S. Sudan oil shutdown could fuel inflation, unrest

JUBA (Reuters) - South Sudan's shutdown of its oil production could stoke inflation and unrest unless the new nation can find alternative sources of funding to help prop up its currency, a senior finance ministry official said on Thursday.

The central African nation declared independence from Sudan in July and has since been embroiled in a dispute with its northern neighbour over how much it should pay to pipe its crude exports to the Red Sea terminal at Port Sudan.

South Sudan shut down its oil output of roughly 350,000 barrels per day - about three quarters of the united country's total - last month after Sudan took some of the crude to make up for what Khartoum called unpaid fees.

If the shutdown continues, it could have "serious implications" for the nation, which depends on oil for about 98 percent of government revenues, South Sudan's Deputy Minister for Finance and Economic Planning Marial Awou Yol said.

"Our currency is not floated. It is being supported to stand at where it stands now. If we lose 98 percent of our revenues that come from oil, definitely we will have no dollars to support the currency," he told Reuters in an interview in his Juba offices.

He said the currency's value would weaken if the government stopped supporting it "and we will have a lot of inflation, we will have unrest on the streets. Such is possible."

Supporting the South Sudanese pound for up to a year would be "no problem", Awou Yol said, without giving details. "We can support ourselves for a reasonable period of time."

Financial analysts have estimated the country will struggle to pay salaries, cover daily expenditures and support the currency after just a few months if the oil shutdown continues. The central bank does not publish details on its foreign currency reserves.

South Sudanese officials are now discussing the possibility of getting credit using the country's oil reserves as collateral to help it meet expenses, Awou Yol said.

"We should approach a number of friends, a number of creditors, a number of people with good hearts. Because up the road we have our oil in the ground. We can mortgage it to get loans. What is wrong about that?" he said.

Awou Yol said it would be easier to get credit to support projects like roads, bridges, agriculture or an alternative oil pipeline than it would be for salaries, but such loans could help free up resources for the state to meet other obligations.

Salaries for civil servants, the army and others now make up between 40 to 50 percent of the budget, he estimated.

BUDGET SHORTFALL

Juba and Khartoum are scheduled to resume oil talks in the Ethiopian capital Addis Ababa on Friday. Awou Yol said South Sudan had received "reports" that indicated the atmosphere would be improved this time around.

"Whether they compromise tomorrow or next month, they should have to compromise. That would be good for both countries, not only for the south, but for the north," he said, pointing to high inflation and a depreciating currency in Sudan.

In the meantime, Juba would look at ways of using the money it does have on hand to help ease the budget shortfall, for example by building refineries that could help feed domestic consumption, Awou Yol said.

Refineries, in addition to a new road leading out of the country, could also allow South Sudan to truck refined and unrefined oil products to neighbouring Ethiopia, Kenya and Uganda, he said.

The finance ministry was also pushing ahead with plans to increase customs and taxes collection by cracking down on "unauthorised" checkpoints and other collection points along the main routes from Uganda, Awou Yol said.

That - along with streamlining bureaucracy, increasing policing of smuggling and taking other measures - could double the roughly 55 million South Sudan pounds per month of customs and taxes the government now collects, he said.

South Sudan seceded from Sudan under a 2005 peace deal that ended decades of civil war with the north. About 2 million people died in the conflict, fought over ideology, religion, ethnicity and oil.

Yol said in September the central bank had introduced a "managed float" for the South Sudanese pound which it aimed to keep between 2.9 to 3.3 pounds to the dollar by regularly supplying the market with dollars.

The official rate on Thursday was 2.96 pounds to the dollar. On the black market, a dollar buys about 3.5 pounds.