Sudan faces difficult economic choices, IMF report shows

July 22, 2009 (WASHINGTON) — The deteriorating economic indicators in Sudan will require the government to undertake major changes to fiscal, monetary and exchange policies, a report by the International Monetary Fund (IMF) shows.

Last week, Sudan has formally asked the IMF to implement a monitoring program of the country’s economic performance and policies to achieve a set of goals including sustaining economic growth, maintaining macroeconomic stability, and rebuilding foreign exchange reserves.

The Sudanese finance and national economy Minister Awad Al-Jaz and the Central Bank governor Saber Al-Hassan said in their letter to the IMF that Sudan has been negatively affected by the global financial crisis.

The IMF sent two missions to Sudan this year to assess the economic situation after which they prepared a report that was released to the public yesterday.

The report reveals a sharp drop in Sudan’s foreign exchange reserves across the years from $2 billion in mid-2008 to $300 million in March 2009, which covers only 2 weeks of imports for the East African nation.

The IMF said this was caused by the fall in oil prices, which is Sudan’s main export, and the “heavy” intervention by the central bank to sustain the exchange rate.

However, the IMF said that Sudan appeared to have slowly reduced its intervention in the foreign exchange market allowing the currency to depreciate compared to the US dollar from 4% in the fourth quarter of 2008 to 8% in the first quarter of 2009.

The fast depletion in foreign reserves has prompted Sudan’s central bank last month to impose a cap on the amount of hard currency available to individuals travelling abroad.

The IMF projected the real GDP growth to slow down to 4% compared to 11.3% in 2006, 10.2% in 2007 and 6.8% in 2008.

The world financial body also criticizes the 2009 budget saying that its underlying assumptions proved wrong including the forecasted oil price of $65 per oil barrel compared to updated projected figures of $36.8 for the current year and $44.7 in 2010.

Moreover the IMF says that “half of the proposed foreign disbursements underpinning the capital expenditure budget were unidentified, suggesting that the assumptions on foreign financing were not realistic”.

The report estimates Sudan’s debt to have increased by a stunning $15 billion in 2000 to about $34 billion due to a “further buildup of arrears to Paris Club and non-Paris Club creditors….and new drawings from Arab multilateral and bilateral creditors, as well as from China and India”.

Sudan informed the IMF that it in light of Sudan’s difficult foreign exchange position their debt repayments to the fund will be at $10 million for 2009 compared to a total of $50 million in 2007 & 2008.

While the report wants Sudan to reduce non-concessional borrowing to $700 million in 2009, the government stated that the “decline in oil prices, lack of access to more traditional forms of concessional finance, and pressing development needs associated with the various peace agreements, had rendered some non-concessional borrowing indispensable”.

The IMF recommended a set of measures some of which are unlikely to be popular among the ordinary citizens particularly changes to the tax code and spending on special programs.

“There is an urgent need to conduct a comprehensive review of tax policy and to move expeditiously towards…reducing VAT exemptions….reforming the personal income tax (including by lowering the tax threshold and removing exemptions to persons aged 50 years and above) and…clarifying tax jurisdiction issues with sub national governments” the IMF says.

“New revenue measures (over and above those already incorporated in the 2009 budget) include an increase in taxes on beverages and cigarettes, and a considerable strengthening in tax collection efforts”.

The IMF advised Khartoum to curtail intervention in the foreign exchange market and remove exchange restrictions saying “it will not address the underlying problem of excess demand for foreign exchange”.

The depreciation of the Sudanese pound against the US dollar may lead to increase in prices of imports affecting the cost of living and inflation rates but the IMF downplayed such impact saying that the declining trend in world food prices and the slower growth in domestic demand should help reduce the inflation concerns associated with greater exchange rate flexibility”.

The IMF also wants the Sudanese government to reduce government expenditure particularly “subnational transfers” to the states suffering cash shortfall and capital spending.

The report acknowledges that these measures may have an adverse impact on the “growth and vulnerable groups of the population”.

“Accordingly, the [IMF monitoring] program calls for full spending of higher-than programmed revenues on infrastructure projects and subnational transfers, and underlines the importance of introducing a targeted social safety net to replace blanket subsidy schemes”.

The report states that Sudan must step efforts to strengthen the banking system which has been plagued by a surge in bad loans. The IMF has particularly singled out the “troubled” Omdurman National Bank (ONB) which it says requires “quick resolution”.

Sudan says that the bank accounts for more than half of the Non Performing Loans (NPL) and about 28 percent of bank lending in the country.

The government told the IMF that they will finalize a plan to restructure ONB by the end of 2009 based on the recommendations of an independent audit.

Sudan is to submit more than a dozen status reports to the IMF relating a wide range of indicators some on a weekly basis while others on a monthly or quarterly basis as part of the monitoring agreement.

The IMF warned against a “weakening of political resolve” by Sudan to implement its recommendations saying that the upcoming 2010 elections could mean that unpopular tax and expenditure policy reform may be delayed until late 2010 or 2011.

The monitoring program is voluntary and Sudan can opt to cancel it at any time.

(ST)