Sudan: Economic Development 2015

Since the shock of South Sudan’s secession in 2011 and the loss of oil revenues, Sudan’s economic growth has gradually recovered, averaging 3.5% in 2013-14 and projected at 3.1% and 3.7% in 2015 and 2016, respectively. Recovery is expected to be driven by rain-fed agriculture, minerals and flows of transit fees from South Sudan. Sustaining growth is however contingent on reducing inflation and addressing the continuous depreciation of the exchange rate. Rain-fed production has benefited from excellent weather, which raised the ratios of cultivated to harvested areas from 54.4% in 2012/13 to 78.1% in 2013/14. In addition, the production of gum increased from 20 000 tons in 2009/10 to 88 000 tons in 2013/14 thanks to reforms supported by the World Bank and the International Fund for Agricultural Development (IFAD). More importantly, the policy adopted by the Central Bank of Sudan (CBOS) in 2014 allowing exporters to sell their proceeds to importers has significantly boosted traditional cash-crop exports. Despite a revival of rain-fed production including livestock, the GDP contribution of agriculture decreased to 32%, or 2.5 percentage points less than in 2013. This was due to falling production under the Gezira scheme (providing about 924 000 hectares of irrigated land), which was the backbone of the economy before the rise of mineral extraction. Reforming land ownership and administration in the Gezira project remains crucial for the country’s ongoing diversification measures.

Despite a drop in gold purchases by the CBOS in 2014, gold production increased by 13%, up from 75 tons in 2013 and projected to reach 120 tons in 2016, with small-scale mining accounting for 83% on average. Oil production is sustained at about 130 000 barrels per day (bpd) as in 2013 and is forecast at 155 144 bpd for 2015. In 2014, the government licensed the Brazilian oil company Petrobras to explore oil in Blocks 9 and 11 in the middle of the country. The plummeting price of oil is expected to reduce the cost of public fuel subsidies (about 2% of GDP in 2014) and contribute to narrowing the budget deficit. However, with growth being driven by an oil enclave, rain-fed agriculture and small-scale gold mining, progress to diversify into more skill–intensive and spatially inclusive growth will be slow and have little effect on protecting natural resources and poverty reduction efforts.

Tertiary-sector growth is estimated to have been 3.1% in 2014 and is projected at 2.2% in 2015. However, drops in gross investment and in foreign direct investment (FDI) in 2014, by 12% and 66%, respectively, compared to 2013, in addition to the high cost of formalization and complex regulations, have confined much of the expansion in services to low-productivity and low-skill informal activities. Fiscal retrenchment considerably reduced public social spending on education and health services, including on health-insurance coverage for the poor. The share of social spending in the total budget is low, at 3.6% in 2014, and is expected to drop to 2.8% in 2015. Also, further deterioration of credit flows to the economy, which declined by 1.7% at end- 2013 (from 13.8% of GDP at end-2012) should contribute to financial exclusion and informality. This trend should be exacerbated by the refusal of foreign banks to process transfers to and from Sudan after the USA prosecuted a number of banks for violating sanctions against Sudan and other countries in 2014. Moreover, if continued, the associated fall in exports and imports and the resulting contraction of growth should have an adverse impact on the poor and the most vulnerable segments of the population. In addition, the persistent gap between the official and parallel-market exchange rates (50% at end-2014) due to foreign-exchange shortages and limited exchange-rate flexibility should weaken external competitiveness as well as divert legal private transactions, including remittances (USD 754 million in 2014), to the parallel market. Reducing CBOS quasi-fiscal operations –purchasing gold at free exchange rate to finance fuel and wheat imports at the official rate – should enhance the effectiveness of the country’s monetary policy in managing its high inflation.

Manufacturing production grew by 2% in 2014, benefiting from a gradual economic recovery after the secession of South Sudan. The growing scarcity of foreign exchange is the major downside risk. Sugar production increased by 14% in 2014 and is forecasted to grow by 13% in 2015 thanks to the inflow of USD 500 million in FDI in 2014, mainly from Saudi Arabia, the co-owner of Kenana Sugar Company, Sudan’s biggest sugar producer. In addition, the annual output of biofuel (a by-product of the sugar industry) is expected to triple to about 200 million liters in 2015. Moreover, the affiliation of three textile factories to Giad, the leading industrial group in the country, and the rehabilitation of the Al Haji Abdullah Spinning Factory are expected to revive the textile industry and recover manufacturing growth.

Domestic demand in 2014 was driven by private consumption but partially moderated by a reduction in public spending due to tight fiscal and monetary policies. Investment, as represented by gross domestic capital formation (GDCF), declined from 20% of GDP in 2013 to 17.7% in 2014 as a consequence of reductions in both private and public investments. Growth in private investment, which accounted for 87% of GDCF in 2014, was flattened by the decline in business confidence due to high production costs, especially energy costs, low credit, shortages of foreign exchange and persistently high inflation. The strong growth of exports – 18.3% compared to -6.7% in 2013 – has partially offset the reduced demand for imports resulting from continued exchange-rate depreciation.

The short- and medium-term growth outlook is expected to be supported by the revitalization of agriculture and increased mining production, including gold and non-mineral exports. In addition, implementation of the FYPER 2015-19 is expected to enhance macroeconomic stability, raise public investment and strengthen social safety nets in support of sustainable and inclusive growth. Nonetheless, limited access to external financing, an unsustainable external debt burden and the breakdown of foreign-correspondent banking remain major challenges. Moreover, instability in South Sudan, the possible failure of national dialogue and social pressures related to fiscal slippages in the wake of the 2015 presidential elections could undermine the country’s already slow growth.

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

Featured image is Khartoum, Sudan. Source: Wikimedia Commons (in Arabic).

Related

References

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