Sudan needs to implement wide economic reforms to weather security deterioration

03 September 2010

Editor’s note: Sudan, which is sitting on large oil reserves, has started to experience sound economic growth in 2010 after a period of slowdown in 2009. The International Monetary Fund (IMF) expects the country to achieve growth of 5.5 percent this year, up from 4.5 percent last year. Bank Audi released a comprehensive report on the performance of the Sudanese economy. The following are excerpts of this report.

Highlights

The Sudanese economy, which had considerably slowed down in 2009, started to recover again this year.

According to IMF estimates and forecasts, real Gross Domestic Product (GDP) growth is estimated to have dropped from 6.8 percent in 2008 to 4.5 percent in 2009 but is expected to rise to 5.5 percent in 2010 and to remain in the 5 to 6 percent range during the next five years.

Real sector indicators reported mixed performances.

Agriculture, an important source for non-oil growth and employment, seemed to have performed well below its potential in 2009 but improved relatively in 2010.

Cement production reported an outstanding growth in 2009 and over the first few months of 2010, underpinning the buoyant construction sector activity. Trade and services indicators were uneven.

Monetary conditions in Sudan were marked over the past year by a noticeable expansionary policy, a relevant growth in broad money supply and a double-digit level of inflation.

Broad money supply (M2) expanded by 20.4 percent in 2009 and by a yearly 29.0 percent up to June 2010. Inflation reported an average of 11.3 percent over the past year.

Within the context of the central bank’s massive intervention on the foreign exchange market to support the national currency, the central bank’s gross official reserves fell from $1.4 billion at end-2008 to $1.1 billion at end-2009, accounting for 8.7 percent of the broad money (M2) and covering a mere 1.5 months of imports.

At the public finance front, a net deterioration was observed in 2009, followed by a relative improvement in the first few months of 2010.

The central government deficit to GDP had widened from 1.0 percent in 2008 to 3.4 percent in 2009, along with a surge in debt ratios.

The IMF forecasts a government deficit of 3.4 percent of GDP in 2010.

The Sudanese banking sector, which remains to date somewhat narrowly integrated with global financial markets, managed to somewhat escape direct global financial crisis spillovers, and posted satisfactory performances until end-June 2010.

Measured by total assets of banks in Sudan, banking activity grew by a yearly 23.9 percent up to June 2010 (16.6 percent in full-year 2009), with deposits and financing activities growing by 29.3 percent and 23.6 percent respectively.

Challenges facing the Sudanese economy remain notable. Among those, we mention the need to enhance efforts aimed at creating fiscal room and meet large development needs as well as challenging politico-economic conditions. Any wavering in structural reforms could jeopardize the major gains that have been achieved thus far and would critically put the country’s economic outlook at stake.

Conclusion

Within the context of a slow but gradual recovery, economic conditions in 2010 are expected to be relatively better than in 2009.

The 60 percent surge in average oil prices in the first half of 2010 relative to the corresponding 2009 period supports such an improvement.

According to IMF forecasts, Sudan’s real GDP growth is expected to rise to 5.5 percent in 2010 and to remain in the 5 to 6 percent range during the next five years.

While oil output is projected to moderate, such growth prospects are contingent on strong non-oil growth, ultimately leading to a more diversified sectoral structure for the Sudanese economy at large.

There is indeed a growing need for economic diversification away from oil which today accounts for about 95 percent of Sudan’s exports and more than half of government revenues.

With oil production expected to steadily decline below current levels after 2013, a steady improvement in the non-oil primary balance is needed over the medium term.

Volatile oil revenues and a deceleration in oil production in the coming years highlight the need to maintain prudent policies and move ahead with structural reforms to sustain growth.

It is within this context that Sudanese authorities have recently embarked on an overall program aiming to invest $5 billion through 2012 to develop the agricultural sector whose potential remains largely untapped, with a mere 15 to 20 percent of Sudan’s arable land being under cultivation.

The government plan focuses on attracting strategic foreign investors by providing better infrastructure, removing structural rigidities and distortions, liberalizing investment and the labor markets and reforming the legal system, including the enhancement of property rights and land-leasing arrangements.

However, challenges facing the Sudanese economy remain quite considerable.

The country needs to enhance its efforts aimed at creating fiscal room and meeting development needs as well as its obligations under the peace agreements.

A medium-term fiscal adjustment strategy is key. Fiscal prudence is a must for containing inflation and maintaining macro-economic stability at large.

According to the recently released IMF Article IV Consultation mission report on Sudan, fiscal adjustment needs to focus on widening the tax base given the narrowness of such a base on one hand and the rigid expenditure profile on the other hand.

Rebuilding foreign-exchange reserves also rise among the top adjustment priorities.

Although oil prices rose considerably in the second half of 2009 and the first half of 2010, foreign reserves remain relatively low mainly due to considerable sales of foreign exchange on behalf of monetary authorities.

Although this has led to limited exchange rate fluctuations so far, the IMF believes that limiting sales of foreign exchange and allowing for greater exchange rate flexibility is needed to mitigate the impact of external shocks and build foreign exchange reserves to a more comfortable level.

In parallel, strengthening the financial sector is a must for any structural adjustment scenario. The renewed emphasis on increasing enforcement of prudential regulations by taking corrective actions in case of shortfalls is an important development in that direction.

But there is a need for more measures to reduce banks’ non-performing loans and increase provisioning and capital.

It is important as well to intensify efforts for the enhancement of financial intermediation through putting in place an appropriate legal and supervisory framework for the development of non-bank financial institutions at large.

Finally, when addressing Sudan’s economic prospects, a number of downside risks come to the fore.

Among the most important of such risks arise from the difficult political and security situation, the high dependence on oil and the debt overhang with related public finance vulnerabilities.

Those risks are exacerbated by the large and complex challenges linked to the slow recovery from the global crisis, the projected decline in oil receipts in the medium term and the large development needs.

As such, any wavering in structural reforms, in response to deterioration in the political or security situation, would jeopardize the major gains achieved thus far and would critically put the country’s economic outlook at stake.

Copyright The Daily Star 2010.