Public Information Notice: IMF Concludes Article IV Consultation with Sudan

June 3, 1999

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 12, 1999, the Executive Board concluded the Article IV consultation with Sudan1.

Background

In March 1999, Sudan reached understandings with IMF staff on a medium-term reform and adjustment program covering the period 1999–2001 to be monitored by the staff. The program, which is based on the government’s four-year economic recovery strategy, follows the encouraging implementation of two staff-monitored programs in 1997 and 1998. In turn, these programs built upon the progress made in deregulating the economy during 1992–96, which included: streamlining investment procedures, initiating a public sector reform and privatization program, instituting major agricultural reforms, eliminating most of the non-targeted consumer subsidies, and made some progress in liberalizing the foreign trade and exchange regimes. While the economy responded positively to these reforms, macroeconomic imbalances persisted with high inflation caused by weak fiscal and monetary policies, and an inadequate exchange rate regime.

The tightening and rebalancing of fiscal, monetary, and external policies, and the initiation and implementation of major structural reforms during 1997 and 1998 resulted in significant macro-economic stabilization and laid the foundation for sustained economic growth. Real GDP growth accelerated to about 6 percent on average in 1997 and 1998; annual average inflation declined from 133 percent in 1996 to 17 percent in 1998; rates of return on deposits became positive in real terms, and financial disintermediation was halted; the foreign exchange market was unified; private transfers from abroad increased; export volume growth was strong; and the current account deficit (on a cash basis and excluding public transfers and oil-pipeline related imports) declined from 7.6 percent of GDP in 1996 to 4.1 percent in 1998. Furthermore, two instruments that are compatible with Islamic finance principles and suitable for indirect monetary control (the Central Bank Musharaka Certificate) and non-inflationary financing of the budget (the Government Musharaka Certificate) were introduced for the first time in Sudan.

Despite these promising initial steps, Sudan still faces formidable obstacles to achieving sustainable and higher economic growth, external viability and improved social indicators. The infrastructure has suffered from years of underinvestment, which in part reflects a weak tax effort. The internal conflict, which is diverting budgetary resources away from productive use, and difficult political relations with some countries have limited access to external resources and undermined private sector confidence. Besides, the external debt burden is unsustainable. Reforms are also needed to enhance the intermediation capacity of the financial system, decrease the size of the public enterprise sector, and further reduce trade protection.

There has been some progress toward normalizing Sudan’s relations with international and regional financial institutions and donors, including the World Bank, the African Development Bank, the Islamic Development Bank, the Arab Fund for Economic and Social Development, the Arab Monetary Fund, the Saudi Fund, and the OPEC Fund.

The newly adopted medium-term program builds on the gains achieved in macroeconomic stabilization and liberalization of the economy. It envisages: (i) maintaining economic growth of about 5.5 percent, with the possibility of accelerating growth to 7–8 percent if external support for infrastructure rehabilitation were to resume; (ii) reducing inflation to below 5 percent by 2001; and (iii) lowering the external current account deficit (on a cash basis and excluding the oil trade and pipeline related imports) by over 2 percentage points of GDP. In support of the above objectives, and given the absence of external financing, the program targets virtual balance (on a cash basis) of the government budget over the medium-term. Strengthened revenue mobilization— notably through the introduction of the value added tax (VAT) in 2000—will be accompanied by continued restraint on non-priority spending, while providing for the targeted increase in public investment and social outlays. This would allow a substantial increase in credit to the private sector in support of the growth objective while gradually reducing the rate of money growth, consistent with the external and inflation targets. The program also envisages wide-ranging structural reforms, including the privatization and/or restructuring of public enterprises, improving the functioning of the foreign exchange market, encouraging bank intermediation, strengthening social policies, with emphasis on human development and poverty alleviation, and an ambitious trade reform.

Executive Board Assessment

Executive Directors noted the significant progress made by Sudan, under very difficult circumstances, to begin reversing two decades of economic decline and to lay the foundation for improved macroeconomic management through price and exchange market liberalizationand the elimination of subsidies, reinforced by tight demand management policies. As a result of these reforms, growth had remained robust and inflation had been reduced sharply.

However, Directors stressed that broader and deeper reforms were needed to achieve sustainable economic growth and external viability. In this regard, they underscored that strengthened demand management policies would be critical for lowering inflationary expectations and maintaining orderly conditions in the exchange market. Directors also encouraged Sudan to accelerate reforms in order to address major impediments to growth, in particular in the trade, financial, and social sectors, and to make every effort to improve relations with major creditors.

Directors welcomed the authorities’ commitment to consolidating progress toward macroeconomic stability and creating conditions for a sustainable increase in savings, higher investment, and rising debt service payments. They noted that the authorities’ medium-term staff-monitored program for 1999-2001 and efforts to improve creditor relations will help to prepare the economy for the time when further support from creditors would be forthcoming, and the conversion of the staff-monitored program into a Rights Accumulation Program could be considered. This will only be achieved if the macroeconomic and structural measures are implemented fully and on time.

At the same time, Directors noted that the medium-term macroeconomic targets of the program were modest, with no growth acceleration and only slow improvement in the external position, but they saw this as realistic given the difficult conditions facing the country. Directors also acknowledged the risks to program objectives stemming from Sudan’s high degree of vulnerability to terms of trade and other exogenous shocks, and from the limited technical assistance at present available outside the macroeconomic field.

Directors expressed concern about the recent rise in inflation, which needed to be monitored carefully. They urged the authorities to improve monetary control by using effectively the new debt instruments, to carefully manage bank liquidity by monitoring the movements of public entities’ deposits at the Bank of Sudan, and to abstain from further reduction in the indicative Murabaha rates until demand pressures abate. Directors encouraged the authorities to preserve the market-determined exchange rate and to further improve the functioning of the exchange market. They noted that the recent significant depreciation of the real effective exchange rate had contributed to the strong growth of export volumes and private transfer receipts. Directors urged the authorities to strengthen banking supervision and prudential regulation. In this connection, they called on the authorities to work closely with the upcoming Fund technical assistance mission to evaluate the soundness of the banking system and identify the required corrective measures.

Directors welcomed the medium-term fiscal strategy aimed at increasing investment in the social and physical infrastructure and further reducing domestic financing. However, they noted that, despite the start of revenues from oil, substantial improvement in tax administration was needed to achieve the revenue goals. While acknowledging the administrative difficulties for the implementation of the value-added tax, Directors stressed the critical importance of introducingthat tax and regretted the delay in doing so. They also emphasized the need to phase out exemptions under the Investment Encouragement Act, so as to broaden the tax base and improve tax revenue collection. The envisaged further enhancement of fiscal transparency and ongoing efforts to improve fiscal relations between the federal government and the states were welcomed.

Directors encouraged the authorities to reorient expenditures toward more productive uses. They stressed that a peace agreement, while not only desirable in itself, would also help to free up resources for expenditure on poverty alleviation and priority infrastructure. Some Directors emphasized the need for greater transparency on data, including on military spending.

Directors were encouraged by the ambitious transition to an open economy envisaged in the program. They called on the authorities to adhere to their commitments to reduce trade tariffs, remove the remaining nontariff barriers, phase out foreign exchange surrender requirements, and eliminate any remaining obstacles to commercial bank foreign exchange intermediation.

Directors found the strong response by the private sector to the structural reforms promising, and called for continued progress in privatization, agricultural deregulation, and human capital development. Directors expressed their concern that dire poverty remains widespread in Sudan, and encouraged donors to provide Sudan with technical assistance for improving social infrastructure and statistics.

Directors urged the authorities to continue making further progress in improving the quality, coverage, periodicity, and timeliness of statistics. In particular, stepped-up efforts should focus on the substantial deficiencies in the collection of fiscal and social data from the states, which continue to undermine the formulation of appropriate social policies.

Directors noted Sudan’s full adherence to the schedule of payments to the IMF in 1997/98, and urged the authorities to maintain this performance in 1999 and beyond. They welcomed the authorities’ commitment to make payments to the World Bank and other non-IMF creditors in 1999, and underscored the importance of Sudan reaching agreements with other creditors as soon as possible. They welcomed the technical assistance that could be provided by the World Bank as a result of the beginning of payments to that institution. Directors reiterated the expectation that any shortfall in payments to non-IMF creditors would be paid to the Fund.

Overall, Directors found that Sudan’s performance under the staff-monitored program had been satisfactory, both in terms of policy implementation and payments to the IMF, despite a few delays in implementing structural measures. They strongly encouraged the authorities to persevere in implementing policies in accordance with the medium-term staff-monitored program and to improve relations with creditors in order for consideration to be given to converting the medium-term program into a Rights Accumulation Program.

Sudan: Selected Economic and Financial Indicators

1995 1996 1997 1998 1

In percent
Domestic Economy
Change in real GDP 4.4 4.7 6.6 5.0
Change in consumer prices (end of period) 71.0 114.0 32.0 8.0
In millions of U.S. dollars 2
External economy
Exports, f.o.b. 556 620 594 596
Growth in volume (in percent) 25.6 9.8 7.9 8.2
Imports, f.o.b. -1,219 -1,547 -1,580 -1,925
Growth in volume (in percent) 14.3 22.0 10.0 35.9
Current account balance (accrual basis) -1,479 -1,548 -1,639 -1,996
Current account balance (cash basis) 3 -610 -580 -420 -360
Capital account balance (including errors and
omissions and other private capital flows) 368 371 364 698
Overall balance -1,111 -1,177 -1,275 -1,297
In percent of GDP 2
Current account balance (accrual basis) -20.8 -20.4 -19.9 -22.6
Current account balance (cash basis) -8.6 -7.6 -5.1 -4.1
Non-interest current account balance -8.6 -8.3 -6.7 -9.8
Change in real effective exchange rate
(In percent) 4 -23.9 6.7 2.3 -5.1
Financial variables
Central government balance (cash basis) 5 -3.2 -3.8 -0.7 -0.7
Change in broad money (in percent of beginning
broad money stock) 147.2 65.1 37.0 29.6

1Preliminary estimates.
2Unless otherwise noted.
3Excluding oil-pipeline related imports, interest due and public transfers.
4(+) = appreciation.
5Excludes interest arrears.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.



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