Persons

IMF International Monetary Fund

IPRSP Interim Poverty Reduction Strategies

LDCs Least Developed Countries

MDGs Millennium Development Goals

NBHS National Baseline Household Survey

NCSP National Council for Strategic Planning

NSDS National Strategy for the Development of Statistics

PICS Private Investment Climate Survey

PIP Project Initiation Plan

PPP Purchasing Power Parity

PRSP Poverty Reduction Strategy Paper

SSA Sub-Saharan Africa

VAT Value Added Tax

| Update on Macroeconomic Developments in Sudan iv

Note on Contents

This short report is an attempt to provide an understanding of Sudan’s

macroeconomic landscape over the course of the post secession period (2011-2013), as far as

available data permits. It is recognized that gaps in data collection across almost all

macroeconomic sectors have posed a major challenge for economic analysis. Despite this,

efforts have been made to draw together what is available for analysis in order to provide a

useful picture of macroeconomic trends in Sudan.

Rather than attempting to present the data at face value, this paper also attempts to

connect developments, undertake an analysis and propose development-related conclusions.

The graphs in this paper are based on time series data compiled from official

Government sources, as well as other credible sources, listed in the Annex Table 1. Although

every effort has been made to refer to official sources, these have been complemented with

information from independent think tanks and international financial institutions, as deemed

appropriate.

We would be grateful to receive feedback on the content and on the data used in this

report.

| Update on Macroeconomic Developments in Sudan v

Executive Summary

The secession of South Sudan in 2011 has had a severe impact on Sudan’s

economy and the country’s future development, and as the IMF has noted, it has left the

country facing “daunting challenges”. The sudden loss of oil income led to a dramatic

drop in the Government’s revenue, rising inflation, soaring food prices and a weakened

currency. Austerity measures brought in to help address this situation in June 2012 have in

turn, further fuelled inflation, forcing prices to rise further.

These austerity measures involved government cuts, including in federal transfers

to the regions, tax increases, and the gradual lifting of subsides on fuel, sugar and wheat.

Fuel-related subsidies have only partially been lifted to date.

Were these measures to be accompanied by the right mix of policies for revitalizing

the non-oil productive sector, particularly agriculture, in the medium to long term, they

should redress the domestic and external macroeconomic imbalances created by the loss

of oil income.

But in the short term, it is ordinary Sudanese people who have borne the brunt of

this economic crisis, as they struggle with an increasingly exorbitant cost of living. The

austerity measures, which have been deeply unpopular, have further fuelled inflation. This

partial lifting of fuel subsidies in September 2013 has added to price rises as transport

costs shot up as a result. By November 2013, monthly transport inflation reached 114.3

per cent. The potential of these austerity measures to cause rising social tensions and

instability was demonstrated during the protests that followed the partial lifting of fuel

subsidies in September 2013.

In the long term, the cuts in federal transfers to the regions, the cuts in the health

and education budgets, as well as an overall low level of development spending, is

affecting the provision of basic services and the future development of the country. The

cost of this crisis on the country’s human development is already evident: in the years

since South Sudan seceded, Sudan itself has slid almost twenty places down the Human

Development Index.

Although an increase in exports, particularly gold, coupled with the austerity

measures, in the last two years has helped ameliorate some of its economic imbalances,

Sudan is failing to attract the investment it needs to grow. Studies indicate that the

country experiences comparably high levels of corruption, which along with its uncertain

political environment, on going conflict in parts of the country, and a weakened currency is

making it increasingly hard to attract foreign or domestic investment.

| Update on Macroeconomic Developments in Sudan vi

Trends/Direction of Changes of Selected macroeconomic Variables (2004-2013)

Indicator

Average Trend/ Direction of Change in the Indicator

2004-2007 2008-2010 2011-2013 2013

Real Sector1 and Prices:

Overall GDP Growth

Strong increase (9.3)

Increased at a declining rate (5.3)

Steep decline albeit in a low positive

territory (2.1)

Slight increase (2.6)

Agriculture Growth Modest increase (7.2)

Modestly increasing Trend

declining (5.7)

Increased declining trend (3.6)

Increased declining trend (3)

Industry Growth Steep increase (14.3)

Increased declining trend

(4.2)

Steep drop in the negative territory

(-7.5)

Recovering (2.3)

Services Growth Steep increase (8.6)

Modest increase (7.4)

Flat (0) Recovering (2.8)

Structure of the Economy: sector share in GDP:

Agriculture Decline (34) Almost flat (35) Almost Flat (34) Flat (34)

Industry Increase (oil factor) (23)

Increasing at a decreasing rate

(24)

Declining trend (19.5)

Flat (20.4)

Service Increase (44) Almost flat (42) Increase (47) Almost Flat (46.5)

Per Capita Real GDP Growth

Steep Increase (25.5)

Marginal increase (1.1)

Steep Decline (-12.1)

Steep decline (-13.0)

General Inflation Increased at Declining rate (8)

Increase (13) Steep Increase (29) Increasing at declining rate (25.6)

Fiscal Sector:

Domestic Revenue as % of GDP

Increasing (16) Flat (15.9) Declining Trend (12) Declining (11.5)

Oil Revenue as % of GDP

Increase (7.1) Increasing Trend (8.9)

Steep Declining Trend (3)

Declining Trend (2.7)

Non-Oil Revenue Increasing (9.0) Almost flat (7.0) Increase (9.0) Almost Flat (8.8)

1 The period average for sector growth rates (Agriculture, Industry and services) and overall GDP refer to the three-year period, 2005-2007.

| Update on Macroeconomic Developments in Sudan vii

as % of GDP

Public Expenditure as % of GDP

Increase (16.9) Almost Flat (16.6) Declining Trend (15) Declining Trend (14)

Recurrent as % of GDP

Increase (13.1) Increase (15.3) Declining Trend (14.1)

Declining Trend (12.1)

Capital /Development as % of GDP

Flat at a low rate (5)

Declining Trend from a low rate

(2.5)

Flat (2.0) Flat (1.9)

Fiscal deficit/surplus as % of GDP

Surplus (2.2) Widening Deficit (-3.1)

Deficit Narrowing Trend (-2.4)

Deficit Narrowing Trend (-1.6)

External Sector & Balance of Payments(BOP):

Trade Balance as % of GDP

Small Deficit but stable (-0.4)

Surplus not stable (1.7)

Widening Deficit (-5.1)

Deficit narrowing trend (-7)

Current Account Balance as % of GDP

Deficit Narrowing trend (NA)

Surplus Declining Trend

Deficit widening trend (-7.8)

Deficit widening trend (-10.5)

Exchange Rate (SDG/USD)

Stable (2.3) Stable (2.2) Depreciation (4.0) Steep Depreciation (5.8)

Debt stock as a ratio to Nominal GDP

Increasing (74.3) Declining Trend (60)

Increasing (95) Steep increase (113)

Human Development Index (HDI)

Medium (0.53), Rank 147

th in 2005

Low (0.38), Rank 154

th in 2010

Low (0.41),

Rank 171st

in 2012

(NA)

Unemployment Rate

Increased (18) Modest Decline (17)

Increase (19) (NA)

NA: Data not available

| Update on Macroeconomic Developments in Sudan viii

Summary by Chapter

Growth Rates: The pre-secession Sudan was one of the fastest-growing oil-led

economies in Africa. After oil production began in 1999, Sudan underwent a boom that

lasted for more than a decade. But the global economic crisis of 2007, coupled with the

secession of South Sudan in 2011 has put an end to this period of rapid growth. Real GDP

growth, which peaked at 10.9 percent in 2007 dropped to 5 per cent in 2010, 2.5 per cent in

2011 and 1.4 per cent in 2012. In 2013, real GDP growth was estimated at 3.6 per cent, but

projections for 2014 suggest a decline to 2.6 per cent.

Inflation: The Sudanese economy has suffered from intense inflationary pressure since

the referendum of January 2011 when the South Sudanese chose to secede from Sudan

and it became clear that the country would soon be losing much of its oil income and the

hard currency that went with it. The official annual inflation rate for 2013 was 36.5 per cent

but for much of the year it was over 40 per cent, peaking in March 2013 at 48 per cent. The

food component, which accounted on average for 53 per cent of household expenditure,

drives overall inflation in Sudan followed by housing (14 per cent) and transport (8 per

cent). These three groups of consumer items together, on average, account for more than

70 per cent of household expenditure. Food price inflation has been compounded by

imported inflation as many food items are imported. Although general inflation dropped

from its peak level of 48 per cent in March 2013 to 23 per cent by the end of August 2013,

this declining trend was reversed following the suspension of fuel subsides in September

2013. The transport component of inflation was the major driver of this.

Fiscal: Sudan’s government estimates it lost 36.5 per cent of its revenue as a result of the

secession of South Sudan. This decline in oil revenue in the aftermath of secession has

caused a major adjustment to Sudan’s fiscal situation, prompting the introduction of a

financial austerity package in June 2012. This involved government cuts, particularly to the

regions, tax increases, and the gradual lifting of subsides on fuel, sugar and wheat.

In the longer term, the cuts have meant a drop in federal transfers to the regional

states, where many of Sudan’s poorest live, as well as a reduction in the budget for the

provision of basic services. Total expenditure as a percentage of GDP has declined from 19

per cent of GDP in 2009 to 15 per cent of GDP by the end of 2012. Even with the available

fiscal resources, allocation between recurrent expenditure and capital expenditure is

highly lopsided to the former. Such a low level of development expenditure (two per cent

of GDP for 2012) is detrimental for sustaining growth and achievement of the MDGs and

Human Development. This is even worse at the state level as the bulk of expenditure

(nearly 90 percent) is allocated to recurrent expenditure which mainly constitutes wages

and salaries. According to a recent study commissioned by UNDP Sudan, transfers to

| Update on Macroeconomic Developments in Sudan ix

states as a whole declined from nearly 2 per cent of GDP in 2011 to 1.6 per cent of GDP in

2012.

The widening fiscal deficit seems to be increasingly – and now almost entirely -

financed from domestic banking sources. This is likely to have a negative impact on

inflation. The Government lacks access to other official external sources to finance

development projects from traditional donors because of existing sanctions. Despite the

recent increases in tax rates, revenue raising efforts in Sudan are low even compared to its

comparators in Sub-Saharan Africa (SSA).

Balance of Payments: The impact of the 2011 secession of South Sudan and the

consequent sudden loss of oil income on the country’s economy is clearly seen in the

sudden drop in its export earnings and the knock on effect of this on its current account.

The year before secession, 2010, Sudan had a trade surplus of 2.6 billion USD. Two years

later it had an estimated trade deficit of - $4.8 billion USD. In the same period the current

account balance fell from a surplus of $500 million USD to a deficit of about - $6 billion

USD. A reduction in imports and an increase in exports, particularly gold, have helped

reverse this trend. Projections for 2013 suggest the trade balance deficit stood at - $2.7

billion and the current account deficit -$4 billion.

Foreign Direct Investment (FDI) has also declined in the post-secession period as it had

largely been related to the oil sector. Foreign exchange reserves have been on the decline

since the secession of South Sudan, triggering the depreciation of the Sudanese Pound

against the US Dollar. The premium between the official and the parallel rate reached 60-

70 per cent in February 2012 and has been widening since then.

External Debt: Sudan is a heavily indebted country. By mid 2013 its existing external

debt was estimated to have exceeded 43 billion USD. According to IMF projections, by the

end of 2013 Sudan’s debt will be running at 86.7 per cent of GDP up from in 82.2 per cent in

2012. When South Sudan seceded, Sudan retained the entire debt burden. This was

agreed in September 2012 between the two countries “on condition that Sudan obtains

debt relief within two years through the Highly Indebted Poor Countries Initiative (HIPC)

and remains in negotiation.

Poverty: Almost half the population of Sudan live in poverty. Since the secession of

South Sudan in 2011, Sudan has become poorer, a reality illustrated by its sudden drop on

the Human Development Index. In 2010 it was ranked 154th. Just two years later, in 2012,

it was ranked 171st place.

Unemployment: A high unemployment rate in a country with a rising population that

is increasingly urbanized remains one of the Government’s major challenges.

Unemployment is highest amongst the youth which is a cause for concern in a population

where more than half the population are under the age of 24.

| Update on Macroeconomic Developments in Sudan x

Business environment: Sudan’s economic and political instability; its undeveloped

physical infrastructure; and its lack of adequately qualified manpower, coupled with

existing levels of corruption made it difficult to attract either foreign or domestic

investment. The country was ranked 173rd out of 176 countries in Transparency

International's 2012 Corruption Perceptions Index and is in the bottom quartile of the

World Bank’s global “Doing Business” report from 2013.

| Update on Macroeconomic Developments in Sudan 1

1- Trends in Real Sector (GDP) and Inflation

1.1. Developments in Real GDP After oil production began in 1999, Sudan underwent a boom that lasted for more than a

decade. But two events, the global economic crisis of 2007 and the secession of South

Sudan in 2011 put an end to this period of rapid growth. The government estimates that

real GDP grew 2.5 per cent in 2011, and this dropped to 1.4 per cent in 2012 before

recovering to 3.6 per cent in 2013. Real GDP growth projections for 2014 suggest a modest

drop to 2.6 percent. The IMF’s assessment indicated that Sudan’s economy actually went

into negative growth during the year of secession. Its figures estimate that real GDP

dropped from 3.4 per cent in 2010 to -1 per cent in 2011. The IMF further estimated real

GDP growth to drop to -2.6 per cent in 2012 before making a marked recovery to 4.1 cent

in 2013.2

Sudan was one of the world’s fastest-growing oil-led economies until the onset of

the global financial crisis in 2007. A UNDP-sponsored study3 found that real GDP growth

slowed down from its peak of 10.9 per cent in 2007 to about 5 per cent in 2010. The period

of the oil boom (1999-2010) saw the service sector expand rapidly to surpass agriculture as

the leading sector of the economy. While the services and utilities sector played an

increasingly important role in the economy, the agriculture sector continued to employ

2 http://www.imf.org/external/np/sec/pr/2013/pr13387.htm

3 This study was conducted with the support of UNDP Sudan and the Ministry of Finance and National

Economy for the Economic Conference on Sudan, Istanbul, March 2012.


the bulk of the work force. On average, agriculture contributed to about a third of GDP,

while industry (dominated by the oil sector) accounted for about one-quarter of GDP

during the oil-boom period. The formal secession of South Sudan on 9 July 2011 brought

significant changes to the socio-economic landscape of Sudan. According to a World Bank

report (2011) secession resulted in Sudan losing 75 per cent of its oil reserves and 20 per

cent of its population. Before the secession of South Sudan, oil accounted for nearly 15

per cent of industrial value added, 90 per cent of export earnings and nearly 50 per cent of

revenue. The oil loss has triggered domestic (fiscal) and external (balance of payments)

imbalances that have threatened macroeconomic stability.

The positive (albeit low) growth in 2012 of 1.4 per cent is mainly a result of the

good performance of the agriculture sector, with an estimated growth of 5.7 per cent,

which was largely attributed to good rains. Notwithstanding the improved performance of

the manufacturing sector (sugar and cement), the industry sector as a whole dropped by

an estimated 6.8 per cent in 2012 owing to the significant drop in the oil sub-sector. The

deceleration of the service sector to an estimated growth rate of 3.2 per cent in 2012

reflects the slowdown in activities in the oil sub-sector. Despite differences in magnitude,

both Government sources and the IMF4 believe there was modest positive growth in 2013,

with IMF estimates putting the figure at 4.1 per cent up from -2.6 per cent in 2012 and the

government estimating it at 3.6 per cent up from 1.4 per cent in 2012 (see table 1).

Table1: Trends in Growth and Structure of GDP (%)

Sector 2006 2007 2008 2009 2010 2011 2012

(Estimate)

2013

(Projection)

Real GDP Growth Rates (%)

Agriculture 8.4 6.0 7.8 4.9 5.7 3.4 5.7 3.5

Industry 12.5 22.7 0.5 4.3 4.5 - 3.6 -6.8 6.5

Services 10.3 5.7 10.7 3.2 4.6 4.4 3.2 2.2

Overall GDP 9.9 10.9 6.4 4.5 5.0 2.5 1.4 2.6

Structure of GDP (%)

Agriculture 31.8 35 35.7 32.3 33.9 34.1 34.1 33.7

Industry 23.8 22.7 25.2 24.7 22.6 18.5 19.5 20.4

Services 44.3 42.2 39.1 43 43.5 46.5 46.5 46.5

Overall GDP 100 100 100 100 100 100 100 100

Source: Central Bureau of Statistics and Ministry of Finance and National Economy

4 According to IMF’s assessment in April 2013, the non-oil economy grew by 4.2 per cent in 2012 while overall

GDP dropped by 3.1 per cent (as a result of the significant drop in the oil sector). The full impact of oil loss is believed to have been felt in 2012. According to the IMF’s original prediction, real GDP was to drop by 8-12 per cent in 2012. However, the IMF’s recent assessment4 showed that the economy performed better than had been originally predicted.


At the same time, oil production reached 139000 barrels per day (bpd) in August 2013 up from 120000 average bpd for 2012, and is projected to have reached 180000 bpd by the end of 2013.5

The rise in oil production is expected to have contributed to growth in 2013 and

improved the outlook for 2014. In addition to oil, the mineral sector (gold) and

manufacturing (cement and sugar) are also expected to augment growth of the industry

sector in 2013. However, according to the Economist Intelligence Unit (EIU), despite the

effort exerted by the government to attract foreign investment in the mineral sector, not

much has been forthcoming so far. Agriculture is projected to grow by a modest 3.5 per

cent in 2013 while the service sector is expected to slow down (2.2 per cent) mainly owing

to the decline in the oil sector.

The changes observed in the structure of the economy in recent years have been

related to oil. As shown in Table 1 above, the share of industry declined by almost 5

percentage points from 25 per cent in 2009 (before secession) to 20 per cent in 2012. The

share of agriculture has remained constant during the same period, while the share of the

service sector increased by almost 4 percentage points during the same period. The fast

expansion of the service sector (surpassing growth in the non-oil productive sectors, i.e.

agriculture and manufacturing) is almost always a recipe for inflation, as has been

witnessed in Sudan in recent years.

According to the 2013 UNDP Human Development Report, GDP per capita in 2005

Purchasing Power Parity (PPP) terms was estimated at $1878 USD and population growth

estimated at 2.4 per cent in 2012. In 2012, after taking into account the loss of the

population of South Sudan, the population of Sudan was estimated at 35.16 million. The

sharp increase in per capita GDP up until 2006 was a result of the increase in oil income,

bolstered by the peace dividend following the signing of the CPA in 2005. The 2007 global

crisis then caused a downward turn, followed by a brief recovery before the anticipated

secession of the South lead to a sustained decline from 2010 onwards (see graph below).

5 The Sudanese Petroleum Corporation (http://www.spc.sd). 6 Population Projections by the Central Bureau of Statistics based on the 2008 Census


The shock caused by the oil loss could have been mitigated had the government

pursued diversification to the non-oil productive sectors during the oil-boom period. The

non-oil productive sector, especially agriculture, had been in decline during this period.

The launching of the Three Year (2012-2014) Programme for Sustainability of Economic

Stabilization, within the framework of the new Five Year National Development Plan

(2012-2016), is aimed at smoothing the transition from oil-led growth to agriculture and

manufacturing-led growth. It also includes relevant social safety measures. The revival of

agriculture is critical for sustaining overall economic growth and poverty reduction.

However, success of the programme depends on getting the right macroeconomic policy

mixes (fiscal, monetary and exchange rate) and then exercising prudence in implementing

them. In addition, the on-going armed conflicts in some parts of the country will continue

to compound the challenges of Sudan’s recovery and growth, at least in the medium term.


1.2. Trends in Inflation

The Sudanese economy has suffered from intense inflationary pressure since the

referendum of January 2011 when the South Sudanese chose to secede from Sudan. At this

point, it became clear that the country would soon be losing much of its oil income and the

hard currency that went with it.

The official annual inflation rate for 2013 was 36.5 per cent but for much of the year

it was over 40 per cent, peaking in March 2013 at 48 per cent. The partial lifting of fuel

subsidies in September 2013 has further added to driving up prices. Transport costs shot up

as a consequence reaching a monthly inflationary rate of 114.3 per cent, in November 2013.

In addition, imported inflation (through the depreciation of the Sudanese Pound) has

further compounded Sudan’s inflation rate. Food accounts for more than 53 per cent of

household expenditure in Sudan, and most food items, including wheat, are imported.

Underlying this aspect of Sudan’s inflation is the neglect of the agricultural sector which has

led to this shortfall in domestic food supply.

Following the referendum of January 2011 when the South Sudanese voted for the

independence of South Sudan, inflationary pressure in Sudan started rising. According to

data from the Central Bureau of Statistics (CBS), by 2012 inflation was running at 35.6 per

cent. Monthly inflation was 44.4 per cent in January 2013, and peaked to 48 per cent by

March 2013 before showing a modest decline in the months that followed reaching 37.3 per

cent by end May 2013, and further dropping to 24 per cent by July 2013 (see Table 2 below).

The food component of the Consumer Price Index7 (CPI) that accounts, on average, for 53

per cent of household expenditure, has driven overall inflation in Sudan. The next most

important items in the household budget are housing (14 per cent) followed by transport (8

per cent). According to computations based on the findings of the 2009 National Baseline

Household Survey of the CBS, these three groups of consumer items - food, housing and

transport - together account, on average, for more than 70 per cent of the household

expenditure budget.

Until July 2013 rural inflation was higher than urban inflation (see Table 2 below).

High transport costs, owing to the existing infrastructure deficit in rural areas, have been

seen as the major factor for this price differential. In November 2013, for example, the

transport component of urban inflation was running at 95.7 per cent whereas for the rural

economy it was 142.6 per cent. But by July 2013 the partial lifting of fuel subsidies had

resulted in a huge increase in to the transport component of urban inflation.

7 The base year for the Sudan Consumer Price Index (CPI) is 2007, i.e., 2007=100


Many factors may account for the high inflation during January-May 2013. Chief

among these is the continued currency devaluation in the free market following the de

facto devaluation introduced during May-June 2012. The continued weakening of the

national currency drove up domestic prices through imported inflation. Other domestic

factors such as supply constraints, as well as the impact of the June 2012 austerity package

(which included increased import taxes and VAT and introduced a phased lifting of fuel

subsidies) have led to increasing prices. These developments have also contributed to the

deterioration of expectations, which has also fuelled price increases.

As shown in Table 3 below, general inflation showed a declining trend from its peak

level of 48 per cent in March 2013 to 23 per cent by the end of August 2013. But this trend

was reversed following the further cut in fuel subsides in September 2013. Table 3 also

shows that the transport component of inflation, which stood at 104 per cent in October

2013, has been the major driver of the increase in general inflation. It further increased to

114.3 per cent by the end of November 2013. The food and housing components have also

shown modest increases in inflation from 20 and 16 per cent in July 2013 to 30 per cent and

26 per cent, respectively in October 2013. General inflation reached 40 per cent in October

and increased further to nearly 43 per cent by the end of November, 2013. The monthly

general inflation trend for 2013 is depicted in the graph below.

According to the Economics Intelligence Unit,8 average general inflation is expected

to show relative stability and to have reached around 32 per cent by the end of 2013. The

average annual rate of inflation is expected to settle at a higher rate than the

8 Sudan Country Report (July, 2013)


projection. This is because inflationary pressure has begun to pick up following the

September 2013 partial lifting of fuel subsidies that resulted in a nearly 80 per cent increase

in fuel prices.

Table 2: Trends in Annual General Inflation Rate (%) in Sudan by Rural and Urban Areas

Level 2008 2009 2010 2011 2012 2013

(March)

2013

(August)

2013

(October)

2013

(November)

National 14.3 11.2 13.0 18.1 35.6 47.9 22.9 40.3 42.6

Urban 11.5 12.1 11.8 17.2 33.5 47.7 23.6 41.2 44.0

Rural 17.3 10.5 14.1 19.0 37.4 48.1 22.3 39.5 41.6

Source: Central Bureau of Statistics (CBS)

Table 3 below depicts annual trends in inflation by selected item groups. It shows how the

partial suspension of the fuel subsidy has affected inflation through the significant increase in

transport prices. The housing group has also witnessed a modest increase in recent months as

shown in the table 3.

Table 3: Trends in Inflation Rate (%) by selected Item Groups

Items Expenditur

e Share (%)

Inflation Rate (%)

2010 2011 2012 2013

(March)

2013

(August)

2013

(November)

Food & Non-

alcoholic

Beverages

53 15.6 20.4 41.6 46.4 20.6 30.5

Housing 14 9.9 11.0 13.2 15.8 15.0 29.7

Transport 8 2.4 14.8 96.8 89.7 15.0 114.3

Source: Central Bureau of Statistics (CBS), various issues


2- Fiscal Situation

In 2011, Sudan’s Government estimated it lost 36.5 per cent of its revenue as a result

of the secession of South Sudan (World Bank, 2011). This decline in oil revenues in the

aftermath of secession has caused a major adjustment to Sudan’s fiscal situation and

prompted the introduction of a financial austerity package in June 2012. This included wide

ranging government cuts, with a reduction in transfers to states; tax increases; and a

phased lifting of subsidies on fuel, wheat and sugar. These measures, while arguably

economically prudent, have had an intensely negative impact on the daily lives of the

majority of Sudanese people. In the short term, cuts in fuel subsidies have triggered intense

price inflation in the transport sector at a time when people are already struggling with

soaring food prices. In the longer term, the human development of the country is likely to

be adversely affected: the cuts have meant a drop in federal transfers to the states, where

many of Sudan’s poorest live, as well as a reduction in the budget for the provision of basic

services.

In response to the sudden drop in revenue from the loss of South Sudanese oil, the

government issued an amended budget for 2011. According to the estimates used in the

amendment, total public revenue declined by 12 per cent compared to the original budget,

with a cut in total public expenditure of just 3 per cent. Most of the spending cuts were

federal transfers to states. Compared to the original budget, these transfers declined by 20

per cent, and development-related components of the transfers (as opposed to recurrent

expenditure related components) declined by 45 percent. The aggregate fiscal picture for

the Amended Budget put the overall fiscal deficit at 5.0 per cent of GDP compared to 3.2

per cent of GDP in the original budget for 2011. The budget assumed that 25 per cent of the

deficit will be financed by external borrowing, while financing from domestic borrowing

accounted for 75 per cent, with huge implications for macroeconomic stability - mainly the

consequent high inflation. The cut in spending was detrimental to future growth because of

the cut in development (capital) expenditure. The expenditure cuts could also have far-

reaching implications on service delivery, aggravating poverty and the challenge of

meeting the Millennium Development Goals (MDGs) as most of the spending cuts were

from federal transfers to states and development expenditures.

The Government’s austerity package included a comprehensive set of fiscal

measures on the revenue side such as an increase in Value Added Tax from 15 to 17 per

cent; an increase in the development tax from 10 to 13 per cent; and an increase in the

business profit tax in the banking sector from 15 to 30 per cent (see the Annex I Table for


details). On the spending side, the Government reduced subsidies from major fuel products

with an estimated saving of 1 per cent of GDP.9

The 2012 budget further witnessed significant cuts in expenditure in order to

balance the budget. The fiscal deficit, which stood at -0.4 per cent of GDP in 2010 had

widened to -4.8 per cent in 2011. The deficit in 2012 narrowed to -2.4 per cent. The

reduction in subsidies and tax increases seems to have helped to narrow the fiscal deficit in

2012.

Table 4: Recent Trends in Public Revenue and Expenditure Performance Million SDG unless otherwise specified

Item 2009 2010 2011 2012

(Estimate) 2013

(Budget) Domestic Revenue 19166 23536 21458 22168 25211

o/w- Non-Oil 9774 11454 14949 17928 19211

o/w-Oil Revenue 9392 12082 6507 4241 6000

Total Expenditure 23852 24162 28578 26272 30822

o/w- Recurrent 21026 20000 24964 22723 26636

- Capital 2826 4162 3615 3550 4187

Fiscal Deficit -4686 -626 -7120 -4104 -5611

GDP @ Current Market Prices 125770 154490 146920 173995 218905

As % of GDP

Total Revenue 15.2 15.2 14.6 12.7 11.5

Non-oil 7.8 7.4 10.2 10.3 8.8

Oil 7.5 7.8 4.4 2.4 2.7

Total Expenditure 19.0 15.6 19.5 15.1 14.1

Recurrent 16.7 12.9 17.0 13.1 12.2

Capital 2.2 2.7 2.5 2.0 1.9

Fiscal Deficit(% of GDP) -3.7 -0.4 -4.8 -2.4 -2.6

Source: Ministry of Finance and National Economy

Looking at revenue performance for the post-secession period (2011-2012), total

domestic revenue performance in 2011 dropped by nearly 9 per cent compared to its level

in 2010 (pre-secession year). As shown in Table 4 above, the oil revenue component

dropped by nearly 47 per cent while non-oil revenue showed about a 30 per cent increase in

nominal terms. The 2012 revenue performance estimate showed a 3.3 per cent growth

compared to its level in 2011. Non-oil revenue increased by nearly 20 per cent while oil

revenue dropped by nearly 35 per cent.

9 African Economic Outlook Report Sudan (2012)


On the expenditure side, although total public spending rose 18 per cent in 2011

over its level in 2010, this increase was largely attributed to the growth of the recurrent

component (24.8 per cent). In 2012, however, total public spending dropped by 8.1 per

cent, development expenditure dropped by over 13 per cent, and recurrent expenditure

declined by 9 per cent and capital by nearly 2 per cent as shown in Table 4 above.

According to a recent study10, tax revenues increased by 0.3 per cent of GDP over previous

projections for 2011. The implemented fiscal measures on the revenue side have

contributed to the growth in the non-oil component of domestic revenue, as shown in the

table above and the graph below.

In relative terms (as a ratio to nominal GDP), domestic revenue has been

consistently declining from more than 15 per cent of GDP in 2009 to 12.7 per cent by the

10 African Economic Outlook Report Sudan (2012)


end of 2012. This level of the revenue generation capacity of the economy (revenue effort)

is low even by the SSA average of 27 per cent for 2011 (African Economic Outlook, 2012).

Total expenditure as a percentage of GDP declined from 19 per cent of GDP in 2009 to 15

per cent of GDP by the end of 2012.

The decline in revenue was largely driven by the significant drop in oil revenue while

the decline in public expenditure was attributed to the significant cut in capital expenditure

and subsidy transfers to states.


According to the Federal Budget for 2013, total revenue including grants amounted

to 25.3 billion SDG while total expenditure stood at 30.8 billion SDG, which resulted in a

fiscal deficit of 2.6 per cent of GDP (last column of Table 4 above). According to the 2013

budget, domestic revenue as a ratio to GDP is projected at 11.5 per cent (oil share 2.7 per

cent and non-oil share 8.8 per cent). As noted above, such a low level of revenue generation

capacity is a cause for concern for the future development of Sudan and needs to be

reversed.

The oil deal, which was signed between the Governments of Sudan and South

Sudan on September 27, 2012 in Addis Ababa, agreed to pipeline fees at the rate of USD

$10/barrel and transitional financial mechanisms amounting to USD $3.028 billion to be

paid to Sudan by South Sudan over a period of three and a half years. This will help in

reducing the fiscal pressure. Although in February 2012 South Sudan shut down its entire

oil production in a dispute with Sudan. This was not resolved until March 2013 and oil was

not being exported again until May of that year by which time much revenue for both sides

had been lost.

Since the resumption of oil exports through Sudan uncertainties around their

smooth flow and, hence, earnings, from pipeline fees for Sudan have remained. Habitual

political tensions between Khartoum and Juba as well as new conflict in South Sudan as of

December 2013, have all added to the lack of predictability. According to the IMF, Sudan

earned USD $442 million from pipeline fees in 2013. This amount was not, however,

included in the 2013 budget. In 2014 the IMF estimates the country will earn $1.4 billion

dollars from pipeline fees, a figure it predicts will decline in subsequent years.11

Despite the renewed oil related income in 2013 - albeit on a much smaller scale than

pre secession - the intensification of armed conflicts and political discontent, coupled with

the creation of new states (the number of states increased from 15 to 17 in 2012), has meant

the fiscal deficit is expected to have widened further in 2013.

11 http://www.imf.org/external/pubs/ft/scr/2013/cr13317.pdf

http://www.imf.org/external/pubs/ft/scr/2013/cr13317.pdf


3- Exports and the Balance of Payment Situation

The impact of the 2011 secession of South Sudan and the consequent sudden loss of

oil income on the country’s economy is clearly seen in the sudden drop in its export

earnings and the knock on effect of this on its current account. The year before secession,

2010, Sudan had a trade surplus of 2.6 billion USD. Two years later, it had an estimated

trade deficit of - $4.8 billion USD. In the same period, the current account balance fell from

a surplus of $500 million USD to a deficit of about - $6 billion USD. A reduction in imports

and an increase in exports, particularly gold, have helped reverse this trend. Projections for

2013 suggest the trade deficit stood at - $2.7 billion and the current account deficit at -$4

billion. The loss of oil income has also meant a depletion of foreign exchange reserves, a

drop in direct foreign investment and a weakened currency. The depreciation of the

Sudanese pound has further driven up food prices and thus increased inflationary pressure

as many food items, including wheat, are imported.

As shown in Table 5 below, merchandise exports declined from 11.4 Billion USD in

2010 to 9.6 Billion in 2011 (a fall of more than 15 per cent), then declined even further in

2012 to 3.4 Billion USD (a drop of more than 65 per cent). Meanwhile, merchandise imports

declined from 8.8 Billion USD in 2010 to 8.1 Billion USD in 2011 (a drop of more than eight

per cent) and then marginally increased in 2012 (0.4 per cent). The overall decline in

merchandise exports is largely attributed to the drop in oil exports. Accordingly, Sudan’s

trade balance worsened from a surplus of 2.6 Billion USD (3.8 per cent of GDP) in 2010 and

1.5 Billion USD (2.8 per cent of GDP) in 2011 to a deficit of over 4.8 billion ( 11 per cent of

GDP) in 2012. The current account balance deteriorated from a marginal surplus of nearly

214 million USD in 2011 (0.4 per cent of GDP) to a deficit of about US$ 6 billion in 2012 (13.3

per cent of GDP).

Based on the export performance for the first two quarters (January –June, 2013)

and pro-rating this for the whole year of 2013, merchandise exports are expected to

rebound by 79 per cent compared to 2012. Overall, the increase in merchandise exports is

largely attributed to non-oil exports such as gold. The trade balance is projected to narrow

down from more than 11 per cent of GDP in 2012 to 7 per cent of GDP by the end of 2013.

The narrowing of the current account deficit was made possible through limiting imports.


Table 5: Recent Trends in the Balance of Payments Million $USD unless otherwise specified

Item 2009 2010 2011 2012

(Estimate)

2013 (Projection)

Merchandise Exports 8,257.1 11,404.3 9,655.7 3,367.7 6034.4

Merchandise Imports - 8,528.0 - 8,839.4 - 8,127.6 - 8,160.4 -8691.0

Trade Balance -270.90 2,564.90 1,528.10 -4,792.70 -2656.6

Service Exports 392.0 254.1 838.5 1,166.5 651.2

Service Imports - 1,907.1 - 2,321.3 - 2,153.0 - 2,014.7 -1963

Service Balance -1,515.10 -2,067.20 -1,314.50 -848.20 -1311.8

Current Account Balance -1,786.00 497.70 213.60 -5,640.90 -3968.4

Nominal GDP (Million USD) 54683 66879 54918 42552 37851

As % of GDP

Trade Balance -0.5 3.8 2.8 -11.3 -7.0

Current Account Balance -3.3 0.7 0.4 -13.3 -10.5

With a drop in oil exports, foreign direct investment (FDI) is also believed to have

declined during the post-secession period, as most of the FDI is related to oil. Foreign

exchange reserves have been on the decline since the secession of South Sudan. As a result,

foreign reserves were depleted although the government has been making efforts to

compensate for the oil loss through expanding mineral exports such as gold. This depletion

resulted in the depreciation of the Sudanese Pound against the US Dollar with a parallel rate

emerging where the gap between the official and the parallel rate reached 60-70 per cent in

February 2012. The gap between the black market and official exchange rates has been

widening further after the adjustment in mid-2012. Foreign exchange rationing and

restrictions have started to emerge as a policy by the Central Bank of Sudan. This magnitude

of depreciation is likely to aggravate inflationary pressure driven by food inflation as most

food items are imported. However, the recent decline in general inflation, as noted in the

section in section 1.2 above, is not consistent with the widening gap between the parallel rate

and the official exchange rate, as such a trend is believed to aggravate inflation.


The Government managed to build up some reserves, based on grants and loans

mainly from Gulf States, China and India. According to an assessment by the IMF done in

2012 Sudan had 2.5 months of foreign exchange reserves to cover imports. The IMF

estimated that this remained the case for 2013 as well.

Outside the oil sector, Sudan’s economic growth is limited to rich non-oil

agricultural products for exports that accounted for around 5 per cent of export earnings

during the oil boom period (World Bank, 2009). Non-oil agricultural exports, such as Gum

Arabic, cotton and others have been on the decline following the advent of oil production at

the end of the 1990s. The major factors contributing to the insignificant share of non-oil

exports have been supply-side constraints; weak transportation systems; weak marketing

services of grading, packing and storing; and deficits in information, combined with

inadequate promotion efforts.

Challenges to the overall development of the trade sector are multi-varied, requiring

improvements in productivity, a reduction in the high cost of production and strengthening

of institutional capacities of human, physical and environmental resources. Macroeconomic

policies (fiscal and exchange rate) and marketing policies all remain to be reformed to

enhance the performance of the productive sector with a focus on agriculture. Thus,

diversification will be imperative for sustained growth and employment creation in the

future for Sudan. Sudan is endowed with rich natural resources, including oil, but also

natural gas, gold, silver, chromate, asbestos, manganese, gypsum, mica, zinc, iron, lead,


uranium, copper, kaolin, cobalt, granite, nickel, tin and aluminium, and has a significant

potential for growth in agriculture.

In the wake of the secession of South Sudan, Sudan is attempting to generate new

sources of export revenues from gold mining, while carrying out an austerity program to

reduce expenditure and thereby balance the budget. As noted already, the Government

has introduced measures to redress the external imbalance. The measures have been

aimed at narrowing the gap between the official rate and the parallel market rate of

exchange for which the premium on the parallel market has almost doubled since April

2012. Reforms aiming to adjust the exchange regime are well placed from a medium term

and long term perspective, provided these measures are accompanied by the right mix of

macroeconomic policies.


4- The External Debt Situation

Sudan is a heavily indebted country. Mid-2013, its existing external debt was estimated

to have exceeded 43 billion USD. It increased from 82.2 per cent of GDP in 2012 to 86.7 per

cent of GDP by the end of 2013.12 When South Sudan seceded, Sudan shouldered the entire

debt burden. This was agreed in September 2012 between the two countries “on condition

that Sudan obtains debt relief within two years through the Highly Indebted Poor Countries

Initiative”13. Known as “the zero option” under the agreement, after the two-year deadline

the division of liability for this debt would be up for review. As of February 2014, agreement on

the HIPC initiative is yet to be reached. The difficulty in reaching agreement has been

exacerbated by a mix of factors, including unmet conditions by creditor countries; US trade

sanctions; a need for unanimity on the principle of debt relief amongst the 55 members of the

Paris Club which holds about 75 per cent of Sudan’s debt; and continued tense political

relations with many of the key creditors.

Sudan’s debt problems can be traced to the 1960s, when the country embarked on

large-scale industrialization, financed in part by borrowing on non-concessional terms and

accompanied by heavy government regulation of the economy. According to the Central Bank

of Sudan, the existing debt stock, which stood at a little over 42 Billion USD by the end of

2012, has remained an important development challenge for Sudan. The debt stock, still on

the increase, reached nearly 43 Billion USD by June 2013. Given the significant drop in

merchandise export earnings from nearly 10 billion USD in 2010 to nearly 4 billion USD in 2012

(the bulk of which comes from oil), the ratio of debt service (both principal and interest) to

merchandise export earnings increased from about 4 per cent in 2010 to over 12 per cent of

merchandise exports in 2012 (EIU, October 2013).

For Sudan to embark on the road towards real recovery and development, it will be

important to make major progress on debt relief so as to address its unsustainable external

debt burden. While Sudan has had limited access to external financing from donors and

multilateral financial institutions over the last two decades, it has increased its ties with

emerging country partners, especially China, Malaysia and India. This has raised the possibility

of resource-backed loans for infrastructure and public services projects, as well as private

sector development.

The government has been pushing for large-scale debt relief as a reward for its

acceptance of southern secession. Following the submission of the Interim Poverty Reduction

12 IMF press release 4 October 2013 http://www.imf.org/external/np/sec/pr/2013/pr13387.htm

13 Sudan South Sudan Agreement September 2012

http://sites.tufts.edu/reinventingpeace/files/2012/10/Sudan-South-Sudan-Agreements-1.03.10.12-PO.pdf


Strategy Paper to the World Bank and IMF Executive Board in November 2012, the

Government through the Ministry of Finance and National Economy, has made repeated calls

to international partners claiming that Sudan had satisfied the conditions necessary for it to

obtain debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. The

Government of Sudan has a plan to undertake a fully-fledged Poverty Reduction Strategy

Paper (PRSP). It has not, however, yet made any formal announcement regarding the timing

of this.

The question remains as to whether, in line with the post secession agreement of

September 2012, South Sudan will end up taking on some of Sudan’s existing debt, if the two

sides fail to secure debt relief under the HIPC initiative for Sudan. In its 2012-2014 Country

Brief, the African development Bank said that Sudan had made “significant progress” towards

meeting the technical criteria for debt relief under the HIPC initiative.14 In a report in

December 2013, the World Bank struck a rather more cautious note. It said further reform

measures taken by the Sudanese government in September 2013, including the further lifting

of fuel subsidies and the unifying of the official and commercial exchange rates, “could

possibly form the basis for agreeing on a new SMP [Staff Monitored Program] with the IMF

and thus be a building block for the track record required for HIPC debt relief”15

In the meantime, while this debt issue remains unresolved, the Government will

continue to seek loans, notably from Gulf Arab states, as well as China and India, to finance

infrastructure and other development projects.

14

http://www.afdb.org/fileadmin/uploads/afdb/Documents/Project-and-Operations/2012-2014-Sudan-%20%20Country%20Brief.pdf par 5.1.8 15

World Bank, 19 December 2013, HIPC INITIATIVE AND MDRI STATISTICAL UPDATE , p. 8 http://www.worldbank.org/content/dam/Worldbank/document/Poverty%20documents/HIPC_Fall2013_EN_web.pdf

http://www.afdb.org/fileadmin/uploads/afdb/Documents/Project-and-Operations/2012-2014-Sudan-%20%20Country%20Brief.pdf

http://www.afdb.org/fileadmin/uploads/afdb/Documents/Project-and-Operations/2012-2014-Sudan-%20%20Country%20Brief.pdf

http://www.worldbank.org/content/dam/Worldbank/document/Poverty%20documents/HIPC_Fall2013_EN_web.pdf

http://www.worldbank.org/content/dam/Worldbank/document/Poverty%20documents/HIPC_Fall2013_EN_web.pdf


5- Poverty Status and Human Development

Since the secession of South Sudan in 2011, Sudan has become poorer, a reality

illustrated by its sudden drop on the Human Development Index. In 2010 it was ranked 154th.

Just two years later, in 2012, it was ranked 171st place. The cost of Sudan’s current economic

crisis, triggered by the loss of South Sudan, is being borne by those who can least afford it. In

the short term the poor, who make up half the population, are facing dramatic rises in food

prices and the daily cost of living. In the long term, the future development of the nation as a

whole is set to suffer because of cuts to both health and education budgets, and a reduction in

the funding of basic services - part of the austerity measures of 2012.

Notwithstanding the improved national economic performance during the oil boom

period, poverty remains deep and widespread in Sudan. According to the 2009 National

Baseline Household Survey (NBHS 2009) by the Central Bureau of Statistics (CBS), 46.5

percent of the population are below the poverty line. This means that nearly one out of two

people in Sudan do not have the necessary means to purchase the value of a minimum food

and non-food bundle in 2009. Those hardest hit by poverty are rural dwellers, particularly

women, as well as people internally displaced by conflict or natural disaster.

Poverty is significantly lower in urban than in rural areas, with only one out of four

urban dwellers considered poor, compared to nearly three out of five people in the

countryside. The poverty gap and the severity of poverty show similar patterns. Poverty levels

also vary greatly by state: the incidence of poverty ranges from a quarter of the population in

Khartoum, to more than two-thirds in North Darfur. Furthermore, poverty levels in the

country are aggravated by the large numbers of people internally displaced by conflict and

natural disasters who need to be supported in re-establishing sustainable livelihoods.

According to the additional poverty analysis work conducted in January 2012 based on

the 2009 National Baseline Household Survey, if per capita GDP increases or decreases by 1

per cent (inequality remaining constant), poverty head count decreases or increases by 1.5 per

cent. If inequality increases by 1 per cent, poverty head count increases by 0.58 per cent (if per

capita income remains constant). This indicates that economic growth is the key to poverty

reduction in Sudan. High growth elasticity of poverty means in times of positive economic

growth, it is possible to achieve faster reduction in poverty and, in times of crisis and declining

per capita GDP, poverty could sharply increase. Income inequality measured by the Gini

Coefficient was also computed based on the Sudan 2009 NBHS in this study. It was estimated

at 0.353 and is modestly high.


The deceleration of growth during the post-secession period (2011-2013) and the

significant increase in the cost of living, as reflected in the accelerating inflation rate, as well as

the lifting of subsidies on fuel, is expected to aggravate the poverty situation in Sudan.

There is already evidence that this has been happening. According to the Human

Development Report, Gross National Income (GNI) per capita in 2012 stood at 1848 USD (2005

PPP) for Sudan. Sudan’s rank based on GNI per capita was 152nd in 2012. This shows that

Sudan fares better on the income-based HDI than on the education and health HDI. According

to the UNDP HDR 2013, the HDI for Sudan was lower than the average for Sub Saharan

African (SSA) & Least Developed Countries (LDCs) for the period 2000-2013 (see graph

below). It is worth noting that even in the oil boom years; the HDI for Sudan has increased at a

rate of a little more than one per cent per annum. From 2000-2012, it rose from 0.364 in 2000

to 0.414 in 2012. According to the Human Development Report 2013, Sudan witnessed the

lowest annual average increase in HDI compared to the average for SSA (1.34 per cent per

annum) and all LDCs (1.7 per cent per annum) for the same period. The HDI for Ethiopia which

had a GNP per capita substantially lower than that of Sudan - US$1017 (2005 PPP) - in 2012

has increased at 3.1 per cent per annum during the same period (HDR, 2013). Ethiopia’s

performance has been consistently higher on the non-income HDI than on the income HDI.

Source: Global Human Development Reports


6- Employment/Unemployment Situation

A high unemployment rate in a country with a rising population that is increasingly

urbanized16, remains one of the Government’s major challenges. Unemployment is highest

amongst the youth, which is a cause for concern in a population where more than half the

population is under the age of 24.17 In the longer term, the diminishing funding of the

health and education sector will exacerbate the challenge of unemployment in Sudan. A

population deprived of education and healthcare means a population that is less fit and less

skilled – and ultimately one that will struggle to compete in a competitive global market.

Moreover, the continued “brain drain” means the availability of the professional skills

needed to build the capacity of the state is steadily diminishing. And this means that

addressing these problems will be even more of a challenge in the coming years.

According to the projection by the Central Bureau of Statistics based on results from

the 2008 Population Census, the population of Sudan is estimated to be 35.1 million in 2012

and expected to grow at an annual average rate of about 3 per cent to reach 42 million by

the end of 2018. The agriculture sector provides employment to more than 42 per cent of

the labour force, while the public sector and trade employ 19 per cent and 11 per cent,

respectively (African Economic Outlook, 2012). Some studies also indicate that an

estimated 60 per cent of the labour force is directly engaged in the informal sector.

Low rates of employment creation, increasing unemployment and low levels of

productivity remain at the core of high and persistent levels of poverty in Sudan. According

to a new survey report issued by the Ministry of Labour and Human Resources, overall

unemployment is estimated at 18.8 per cent in 2011. According to this new survey, the rate

of unemployment among the youth (15-24 year olds) is estimated at 33.8 per cent and

unemployment among adults (25 years and above) at 14.5 per cent.

Years of conflict and insecurity have taken a toll on employment rates. It has meant

skills have not been enhanced, and often been lost altogether; professional competencies

have not been built up; and population displacement and a lack of economic opportunities

have led to a “brain drain” that has deprived the country of essential capacity within the

public and private sectors alike. This is a real challenge for Sudan’s government in

managing its basic functions, including ensuring the delivery of services and taking

advantage of socioeconomic development.

16

http://www.tradingeconomics.com/sudan/urban-population-wb-data.html 17

http://worldpopulationreview.com/countries/sudan-population


Efforts to create employment opportunities and raising labour force participation

rates need to be urgently complemented by strengthening human resources. As

underscored in the Sudan IPRSP, creating employment also requires that the education and

knowledge systems produce the skills that employers need in order to be innovative and to

raise productivity. Thus, access to quality education and healthcare is crucial for enabling

more and more citizens to take advantage of the opportunities presented by a growing

economy, while adding value and escaping the poverty trap.


7- Private Sector Development and Business Environment

Sudan’s economic and political instability; its undeveloped physical infrastructure;

and its lack of adequately qualified manpower, as well as its reputation for having a corrupt

business environment, mean it struggles to attract either foreign or domestic investment.

The country ranks low in Transparency International’s most recent “Corruption Perceptions

Index” and is in the bottom quartile of the World Bank’s global “Doing Business” report for

2013.

The manufacturing and service sectors are the two key areas for modern private

business operators. According to the World Bank’s Sudan Private Investment Climate

Survey (PICS) of 2008, 36 per cent of Sudanese manufacturing firms are operating in the

food sector followed by non-metallic minerals sector (30 per cent). Those in the textile and

garment sectors accounted for less than 2 per cent of the manufacturing firms. The

majority of firms in the manufacturing sector have fewer than 20 employees. The PICS

highlighted the high concentration of manufacturing firms in certain areas, with Khartoum

state accounting for 75 per cent of manufacturing firms followed by El Gezira accounting

for 11 per cent, North Kordofan for nearly 8 per cent and Red Sea state for about 3 per cent

of the surveyed firms (World Bank PICS, 2008).

According to the PICS 2008, the private service sector is dominated by retail

services (about 80 per cent) and wholesale (12 per cent). The bulk of service sector firms are

small (96 per cent). The spatial distribution of service sector firms followed the same

pattern as that of manufacturing. As indicated in the PICS 2008, Khartoum state accounted

for about 86 per cent of service sector firms followed by El Gezira (7 per cent) and North

Kordofan (3 per cent). Red Sea state accounts for less than 1 per cent of service sector

firms.

Following the secession of South Sudan, efforts have been made to expand the

mining sector with particular focus on gold, in order to compensate for the oil loss in the

export sector. Some sources suggest that 500 mining licences were issued in late 2012.

Sudan is considered one of the most corrupt countries in the world to do business in.

It was ranked 173rd out of 176 countries and territories with a score of 13 out of 10018 in

18

A country’s or territory’s score indicates the perceived level of public sector corruption on a scale of 0 to 100, where a score of 0 means that a country or territory is perceived highly corrupt and a score of 100 means it is perceived as very clean. A country’s rank indicates its position relative to the other countries and territories included in the index.


Transparency International's 2012 Corruption Perceptions Index, which was released in

December 2012. In light of this, it is not surprising that the country is struggling to attract

major new investment in other sectors. Studies indicate that tackling corruption would

improve the business environment for private firms considerably.

According to the World Bank’s Doing Business (2013) report, Sudan was ranked

143rd out of 185 economies, three percentage points down from 2012.19 While the ranking

on the categories ‘dealing with construction permits’ and ‘starting a business’ improved by

8 and 6 points respectively, between 2012 and 2013, the deterioration in ranking on other

categories – such as ‘protecting investors’ (down 3 per cent); ‘getting credit’ and ‘trading

across borders’ (down 2 per cent each); ‘paying tax’, ‘enforcing contract’ and ‘resolving

insolvency’ (a drop of 1 per cent each) - outweighed these positive developments. Thus,

much remains to be done to improve prospects for private sector development, particularly

in protecting investors and property, getting credit, trading across boarders and paying

taxes.

A newly established Higher Council for Investment, headed by the President of the

Republic, is mandated to remove obstacles facing foreign investors in strategic sectors such

as agriculture. A new regulatory framework has been proposed to attract strategic Foreign

Direct Investment (FDI) from Arab states and other emerging country partners. These

reforms include amendments to the Investment, Companies, Custom, Taxation and Labour

and Migration Acts, as well as the establishment of a new arbitration entity for resolving

disputes.

19

Economies are ranked on their ease of doing business, from 1 to 185. A high ranking on the ease of doing business means the regulatory environment is conducive to the starting and operation of a local firm. This index averages the country’s percentile ranking on 10 topics.


8- Conclusions & Observations

1) Sudan needs to diversify its economy: The transition from reliance on an oil-led

economy to the non-oil productive sector is yet to come to fruition. This calls for a

diversification in the potential sources for growth (such as agriculture and

manufacturing) through the development of appropriate macro policies to enhance the

capacity of the non-oil productive sectors. The hitherto fast expansion of the service

sector relative to the productive sectors (agriculture and industry) is almost always a

recipe for inflation. The Government has to pursue the right mix of macroeconomic

policies that help to stimulate the non-oil productive sector in general and the

agricultural and agro-processing sectors in particular. This would help Sudan to

improve food supplies and diversify and expand its exports base in the coming period.

2) Sudan needs to increase its level of development expenditure: Even with the

available fiscal resources (revenue), allocation between recurrent and capital

expenditure is highly lopsided in favour of the former. Such a low level of development

expenditure (hovering around 2 per cent of GDP on average in recent years) is

detrimental for sustaining growth and achieving the MDGs and Human Development.

Moreover, transfers from the central government to the states need to be protected

from budget cuts to ensure equity and service delivery to the grass-root population. It is

important that the government pursues formula based, transparent and equitable inter-

governmental fiscal transfer systems for pro-poor growth, poverty reduction,

achievement of MDGs and human development in Sudan.

3) Sudan needs to narrow its fiscal deficit for macroeconomic stability: The widening

fiscal deficit seems to be increasingly financed from domestic banking sources

(monetization of the deficit-money printing). This has aggravated inflation which is a

threat for macroeconomic stability. But the Government’s choices have been limited

because of its lack of access to other financing options from official external financing

sources from traditional donors that could fund development projects. This is a

consequence of existing sanctions and the unsustainable external debt burden. Prudent

fiscal policy aimed at rationalization of spending from non-priority sectors to poverty-

oriented sectors is timely.

4) Sudan needs to diversify its export base: Sudan’s external sector has structural

problems following the shift in emphasis from agricultural exports to oil that resulted in

the decline of non-oil agricultural exports during the oil boom period (until secession of

South). This needs to be addressed through a holistic approach of promoting


diversification towards non-oil exports, enhancing private investment, overhauling the

exchange rate system and creating a business environment conducive to private sector

development.

5) Sudan’s exchange rate needs to be better managed: The gap between the parallel

and official exchange rate has still been widening. This is a cause for concern as it may

lead to a further depreciation of the official exchange rate which aggravates inflationary

pressure. Addressing the supply side of the economy through the revitalization of the

agricultural sector (food crops) coupled with prudence in exchange rate management

would help stabilize the economy.

6) Sudan’s slide down the Human Development Index needs to be halted. The

downward trend in recent years of Sudan’s global ranking on the Human Development

Index (HDI) is a cause for concern. Moreover, Sudan fares worse on the non-income

dimensions of the HDI than on the income dimensions. Inequality is relatively high and

could be a constraint for growth to reduce poverty. Expanding access to basic services

and infrastructure along with improving the quality of these services is an important

area of focus for improving the status of Human Development in Sudan.

7) Sudan needs to improve and streamline its revenue collection systems: Despite the

recent increases in tax rates, the revenue effort (domestic revenue generation capacity

measured by domestic revenue to GDP ratio) in Sudan is low even compared to its

comparators in Sub-Saharan Africa (SSA). It is of paramount importance for the

Government to consolidate its revenue mobilizing effort through streamlining revenue

sources, suspending the various exemptions, and improving tax administration

capacity.

8) Sudan needs a holistic policy approach to address the increasing levels of

unemployment: Overall the unemployment rate is high and on the increase in Sudan.

Unemployment among youth is particularly high (about 34 percent in 2011). A holistic

and pro-active approach needs to be pursued to address the challenge of

unemployment. The approach would include, inter alia, the creation of an enabling

business environment for private sector operations, expansion of technical and

vocational education/training programs, improvement of the security situation,

macroeconomic stability, and access to finance to small and medium-sized businesses.

9) The government of Sudan needs to find ways to halt the ‘brain drain’ in order to

enhance its own human capacity: Limited institutional and human capacity has been

aggravated by a ‘brain drain’ linked to conflict and insecurity, population displacement


and lack of economic opportunities. Sudan’s public administration therefore faces

serious capacity constraints in managing respective functions, including the delivery of

basic services and the promotion of socioeconomic development. A weak and less

efficient public sector is an impediment to private sector operations. Thus, it is of

paramount importance that coordinated donor support focuses on enhancing the

implementation capacity of public and private sectors alike.

10) Sudan needs to improve its socioeconomic data base: Access to up-to-date and

consistent time series data/information on key macroeconomic variables is a real

challenge in Sudan as experienced during the preparation of this Report. It is important

that the pertinent macro institutions (such as the Ministry of Finance and National

Economy, Central Bank of Sudan, Ministry of Labour And Human Resources, etc.)

provide up-to-date and consistent data of national scope on key macroeconomic

variables that will enable international organizations and non-state actors at large to

have a better understanding of the macroeconomic situation in Sudan.

Source: Compiled from various sources (World Bank, IMF, Economics Intelligence Unit, Government official sources). Data up to June 2011 are for the united country (Sudan and South Sudan); those from July 2011 onwards are for Sudan only. Sudan lost 20% of its population and 75 percent of its oil after the secession of South Sudan in July 2011.N/A= Not Available; E=Estimate; P= Projection

Item

Years

2004 2005 2006 2007

2008

2009 2010 2011 2012

(E) 2013 (P)

Population (Million) 27.4 28.2 29.0 29.7 30.6 31.6 32.6 33.7 35.0 36.4

GDP @ Const. Prices (Million SDG) 18866 20122.6 21662.4 22916.0 32797.8 24868.6 26482.7 26729.2 27092.7 27800.2

Agriculture Share in GDP (%) 34 33.2 31.8 35 35.7 33.9 33.9 34.1 34.1 33.7

Industry Share in GDP (%) 21.4 22 23.9 22.7 25.2 22.6 22.6 18.5 19.5 20.4

Services Share in GDP (%) 44.6 44.8 44.3 42.2 39.1 43.5 43.5 46.5 46.5 46.5

Real GDP Growth Rate (%) 5.1 5.5 9.9 10.9 6.4 4.5 5.0 2.5 1.4 2.6

Real GDP Per Capita(USD) 769.1 996.3 1253.3 1517.3 1401.8 1286.7 1533.9 1231.3 1185.3 1031.4

Nominal GDP (Million SDG) 68698.7 85707.1 98718.8 114017.5 127746.9 139386.5 160646.5 186556.3 173995 218905

Inflation Rate (%) 9.5 8.6 7.2 6.2 14.3 11.2 13.0 18.1 42.1 25.6

Nominal GDP (Million USD) 26533 35270 45493 56444 58033 54683 66879 54918 42552 37851

Exchange Rate (SDG/USD) 2.6 2.4 2.2 2.0 2.1 2.3 2.3 2.7 3.6 5.8

Unemployment Rate (%) 16.3 16.2 17.1 20.2 16.8 17.3 17.8 18.8 N/A N/A

Total Revenue 13223 11888 15375 18136 24708.2 19166 23536 21458 22168 25211

Oil Revenue 4131 5418 7413 9924 15996.7 9392 12082 6507 4241 6000

Total Public Expend. 10852 13771 17096 20806 22440.1 23852 24162 28578 26272 30822

Capital (Development) Expenditure 2475.14 3415.56 4031.92 3705 3720.04 2826 4162 3615 3550 4187

Development Exp. as % of Total Public Exp.

22.8 24.8 23.6 18 16.5 14.6 13.6 6.8 12.2 N/A

Development Expenditure as % of GDP 3.6 4 4.1 3.3 2.7 2.2 2.7 2.5 2.0 1.9

Total Current Expenditure as % of GDP

12.1 12 13.3 15.1 16.2 16.7 12.9 17.0 13.1 12.2

Fiscal Balance/Deficit as % of GDP 2.2 2.2 1.8 2.4 -4.9 -2.4 -2.0 -4.0 -1.7 -1.6

Debt Stock (Million USD) 26,784 27,006 28,457 31,873 33,542 35,687 37805 39,800 42,047 42,921

Debt Stock as a Ratio to GDP (%) N/A N/A N/A 67.1 58.1 65.3 56.5 70.3 93.3 108.5

International Reserves(Million USD) N/A N/A 1660 1378 1399 897 843 295 298 313

Annex Table 1: Time Series Data Base on Selected Macroeconomic Indicators: Values in Million SDG, unless otherwise specified


Additional note on data and data sources:

Data on Revenue and Expenditure (2004-2008) are based on the Report “The Sudan Economy in Figures 2000-2010”, General Directorate of Planning and Policies, Ministry of Finance and National Economy;

Data on Sector shares (% of GDP) and real GDP growth rate (2004-2008) are based on the report ‘The Sudan Economy in Figures 2000- 2010’, General Directorate of Planning and Policies, Ministry of Finance and National Economy;

Figures on debt stock are from the Central Bank of Sudan.

Population for the period (2004-2007) for a united Sudan, and for the period (2008-2013) for the Republic of Sudan (after the secession), are from the Central Bureau of Statistics;

Figures used in the analysis in the tables of the main body of this paper and the Annex are checked for consistency;

Data on GDP is at constant and current market prices (Million SDG) and checked for consistency with the series from the Central Bureau of Statistics.


Annex 2: Economic Reform Package, June 2012

Source: IMF Report December 2012


References

African Development Bank (2012), African Economic Outlook 2012, Promoting Youth Employment Central Bureau of Statistics (2008-2013), Monthly Consumer Price Index, Various issues Economist Intelligence Unit (2013), Sudan Country Report, various monthly issues International Monetary Fund (2013), Update to the International Community, EU Office, 11 April 2013 Ministry of Finance and National Economy (2012), Summary of the Three-Years Program for Sustainability of Economic Stabilization Program (2012-2014) Ministry of Finance and National Economy, Budget Documents, 2011-2013 National Population Council (2012), Millennium Development Goals (MDGs): Status, Challenges & Prospects for Sudan, paper prepared through UNDP support for Istanbul International Economic Conference on Sudan Siddig, Elfatih (2012), Review of a macroeconomic paper for Sudan Economic Conference in Istanbul-Turkey, Paper Prepared through UNDP support for Istanbul International Economic Conference on Sudan UNDP (2013), Human Development Report 2013, The Rise of the South: Human progress in a Diverse World UNDP Sudan (2012), Sudan: Land of Challenges and Opportunities: Seeing Hope in the Horizon, Background Paper prepared for Istanbul Conference on Challenges and Opportunities of Private Investment in Sudan UNDP Sudan (2013), Sudan Views: Contribution to the post-2015 Global Development Agenda World Bank (2009), Sudan Private Investment Climate Assessment, December 2009 World Bank (2011), Sudan Country Economic Brief, Poverty Reduction and Economic Management (PREM) Unit, Africa Region, February 2011

March 2014 - Khartoum, Sudan - UNDP€¦ · Gama'a Avenue, House 7,Block 5 P.O.Box 913 Postal Code...

Documents

Transcript of March 2014 - Khartoum, Sudan - UNDP€¦ · Gama'a Avenue, House 7,Block 5 P.O.Box 913 Postal Code...