Sudan’s Economy and the Financial Crisis
In the last ten years, the Sudanese economy has undergone a drastic change. Instead of been an agriculture-based economy it has turned into an oil-dependant economy which in turn has marginalized agriculture. At a time when the world is suffering a food crisis, which is especially afflicting Africa, food production should offer the main productive future for the Sudanese economy.
At the beginning of the current economic crisis the Sudanese government tried to minimize its impact on the Sudanese economy by saying that the country is not linked to the world economy, and because of its Islamic credit system, it will not be affected by the financial meltdown and credit crunch. But as soon as the demand for oil started to fall and the oil prices dropped the government could not deny the difficulties they are facing. The budget presented to the National Assembly in November by the finance minster Dr Awad Abu al Jaz was less than 50% of the 2008 budget, savagely cut on account of falling oil prices and the failure of the government to accumulate reserves against this eventuality. The following month Dr Abu al Jaz told the members of the National Assembly that he had prepared a contingency plan to overcome the impact of reduced revenue by introducing new taxes including raising the duties on imported cars and also increasing VAT on the telecommunication service. But those measures will not compensate even ten percent of the amount lost by the fall in the oil price.
During the last year, oil revenues represented more than 65% of the Government of National Unity income and more the 90% of the revenue for the Government of South Sudan. In the last four months, oil prices have dropped by around 70%. This is a huge blow. Meanwhile, others sectors of the economy have been weakened by a combination of poor policies followed by the regime in the in the 1990s, and the failure to adapt the non-oil sectors to the impact of the growth in petroleum production. Most of the agricultural sector has been neglected and the economy is now driven by the trading sector and the informal sector, which do not contribute in a major way to creating jobs or generating income in the shape of direct or indirect taxes.
A week ago in his meeting with the states governors, for the first time the Finance Minister admitted the seriousness of the crisis facing the country’s economy. He told them that the era of oil dependency is over. He said that preliminary estimates show that Sudan need around $2billion to finance the deficit in its budget.
The Sudan Government has few options which it can use to fund this deficit. The credit worthiness of the country is very poor, and its foreign debt amounts to more that $40 billion. The only option the government has is for the Central Bank to print more banknotes to finance the deficit through increasing the money supply, which will increase the inflation rate. Inflation is around 15% now and any increase will hit the majority of Sudanese people hard. A larger part of the population survives on an income below the poverty line, and it has already been hit by tax increases in last year’s budget which increased the prices of the essential commodities like sugar, cooking oil and flour by more than 30%, at time when the government froze any salary increases.
The other options for funding the deficit are by borrowing from the banking system in the country or issuing bonds to the public through the money market internally. But those alternatives will not be workable as the majority of the commercial banks in Sudanese are in collapse according to international standards of liquidity ratio and capital adequacy ratio. Sudanese banks all hold huge amounts of bad debts in their balance sheets, a consequence of bad lending during the last nineteen years, including many loans extended to individuals associated with the regime. Under the banner of “Islamic Banking” a large number of fraudulent practices were carried on. In fact, the Sudanese banking system faced its own domestic crisis ten years ago, when the scale of these bad debts became clear, fully a decade before the current international crisis. The government did not use the breathing space it won from oil revenue to reform and rebuild the financial sector.
The economic activity that sustains by far the largest number of people in the country is agriculture. This is facing many difficulties which include lack of finance and no clear marketing strategy for agricultural products. Commercial farmers have been facing immense problems in repaying their loans to banks and in some important locations more than 90% of commercial farmers are bankrupt. The Gezira scheme, once the heartbeat of the Sudanese economy, is facing many difficulties due failed policies which were adopted by successive regimes. Nonetheless, twenty years ago Sudan produced more than ten percent of the world’s cotton, which was a mainstay of the economy. In the early 1990s, the current government compounded the long-term decline of the Gezira scheme with the decision to switch priority production from cotton to wheat. This followed the regime’s slogan “we eat what we grow.” While it is true that the urban Sudanese market had developed a taste for wheat, which had to be imported (itself a product of distorted economic policies), the principal of comparative advantage dictated that Gezira stick to its most suitable crop, cotton. The outcome of the attempted switch to wheat is that today Sudan produces just four percent of the world’s cotton. At the same time, wheat production was insufficient, partly because Gezira possesses the wrong climate for quality wheat production.
Sudan today suffers not only from falling oil prices but also reduced production due to the exhaustion of the easy-to-exploit oil fields and technical problems with the quality of the oil. Sudan’s oil bonanza shows every sign of being history. But while the oil money was flowing, the government behaved as though it would last for ever. The government failed to use its resources to invest in developing other sectors of the economy except for a few roads and bridges build in the centre of the country, and instead diverted most of the resources to finance the military and the security apparatus.
In his address to the state governors, the Finance Minister called on them to facilitate investments in their states to create jobs and enhance production. He noted that south Sudan will be hit hardest by the falling oil revenue as the south gets more the 90% of its income from oil. But no state government or even the Government of South Sudan has the capacity to finance investment or job creation. That must be done by Khartoum.
The drop in government revenue may adversely affect the peace process as the government will not be able to fulfil its commitments according to the agreements. Issues like repatriation of the IDPs and refugees, developing area affected by the war, are less likely to be carried out as there are no funds to support those activities. For the Darfur Peace Agreement the government has pledged to invest around $300 million in developing the region. We are now close to the end of the third year of the agreement and nothing has been invested until now. The government only pays the salaries of the transitional authority staff and their other running expenditure.
The credit crunch will also affect the flow of grants and donations as the major donors have been severely hit by the crisis and will cut back on their aid budgets. The Sudanese government will not be able to borrow from the international lending institutions because of the bad creditworthiness and also the American sanctions which are hitting hard at the financial sector in Sudan, and there are no sign that will ease in the short term.
The Sudan government has no alternative but to undertake some difficult reforms of its domestic economic policies. These should begin with attention to its investment policies, especially the way of giving tax incentives for new investor for five years. Currently Sudan is not attracting investors in the main sectors of the economy so they can create jobs. Most investors in Sudan (for example from the Middle East and Turkey) are interested only in making short-term returns, focusing on activities that bring quick income and not creating long term jobs in the economy. Recently Sudan has succeeded in attracting investors in the agriculture sector but it is to early to judge the benefit of that.
The current tax system in Sudan needs an overall review to close its many loopholes and allow the government to levy the correct taxes from the right people. Currently only the small traders are obliged to pay the full taxes while the big cats usually pay less then 25% of the taxes they are due. The agricultural sector has also been hit hard by different types of taxes especially local taxes on rainfed irrigation systems.
The most important social and economic challenge facing Sudan today is the high rate of youth unemployment. About three quarters of the university graduates of the last ten years are unemployed. The government has no policies which might reduce this rate by creating jobs for them.
The Sudanese people are still waiting for the peace dividends in shape of economic development which will help in alleviating poverty and raising the standard of living to the majority. At the time when market economy has been tested to the limit in western countries and governments are now nationalizing banks and taking control of key economic sectors, the opposite is happening in Sudan. Thirty years ago, Sudan led the world in selling off its state assets to well-connected private individuals, even before it became fashionable to do so in the UK and US. Now the government is continuing the privatization drive, which now extends as far as the education and health services. No support is given to the majority of low-income families. Despite the rhetoric we do not have a free market economy in Sudan. Instead we have a market dominated by a number of monopolies in most economic sectors, controlled by private individuals who are well-connected to the government. It is not the state that regulates the country’s leading businessmen but a cosy partnership between the two. Sudan’s economic policies are designed to enrich certain people at the expense of the majority.