Home | Comment & Analysis    Wednesday 11 July 2018

Comprehensive political reform is the only way to address Sudan economic crisis


By Hafiz Mohamed

Sudan is facing multiple crises, mainly due to unclear political vision to tackle them, the current chronical economic problem is the manifestation of that. The Government of Sudan (GoS) decided to apply a package of measures to address the huge gap in its finances, most important components of the package is the increase of custom duties by over 200% and that will have an impact on the prices of most of goods by that they decided to liberalized the market by allowing companies to import it at the parallel market exchange rate, plus others austerity measures, 2018 budget allocated over 70% of the spending on defense and security with less than 10% in health and education. At the same time they have devalued the official exchange rate of the Sudanese pound and now US$ 1 equal SGD18, and created a parallel rate( US$1 equal SDG30), the value of Sudanese pound in the open market now is (US$1=SDG40) and that increased the prices of most essential commodities raising inflation rate to over 60% One of the most important justifications for the removal of subsidies is that the beneficiaries of the subsidies are the well-off people at the expense of the poor people and they will provide direct assistance to the low-income families so as to overcome the price increase due to the new measure introduced .

The government economic policies during the past three decades, did not reflect a bias towards poor people in the society , as the most important measures which target the rich are the income tax and business profit tax, but Sudan apply the lowest income tax in the world as the high rate is 15%, in the two decades the government has raised the indirect taxes many time by introducing Value Added Tax (VAT) and increased it to 17% at the same time customs duties has increased by over 200% in the current budget, due to the combination of tax increase and devaluation of the Sudanese currency the prices of locally produced commodities such like meat, milk and vegetables have increased with even higher rate. The tax system works in favour of the few rich as it includes many loopholes which helping them evading paying a fair tax. While targeting the least poor segments of the society directly and very sharp by increasing the value-added tax and customs duties those are the indirect taxes and do not differentiate between the rich and the poor.

The introduction of Tamkain (Empowerment) policies during the last two decades sanctioned nepotism and corruption as it becomes the norm.

Second: The new monetary policy

To address the economic crises facing the country the government opted to use some monetary policy measures instead of addressing it holistically through political reform and macroeconomic policies, the measures they introduced have complicated the situation even further they have implemented the following policies:
1- Limiting cash withdraw from banks:
To stop the rapid deterioration of the national currency ( Sudanese Pound) they decided to limit cash withdraw from the bank they aimed to target foreign currency dealers as most of their transactions are in cash , but by doing that they stop other economic activities as 80% of the commercial transactions in the retail and wholesale sectors completed by cash as most Sudanese don’t have bank accounts or they don’t trust dealing with cheques, The other reason Sudan lack other forms of payment methods such as point of sale in which debit and credit cards, with the shops and other commercial outlets, and there are no debit cards or credit cards.
This policy has reduced the commercial transactions and that will have an impact on the government revenue in term of tax payment (Value Added Tax) and that will increase the hole in the government finances and it will force it to resort to deficit finance by print banknote and that will fuel inflation which already too high
2- Banning Import
They have decided to ban import from own resources (non-value) and restrict it to the finance of the banking sector as the time when bank doesn’t have enough foreign currencies reserve to cover the needs of importers, and that will have serious impact as the country will soon run out of many essential commodities , and that is apparent now with the shortage of fuel which the country is facing and that will hamper the preparation for the new agriculture seasons
3- In 2018 budget the government budgeted to get the amount of 5 billion US dollars from Sudanese expatriates’ remittances, but actually they are not expecting to get 50% of that amount, and that will have an impact on their balance of payments.
4- At the time when the country is facing deep recession and the economy needs stimulus measure so it can start growing they are using deflationary measures just as restrict bank borrowing and reducing cash in circulation and that will deepen the recession even further.
5- All their attempt to get short-term borrowing especially from the Gulf states has failed it is clear they have no intention to bail them out as they use to do in the past even though they sent their troops to fight a proxy war in Yemen. It is clear from the recent speech of the finance minister in the National Assembly that they run out of options

Third: The Government Reshuffle
The recent government reshuffle within the National Congress Party(NCP) ministers and state governors has nothing to do with addressing the economic crisis its mainly to consolidate the power of president Bashir in preparation for his re-election in 2020, that shows the rift within the NCP and that will continue and weaken their grip on especially ally if the current economic crises continue. The reshuffle is just recycling old faces without injecting any new visions or ideas, the problem can be addressed by changing the whole system and the way the government is run.
What the country needs to move forwards a change of the system and dismantling the centre of powers, so corruption can be rooted out and establishing a system of transparency and accountability, their attempt to fight corruption will not work because its selective and use to punish political rivalries. Sudan is now ruled by one person (the president) surrounded by incircle and has the power to override any decision by ministers or within the party (NCP), many senior members within the NCP and the Islamic movement strongly believe that is hindering any genuine political reform.

Fourth: Combating Corruption
Recent the NCP government took some steps to fight corruption by arresting some businessmen most to them very close to the ruling party, they promise to take legal action against them, but they are selective and targeting certain people not all of them as that mainly driven by the power struggle within the NCP. Without radical political reform, which dismantles centres of power they will not be able to root out corruption

Fifth: Political Reform
1- To pave the way for any economic recovery Sudan, need radical political reform, first to start with a genuine and comprehensive peace process to achieve a sustainable peace in all conflict zones, and that will save a huge amount of money through cutting security and defence budget.
2- Genuine and inclusive political dialogue to set the constitutional principles and terms of an interim period which will lead to a free and fair election after creating the conducive environment for it.

Sixth: Diagnosis of the economic crisis in Sudan
The problem facing Sudan economy is in structural imbalances because of poor infrastructure of the economy and the inability to absorb any shocks due to internal or external factors.
1 -The huge budget deficit.
2 - The balance of trade/payment deficit that led to a sharp deterioration of the national currency value
3 - External debt crisis, the debt for Paris club members is over 50 billion US dollar most if its interest and fines due to default in paying debts instalments, but there are other debts which are undeclared from Arabs financial institution and Chinese Banks.
4 - Sharp rise in the rate of inflation, particularly food prices the official inflation rate now over, 63% without any rise in the average salary.
5 - High unemployment rate among the youth specifically universities graduates.
6 - Shrinking economy due to the deep recession and that led to the sharp decline in the gross domestic product (GDP) and led to decrease of the government budget from $ 10.5 billion in 2010 to 3.5 billion in 2012, the forecast of 2018 budget has increased it to around 8 billion us $ but that is unrealistic, that was mainly due to the loss of oil revenue but at the same time non-oil products have also declined.
7 – Sharp rise in the poverty level due to, many factors such as displacement and low income for families in Sudan.

Seventh: Economic Reform Needed
1- For ensuring the success of any economic policy radical review for the government accounts and financial systems to ensure all the loopholes are closed and to strengthening the monitoring and audit systems and ensure there are robust and rigorous measures to compact corruption.
2- Sudan needs to undertake the needed reforms to meet the criteria for debt relief under the UN high indebted countries initiatives, include a clear strategy for poverty eradication.
3- Reform the rule and regulation covering the banking systems and restructure Sudanese bank as most of them don’t meet the international criteria (Basel Accord) for capital adequacy and liquidity ratios

The Way Out
The only way by which Sudan can address its economic crises is by taking a serious political reform by starting a holistic and comprehensive process which address the issues of governance, end the wars and agree on a roadmap for transition to democracy by establishing transitional institutions to lead that process.
First: Political Reform: -
The political reforms must start with an agreement which stop the ongoing wars as that consume more than 75% of the total budget, used for mass killing and destruction those extravagant resources can then be spent on investments in health services and education reform, infrastructure of the main economic activity which is agriculture and processing manufacturing of agricultural products and that will create jobs and boost the economy..
The political reform must include genuine democratic reforms leading to free and fair elections and establish a state based on citizenship rights, rule law recognition of Sudan multi-ethnicity multicultural, freedom of belief with the participation of all Sudanese and that begins with:
1 - negotiation with the armed movements to reach a just and lasting peace agreements which addresses the underlying causes that led to the military struggle to achieve political rights and mitigate the impact of those wars on areas of conflicts and working to return displaced persons and refugees, to their villages.
2 – To Establish transitional government which include representatives of all political parties, armed movement and all the states where everyone is treated equally so that no one has a veto by which he/she can block the implementation of the transitional programme.
3- Reforming all government institution to make them more transparent and accountable, institutions such as the army and all law enforcement and security organs. Respect for human rights according to the international norms and standards.
4 - To agree on a roadmap in a transitional period so as to lead to a final settlement by establishing a state based on citizenship, equal rights and rule of law.
5- Addressing the issue of transitional justice, reparation for victims and their families.
6 - Pave the way for free and fair elections.

Unlocking the Gate to Economic Recovery and Regeneration
The only way to unlock the gate and to pave the way for serious economic reforms to attract investment and regenerate the economy by carrying out serious political reforms. And that will pave the way for:
1 – removing Sudan from the list of countries sponsoring terrorism and according to that lifting the remaining U.S.A. sanctions against Sudan and that will open new Investment opportunities with the inflow of foreign capital and import of modern technology.
2 - Paving the way for debt relief and that will improve Sudan’s creditworthiness, so it can borrow from leading international financial institutions to invest in development projects, which will lead to job creation so as to employ millions of the unemployed and it helps in the reverse migration of large numbers of Sudanese professionals, forced to leave Sudan due to the economic situation and the NCP policies.
3 - Sudan now isn’t qualified for debt relief programs, grants and subsidies for poverty alleviation in the least developed countries and those programs include the following: -
A - Debt Relief under the Heavily Indebted countries.
B - This program is based on the state’s plan to fight poverty through debt relief and its plan to lift the most destitute and poor within the country.
C - Clear and genuine political and democratic reform and fighting corruption.
The government’s attempt to impose harsh austerity policies in the country of most of its people live below the poverty level will lead to social results difficult to treat.

If the NCP government is serious in addressing the consequences of its policies in the last two decades, it must address the underline causes of those crises, the problem in Sudan is not lack of resources, but mismanagement of those resources, taking short-term measures do not resolve them. They must introduce policies which target those who benefited from its policies in the last three decades, at the expense of millions who have been impoverished such measures include the followings : -
A – Increase Income tax band for high- income earners by as much as 40% at the same time Increase business profits tax rate to 40%.
B - Reform rates and property taxes.
C - Re-evaluate the public institutions that have been sold less than half their real values and the impose windfall taxes on the owners of those institutions for a period of up to 5 years. The windfall-Tax then can be invested in retraining graduates who have spent years without a job, so they can find their way in the job market.

Other Possible Scenarios
There are many changes in the regional and international politics, the recent development in Ethiopia is a clear sign of the maturity of it political leaders by putting the interest of the country and its people over their narrow personal interest, the recent Khartoum agreement by South Sudan political leaders also goes on that direction and their seriousness will be tested in the coming few months. But the ruling elites in Khartoum still haven’t learned the lessons insisting on putting their narrow personal interest over the interest of the country and its people the current status quo is not an option as no one can predict what will happen within one week as the GoS adopting hand to mouth and buying time tactics, waiting for miracle to bail them out.

The author is a former banker and civil society activist. He can be reached at hafiz2502@hotmail.com

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