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.
The main problem facing Sudan now is the absence of due diligence. Just after independance and up to the 70s, people in the public and private sectors were HONEST AND HARDWORKING. Unfortunately, since the late 70s and specially since the mid80s to date, a culture of “grab what you can when you can” now prevails. Everyone wants to get rich and fast – a concept promoted first and foremost by those in power. There is no middle class now as exited 30 years ago. Health and education services have decreased dramatically – unless, of course, you have money and can pay for yourself.
Is there light at the end of the tunnel? Unfortunately, as a relatively young Sudanese, I am very pessimistic. Unless there is a complete change of attitude among the general population, where people feel they are worth something and start demanding those in authorities to deliver and make things better, things will remain the same: policies that enrich only some at the cost of others will continue to be made and implemented.
Dear Hafiz Mohammed,
Dear Elsara Badri,
A well written blog, it is informative. I have some questions, and I would be glad if you took the pains and answered them.
1- The government stabilized the exchange rate of the US$ at 2,000 pounds since January 2008. In Septemeber it rose to 2,200. Bearing in mind the huge bad debts and other financial difficulties, can you explain to me how could they keep it from skyrocketing?
2- The housing boom persisted for so long. Everyone was speculating that it will drop some years ago. Are the financial difficulties have any impact on the housing sector?
3- Is there any national institution which could provide economists with reliable figures or info. inside the country?
4- What is the worst economic scenario that could follow the ICC indictment? Can we claim that the economy could be used by the NCP as a weapon against its enemies after the ICC indictment?
5- What are the chances that the governmet will seek loans? Are there any international parties that could afford it such loans?
Thank you for your comments, and also thank you for El Sara Badri for the comments, I totally agree with all the points mentioned, with regard to your questions, those are some answers:
1- Exchange rates have two systems, fix rate system and floating rate, in a fix rate system the authority intervene to keep the currency rate at a certain level, either by adopting strict exchange control or intervene in the currency market by buying or selling its currency, in the second the country must have enough reserve to be able to do that. But in the second normally through restrictions include tighter control over import, export and international remittances. In the case of Sudan it doesnâ€™t has free floating exchange rate policy, Bank of Sudan impose a certain margin for currency fluctuation by regulating banks and other dealers. The Sudanese government used both ways, now they get foreign currencies from the sell of oil, by which they are able to finance their export and also controlling all the proceeds of non-oil export and restricting the import. The other factor which helps them keep the exchange rate of Sudanese pound high is the low demand in the economy due to lack of disposal income among most of Sudanese people as their incomes only enough to buy them their basic needs.
The GOS adopt a policy of fixing the Sudanese pound to one international currency which used to be sterling pound up to the seventies, then changed to US Dollars until 2007 and now the Euro this currency called the base currency, Sudanese pound (SP) rate moves according to the Euro movement, since last month the Euro has weaken against US dollars that why the dollar value increase in front of the SP. That means the SP is not allowed to move freely against the Euro according to the rule of supply and demand. This system is also adopted in Saudi Arabia where the Riyal is fixed to the US $ at $1 = SR 3.75 and that is going on for the last 30 years.
2- Of course the financial difficulties will have an impact on the housing marking as the lack of liquidity in the system will make it difficult to find buyers for houses , now the houses prices are fallen in Sudan but not at the same scale like Europe and United States, and that for one simple reason banks in Sudan until recently were not allowed to give mortgages loans to household only for businesses that why we donâ€™t have big mortgage market in Sudan, and at the same time we donâ€™t have derivatives market where bank can repackage mortgages and other loans and sell them in whole sale market ( subprime market) and also there is no whole sale banking in Sudan.
3- I t is very difficult to get reliable financial information in Sudan as most of the transactions in economy are in cash and not through the banking system and that how most of the rich people are able to evade paying the right taxes. Even the central bank in Sudan dose not know the size of money in circulation, The main reason for that is the lack of trust on the Sudanese banking system and that was aggravated by Abdel Rahim Hamdi( Finance Minister in 1990) policy of changing the currency and restricting the withdrawal of cash from all bank accounts to SP5000, contradicting one the main principle of bank and customers relations , taxes offices used that to send huge tax bills to most depositors, and also the policy buying all the customers foreign currencies balances in the banks and gave them Sudanese currency instead of it that was also in the early nineties .
4- I donâ€™t think the ICC indictment of President AL Bashir makes any difference unless the international community take action against Sudan because of their refusal to hand him over . For the NCP to take action in the case of an arrest warrant, I donâ€™t think they have much options to take against the international community the only weapon they have is the oil and if they stop exporting it they will only heard themselves and the Sudanese people as Sudan export is very minimum and the demand for oil is very low now. At the same time they cannot ask the international humanitarian organisations to leave Sudan because the GoS hasnâ€™t got the resources to feed millions of IDPs in Darfur and other parts of the country, as such action will mean allow some of the most vulnerable people to starve to death.
5- The GoS has very small room for manoeuvre regarding seeking loans to finance itâ€™s budget deficit or the development programmes, they cannot borrow from most of the international lending institutions. That is due to numbers of factors:
– The political system in the country is not stable (war in Darfur and problems with ther CPA implementation)
– The American sanctions are hurting the country financial system and no international lending institution want to do business with Sudan just recently the American government fined the British Bank Lloyds Â£350 millions for allowing companies to do business with Sudan and Iran, in breach of the sanctions and now it is very difficult find one of the international bank whoâ€™s ready to transfer money to Sudan and most of the big banks in the world closed the Sudanese banks accounts with the in fear of the American sanctions as they cannot afford to lose their business with USA.
– The are many pressure group in Europe and American asking for disinvestments in Sudan and that make., any bank or company which want to do any deal with the Sudanese government think twice .
– The only institutions which ready to lend Sudan are the Arabs investment funds and Chinese banks and last year the GoS borrowed for the Islamic Development bank to build the Dam in Nothern States
My name is hassab Yousif Ali.
I’m working on a Ph.D research at the University of Alaska Fairbanks, Alaska, USA.
My research with focuses on the Sudan’s oil development.
With all standards your article makes realsense, at least to me.
I have many questions about the Sudan’s oil industry, and for sure I need your advice, if that’s okay with you.
My email: [email protected]
aralen for lupus https://chloroquineorigin.com/# hydrochloquin