South Sudan to survive without oil exports: deputy finance minister - Reuters

South Sudan is rich in oil, but is at loggerheads with Sudan from which it split in July 2011, and has shut down its oil production because of disputes over pipeline fees with Sudan, through whose territory its exports flowed.

The new African nation reached an interim deal last week with Sudan on how much it should pay to export its oil through northern pipelines, ending a dispute that saw Juba shut off its entire oil output in January. Oil revenue made up 98 percent of the budget.

The interim oil agreement marks a step towards ending hostilities between the neighbours which came close to war in April, the worst violence since South Sudan became independent.

But a wider peace agreement is needed for the oil deal to become effective with a new round of talks starting in two weeks. Both nations, which share a deep mistrust and have often broken agreements, need to reach a deal to improve security at their joint border, much of which is disputed.

The mainly Muslim north split from the south where most follow Christian or African faiths after decades of civil war ended in a 2005 peace agreement.

South Sudan's Deputy Finance Minister Marial Awuou Yol said it time for the neighbours to make a lasting peace as oil was the lifeline for both economies.

"In fact, it's now both of us who are facing an impending collapse (of our economies)," he told Reuters in an interview in the capital Juba.

The young nation would survive without oil as it had 1 billion South Sudanese pounds (SSP) in reserves -- around $300 million based on the official rate to cover government salaries which make up the biggest budget component, thought Yol did not as for how long.

With the United Nations running an extensive welfare program in the poor nation the government's biggest worry is to pay salaries of its bloated army, a constellation of former militias estimated by some officials to number 200,000.

"The worst assumption is, if there is no (final peace) deal reached with the north, still we'll be surviving," Yol said.

Since the oil shutdown South Sudan, one of the world's least developed countries, started a previously almost unknown tax enforcement, collecting now up to 60 million SSP a month.

"If we're to collect about 60 million SSP per month, it means we will be collecting more than 700 million SSP in one year, and that would be above our budget target," he said.

Without a final oil deal, South Sudan would borrow abroad using its oil and mineral resources as collateral to plug an estimated budget deficit of 3.7 billion SSP.

"We've made some arrangements with friendly countries for loans for budget support," Yol said, without giving details

"We have projected that (budget support would) come from other sources, like external borrowing, like petroleum and mining concessions that we're going to give out to companies who are interested in investing in the oil sector," he said.

The government has also made arrangements to raise 1 billion SSP in domestic borrowing if needed, he said.

CURRENCY FALLING

South Sudan hopes to resume oil production in September but even if a security deal with Sudan was in place by then it needs to build up capacity.

Until oil revenues come in the SSP will further fall on the black market, the unofficial benchmark, because the central bank was no longer supporting it to preserve its reserves, Yol said.

On Friday, one dollar bought up to 5.5 SSP on the black market, compared with the official rate of around 3. The fall is fuelling inflation as South Sudan needs to import almost everything.

"People are facing tremendous difficulties...Prices are going up because our central bank is no longer supplying the market with the foreign currency," he said.

He estimated annual inflation to be around 80 percent, higher than the 60.9 percent reported for July by the statistics bureau.

But Yol said the oil shutdown has had also its bright sides because the government had learned how to collect taxes and cut spending.

He was confident that non-oil revenues could reach 10 percent in 2013, up from 2 percent before the shutdown.

"I am somehow excited about this oil shutdown activity because it has shown us the side of the economy we didn't know how to apply it," he said.

(Reporting by Mading Ngor; Writing by Ulf Laessing; editing by Ron Askew)