Blood and oil tinge South Sudan's first birthday - Reuters

Cleaners have swept Juba's dusty streets, hawkers have been peddling red, green and black national flags, and government workers have hung colorful bunting from lampposts to prepare for the ceremonies.

"Together we walk the land of freedom," read a 20-foot independence day billboard near the airport showing President Salva Kiir in step beside Vice President Riek Machar.

South Sudan split from Sudan after a civil war that killed some 2 million people over two decades, becoming the world's newest nation. But the jubilation that saturated the ramshackle capital last year has dimmed.

The government is struggling to build institutions and stamp their authority over a vast, gun-riddled territory.

Prices have been soaring, especially since the country shut down oil output in a row with Khartoum last January, erasing 98 percent of state revenues and the main source of hard currency.

Many South Sudanese have been forced to tighten their belts while official corruption has gone largely unchecked.

"Now we are struggling for even the basic needs," one government employee said as she sat in a traffic jam, cursing at the luxury cars creeping along newly-tarmacked streets.

"We've given the government a lot of responsibility, allowed them to take decisions on our behalf but they don't make any consultations. They shut down the oil without telling us anything and they didn't even have a plan B."

WOUNDED LION

South Sudanese voted overwhelmingly to secede in a referendum last year that was promised in a 2005 peace deal that ended the war over ideology, religion, ethnicity and oil.

Amid pomp and flag-waving, the former guerrillas of the Sudan People's Liberation Movement took full control of the country on July 9, 2011.

They also took about three-quarters of Sudan's oil output, bringing in billions of dollars that many citizens hoped would be channeled to develop a nation where just over a quarter of adults can read and life expectancy is under 50.

Instead, officials are now scrambling to find enough money to keep basic services running.

Businessman Tong Albino Akot said the government's new interest in collecting taxes was a positive step, but his agriculture and import venture was feeling the sting.

"The government tried to explain that there's no money. They're even getting tough on income tax. They're like a wounded lion opening its mouth. You can feel it," Akot said.

"There's no dollars. There's no oil so the government doesn't pay (contractors) on time and sometimes not at all."

Corruption and mismanagement have not helped. In June, Kiir sent a letter to current and former officials asking them to return $4 billion of "stolen" government money.

Like many other South Sudanese, Akot balked at the figure: "If there's $4 billion outside the country and they're asking us for pennies, why don't they return that money first?"

FLOWER OF FREEDOM

Independence has also failed to end violence both inside the country and on the border with Sudan. In April, South Sudan's army occupied an oil-producing region also claimed by Sudan, bringing the countries close to a new war.

A few months earlier, the armed forces failed to prevent cattle raids between warring ethnic groups that killed hundreds of people.

Human rights groups say weak rule of law allows security forces to carry out abuses against civilians with impunity.

The challenges have not dampened everyone's optimism.

Leaning back on a plastic garden chair in an unfinished building near Juba airport, student Pater Achuil sipped a glass of milk and listed the ways life had improved since secession.

"We have waited for the flower of freedom," he said, shards of concrete poking through the capital's skyline behind him. "The difference you can feel here in South Sudan is that ... even the government cannot hassle you (now)."

But moments later, police in blue camouflage brandishing Kalashnikov rifles raided the tea stall, confiscated the shisha water pipes and loaded the chairs onto a truck.

Achuil stood with his friend to the side, baffled. The officer brushed off a question about whether the raid was part of a drive to clean up Juba ahead of celebrations.

"This is not your concern," he said.

(Editing by Alexander Dziadosz and Robin Pomeroy)