Sudan may need help from China and IMF to stabilise economy

Sudanese protesters crowd a train as it arrives at the main sit-in of the demonstration in the capital Khartoum -- the country needs aid and loans for its economy to ride out political uncertainty.  AP

Sudan, once an oil rich country, needs economic policy reforms, foreign direct investment and wider fiscal support to help its economy ride out ongoing political uncertainty, which may push Khartoum to embrace China and the International Monetary Fund.

Years of international isolation that ended less than two years ago with the lifting of US sanctions, and a mismanaged economy exacerbated popular discontent that pushed the all-powerful army to end Omar Al Bashir's 30-year rule earlier this month. An acute shortage of foreign currency and a dramatic rise in price of staples such as bread were the flash points behind the nationwide protests which started December and led to the ensuing turmoil. Though Khartoum received a lifeline from Saudi Arabia and the UAE who pledged $3 billion (Dh11bn) in aid, that generosity may not be enough to pull Sudan’s economy out of a downward spiral.

“Prior to the recent political developments, the economy of Sudan was facing substantial challenges,” said Nassib Ghobril, chief economist at Lebanese lender Byblos Bank, which operates in Khartoum.

Acute shortages of foreign currency, limited access to external financing, an absence of foreign correspondent banking relationships, low oil transit receipts from South Sudan, a weak business environment, coupled with US sanctions on the Sudan, had marred the economic prospects over the past decade. The independence of South Sudan effectively meant Khartoum's loss of 80 per cent of its oil production, 60 per cent of its fiscal revenue and about half of its foreign exchange proceeds.

In October the IMF, projected Sudan's real gross domestic product (GDP) to contract 2.3 per cent in 2018 and 1.9 per cent this year, following an expansion of 1.4 per cent in 2017. The Economist Intelligence Unit, however, has a more conservative view and expects the economy to slow down to 0.4 per cent this year.

The “anticipated contraction in [economic] activity in 2019 reflects the substantial challenges facing the economy,” said Mr Ghobril.

Of the $3bn pledged by the UAE and Saudi Arabia, $500 million is destined for the country's central bank to help shore up Sudan's pound. The package aims to stabilise the country's fiscal position, which in the past has spent an estimated 70 per cent of the budget on security. Moving forward Khartoum will need to implement structural reforms to its economy which will require greater financial backing.

“Besides its Gulf allies, Sudan will also look toward Egypt and Ethiopia for aid. However, China will be Sudan's major donor as it has significant investments in Sudan's oil sector,” said Sreya Ram, research Analyst at The Economist Intelligence Unit. “The authorities will also try to get a financial aid package from the IMF, but that will not be forthcoming until a civilian transitional council is formed and a stable government is established, which will happen only over the longer term.”

The Institute of International Finance (IIF) said Sudan’s practice of “monetising the fiscal deficit led to rapid growth in the money supply -- over 60 per cent year-on-year in both 2017 and 2018 -- leading to rapid inflation.”

In the near term, consumer prices are likely to remain high, "amplified by the sharp depreciation of the Sudanese pound,” IIF said. “However, we expect a downward trend if the authorities show clear signs both in words and in actions of a sustained and enhanced commitment to tightening monetary policy.”

While the all-powerful army and politicians try to decide, who will run the country in the future, the $500m deposit from Saudi Arabia and the UAE to Sudan’s central bank will support the Sudanese currency– but only in the short term.

“A stable government, better liquidity and a strong external sector is what is required to ensure long-term stability in the foreign exchange market and boost growth. However, we expect this to happen only over the longer term,” said Ms Ram of the EIU.

Besides aid from allies, the chance of foreign investment flowing to the country is unlikely in the short-term despite the removal of the US sanctions in 2017. The country had little investment from western countries in the past and in the current situation, whatever foreign investment Sudan attracted is likely to decline in the wake of uncertainty.

Though Chinese companies are increasingly becoming risk averse, especially with regard to states perceived to have poor repayment records "some investments into Sudan's oil and gold sectors are likely to be forthcoming from China,” Ms Ram said.

Sudan needs to reduce inflation and stabilise its currency, risks that "would act as major deterrents to substantial foreign investment,” she added.

Khartoum could also help turn its economy around by renegotiating a transit fee for South Sudan’s oil exports through its territory. Both countries have an agreement under which South Sudan reportedly pays transit fees per barrel for exports. However, transit fees are well below the levels originally agreed in 2013, when international oil prices were much higher, and South Sudan continues to run up arrears relating to these payments owing to domestic instability in its own territory.

For the country to restore confidence in its economy, the political situation would need to stabilise before any economic reforms can be implemented, Ms Ram said.

"The most effective solution would be direct loans or aids received into developing its infrastructure and capital projects,” she added. “These will restore some confidence for investors …. [and] implementing policies to encourage private investments into the oil and gold sectors is essential.”