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Sudan Economy: Coping with a New Global Oil Order

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Abda El-Mahdi - Former State Minister of Finance and National Economy, Sudan
ERF Conference on “Arab Oil Exporters: Coping with a New Global Oil Order”

Kuwait, November 26-27, 2017
www.erf.org.eg

Published in: Government & Nonprofit
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Sudan Economy: Coping with a New Global Oil Order

  1. 1. LastModified11/11/201711:28ArabStandardTimePrinted 1 Sudan Economy: Coping with a New Global Oil Order Abda El-Mahdi | November 2017
  2. 2. LastModified11/11/201711:28ArabStandardTimePrinted 2 Executive summary Sudan pre-2011 ▪ Sudan experienced high economic growth from 2000 to 2010 as an oil exporter, with production reaching ~500 thousand barrels per day ▪ The oil sector contributed ~16% of GDP by 2010, but symptoms of the Dutch disease were evident Effects of South Sudan secession ▪ Secession of South Sudan in 2011 caused a shock to the economy due to the loss of 75% of the oil sector, equivalent to 50% of government revenue ▪ The government of Sudan responded to the crisis with an economic reform program, but the recovery was aided by discovery of gold resources Impact of lower global oil prices on the Sudanese economy ▪ Falling oil prices had a mixed impact on Sudan’s exports and imports of oil… ▪ …whereas at the fiscal level, oil revenue dropped by ~12% in 2014-15 ▪ Falling oil prices also had indirect impacts on Sudan’s oil sector, workers abroad, and foreign direct investment The way forward ▪ Sudan is advised to diversify its economy toward sustainable resources as well as cease a window of opportunity with the removal of US sanctions ▪ The first step: ensure a stable macro-economy and political situation ▪ Several other important reforms are required for Sudan to move forward
  3. 3. LastModified11/11/201711:28ArabStandardTimePrinted 3 Sudan experienced high economic growth from 2000 to 2010 as an oil exporter, with production reaching ~500 thousand barrels per day SOURCE: World Bank 2000 – 2010 Oil production 2000 – 2010 Economic growth rate 462475457 483 356 294291 262 236 209 180 080706 09 20102000 01 02 +10% p.a. 03 04 05 000’s barrels / day 60 70 20 30 0 10 50 40 08 201006 0704 0501 022000 03 09 GDP (current US$) ~8% growth per year ▪ Despite the high oil exports and resulting growth, Sudan was on the verge economic deterioration for two key reasons: 1. Symptoms of the Dutch disease were evident 2. Growth was not inclusive and poverty increased
  4. 4. LastModified11/11/201711:28ArabStandardTimePrinted 4 The oil sector contributed ~16% of GDP by 2010, but key symptoms of the Dutch disease were evident Exchange rate Public debt Government spending Agriculture ▪ The real exchange rate appreciated substantially ▪ Overvaluation was as much as 65 percent in 2008 ▪ Both domestic and foreign debt ballooned to unsustainable levels ▪ Government spending increased unsustainably with current spending expanding at the expense of development spending ▪ Agriculture was neglected and its share in GDP declined from 46% in 2002 to 32% in 2010 Symptoms of Dutch disease SOURCE: Unicons analysis 1 2 3 4
  5. 5. LastModified11/11/201711:28ArabStandardTimePrinted 5 Secession of South Sudan in 2011 caused a shock to the economy due to the loss of 75% of the oil sector, equivalent to 50% of government revenue Recession Effects of South Sudan secession Trade deficit High inflation A B C 0 -10 20 10 % Real GDP growth 0 -10,000 -5,000 5,000 Trade balance 0 20 40 14 20161513121110092006 0807 % inflation1 SOURCE: IMF, Central bank of Sudan June 2011 – South Sudan secession 1 Calculated as average inflation % per year
  6. 6. LastModified11/11/201711:28ArabStandardTimePrinted 6 The government of Sudan responded to the crisis with an economic reform program1. Recovery was aided by discovery of gold resources 2009 – 2016 Exports Key takeaways 8,000 6,000 2,000 12,000 0 4,000 10,000 13122009 10 11 20161514 Gold exports Total exports ▪ Exports of gold peaked in 2012 to reach more than 2 billion dollars ▪ Gold became the number one earner of foreign currency earnings in 2012 ▪ Contribution of gold exports has since declined to 34% in 2016 SOURCE: Central Bank of Sudan Trade Statistics 1 Three-year emergency program was instituted in 2012-2014 followed by a five-year economic reform program in 2015-2019 ▪ Large imbalances in the economy persisted, made worse by American sanctions – Current account deficit was still large at 8% of GDP in 2015 – Exchange rate continued to depreciate with gap between official and parallel rates widening; this despite step nominal devaluations undertaken by the Central Bank – High inflation rates of 36-37% in 2013-14 quickly ate up positive RER effects of nominal devaluations Millions US$
  7. 7. LastModified11/11/201711:28ArabStandardTimePrinted 7 Falling oil prices had a mixed impact on Sudan’s exports and imports of oil… 2009 – 2016 Oil exports and imports Key takeaways ▪ Sudan imports about 30% of its domestic consumption of oil products; the decline in prices has had a positive impact on the country’s import bill (fell by 50% since 2014) ▪ Oil exports are on the decline mainly because of lower global oil prices but also because of the consequent smaller government entitlement in the EPSAs1; oil exports fell from $1.3 billion in 2014 to $627 million and $336 million in 2015 and 2016 respectively SOURCE: World Bank 0 3,000 7,000 1,000 9,000 2,000 4,000 5,000 6,000 8,000 10,000 Oil imports Oil exports 2009 1211 1510 13 14 16 1 The impact of lower oil prices is further complicated by the fact that the government’s entitlement from oil production is governed by what are known as EPSA (oil exploration and production sharing agreement) Millions US$
  8. 8. LastModified11/11/201711:28ArabStandardTimePrinted 8 …whereas at the fiscal level, oil revenue dropped by ~12% in 2014-15 2005 – 2015 Oil and non-oil revenue Key takeaways ▪ Low oil prices and continued civil conflict in South Sudan have necessitated re- negotiation and extension of the Bi- Lateral agreements - leading to lower oil related revenues for Sudan ▪ Oil revenues dropped by 12% between 2014 and 2015 so that its share in total revenues fell from 34% in 2014 to a mere 16% in 2015 SOURCE: Oil Ministry, Sudan 1 Three-year emergency program was instituted in 2012-2014 followed by a five-year economic reform program in 2015-2019 Billions SDG 7 8 8 10 11 15 15 22 31 44 6 8 10 16 10 9 6 6 11 16 8 6 082005 07 52 2015 47 18 15 12 24 06 2019 32 2122 10 13 141109 12 Non-oil revenue Oil revenue
  9. 9. LastModified11/11/201711:28ArabStandardTimePrinted 9 Falling oil prices also had indirect impacts on Sudan’s oil sector, workers abroad, and foreign direct investment Oil sector Impact Workers abroad Foreign direct investment A B C ▪ Sudan’s ambitious oil exploration and development plan has virtually come to a standstill since mid-2014 ▪ The return of thousands of Sudanese workers from the oil exporting countries ▪ Impact on remittances and unemployment ▪ Possibly lower FDI as GCC countries account for 80% of these investments ▪ Lower financial support from Gulf countries SOURCE: Unicons analysis
  10. 10. LastModified11/11/201711:28ArabStandardTimePrinted 10 Sudan is advised to diversify its economy toward sustainable resources as well as capitalize on the removal of US sanctions The way forward… ▪ Both oil and gold are depletable resources and projections put them as shrinking beyond 2030 even when assuming more favourable global oil and gold prices ▪ Sudan is blessed with large swaths of fertile agricultural land and is rich in animal resources ▪ The government of Sudan must focus on diversifying the economy by making use of its natural resources to develop its agriculture and agro-industry sectors ▪ Sudan can capitalize on a great window of opportunity with the removal of US sanctions in October of this year ▪ To do so, the government needs to implement a comprehensive set of economic, sectoral and institutional reforms SOURCE: Unicons analysis
  11. 11. LastModified11/11/201711:28ArabStandardTimePrinted 11 The first step: ensure a stable macro-economy and political situation Macro-economic stabilityPolitical stability ▪ Political stability entails: – Ending the civil conflicts – Greater freedoms of expression and the press – Serious effort for democratic transition ▪ A comprehensive economic reform package must be carefully planned within a medium term macro-economic framework. Policy actions need to be strong, long lasting and credible – Exchange rate flexibility to unify the exchange rates, reduce external pressures and improve competitiveness – End fiscal dominance and re-assert the independence of the central bank – Increased domestic revenue mobilization – Austerity measures to reduce current spending and create fiscal space for greater social and development spending – Redirecting of subsidies to more efficiently benefit the poor SOURCE: Unicons analysis
  12. 12. LastModified11/11/201711:28ArabStandardTimePrinted 12 Several other important reforms are required for Sudan to move forward 1 Improve the business environment: In the 2017 Ease of Doing Business report, Sudan ranked 160 out of 190 countries 2 Clamp down on corruption: inorder to boost investor confidence, channel transactions through formal avenues and reduce inequalities 3 Resolve the country’s debt problem: This will be instrumental in opening international financial markets to Sudan and availing badly needed financing for the country’s development projects 4 Build human capital: Invest in the education of children and youth as a pre-requisite to reducing poverty and improving the competitiveness of its labor force 5 Develop infrastructure: As a pre-requisite for increasing higher private investment. Electricity, roads and railways to improve market access especially in rural areas 6 Attract financing to bridge the infrastructure gap: If Sudan is to attract financing from emerging economies such as China and India, it must carefully manage and monitor such financing in order to avoid falling in the debt trap once more SOURCE: Unicons analysis

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