ISSUE PAPER F-4

Post-conflict Sudan will be deeply indebted and aid dependent. Experience of post-conflict transitions in Sudan and elsewhere indicates that appropriate economic policies and the correct sequencing of political and economic transitions are essential if the right outcome is to be achieved. Sudan should not rely on rapid and generous assistance from western donors: a transition to peace and democracy will probably see an increase in aid, but donors will insist on conditions before providing debt relief and major development assistance. Some of the basic principles for the post-transition economic arrangements will need to be agreed between the major parties, and possibly discussed with donors and creditors, before the political transition is negotiated. This issue paper will address some of the questions that arise.

Assessing Sudan’s economic performance is complicated by the unreliability of statistics. Many of the figures for government income and expenditure, inflation, growth and production are based on Sudan Government estimates, which are not always reliable. For example, official figures for defence expenditure are grossly understated. However, figures for debt, balance of payments, international financial flows and aid are much more accurate.

This section outlines some of the major elements of Sudan’s current economic position.

Per capita, Sudan is one of the world’s most highly-indebted countries. The debt burden is huge and completely unsustainable. Even though Sudan cannot borrow, because of arrears on the existing debt, Sudan’s liability is increasing. Even the consolidated debt arrears themselves—totally about $6bn—are unpayable.

Most of Sudan’s debt was run up in the 1970s, and well over half the outstanding amount consists of the consolidated arrears on interest payments. Sudan is repaying only a very small fraction of the debt it owes, and its arrears are continuing to mount. No lender of any sort is prepared to lend money to Sudan at present.

A particular aspect of Sudan’s debt crisis is its arrears to the IMF. In 1986, when Sudan was suspended from the IMF, the unpaid debt and arrears stood at about $260m. In 1990, after repeated failure to pay arrears and implement agreed macroeconomic changes, the IMF declared Sudan ‘non-cooperative’—potentially the first step to the unprecedented step of expulsion. Since then, Sudan’s debt to the IMF has mounted to reach $1.57bn by April 1999 (the largest arrears of any debtor to the IMF). Although this is a small part of Sudan’s overall debt, it is particularly significant as (a) the IMF’s statutes restrict its ability to forgive debt and enter into agreements with defaulters, and (b) the IMF also plays the role of international umpire for the acceptability of financial and economic arrangements—without the IMF’s imprimatur, Sudan is very unlikely to achieve any debt forgiveness by major creditors.

In 1997, the Sudan Government reached an agreement with the IMF which involved paying $4.5m per month against the arrears. Sudan has complied with this—so that virtually the entire debt service payments it has been making have been to the IMF, totally neglecting the other debtors. The IMF also insisted on some other economic policy changes. The Sudan Government has averted the danger of expulsion, and the IMF expressed its satisfaction at recent performance in debt repayment and economic reform. In September 1999 the IMF lifted its declaration of non-cooperation with Sudan. The next step, dependent on continued good performance on economic reform and debt repayment, may be reversing Sudan’s suspension. But even with full status regained at the IMF, Sudan would be a long way from being eligible for further loans from the IMF, or indeed from any other major creditor. The arrears are simply too vast and the macroeconomic imbalances too huge for Sudan to be attractive to any lender.

Without a far-reaching agreement with creditors, including massive debt forgiveness, there is no realistic prospect of Sudan being able to pay off the arrears on its international debt, let alone the principal.

Sudan’s debt is owed to a very wide range of creditors, including the IMF, other international financial institutions, Paris Club members, Arab countries, former eastern bloc countries, and commercial banks. Most of the debt consists of liabilities incurred in the 1970s plus interest arrears—which by now well exceed the original loans. The complexities of the loan arrangements in the 1970s meant that in 1978 the Ministry of Finance had to employ external consultants to track down all the agreements made by different ministries and individuals. Since then the situation has become more complicated by further layers of agreements on rescheduling and automatic sanctioning by donors because of non-payment of arrears. (For example, the US Government automatically prevents payments to certain debtors that have fallen behind in repayments.) This means that even if the Paris Club countries and the major multilateral institutions were to forgive Sudan’s debt, the other debts would still be immense.

Some critics of the Sudan Government have campaigned for severe sanctions on Sudan including expulsion from the IMF. This is a mistaken approach. Any future democratic government will find itself encumbered by the legacy of such sanctions, which will be hard to reverse. Advocates for the Sudanese people would be better advised to begin preparing for how to mobilise major economic resources after a peace agreement and transition to democracy.

A symbolic action on the debt crisis would be to try to recover some of the money diverted and mis-spent by those who took out the debt. This would focus on investigating those in government during the relevant period and trying to discover whether any illegally acquired funds could be traced. While little money would probably be retrieved, this action might be a disincentive for future diversion of foreign loans.

Sudan’s balance of payments is in a disastrous state.

These figures indicate that Sudan’s trade balance and current account balance continue to worsen. The adjustment measures instituted by the Sudan Government in order to increase production for export do not appear to have succeeded in changing a continuing adverse balance of payments situation, as the increases in exports marked in the early and mid-1990s have not been sustained, and in any case they are more than offset by increases in imports, especially since 1997.

Unrecorded flows, especially remittances from Sudanese expatriates working abroad, constitute a major component of the Sudanese economy. Remittances outside the formal exchange system are the largest source of foreign currency and help to explain why the Sudanese economy still functions despite these disastrous statistics. This is why the figure for ‘errors and omissions’ is so huge. In the mid-1980s, the earnings of the approximately 350,000 Sudanese professionals working in the Arab countries was estimated at more than $5 billion, equivalent to about 75% of Sudan’s GDP at that time. The situation has not changed fundamentally since.

Oil revenues will substantially improve the balance of payments. Estimates for production (see below) suggest that oil income could narrow the deficit by $350-450m in a two-three year period, and even create a modest surplus thereafter. (The medium- and long-term possibility that oil exports could overvalue the exchange rate and depress agricultural exports should not be overlooked.)

Sudan’s reserves are entirely in foreign exchange, with no reserves at the IMF. These reserves represent between one and two months’ worth of imports.

Sudan’s economy is probably growing. But this is little reason for optimism as it is growing from a very low base. Many years of rapid growth will be needed if the country is to escape from poverty.

These figures, from the IMF, are considerably lower than Ministry of Finance estimates which are 7-12% growth, and cannot be considered reliable. These growth rates are very vulnerable to the slightest shocks, such as a poor harvest or fluctuations in remittance income. In the near future, the growth of—or disruptions to—the oil industry will be a major influence on growth rates.

Note that with population growth rates of approximately 2.5%, the above figures need to be adjusted downward to reflect real per capita growth.

The agricultural sector is the backbone of the Sudanese economy. The following table indicates the basic trends, and also the great variability in production from one year to the next due to dependence on unreliable rainfall and other factors.

These figures are from the Sudan Government but they are roughly in line with the FAO and US Department of Agriculture estimates.

Agriculture represents approximately 40% of Sudan’s recorded GNP and is the largest proportion of the recorded economy. (If remittance income is included, it probably represents 30% and is in second place behind remittances.)

One of the interesting elements in these statistics is that the productive area has remained roughly constant over these years. There is neither a major crisis in agriculture, nor a massive expansion of agriculture. Production varies tremendously from one season to the next because of the weather. There is however a diversification away from the earlier heavy dependence on sorghum and cotton, towards a wider range of crops. The experiment with wheat production initiated by the current government in 1990 has not proved very successful.

Cotton production used to represent Sudan’s major export. In the 1970s it provided more than 50% of Sudan’s export revenue, and as recently as 1987 it provided $176m worth of exports—37% of total exports. Various factors including neglect of irrigated schemes and the early 1990s drive for self-sufficiency in food production led to a sharp decline. By the mid-1990s cotton had dropped to under 20% of export revenue, and since 1996 it has provided a lower share than sesame. In 1998, cotton exports were valued at just $96m, just 16% of exports.

Sudan’s oil production sector holds out the promise of helping to solve some of the country’s economic problems. The known reserves consist of about 800 million barrels. The three main oil fields at Unity, Heglig and Adar have an existing capacity to produce more than 71,000 barrels per day, and peak output when all fields are fully operational could be as much as 300,000 b/d. There are also unexplored oil fields near Suakin. The oil pipeline to Port Sudan has a capacity of approximately 100,000 b/d. A second pipeline will be needed if the export capacity of the existing oil fields is to be met. In August 1999, Sudan exported its first 600,000 barrels.

With exports of 100,000 b/d, at current prices, Sudan will be earning $350-450m per year in hard currency. Government revenue will probably start at around 40% of revenue, rising in proportion as output increases to a maximum of 70% or more. Most estimates indicate that the Sudan Government can hope to earn $200-300m per year from oil.

The oil industry can be a mixed blessing, as a number of countries have found. Among the potentially adverse implications are:

1. Oil exports maintain the currency at an artificially high rate, making agricultural exports uncompetitive on the world market, and undermining the agricultural sector. (For example this has happened in Nigeria, where agriculture has stagnated, impoverishing farmers, and agricultural exports have virtually ceased, rendering the country entirely dependent on one export—oil.)
2. Extreme dependency on oil exports can leave a country vulnerable to fluctuations in the price. Sudden price drops can cause a sudden contraction in government budgets, a crisis of foreign exchange, etc.
3. The benefits of the oil production and export accrue to a very small section of the populace, especially the government, which therefore gain disproportionate power relative to the rest of the population. This can create friction between communities (the Ogoni in Nigeria is the classic case) and can undermine democracy.
4. Oil companies often respond to problems of crime and local instability by militarisation, including hiring mercenaries, supporting local militia groups, or paying protection money to armed groups active in the areas where they work. This has happened in Sudan before, as well as other countries including Colombia and Angola.
5. There can be problems of pollution. This is a particularly serious problem in Sudan because a major oil spill in the Nile would have immense consequences for populations living downstream. The Sudan Government and the oil industry should be liable for any such spillages and responsible for cleaning them up rapidly and effectively.
6. There can be tensions arising because of the alienation of land from local communities, both for drilling sites and pipelines.
7. Oil has a mystique: the rulers of oil-exporting countries suddenly believe they have inherited unlimited wealth, and lose their judgement about what is a sensible investment, how long the money will last, etc. Oil-rich countries have a tendency to show very bad economic decision-making.
8. The oil wealth has an unknowable impact on the investment decisions of Sudanese businessmen, especially expatriates in the oil-rich Gulf states. It is possible that the oil mystique may encourage Sudanese with money abroad to invest in Sudan once again. If so, this inflow of capital might have a larger net effect on the Sudanese economy than the oil itself. I.e. the oil might have its greatest effect indirectly, by creating a psychology of potential future wealth.

The current government is holding out oil exports as a possible economic salvation for the country. Oil will greatly ease the current government’s cash-flow problems. Oil can also be mortgaged in order to buy on credit (and there is evidence that this is how the government is obtaining new arms supplies).

But the overall economic impact of oil exports should not be exaggerated. They cannot on their own solve the massive macro-economic imbalances that exist. In fact, without a comprehensive agreement with creditors, oil income would simply be an invitation for Sudan’s creditors to ask for increased debt repayment. The vision of an oil bonanza also overlooks some of the potential negative consequences from the development of the oil industry. A future democratic government needs to have a long-term policy for the oil industry that maximises the benefit from oil production, and minimises the negative implications.

These figures are from the Ministry of Finance and cannot be considered reliable. In 1998 the government claimed that inflation was about 20%, which is unlikely to be accurate. However, it is certain that the hyper-inflation of 1990-2 has subsided somewhat.

The above is based on Sudan Government figures which must be treated with caution. At the time, $1=LS1,500. Official figures for defence expenditure cannot be considered reliable. In addition, no extra-budgetary expenditure was recorded.

These figures do however indicate:

1. Payment of interest arrears is the most substantial part of the Sudan Government’s budget. In practice, the Sudan Government succeeds in (almost) balancing its books by simply not paying interest, and accumulating more arrears.
2. Capital expenditure has been almost eliminated from the budget. This has long-term implications for Sudan’s infrastructure.
3. Even with the above stratagems, the Sudan Government is still running a year-on-year deficit.
4. Revenues from oil production (which do not figure in the table above) will ease the Government’s crisis but not solve it.

The big unanswered question from the above figures is the level of defence spending and its impact on the Sudanese economy. The last broadly reliable figures for defence spending are for the 1988/9 financial year, when the budget was $570m, of which an estimated $460m was met. The military government presided over a major increase in military expenditure in 1989/90 and it is unlikely that expenditures have decreased subsequently. A rough figure of $1 bn is often cited as the cost of the war. At an exchange rate of LS1,500=$1 for 1997, this implies approximately LS1,500,000m on defence—more than 50% of all government expenditure. Sources of finance for this include aid in cash and kind from supportive governments.

Much of the Government’s war effort is supported by loans and gifts from friendly countries. These do not appear in official statistics, and the terms of any loans are not known. It is possible that the Sudan Government has been running up new debts which are not recorded, or mortgaging oil revenues, for the war effort.

The end of the war will see a reduction in defence spending. But it would be unwise to count on any substantial peace dividend, for the following reasons:

1. A peace agreement will bring substantial numbers of unpaid guerrilla fighters currently in the opposition forces onto the government’s payroll, at least for a short period.
2. Disarmament, demobilisation and the reintegration of former combatants will be an expensive business.
3. Military aid in cash and kind that supports the current levels of military spending are unlikely to be translated into direct financial or development aid.
4. The macro-economic imbalances of the Sudanese economy are so adverse and so huge that any dividend will disappear into urgent demands for unpaid salaries, debt repayments, rehabilitation of capital infrastructure, etc.

These figures show a quite catastrophic decline—in fact a collapse—of international financial flows to Sudan. (Direct military assistance is excluded.) It is worth comparing these figures with the flows that occurred in the 1980s. The same source (OECD) gives the following figures: