South Sudan: Economic Development 2015

Before the conflict broke out in December 2013, South Sudan had positive development prospects. The country was expected to achieve an average growth rate of GDP of about 30.7% in 2014, after a sharp decline of -26.7% in 2013. The economic growth outlook remains fluid, largely dependent on the evolution of the political peace prospects and international oil prices. It is estimated that the GDP will contract by -7.5% in 2015. In January 2012, South Sudan suspended production of oil because of its dispute with Sudan over transit fees. This had a devastating impact on GDP, which plummeted from USD 49 billion in 2011 to USD 10 billion in 2012. The resumption of oil production in early 2013 boosted growth and GDP rebounded in 2014. GDP per capita progressed from USD 984 in 2012 to USD 1 262 in 2013. This evolution reflects the over reliance of South Sudan economy on oil. Oil accounts for 99% of exports, 95% of government revenue and over half of its GDP.

The economic growth outlook remains uncertain, largely dependent on the evolution of the political peace prospects and international oil prices. The recent armed conflict casts a shadow over the prospects for sustainable economic development. It is estimated that the current conflict will cost up to 15% of the potential GDP in 2014/15. GDP growth is projected to continue to be constrained by the ongoing war. Oil production has already fallen by 20% and might further decrease with the declining international price of oil. It is estimated that GDP will contract by -7.5% in 2015.

Since independence, the fiscal environment in South Sudan has evolved under very difficult economic and political conditions where the country moved from an oil shutdown induced austerity in 2012 to a conflict-driven fiscal crisis beginning in December 2013. Capital expenditures have been the most affected components of the budget as it is easier to cut investment spending than to reduce salary payments in the face of temporary revenue shortfalls. If peaceful conditions can be restored, social services delivery and infrastructure investment should be priorities for future budgets. The armed conflict is having large welfare costs for the population, particularly the poor. More generally, South Sudan has had a very long history of instability, which invariably affects the provision of basic service delivery and the quality of human resources. Finally, it is worth nothing that South Sudan is characterized by a severe lack of reliable basic economic and social statistics, a reflection of the legacy of decades of civil war and the many challenges in state and institution building. The lack of basic socioeconomic statistics across all sectors, and the weak statistical system, constitute major constraints on macroeconomic management, and explain on occasions the approximate nature of most of conventional economic figures.

Prior to the current conflict, the country had initiated a number of reforms, whose fate depends on the peaceful resolution of the crisis. A law for the management of oil revenues has been finalized and is waiting for the president’s signature. The 2012 Petroleum Revenue Management Bill (PRMB) makes a significant contribution towards more credible and transparent management of oil revenues and towards ensuring that public expenditure is insulated from the inherent volatility of oil revenue. In this regard, the bill provides for the creation of stabilization and future generation funds. The PRMB includes provisions that seek to prevent corruption and mismanagement by demanding the publication of contracts, ensuring the regular release of production and revenue data, and requiring that all oil contracts be awarded through a competitive, public process. Moreover, the PRMB includes important provisions on how revenues are to be collected, managed, audited, reported and transferred from the central government to the state and community level. However, PRMB also raises contentious issues that, if unaddressed, could hinder its effectiveness. These include the transfer of 25% of oil income to the Petroleum Revenue Savings Funds and future generation fund; prohibiting use of the Petroleum Revenue Savings Funds, which is said to crowd out current investment; and the transfer of net income to petroleum producing states and local communities, particularly given the lack of clarity as to what the bill means for local communities.

A comprehensive tax reform is being implemented. In order to diversify revenue sources and increase efficiency of collection, the government has embarked on an ambitious tax reform to help increase non-oil tax revenues from South Sudanese Pound (SSP) 700 million to SSP 1.4 billion. In particular, the Taxation Amendment Act of 2012 authorized a sales tax on imports, increased excise tax rate on alcohol and tobacco products, as well as on vehicles. An advance payment system of income tax at the time of importing goods into South Sudan has also been implemented. The government has also implemented a centralized tax collection agreement through an improved relationship with the states. The compliance of the latter with the centralized agreement has made it easier and faster for goods and services to travel throughout South Sudan. In addition, the Taxation Amendment Act of 2012 also authorized the imposition of a state excise tax as a percentage of the national excise tax. Furthermore, government is in the process of improving the system for collection and tracking of revenues through the implementation of a pilot program enabling taxpayers and importers to deposit their tax and customs payments directly to commercial banks coupled with the creation of a single treasury account. The arrangement requires that all revenue-generating government agencies remit collections to the single treasury account.

Extracted from South Sudan Country Note, African Economic Outlook^[1] 2015.

Featured image is Market in Juba, South Sudan. Source: Wikimedia Commons (Jonathan Lundquist).

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References

1. ^{^} African Economic Outlook (www.africaneconomicoutlook.org)