Africa > North Africa > Sudan > Sudan Economy Profile 2011

Sudan: Sudan Economy Profile 2011


Sudan is the third largest oil producer in sub-Saharan Africa after Nigeria and Angola. Oil remains the main driver of growth although agriculture still accounts for more than one third of GDP and nearly two-thirds of employment. Oil accounted for 22% of GDP in 2008 and oil revenue has contributed greatly to the reconstruction of the economy in the aftermath of the civil war, especially in enabling the government to develop the road and energy infrastructure. Apart from this spending, there is no other programme of large scale distribution of oil revenues across the states nor focus on the poor. Sudan has been adversely affected by the global economic slowdown and the decline in international oil prices since the last quarter of 2008. Oil revenue dropped by about 21% in 2009 from USD 11.1 billion in 2008 but it is expected to increase to USD 12.4 billion in 2010 as prices recover.
GDP growth declined to 4.9% in 2009 from 7% in 2008 and is projected to increase to 5.4 percent in 2010. Foreign exchange reserves fell to less than two weeks of import cover in the last quarter of 2009. The sharp drop in oil revenues has put significant pressure on public finance, reducing the government’s overall resources. Inflation continued to ease, to 10.5% in 2009 from 14% in 2008 due to the downturn in world commodity prices, fiscal retrenchment and improved agricultural production. The inflation rate in 2009 was, however, higher than anticipated, perhaps due to the larger than expected depreciation of the local currency and its effect on domestic prices given the high import-content of domestic expenditure. The inflation rate is projected at about 9.1% in 2010 thanks mainly to low food prices and tight monetary policy.
According to the Ministry of Energy and Mining, oil reserves increased to 2.35 billion barrels by January 2008. Production in 2009 reached 490 000 barrels per day, slightly higher than the 475 000 bpd in 2008, and it is expected to reach 600 000 bpd in 2011. Sudan’s oil exploration prospects are positive based on a high success rate of 58 productive wells out of 400 drilled so far.
In addition to lower oil prices, the global crisis adversely impacted Sudan through lower FDI flows. As oil production increased in 2009 in terms of volume, the non-oil sector slowed owing to the global situation and restrictive domestic demand policies aimed at reducing import demand in the face of the massive decline in foreign exchange reserves. The services and agricultural sectors are the most affected by the decline in FDI inflows. Agricultural policies in 2009 remained focused on achieving food security and self-sufficiency. As part of its demand management policies, the government aims to reduce food imports and encourage demand for local food products. With appropriate support for farmers to overcome supply constraints, this could stimulate domestic investment and production in agriculture.
The depreciation of the Sudan Pound against the US dollar and increased flexibility of the exchange rate since the last quarter of 2009 is expected to enhance the competitiveness of agriculture in domestic and foreign markets. The government continued to implement reforms to improve the investment climate and attract more FDI, especially in agriculture. These include liberalising investment and the labour market, easing structural rigidities, reducing the cost of doing business, reforming the legal system and providing adequate infrastructure. In the World Bank Doing Business 2010 report, Sudan ranked 154 out of 183 economies despite government reform efforts.
Sudan’s internal and external balances deteriorated in 2009 as a result of the sharp drop in oil revenue, which was 6 percentage points of GDP lower than in 2005-08. As a result, the budget deficit increased to 3.7% of GDP in 2009 from 1.4% in 2008 but it is projected to narrow to 2.8 % in 2010. Lower oil prices and central bank intervention to defend the exchange rate and reduce import growth contributed to the deterioration in the external balance. The current account deficit increased to 9.2% of GDP in 2009. Sudan needs to ensure sustainability in its internal and external deficits in view of the depletion of its foreign reserves, heavy external debt and declining ODA receipts. Policy options may include widening the tax base and improving tax and public finance management in general, curbing current expenditure and maintaining exchange rate flexibility.
Oil production and to some extent the service sector remain the main drivers of growth in Sudan. Concentration of investment in the oil and the urban-based services sector exacerbated inequality in income distribution across the states and between rural and urban areas. In particular, the conflict and post-conflict regions of Darfur, and the marginalised areas of Southern Kordofan and Southern Blue Nile states remain disadvantaged in terms of infrastructure and development. This has fuelled discontent and political tensions and despite rapid increases in per capita income, Sudan continues to be one of the least developed and vulnerable states. Increasing investment to directly help the poor, especially in agriculture, and reducing income inequality while maintaining sound internal and external balances are the key economic and social policy challenges facing Sudan in the medium-term. Key current political issues include settlement of the conflict in Darfur, recurrent disputes over the implementation of the Comprehensive Peace Agreement (CPA) between North and South Sudan, and the run up to general elections in April 2010.


Recent Economic Developments and Prospects

GDP growth declined to 4.5% in 2009 from 7% in 2008 but is projected to rise to 5.4% in 2010. Domestic consumption and investment expenditure underpinned growth, in part offsetting lower oil earnings. There was a notable decline in FDI inflows owing to the global financial and economic crises. Increased oil production and prices, and expected increases in FDI and domestic demand are the main factors for growth in 2010.

To confront the challenges and uncertainties posed by the global economic slowdown, the authorities took measures to attract more FDI, especially in oil refining, and at the same time diversify away from dependence on oil exports. Oil output is being increased, mainly from blocks 3 and 7, run by a consortium headed by China National Petroleum Corp. An accord to be finalised with China will double capacity at the Khartoum refinery. Besides the opening of the new Qamari oil field in mid-2009, Sudan is due to start its first offshore drilling operation in the Red Sea in early 2010.

The contribution of agriculture to GDP was 29.3% in 2008, up from 28.9% in 2007 thanks to adequate rainfall and increased government support through the Green Mobilisation Program 2008-2011. The programme started in 2008 with planned expenditure of USD 5 billion and aims to revitalise agriculture and accelerate diversification away from the oil sector. The 2010 budget exempted agriculture from new taxes and custom duties. The first Forum on Agricultural Cooperation between China and Sudan in early 2009 saw the signing of eight agreements and inauguration of the pilot Agricultural Technology Demonstration Centre in Khartoum. The government has ended the state monopoly over exports of gum Arabic which should benefit a large number of small producers in rural areas. Livestock exports rose sharply from early 2009 after the lifting of a ban imposed by Gulf countries following the spread of Rift Valley Fever in Sudan and other countries in the Horn of Africa.

The government of South Sudan launched a special agricultural investment programme to attract investors, including 8 to 32-year renewable land leases, tax-free imports of tractors, seeds and other farming materials.

The inauguration of the first stage of the Marawi dam in early 2009 with a design capacity of 1 250 Megawatts boosted electricity output and allowed the government to lower prices, with reductions planned of 30% for agriculture and 25% for industry and domestic consumption.

The share of the mining and quarrying sub-sector, namely oil and gold, increased to 15.7% of GDP in 2008 from 15.2% in 2007 whereas manufacturing declined to 7.6% from 7.7%. The Vietnam National Oil and Gas Group (Petrovietnam) and the Sudan National Oil and Gas Corporation (Sudapest) signed a co-operation agreement to increase investment in the exploration and exploitation of oil and gas in Sudan. The Ministry of Energy and Mining has awarded the Dan Fodio Corporation and the Chinese Poly Technology Company a license for exploration and mining in the rich gold deposit Gibait area in the Red Sea State. Total gold output was 2 300 kilograms in 2008 from eastern Sudan mines run by Ariab, the Sudanese-French company.

The Peace Cement Plant began production in early 2009 while French cement maker Lafarge SA is investing USD 800 million, with production planned to start this year. In the consumer sector, Rashidi El-Mizan, a leading confectionary brand in the Middle East, has signed a deal to acquire 75% of Al-Musharraf, one of Sudan's largest producers of sweets, biscuits and flour.

The share of services declined slightly in 2008 to 4.4% GDP despite active telecommunications and finance sub-sectors. Following the entry of Kuwait-based Zain in 2008, South Africa’s MTN has set up a mobile network in Yirol West County (YWC) of Lakes State in South Sudan. Sudan Tecommunications Company (Sudatel) further expanded its cross-border operations and inaugurated a new corporate site in Senegal after a successful USD 200 million investment in mobile phone services in Mauritania. Ivory Bank moved its headquarters from Khartoum to Juba following a pledge of USD 11 million in financing from the government.

Investment and domestic consumption are the key drivers of growth in Sudan with their respective contributions to GDP growth of 0.4 and 2 percentage points in 2009, projected to rise to 1.5 and 4 percentage points in 2010. Public investment fell in 2009 as the global crisis cut government revenue but it is expected to register strong growth in 2010 and 2011. Private investment continued a major contributor to GDP growth, focusing on the agriculture and service sectors. The contribution of private consumption to GDP growth, as opposed to net exports, remained positive and strong at 2.5% in 2009.


Macroeconomic Policy

The Comprehensive Peace Agreement (CPA) and the Joint Assessment Mission (JAM) will continue to guide Sudan’s economic policy through 2011. The CPA-JAM’s framework and the Poverty Reduction Strategy Paper (PRSP), finalised in December 2009, set general guidelines for post-conflict reconstruction efforts. These focus on good economic governance and macroeconomic stability as well as the need to accelerate growth to help the poor, promote sound oil sector management, maintain sustainable internal and external debt levels, and to enhance decentralisation and build institutional capacity. They also include measures to promote monetary and financial policies that are conducive to growth and create an enabling environment for private sector development.

Fiscal Policy
The main aim of fiscal policy is to help achieve high growth rates especially in the non-oil sector, improved distribution of the benefits from growth and efficient allocation of public expenditure to enhance progress towards achieving Millennium Development Goals (MDGs). In 2009, fiscal policy also had to help mitigate the economic and social impact of the global economic crisis through increased mobilisation of revenue, rationalisation of public expenditure and effective use of external aid.

In 2009, despite the sharp fall in oil earnings, revenue amounted to 97.4% of budgeted revenue, mainly due to a doubling of grant and aid flows as well as to unexpected increases in income from non-oil sources. Actual public expenditure in 2009 was 89% of planned expenditure and deficit financing was 31% less than planned.

Despite the fall in oil revenue, the 2009 budget was expansionary with agriculture receiving the largest share at 10.3%, followed by road and transport infrastructure with 10.1%, energy and mining 8.1% while 7.1% went for education and 3.2% for health. The fiscal deficit increased to 3.7% of GDP in 2008 but it is projected to decline to 2.8% in 2010. Most of the increase in the deficit was financed through domestic borrowing. The medium-term fiscal policy response to the global crisis and the squeeze in foreign financing was to increase tax revenue.

Opportunities to increase revenue include improving tax collection through revision of VAT exemptions, collection of tax arrears and enhancing the performance state controlled bodies. Expenditure reform, especially through adjustment of public spending on goods and services, is also required. Better prioritisation and targeting of capital expenditure and social spending will enhance growth and reduce the impact of expenditure cuts on the poor.

Monetary Policy
Reducing inflation to single digits and a flexible exchange rate to rebuild foreign reserves were the main objectives of monetary policy in 2009. Monetary policy also included measures to reduce the growth of non-performing loans and domestic arrears, and to increase credit to the private sector. Monetary and financial instruments were used to compliment fiscal measures aimed at promoting private investment and private sector development as an engine of sustainable growth and increased employment for poverty reduction. In 2009, consumer price inflation declined to 10.5% from 14% in 2008, due mainly to lower global prices and increased domestic production, especially of agricultural and food items. Inflation is projected to decline further to 9.1% in 2010.

Broad money supply grew 20% in 2009 after 21% in 2008 and credit to the private sector increased by 22%. The slower growth in broad money supply in 2009 was driven by the fall in foreign reserves as a result of lower oil income. Continued efforts to clear the government’s domestic arrears as well as to rebuild foreign reserves should allow for higher growth in bank credit to the private sector in 2010.

The conduct of a prudent monetary policy is a challenge given uncertainties in oil prices, foreign reserves and exchange rate movements, disbursement of aid and inflows of FDI. The Bank of Sudan continues to focus on liquidity management. Although the central bank often intervenes in the foreign exchange market to sterilize liquidity for inflation control, it has kept intervention to the minimum in the fallout from the global economic slump. Lower world food prices and the relative slowdown in domestic demand growth have eased concerns about inflation. However, selective foreign exchange control and allocation measures are in place to safeguard against destabilising exchange rate movements and the impact on prices from the depreciation of the Sudanese pound.

External Position
Oil accounted for over 90% of Sudan’s merchandise exports in 2009, down from more than 95% in 2008. The current account deficit widened to 9.2% of GDP in 2009 from 9.1% in 2008 but is projected to decline to 8.5% in 2010. Sudan had a trade surplus in 2009 but a large deficit in factor income and services due to profit repatriation, especially by foreign oil firms. The country’s net international reserves position deteriorated in 2009 to only 0.8 months of imports compared to 1.4 months in 2008. In addition to the fall in oil prices and export revenue, sustained high import demand and government efforts to defend the exchange rate during the first half of 2009 contributed to this deterioration.

Sudan’s stock of public and publicly guaranteed external debt was estimated at USD 34 billion in 2009. Most of this debt represents arrears to Paris Club and non-Paris Club creditors, with some new drawings from Arab multilateral and bilateral creditors as well as India and China. Notwithstanding the improvement of Sudan’s debt servicing capacity since the exploitation of oil resources in 1999, the country is not expected to achieve a sustainable external debt position without generous debt relief. Continued debt repayments and compliance with an IMF monitored programme are expected to help Sudan to reach the Heavily Indebted Poor Countries (HIPC) decision point. The sharp drop in export receipts prompted the government to ask major creditors to reschedule debt service due in 2009 and some have expressed a tentative willingness to reschedule Sudan’s obligations for a year or two while negations continue with others.


Structural Issues

Private Sector Development
Sudan has kept up efforts to create an enabling environment for private sector development, with a special focus on attracting private FDI in agriculture. Despite these efforts, Sudans ranking in the World Bank Doing Business report for in 2010 fell to 154 from 149 out of 183 countries. Sudan posted a marginal improvement in labour but fell back on ease of starting a business, getting a construction permit and credit. Private sector access to long-term loans remains extremely limited.
Following the establishment of the central bank’s Microfinance Unit with capital of USD 40 million in 2007, all commercial banks were required to set up microfinance offices at their headquarters and allocate 12 percent of total loans to such lending operations by 2009. The central bank of South Sudan established a Private Sector Development project in 2009 with funding of USD 20.2 million fund to stimulate private businesses in the south. To promote entrepreneurship, the Ministry of Commerce and Industry has trained prospective entrepreneurs, offering them a USD 20 000 grant through a “Business Plan Competition.”
The banking sector showed modest growth. Although the Sudanese banking sector is small and isolated from the global financial system, there was a concern that the global financial crisis might negatively impact domestic credit through liquidity restrictions imposed by the headquarters of foreign-owned banks.
Other Recent Developments
The government of Sudan undertook several important reforms in 2009 to improve the performance of the banking sector. Restructuring of the El-Nilein Bank and Omdurman Bank was completed by the end of 2009. Non-performing loans amounted to 26 percent of total loans in 2009. On the fiscal side, the government announced several tax and other reforms aimed at promoting private investment and diversification of economic activity in the aftermath of the global recession through 2011. These reforms included a comprehensive tax review to expand the non-oil tax base, the introduction of federal custom and excise duties in the south, and measures to improve revenue mobilisation and administration in order to reduce tax evasion and improve the targeting of government expenditure.
Other Recent Developments
The government of Sudan undertook several important reforms in 2009 to improve the performance of the banking sector. Restructuring of the El-Nilein Bank and Omdurman Bank was completed by the end of 2009. Non-performing loans amounted to 26 percent of total loans in 2009. On the fiscal side, the government announced several tax and other reforms aimed at promoting private investment and diversification of economic activity in the aftermath of the global recession through 2011. These reforms included a comprehensive tax review to expand the non-oil tax base, the introduction of federal custom and excise duties in the south, and measures to improve revenue mobilisation and administration in order to reduce tax evasion and improve the targeting of government expenditure.

Public Resource Mobilisation

Sudan’s ratio of tax to GDP averaged 6.3% during the period 1999-2008, which is weak relative to its tax capacity, and dropped by about 0.3 percentage points in 2009 compared to 2008.

Total tax revenues covered about 41% of total expenditure during 1999-2008 but showed an overall declining trend -- from 67% in 1999 to 37% in 2009. This drop in yield reflects large cuts in agricultural production and sales tax and other levies.

The ratio of direct tax to total tax revenues dropped from 23% in 1999 to 12% in 2008, averaging 19% during this period. The ratio of tax revenue to total revenue declined from 70% in 1999 to 30% in 2008. This was partly due to the abolition of some taxes, tax evasion due to weaknesses in tax administration and widespread tax exemptions. The personal income tax base is narrow --many government employees and private business workers are exempted from personal income tax.

Sudan has implemented a number of tax measures since 2000 including introduction of VAT, a petroleum excise tax and improvement of its tariff structure. Planned tax reforms may include replacement of the Investment Encouragement Act (IEA) of 1999 with a single profit tax, reform of the personal income tax regime and rationalisation of VAT and custom duty exemptions.

Tax administration is the responsibility of the Ministry of Finance and National Economy, the Government of South Sudan and State governments. The Directorate of Budget and Finance and the Directorate of Development manage revenue collection, expenditure commitments, cash releases and appropriation and development expenditure. The CPA and the Interim National Constitution govern oil revenue sharing between the national government and the GSS. The design of tax policy is stipulated in the Interim National Constitution of 1998 and the CPA.

Sudan has a history of decentralisation but fiscal decentralisation remains limited. Most state and local authorities lack the technical skills and information technology needed to mobilise revenue from local sources and continue to depend heavily on subvention by the central government.

The major challenges facing Sudan’s tax system are exemptions, rationalisation of VAT and custom taxes, and tax evasion. Low tax compliance is due to the large and growing informal sector and unrecorded transactions especially among the self-employed in rural agriculture and urban centers. Exemptions from VAT are estimated to reduce revenues by about 1.2% of GDP while the system is complex and cumbersome.

The large and growing informal sector poses major challenges to policymaking in Sudan. The sector is estimated to have accounted for 37% of GDP during the 1999-2002 period while tax evasion was equal to 36% of potential tax revenues. The World Bank is helping Sudan with technical support to remedy some of the problems while the government aims to reduce the informal sector through wider economic development.

Increasing the tax yield by reducing exemptions and tax evasion is an important policy aim. Recent estimates suggest that tax revenue could be increased by about 2% of GDP by reducing exemptions and by 3% by reducing evasion and the informal economy. The government tries to use exemptions selectively to attract more capital and discourage profit repatriation in the context of its investment promotion campaign. Better tax administration should help fight corruption and attract more FDI.

Foreign investment in Sudan enjoys tax exemption. However, the authorities are preparing a new regime which seeks to rationalise current exemptions and reduce waste. Foreign investment in Sudan is concentrated in the oil sector, making it a key area for government finances. Improving transparency should make it easier to assess and project oil production and revenue, which in turn, enhances public accountability and fiscal stability. The National Petroleum Commission is looking at reform of the Oil Revenue Stabilisation Account (ORSA) with a view to strengthen its role and responsibilities in the management of the oil sector. There is a lack of transparency in contract awards, procurement and revenue management in the oil sector, a factor that has contributed to Sudan’s ranking as one of the most corrupt countries in the world.


Social Context and Human Resource Development

Since 2000, Sudan‘s per capita income has increased steadily and the government has invested heavily in infrastructure and public services, helping to improve some social development indicators. According to the Ministry of Education, 2009 primary school enrollment totaled 7.9 million in 2009, with an estimated 1.2 million children in classes in South Sudan, almost three times the estimated number prior to the CPA in 2005. The adult literacy rate in 2007 was put at 60.9%, with combined gross enrollment in education at 39.9%, compared to 2015 targets of 34% and 56%, respectively. Some 88% of the population has access to basic health services while the adult HIV infection rate was 1.4% in 2009. The infant mortality rate was 112 deaths per 1 000 live births and the maternal mortality rate was 1 107 per 10 000 live births in 2008. A chronically high poverty rate running at more than 50% of the total population in 2008, widespread disease and inadequate public health services contribute to these high mortality rates.

Sudan’s labour force was estimated at about 11.9 million in 2009. Agriculture remains the main employer, accounting for 65 percent of the total workforce while about 90 percent of agricultural labour is self-employed. Wage labour is limited.

Public expenditure on education and health remain low at 7.1% and 3.2% of total government spending in 2009. Infrastructure and social development projects have been concentrated mainly in a few northern States such as Khartoum, with much less done in the remoter areas of the country. As a result of the conflict in Darfur, close to 2.5 million people remain in camps for the displaced. Sudan’s overall ranking in the Human Development Index series fell to 150 out of 177 countries in 2009 from 147 in 2008. The country faces enormous challenges in infrastructure and human resource rehabilitation in war affected areas.