## 1ssdea2019001 ## Source details **Canonical URL:** [1ssdea2019001](https://www.imf.org/-/media/files/publications/cr/2019/1ssdea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1ssdea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1ssdea2019001.pdf.json) --- ### Recent economic developments and humanitarian context - Real disposable income (adjusted for terms of trade) is estimated to have declined by about 70 percent since independence in 2011. - Poverty headcount ratio increased from 50 percent in 2012 to about 82 percent in 2016. - Peace agreement signed in September 2018 improved prospects for lasting peace and economic recovery; formation of a new national unity government experienced a six-month delay. - Cessation of hostilities enabled reopening of some damaged oil wells and pushed up daily oil production (export) by about 20 percent in February 2019. - Inflation declined to about 40 percent in December 2018 from a peak of 550 percent in September 2016. - Exchange rate depreciated substantially in the last 18 months prior to the report. - Nearly 40 percent of the population are either internally displaced or live as refugees in neighboring countries; about 7.1 million South Sudanese require humanitarian assistance in 2019. - Humanitarian assistance since 2011 totals about US$10 billion; the US contributed about US$3.6 billion and the UK about US$1.1 billion. ### Fiscal developments, public finance issues, and near-term constraints - Loss of fiscal discipline, deteriorating public financial management, and contracting of non-transparent oil advances increased corruption vulnerabilities. - Shortfalls in revenue led to deep cuts in expenditure, including wages and operating expenses; cash deficit contained to an estimated 2.8 percent of GDP in 2017/18. - With cash rationing, arrears grew; civil servants’ salaries lagged by at least 3 months; in first half of 2018/19 salary arrears reached about 3–4 months. - Key near-term policy recommendations: - Strengthen oil management and transparency by an immediate stop of contracting new oil-backed advances. - Restore fiscal discipline and refrain from central bank financing. - Fast-track operationalization of the National Revenue Authority to bolster non-oil revenue mobilization. - Shift spending priorities from war to peace-building and increase spending in education, health, infrastructure, and rural development. - Debt sustainability: Based on external debt indicators, South Sudan is currently in debt distress; accumulation of arrears, low capacity to service debt, and low foreign exchange reserves indicate unsustainable debt dynamics. ### Monetary, banking, and exchange rate issues - Removal of domestic fuel subsidies and liberalization of the fuel market contributed to lowering inflation. - Authorities’ efforts to reverse fiscal dominance by reducing central bank budgetary financing contributed to lower inflation. - Directors recommended: - Pursue a tight monetary policy, including abstaining from providing credit to government. - Liberalize the foreign exchange market and abolish surrender requirements. - Adopt a unitary exchange rate system with market-determined rates. - Banking sector remains weak: many domestic banks are heavily undercapitalized and face rising non-performing loans (to more than 50 percent of total gross loans in some cases). - Bank of South Sudan (BSS) commitments welcomed: strengthen financial stability, adopt a sound banking resolution framework, and address undercapitalization. - Efforts to strengthen the AML/CFT framework were encouraged. ### Medium-term outlook, projections, and risks - Without peace and security, outlook remains extremely difficult with continuing threats to macroeconomic and financial stability, declining income, and deteriorating humanitarian conditions. - Under assumptions of sustained improvements in political and security situation, robust economic adjustment and reforms, budgetary discipline, and enhanced oil revenue management: - Fiscal deficit is projected to average 1–2 percent of GDP in the coming years assuming a robust recovery in oil production and higher capital spending. - Annual GDP growth could increase to about 6 percent a year, reflecting a recovery in oil production and in non-oil GDP. - Directors stressed the need for a transparent audit of Nilepet’s financial operations and auditing the current stock of domestic arrears with a credible clearance strategy. - Scenarios and risks: - Baseline (peace) vs Adverse (domestic risks realized) produce large divergences (examples): - Real GDP (percent change): Baseline 2019/20 = 8.1; 2020/21 = 6.6. Adverse 2019/20 = 1.0; 2020/21 = -2.6. - Inflation (average): Baseline 2019/20 = 26.4; 2020/21 = 11.0. Adverse 2019/20 = 40.1; 2020/21 = 48.2. - Gross foreign reserves (millions of US dollars): Baseline 2019/20 = 72.3; 2020/21 = 137.2. Adverse 2019/20 = 38.1; 2020/21 = 32.9. ### Selected key statistics and projections (as presented) - Real GDP (percent change): 2016/17 -13.0; 2017/18 -2.4; 2018/19 3.4; 2019/20 8.1; 2020/21 6.6; 2021/22 5.5; 2022/23 5.6. - Oil (real percent change): 2016/17 -19.8; 2017/18 3.8; 2018/19 12.7; 2019/20 17.6; 2020/21 10.5; 2021/22 4.4; 2022/23 3.8. - Non-oil (real percent change): 2016/17 -8.3; 2017/18 -6.1; 2018/19 -2.7; 2019/20 0.9; 2020/21 3.1; 2021/22 6.5; 2022/23 7.2. - Inflation (average): 2016/17 384.9; 2017/18 125.8; 2018/19 33.5; 2019/20 26.4; 2020/21 11.0; 2021/22 9.2; 2022/23 8.2. - Inflation (end-of-period): 2016/17 361.9; 2017/18 88.5; 2018/19 27.2; 2019/20 14.0; 2020/21 9.5; 2021/22 8.5; 2022/23 8.1. - Exchange rate (SSP/US$, average): 2016/17 85.3; 2017/18 127.8. Exchange rate (SSP/US$, end period): 2016/17 117.0; 2017/18 140.2; 2018/19 157.1 (Exchange rate as of April 24, 2019). - Broad money (percent change): 2016/17 87.2; 2017/18 64.3; 2018/19 33.4; 2019/20 20.4; 2020/21 14.1. - Total revenues and grants (percent of GDP): 2016/17 36.5; 2017/18 28.6; 2018/19 31.5; 2019/20 32.0; 2020/21 35.8; 2021/22 39.2; 2022/23 40.6. - Of which: Oil (percent of GDP): 2016/17 32.8; 2017/18 24.5; 2018/19 27.4; 2019/20 27.9; 2020/21 31.7; 2021/22 35.1; 2022/23 36.5. - Expenditures (percent of GDP): 2016/17 36.8; 2017/18 31.4; 2018/19 31.5; 2019/20 32.6; 2020/21 35.8; 2021/22 38.9; 2022/23 39.4. - Overall balance (cash, percent of GDP): 2016/17 -0.3; 2017/18 -2.8; 2018/19 0.0; 2019/20 -0.6; 2020/21 0.0; 2021/22 0.2; 2022/23 1.2. - Change in arrears (percent of GDP): 2016/17 4.5; 2017/18 3.3; 2018/19 2.4; 2019/20 0.7; 2020/21 -0.4; 2021/22 0.0; 2022/23 0.0. - Total Public Debt (percent of GDP): 2016/17 46.8; 2017/18 43.0; 2018/19 35.9; 2019/20 34.2; 2020/21 38.2; 2021/22 51.9; 2022/23 51.6. - Gross foreign reserves (millions of US dollars): 2016/17 28.3; 2017/18 33.0; 2018/19 41.3; 2019/20 72.3; 2020/21 137.2; 2021/22 253.0; 2022/23 513.0. - Gross foreign reserves (in months of imports): 2016/17 0.1; 2017/18 0.1; 2018/19 0.1; 2019/20 0.2; 2020/21 0.4; 2021/22 0.8; 2022/23 1.4. - Oil production (millions of barrels): 2016/17 42.0; 2017/18 43.5; 2018/19 48.6; 2019/20 56.4; 2020/21 62.0; 2021/22 64.8; 2022/23 67.2. - South Sudan’s oil price (US dollars per barrel): 2016/17 42.3; 2017/18 53.4; 2018/19 56.9; 2019/20 52.6; 2020/21 52.3; 2021/22 51.5; 2022/23 51.9. - Nominal GDP (billions of SSP): 2016/17 276.1; 2017/18 532.2; 2018/19 713.0; 2019/20 913.8; 2020/21 1,062.8; 2021/22 1,204.9; 2022/23 1,363.5. - GNI per capita (US dollars): 2016/17 230.7; 2017/18 233.2; 2018/19 280.1; 2019/20 272.8; 2020/21 253.2; 2021/22 234.0; 2022/23 232.0. - Nominal GDP (percent change): 2016/17 327.1; 2017/18 92.7; 2018/19 34.0; 2019/20 28.2; 2020/21 16.3; 2021/22 13.4; 2022/23 13.2. ### Implementation of prior recommendations, revenue administration, and Nilepet - Implementation of 2016 Article IV recommendations hampered by continued fighting and weakened institutional capacity. - Noticeable progress: liberalizing the fuel market (reducing subsidies) and curtailing direct central bank lending to government. - NRA launched in 2018 and developing IT roadmap to automate customs and tax operations; electronic collection system started. - For NRA to be fully operational, complete recruitment of core management team and fast-track staffing. - Lack of transparency of Nilepet remains a concern: no financial statements obtained; legally required audited statements never completed. - Staff urges an audit of Nilepet and recommends Nilepet eliminate all fuel subsidies. ### Oil revenue management and public financial management (PFM) priorities - Immediate oil revenue management actions: - Complete stop of contracting oil-backed loans, advances and prepayments. - Government oil should be sold at spot market prices and gross proceeds transferred directly to the BSS oil account. - Publish detailed crude oil production and export information on the Ministry of Petroleum’s website as stipulated by the Petroleum Act (2012). - Outstanding short-term oil advances: Estimated at US$338 million (7.3 percent of GDP) as of March 2019 (estimate may not capture all advances). - PFM immediate "low-hanging fruit" actions: - Remove ghost workers from the payroll. - Implement technical tools prepared in 2016 for cash forecasting. - Prepare an annual borrowing plan as part of the budget cycle. - Start verification of the current stock of arrears and develop a credible clearance strategy. ### Banking sector, FX regime, and reserve management - BSS “Special Accounts” scheme since mid-2017 required banks to sell FX purchased from special account holders to the BSS at official (indicative) rate; banks allowed to repurchase 25 percent from BSS. - Recommendation to discontinue the “Special Accounts” scheme; unify and let the exchange rate be market determined; re-instate FX auction mechanism. - Spread between official (indicative) rate and parallel market remained excessively high; parallel market premium peaked at about 120 percent in mid-2018 and was about 80 percent in April 2019. - BSS should adopt price stability as primary objective, use reserve money as intermediate target, and ensure minimum reserve requirement of 20 percent is met. - Reserve adequacy: current level US$30–70 million (less than one week of next year’s imports) is inadequate; medium/long-term target closer to peers (about 4 months of imports) preferable. ### Debt, DSA findings, and external position - Total external public debt including arrears: US$1,196 million (34 percent of GDP) as of end-March 2019. - External debt composition (US$ millions): World Bank (IDA) 53; AfDB 28; China Exim Bank 150; QNB 627; Oil‐related advances 338; Arrears to QNB 175. - Total domestic debt stock excluding arrears (SSP millions): 38,670 (borrowing from Bank of South Sudan: 38,668; borrowing from commercial banks: 2). - Arrears estimated at 17,200 (percent of GDP in local currency): 7.3 (estimate and subject to verification). - DSA conclusions: - Joint Bank-Fund DSA (May 15, 2019) — Risk ratings: Risk of external debt distress: In debt distress; Overall risk of debt distress: In debt distress; Granularity: Unsustainable. - Debt carrying capacity: Composite Indicator (CI) score 1.42 — classified as “weak.” - PV of public and publicly guaranteed (PPG) external debt-to-GDP threshold: 30 percent; several indicators breach thresholds under baseline and stress tests. - Clearing external and domestic arrears is prerequisite to improving debt distress rating; concessional borrowing recommended where possible. ### External Sector Assessment (Annex II) — key points - External position weaker than implied by fundamentals and desirable policies as of December 2018: nearly depleted foreign reserves and an overvalued official exchange rate. - Standard EBA tools not applicable due to insufficient data, high inflation, and extreme volatility; assessment is descriptive. - South Sudan is highly oil dependent: oil exports about 97 percent of total exports of goods and services. - Reserve adequacy: foreign exchange reserves have steadily declined; current US$30–70 million (less than one week of next year’s imports). - Policy recommendations: - Short-term: restore fiscal discipline; refrain from central bank financing; allow for greater exchange rate flexibility. - Medium-term: diversify away from oil dependence. ### Capacity development, data gaps, and IMF engagement - Capacity needs substantial across all sectors; South Sudan Trust Fund (SSTF) to be phased out in 2019/20 absent new commitments. - Focus TA areas: PFM (including oil revenue management), monetary and FX operations, bank supervision, payments systems, macroeconomic statistics. - Data shortcomings: serious weaknesses in quality, periodicity, and timeliness for most macro data; consumer prices, monetary, and exchange rate data relatively better. - Statistical priorities: improve GFS, national accounts, external sector statistics, and financial soundness indicators; planned TA missions on government finances, external sector statistics, and real sector statistics. ### Executive Board and authorities’ views — priorities and commitments - Directors commended signing the revitalized peace agreement and stressed lasting peace is critical for macro stability and living conditions. - Prioritized actions repeated by Directors and authorities: - Restore fiscal discipline and strengthen oil revenue and public financial management. - Discontinue contracting oil advances and arrest off-budget transactions. - Fast-track operationalization of the National Revenue Authority. - Liberalize the foreign exchange market, abolish surrender requirements, and let the exchange rate be market-determined. - Strengthen the banking resolution framework and address bank undercapitalization. - Improve governance, ensure transparency of Nilepet through an audit, and audit and clear domestic arrears. - Authorities agree with the DSA assessment and recognize clearing debt arrears as important to improve risk ratings. _Italic: Source — Republic of South Sudan: Staff Report for the 2019 Article IV Consultation (excerpts provided)._ ### 2.4 percent in 2017/18 adding to a cumulated decline of about 24 percent in the last three years. ### 1ssdea2019001 - 2.4 percent in 2017/18 adding to a cumulated decline of about 24 percent in the last three years. ### Recent economic developments and humanitarian context - Real disposable income (adjusted for terms of trade) is estimated to have declined by about 70 percent since independence in 2011. - Poverty headcount ratio increased from 50 percent in 2012 to about 82 percent in 2016. - The peace agreement signed in September 2018 improved prospects for lasting peace and economic recovery; formation of a new national unity government experienced a six-month delay. - Cessation of hostilities enabled reopening of some damaged oil wells and pushed up daily oil production (export) by about 20 percent in February 2019. - Inflation declined to about 40 percent in December 2018 from a peak of 550 percent in September 2016. - Exchange rate depreciated substantially in the last 18 months prior to the report. - Nearly 40 percent of the population are either internally displaced or live as refugees in neighboring countries; about 7.1 million South Sudanese require humanitarian assistance in 2019. - Humanitarian assistance since 2011 totals about US$10 billion; the US contributed about US$3.6 billion and the UK about US$1.1 billion. ### Fiscal developments, public finance issues, and near-term constraints - Loss of fiscal discipline, deteriorating public financial management, and contracting of non-transparent oil advances increased corruption vulnerabilities. - Shortfalls in revenue led to deep cuts in expenditure, including wages and operating expenses, containing the cash deficit to an estimated 2.8 percent of GDP in 2017/18. - With cash rationing, arrears grew; civil servants’ salaries lagged by at least 3 months. - In the first half of 2018/19, fiscal path ran essentially a balanced cash deficit with 3–4 months of salary arrears. - Key policy recommendations emphasized: - Strengthening oil management and transparency by an immediate stop of contracting new oil-backed advances. - Restoring fiscal discipline and refraining from central bank financing. - Fast-tracking operationalization of the newly-created National Revenue Authority to bolster non-oil revenue mobilization. - Shifting spending priorities from war to peace-building and increasing spending in education, health, infrastructure, and rural development. - Debt sustainability: Based on external debt indicators, South Sudan is currently in debt distress. Accumulation of arrears, low capacity to service debt, and low foreign exchange reserves indicate unsustainable debt dynamics. ### Monetary, banking, and exchange rate issues - Removal of domestic fuel subsidies and liberalization of the fuel market contributed to lowering inflation. - Authorities’ efforts to reverse fiscal dominance by reducing central bank budgetary financing contributed to lower inflation. - Directors recommended: - Pursue a tight monetary policy, including abstaining from providing credit to government. - Liberalize the foreign exchange market and abolish surrender requirements. - Adopt a unitary exchange rate system with market-determined rates to help address external imbalances and improve resilience to shocks. - Banking sector remains weak: many domestic banks are heavily undercapitalized and face rising non-performing loans. - Directors welcomed the Bank of South Sudan’s commitment to strengthen financial stability, including adopting a sound banking resolution framework and addressing undercapitalization of banks that do not meet minimum capital requirements. - Efforts to strengthen the AML/CFT framework were encouraged. ### Medium-term outlook, projections, and risks - Without peace and security, outlook remains extremely difficult with continuing threats to macroeconomic and financial stability, declining income, and deteriorating humanitarian conditions. - Under assumptions of sustained improvements in political and security situation, robust economic adjustment and reforms, budgetary discipline, and enhanced oil revenue management: - Fiscal deficit is projected to average 1–2 percent of GDP in the coming years assuming a robust recovery in oil production and higher capital spending. - Annual GDP growth could increase to about 6 percent a year, reflecting a recovery in oil production and in non-oil GDP. - Directors stressed need for transparent audit of Nilepet’s financial operations and auditing the current stock of domestic arrears with a credible clearance strategy. ### Selected key statistics and projections (as presented) - Real GDP (percent change): 2016/17 -13.0; 2017/18 -2.4; 2018/19 3.4; 2019/20 8.1; 2020/21 6.6; 2021/22 5.5; 2022/23 5.6. - Oil (real percent change): 2016/17 -19.8; 2017/18 3.8; 2018/19 12.7; 2019/20 17.6; 2020/21 10.5; 2021/22 4.4; 2022/23 3.8. - Non-oil (real percent change): 2016/17 -8.3; 2017/18 -6.1; 2018/19 -2.7; 2019/20 0.9; 2020/21 3.1; 2021/22 6.5; 2022/23 7.2. - Inflation (average): 2016/17 384.9; 2017/18 125.8; 2018/19 33.5; 2019/20 26.4; 2020/21 11.0; 2021/22 9.2; 2022/23 8.2. - Inflation (end-of-period): 2016/17 361.9; 2017/18 88.5; 2018/19 27.2; 2019/20 14.0; 2020/21 9.5; 2021/22 8.5; 2022/23 8.1. - Exchange rate (SSP/US$, average): 2016/17 85.3; 2017/18 127.8. Exchange rate (SSP/US$, end period): 2016/17 117.0; 2017/18 140.2; 2018/19 157.1 (Exchange rate as of April 24, 2019). - Broad money (percent change): 2016/17 87.2; 2017/18 64.3; 2018/19 33.4; 2019/20 20.4; 2020/21 14.1. - Total revenues and grants (percent of GDP): 2016/17 36.5; 2017/18 28.6; 2018/19 31.5; 2019/20 32.0; 2020/21 35.8; 2021/22 39.2; 2022/23 40.6. - Of which: Oil (percent of GDP): 2016/17 32.8; 2017/18 24.5; 2018/19 27.4; 2019/20 27.9; 2020/21 31.7; 2021/22 35.1; 2022/23 36.5. - Expenditures (percent of GDP): 2016/17 36.8; 2017/18 31.4; 2018/19 31.5; 2019/20 32.6; 2020/21 35.8; 2021/22 38.9; 2022/23 39.4. - Overall balance (cash, percent of GDP): 2016/17 -0.3; 2017/18 -2.8; 2018/19 0.0; 2019/20 -0.6; 2020/21 0.0; 2021/22 0.2; 2022/23 1.2. - Change in arrears (percent of GDP): 2016/17 4.5; 2017/18 3.3; 2018/19 2.4; 2019/20 0.7; 2020/21 -0.4; 2021/22 0.0; 2022/23 0.0. - Total Public Debt (percent of GDP): 2016/17 46.8; 2017/18 43.0; 2018/19 35.9; 2019/20 34.2; 2020/21 38.2; 2021/22 51.9; 2022/23 51.6. - Gross foreign reserves (millions of US dollars): 2016/17 28.3; 2017/18 33.0; 2018/19 41.3; 2019/20 72.3; 2020/21 137.2; 2021/22 253.0; 2022/23 513.0. - Gross foreign reserves (in months of imports): 2016/17 0.1; 2017/18 0.1; 2018/19 0.1; 2019/20 0.2; 2020/21 0.4; 2021/22 0.8; 2022/23 1.4. - Oil production (millions of barrels): 2016/17 42.0; 2017/18 43.5; 2018/19 48.6; 2019/20 56.4; 2020/21 62.0; 2021/22 64.8; 2022/23 67.2. - South Sudan’s oil price (US dollars per barrel): 2016/17 42.3; 2017/18 53.4; 2018/19 56.9; 2019/20 52.6; 2020/21 52.3; 2021/22 51.5; 2022/23 51.9. - Brent price (US dollars per barrel): 2016/17 49.8; 2017/18 60.6; 2018/19 63.7; 2019/20 59.1; 2020/21 58.6; 2021/22 57.9; 2022/23 58.2. - Nominal GDP (billions of SSP): 2016/17 276.1; 2017/18 532.2; 2018/19 713.0; 2019/20 913.8; 2020/21 1,062.8; 2021/22 1,204.9; 2022/23 1,363.5. - GNI per capita (US dollars): 2016/17 230.7; 2017/18 233.2; 2018/19 280.1; 2019/20 272.8; 2020/21 253.2; 2021/22 234.0; 2022/23 232.0. - Nominal GDP (percent change): 2016/17 327.1; 2017/18 92.7; 2018/19 34.0; 2019/20 28.2; 2020/21 16.3; 2021/22 13.4; 2022/23 13.2. ### Executive Board views and policy priorities - Directors commended signing the revitalized peace agreement and stressed lasting peace is critical to restoring macroeconomic stability and improving living conditions. - Directors underscored decisive implementation of key reforms to restore macroeconomic stability, strengthen economic buffers, improve governance, and rebuild credibility with the international community. - Prioritized actions include: - Restore fiscal discipline and strengthen oil revenue and public financial management. - Discontinue contracting oil advances and arrest off-budget transactions. - Fast-track operationalization of the National Revenue Authority to bolster non-oil revenue. - Liberalize the foreign exchange market, abolish surrender requirements, and let the exchange rate be market-determined. - Strengthen the banking resolution framework and address bank undercapitalization. - Improve governance, ensure transparency of Nilepet’s operations through an audit, and audit and clear domestic arrears. _Italic: Source — Republic of South Sudan: Staff Report for the 2019 Article IV Consultation (excerpts provided)._ ### 3. Implementation of the recommendations from the 2016 Article IV Consultation have ### 1ssdea2019001 - 3. Implementation of the recommendations from the 2016 Article IV Consultation have ### Implementation status and constraints - Recommendations from the 2016 Article IV Consultation have been hampered by continued fighting and weakened institutional capacity (Annex I). - Noticeable progress: liberalizing the fuel market (reducing subsidies) and curtailing direct central bank lending to government, which has helped reduce inflation. - Controls on oil management and government spending have weakened further. ### Recent economic developments - Real GDP: estimated decline of 2.4 percent in 2017/18, adding to a cumulative decline of 22 percent in the last three years. - Oil production (daily export): - about 120,000 barrels per day in 2017/18; - about 145,000 barrels per day in February 2019 / early 2019. - Inflation: - reached 550 percent in September 2016; - declined to about 40 percent in December 2018; - note: "The production of consumer prices has faced difficulties since January 2019 where information became unreliable. However, the downward trend of inflation is expected to have continued." - Budget and fiscal execution 2017/18: - Repayment of financial obligations to Sudan and oil-collateralized loans absorbed nearly all oil revenue (Text Table 1). - Cash deficit estimated 2.8 percent of GDP in 2017/18. - Central bank financing contained at 2.1 percent of GDP. - Arrears grew by an estimated 3.3 percent of GDP. - Civil servants’ salaries lagging by about 3 months; during first half of 2018/19 salary arrears increased to about 4 months. - Exchange rate and reserves: - Parallel market rate more than doubled in 2017-18. - Parallel market premium over BSS official (indicative) exchange rate remained high at 80 percent in April 2019. - International reserves fluctuating around 1–2 weeks of imports since early 2017. - Banking sector pressures: - Since mid-2017 BSS “Special Accounts” scheme: commercial banks required to immediately sell all FX purchased from special account holders to the BSS (transactions at official (indicative) rate), banks allowed to repurchase 25 percent from the BSS. - Many domestic banks heavily undercapitalized; non-performing loans rising rapidly (to more than 50 percent of total gross loans in some cases). - Debt and external position: - Mechanical DSA risk ratings indicate South Sudan is at high risk of debt distress with breaches of thresholds related to the PV of debt-to-GDP and debt service-to-revenue ratios. - South Sudan has arrears on external and domestic debt and remains in debt distress. - External position weaker than implied by fundamentals and desirable policies; nearly depleted foreign exchange reserves and an overvalued official exchange rate (Annex II). ### Economic outlook and scenarios - Outlook conditional on peace: - Without credible and lasting peace: extremely difficult outlook, threats to macroeconomic and financial stability, declining income, deteriorating humanitarian conditions. - Peace scenario: inclusive new government of national unity could produce a peace dividend, repair donor relations, and enable upturn in economic activity. - Staff baseline projection (peace scenario): - Real GDP projected to grow by 3.4 percent in 2018/19 and continue to improve over the medium term (Table 5 referenced). - Main near-term growth driver: rising oil production and exports from planned oil company investments. - Higher oil exports and revenues expected to improve fiscal position, create space for increased capital spending, reduce domestic financing needs, rebuild foreign exchange reserves, and support continued decline in inflation. - Additional revenue will accrue to the budget when South Sudan finishes paying the transitional financial arrangement (US$15/barrel) to Sudan projected by 2021/22. - Box 2 — Prospects for oil production: - Oil production history: from about 350,000 barrels per day in 2011 to about 110,000 barrels per day in 2017. - Production increased from about 120,000 barrels per day in 2017/18 to about 145,000 barrels per day in early 2019. - Oil reserves: Oil and Gas Journal (2014) estimate proven oil reserves at 3.75 billion barrels. - Simulation scenarios (chart): - Baseline (peace): oil production rebounds to 200,000 barrels/day by 2025. - Middle (EOR): sustaining high levels requires investment in EOR techniques. - EOR + new oil wells: production could reach a peak of 350,000 barrels/day in about 10 years. - Risks: - Downside political and external risks predominate (Annex III). - Adverse scenario (domestic risks realized) vs baseline (Text Table 2 key comparisons): - Real GDP (percent change): Baseline 2019/20 = 8.1; 2020/21 = 6.6. Adverse 2019/20 = 1.0; 2020/21 = -2.6. - Inflation (average): Baseline 2019/20 = 26.4; 2020/21 = 11.0. Adverse 2019/20 = 40.1; 2020/21 = 48.2. - Broad money: Baseline 2019/20 = 20.4; 2020/21 = 14.1. Adverse 2019/20 = 40.7; 2020/21 = 48.2. - Total revenues and grants (percent of GDP): Baseline 2019/20 = 32.0; 2020/21 = 35.8. Adverse 2019/20 = 24.0; 2020/21 = 24.4. - Expenditures (percent of GDP): Baseline 2019/20 = 32.6; 2020/21 = 35.8. Adverse 2019/20 = 33.6; 2020/21 = 30.5. - Overall balance (cash, percent of GDP): Baseline 2019/20 = -0.6; 2020/21 = 0.0. Adverse 2019/20 = -3.6; 2020/21 = -6.1. - Change in arrears (percent of GDP): Baseline 2019/20 = 0.7; 2020/21 = -0.4. Adverse 2019/20 = 2.9; 2020/21 = 3.7. - Current account balance (including grants, percent of GDP): Baseline 2019/20 = -1.8; 2020/21 = -1.9. Adverse 2019/20 = -2.7; 2020/21 = -3.0. - Gross foreign reserves (millions of US dollars): Baseline 2019/20 = 72.3; 2020/21 = 137.2. Adverse 2019/20 = 38.1; 2020/21 = 32.9. - Gross foreign reserves (in months of imports): Baseline 2019/20 = 0.2; 2020/21 = 0.4. Adverse 2019/20 = 0.1; 2020/21 = 0.1. ### Authorities’ views - Authorities more sanguine about the outlook but agreed with staff's risk assessment. - Authorities expect peace dividend to materialize faster via faster reopening of oil wells and acceleration in oil production. - Authorities plan to use improved oil export earnings to invest in rural development, reduce poverty, and promote inclusive growth. - Authorities agree political stability and security are crucial for entrenching peace, facilitating growth, and supporting economic development. ### Near-term policies to restore macroeconomic balance - Overarching priorities: restore fiscal discipline, strengthen oil revenue management and public financial management (PFM), and maintain tight monetary conditions. - Immediate needs identified: - Restore fiscal discipline and strengthen oil revenue management and public financial management. - Maintain zero-central bank financing policy to instill fiscal discipline and incentivize non-oil revenue increases, improve oil revenue governance, and strengthen budgetary controls. - Regain credibility with international community and private investors through transparent macroeconomic policies and reforms. - Fiscal context and constraints: - 2018/19 budget adopted in October 2018 targeted a cash surplus of 2.5 percent of GDP (Text Table 3). - Preliminary first-half outturn: fuel subsidies reduced substantially; huge spending overruns on operations and off-budget spending; accumulation of arrears on wages and transfers to states. - Risks of budget overruns and further accumulation of arrears remain high despite higher oil revenue and improved non-oil revenue performance. - FY 2018/19 near-term guidance: - Resource envelope (net of payments to Sudan, Nilepet, and oil advances) for the fourth quarter estimated to decline by about one-third compared to the average of the first three quarters to about SSP 20 billion (3 percent of GDP), assuming continued modest non-oil revenue. - Overall balance (cash) for the year projected to be close to zero. - Authorities should allocate a limited amount to the National Pre-Transition Committee (NPTC) for piloting cantonment of combatants. - Reporting of peace-related spending, including by NPTC, should be transparently publicized monthly. - Staff advised authorities to seek a longer-term loan, preferably on concessional terms, to clear the stock of short-term oil advances. - FY 2019/20 guidance: - With clearance of old oil advances and expected gradual increase in oil production, gross revenues expected to rise from SSP 196 billion to SSP 255 billion. - Assuming roughly balanced budget, net resource envelope (after payments to Sudan and Nilepet) estimated to increase to SSP 147 billion (16 percent of GDP) in FY 2019/20 from SSP 101 billion (14 percent of GDP) the previous year. - This could allow: payment of civil servant salaries including outstanding arrears of about SSP 14 billion (1.5 percent of GDP); peace-related spending of about 2 percent of GDP; but will require moderation in operational spending. - Authorities should present the FY 2019/20 budget to parliament for approval before July 1. ### Oil revenue management recommendations - Immediate actions recommended: - Complete stop of contracting oil-backed loans, advances and prepayments. - Government oil should be sold at spot market prices and gross proceeds transferred directly to the BSS oil account to enhance transparency, reduce costs, and ensure oil revenues are available for budgetary spending. - Publish detailed and up-to-date crude oil production and export information on the Ministry of Petroleum’s website, as stipulated by the Petroleum Act (2012). - Outstanding short-term oil advances: - Estimated at US$338 million (7.3 percent of GDP) as of March 2019. - Note: the outstanding stock estimate is based on multiple sources and may not capture all outstanding advances; authorities were unable to provide a full list of contracted oil advances and their repayment terms. ### Public financial management (PFM) priorities - Urgent need to strengthen PFM; nascent PFM institutions and processes largely collapsed during recent turmoil. - Recommended immediate "low-hanging fruit" actions (from IMF Fiscal Affairs Department): - Remove ghost workers from the payroll. - Implement the technical tools prepared in 2016 to support cash forecasting. - Prepare an annual borrowing plan as part of the budget cycle. - Start verification of the current stock of arrears and develop a credible clearance strategy. *IMF staff summary based on the chapter text in 1ssdea2019001 - 3. Implementation of the recommendations from the 2016 Article IV Consultation have* ### 17. On revenue administration, the mission welcomed the formation of the National ### 17. On revenue administration ### Revenue administration and Nilepet: findings and recommendations - The National Revenue Authority (NRA) was launched in 2018 and is leading efforts to develop a high-level information technology roadmap to automate customs and tax operations and integrate core systems. - An electronic collection system recently has started to improve domestic revenue collection. - For the NRA to become fully operational, authorities should complete the recruitment of the core management team and fast-track the staffing. - The lack of transparency of the public oil company, Nilepet, remains a concern: - Nilepet manages the government’s shares in the oil producing consortia in South Sudan and provides subsidized petroleum products to certain government entities. - Nilepet has ambitions to get involved in crude production and refinery activities. - Staff has been unable to obtain any financial statements of operations and legally required audited statements have never been completed despite requests from the Auditor General. - Staff urges the authorities to facilitate the conduct of an audit of Nilepet, including to identify possible profit transfers to the budget. - Staff recommends Nilepet eliminate all fuel subsidies because they provide opportunities for misuse. ### Authorities’ views on revenue, oil, and budget management - Authorities were receptive to staff recommendations and agreed that oil and budget management have been complicated by oil advances in recent years. - They committed to strengthening oil management through discontinuing contracting oil advances. - On Nilepet, authorities agreed an audit should be conducted according to existing legal requirements. - Authorities noted they will aim at a broadly balanced budget for 2019/20 given the unavailability of budgetary financing. - There is a strong commitment to avoid borrowing from the central bank to finance the budget for the remainder of 2018/19 and 2019/20. - The government will continue to provide necessary support to the NRA, seeking technical assistance from the IMF where required. - Authorities foresee a financing gap and urge the IMF to support its case for external resource mobilization with donors. ### Monetary policy, foreign exchange, and financial sector: key findings and recommendations - Monetary policy should focus on containing inflation and gradually replenishing international reserves. - The BSS should adopt price stability as the primary objective and use reserve money as an intermediate target, given the undeveloped financial system. - The BSS should gradually reduce money expansion and rebuild foreign exchange reserves by refraining from extending credit to the government. - The cessation of central bank borrowing to finance the fiscal deficit has been proven to eliminate fiscal dominance and manage inflation. - FX market liberalization and discontinuation of the “Special Accounts” scheme are recommended: - Under the current system, government FX transactions, FX sales by “special accounts” holders to banks and surrender by banks of these amounts to the BSS are required to take place at the BSS established official (indicative) rate, while a limited amount of transactions on the official FX market occur at the banks’ market rate. - Banks receive (a) 25 percent allocated by the BSS to banks from the FX sold by the special accounts’ holders and (b) allocations from other sources than special accounts. - The spread between the official (indicative) rate and the freely determined banks’ market rate is close to the spread between official (indicative) rate and parallel market rate, and both spreads remain excessively high. - The large spreads give rise to multiple currency practices (MCPs); the BSS practice of prioritizing FX allocation for government payments and payments of essential commodities gives rise to a new exchange restriction. - The current system and banks’ surrender requirement to the BSS have contributed to a decline in FX inflows. - Recommendations: discontinue the “Special Accounts” scheme; unify and let the exchange rate be market determined; re-instate the FX auction mechanism—introduced in 2015 and suspended in 2017—to ensure transparency and fairness in allocation of FX to the market. - Expected benefits: attract FX inflows, reduce rent seeking, and increase budgetary revenues. - Banking sector stability and regulation: - Many banks are currently noncompliant with the minimum statutory capital requirements. - An earlier plan to resolve undercapitalization through three options (raising capital, mergers, or liquidation) has not been implemented. - The BSS should take firm action to ensure banks meet minimum capital requirements by implementing its original plan and adopt a comprehensive banking resolution regulation as soon as possible. - Reserve requirements: - The BSS should ensure that the minimum reserve requirement of 20 percent is met for all commercial banks. - In the event of foreign exchange market liberalization, reserve requirements on foreign currency deposits held in local currency will rise substantially. - A change towards meeting reserve requirements on foreign currency deposits in foreign currency should be considered to reduce domestic liquidity volatility due to exchange rate movements. - Audits: - Staff welcomes the completed audits of the BSS for 2013, 2014, and 2015, but urges the outstanding audits for 2016, 2017, and 2018 to be completed as well. ### Authorities’ views on monetary and financial policies - Authorities agreed with most staff recommendations and recognize shortcomings of the multiple foreign exchange rate system; the BSS is reviewing reforms to eliminate the “Special Accounts” scheme, though timing is uncertain. - Implementation of a banking resolution plan faces political resistance. - The BSS intends to retain minimum reserve requirements at 20 percent of total deposits, with requirements for local and foreign currency deposits calculated separately. - The BSS is considering introducing term deposit facilities and central bank bills; the mission offered to facilitate IMF TA support. ### Medium-term objectives: fiscal consolidation, debt, governance, and diversification - Fiscal policies and debt management: - Fiscal policies should aim to restore debt sustainability and domestic and external stability. - Over the medium term, fiscal consolidation should be pursued to reach a surplus within a few years and thus bring down debt ratios, eliminate the need for domestic financing, contain inflation, avoid crowding out private sector credit, and rebuild reserves. - This would be supported by the projected completion of financial transfers to Sudan in 2021/22, which will free up substantial resources. - Policies should focus on raising non-oil revenues and reprioritizing budgetary spending. - As the economy stabilizes and the NRA is fully in place, efforts should be made to further raise non-oil revenues, including by diversifying the revenue base. - Expenditure should shift away from security-related spending toward investment in education, health, infrastructure and rural development. - Authorities are encouraged to seek a restructuring plan on external debt arrears; combined with improved fiscal conditions, this could allow South Sudan to restore debt sustainability and move out of debt distress. A solution to outstanding treasury bills would help regularize relations with domestic creditors. - Governance and anti-corruption: - Key weaknesses include fiscal governance (revenue institutions, procurement, transparency, PFM controls), the regulatory framework, rule of law, and AML/CFT. - Staff discussed implementation of a comprehensive asset declaration regime and encouraged authorities to apply for membership in a FATF-style regional AML body such as the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG). - While the 2012 Anti-Money Laundering Act provides for establishment of a Financial Intelligence Unit (FIU), this has not been done; staff advised establishing the FIU as soon as possible. - Economic diversification (Box 3 summary): - Goal: reduce reliance on the oil sector, broaden domestic revenue mobilization, and achieve sustainable and inclusive growth. - Baseline: oil production will gradually fall over the next decade, and the economy will increasingly rely on other sectors. - Non-oil sectors with potential: - Agriculture: about 95 percent of population is engaged in agriculture; more than 70 percent of total land suitable for agriculture. - Fisheries: abundant resources in the Nile River basin and the Sudd; constraints include old fishing gear, poor fingerling skills, poor infrastructure, and lack of storage facilities. - Mining: potential for gold, diamond, copper, and various rare minerals; resources are almost completely unexplored and commercialization is insufficient. - Construction: high demand due to lack of basic infrastructure (transportation, power, water, communication); priority investment in roads, especially in southern part of South Sudan. - Preconditions: peace, shifting spending away from security, mobilizing revenues, improving expenditure composition and efficiency, and regaining confidence with donors and investors. ### Capacity building and data for surveillance - Capacity building: - Capacity needs are substantial across all sectors. - The South Sudan Trust Fund will be phased out as the main TA delivery vehicle in 2019/20 after seven years in operation if no new commitments are made. - South Sudan is a member of the Measuring Natural Resource Wealth Topical Trust Fund and expected soon to be approved as a member of East AFRITAC. - Focus areas for capacity building: improving PFM (including oil revenue management), strengthening monetary and FX operations, reintroducing FX auctions, strengthening banking supervision, developing payments systems, and improving macroeconomic statistical systems. - Data shortcomings: - Data provision has serious shortcomings in quality, periodicity, and timeliness, significantly hampering surveillance. - Since the relapse into war in mid-2016, some areas have seen serious deterioration in quality, particularly government finances and oil sector transactions. - Actual data received from the authorities and historical estimates are often revised substantially as new information becomes available. - Significant data gaps exist in fiscal governance, central bank governance, financial sector oversight, and trade facilitation. - TA missions are currently planned on government finances, external sector statistics, and real sector statistics. ### Staff appraisal: summary of main messages - The peace agreement signed in September 2018 has enhanced prospects for lasting peace and a peace dividend, but political downside risks remain significant. - The peace agreement is the first of several steps toward economic recovery and regaining donor and investor confidence; further steps include formation of a functioning transitional unity government and implementation of main security arrangements. - Fiscal discipline needs restoration and public financial management improvement: - Non-transparent oil advances, oil-backed loans, and off-budget transactions undermine fiscal discipline and budgetary integrity. - Budget ceilings have become non-binding and spending decisions ad-hoc and non-transparent. - The budget process needs reestablishment with realistic assumptions and tighter controls. - Staff welcomes removal of most domestic fuel subsidies. - Oil management: - Successful stabilization relies on strengthening oil management. - Contracting oil-backed advances or loans is non-transparent, costly, encourages misuse, and complicates fiscal management and monitoring. - Government should impose an immediate stop on contracting oil advances; crude oil should be sold at the spot market and gross proceeds transferred to the BSS oil account. - NRA and Nilepet: - Staff welcomes the creation of the NRA and urges completion of recruitment and full staffing. - Lack of transparency of Nilepet is a concern; staff welcomes authorities’ commitment to facilitate a public audit as stipulated by law. - Monetary and FX policy: - Monetary policy should focus on containing inflation and replenishing international reserves; BSS should set price stability as primary objective and continue using reserve money as intermediate target. - Staff commends the BSS for abstaining from providing credit to government and urges continuation of this policy. - The multiple foreign exchange rate system should be abolished; the FX market should be liberalized and surrender requirements at the official (indicative) rate abolished. - The new exchange restriction arising from prioritized access to FX for certain government transactions and essential commodities should be abolished. - Banking sector: - Serious undercapitalization of many banks needs to be addressed; the BSS should adopt a comprehensive banking resolution regulation and ensure banks meet minimum capital requirements. - Outlook: - South Sudan remains in debt distress and the external position is weaker than implied by fundamentals and desirable policies. - The peace agreement, an improved oil sector, and foreign exchange market liberalization could help improve the debt outlook and external position in the near term. - In the medium term, fiscal policies should aim to restore domestic and external stability while reprioritizing spending toward development. *Source: IMF staff report (sections 17–44) contained in the provided content unit.* ### 45. It is proposed that the next Article IV consultation with South Sudan be held on the ### It is proposed that the next Article IV consultation with South Sudan be held on the standard 12-month cycle. ### Recent economic developments - Real GDP (percent change): -13.0 (2016/17 Act.), -2.4 (2017/18 Est.), 3.4 (2018/19), 8.1 (2019/20), 6.6 (2020/21), 5.5 (2021/22), 5.6 (2022/23). - Oil real GDP component (percent change): -19.8 (2016/17), 3.8 (2017/18), 12.7 (2018/19), 17.6 (2019/20), 10.5 (2020/21), 4.4 (2021/22), 3.8 (2022/23). - Non-oil real GDP component (percent change): -8.3 (2016/17), -6.1 (2017/18), -2.7 (2018/19), 0.9 (2019/20), 3.1 (2020/21), 6.5 (2021/22), 7.2 (2022/23). - Inflation (average): 384.9 (2016/17), 125.8 (2017/18), 33.5 (2018/19), 26.4 (2019/20), 11.0 (2020/21), 9.2 (2021/22), 8.2 (2022/23). - Inflation (end-of-period): 361.9 (2016/17), 88.5 (2017/18), 27.2 (2018/19), 14.0 (2019/20), 9.5 (2020/21), 8.5 (2021/22), 8.1 (2022/23). - Exchange rate (SSP/US$, average): 85.3 (2016/17), 127.8 (2017/18). Exchange rate (SSP/US$, end period): 117.0 (2016/17), 140.2 (2017/18), 157.1 (2018/19; note: "1" Exchange rate as of April 24, 2019). ### Fiscal developments (central government) - Total revenues and grants (percent of GDP): 36.5 (2016/17), 28.6 (2017/18), 31.5 (2018/19), 32.0 (2019/20), 35.8 (2020/21), 39.2 (2021/22), 40.6 (2022/23). - Total oil revenues (percent of GDP): 32.8 (2016/17), 24.4 (2017/18), 21.9 (2018/19), 27.4 (2019/20), 27.9 (2020/21), 31.7 (2021/22), 35.1 (2022/23). - Non-oil tax revenue (percent of GDP): 3.2 (2016/17), 3.7 (2017/18), 2.6 (2018/19), 4.1 (2019/20), 4.1 (2020/21), 4.1 (2021/22), 4.1 (2022/23). - Expenditures (percent of GDP): 36.8 (2016/17), 31.4 (2017/18), 31.5 (2018/19), 32.6 (2019/20), 35.8 (2020/21), 38.9 (2021/22), 39.4 (2022/23). - Current expenditure (percent of GDP): 36.1 (2016/17), 31.1 (2017/18), 30.8 (2018/19), 30.5 (2019/20), 32.9 (2020/21), 34.7 (2021/22), 30.5 (2022/23). - Transfers to Sudan (percent of GDP): 16.0 (2016/17), 15.9 (2017/18), 13.3 (2018/19), 11.9 (2019/20), 12.6 (2020/21), 12.4 (2021/22), 6.4 (2022/23). - Net acquisition of non-financial assets (percent of GDP): 0.7 (2016/17), 0.4 (2017/18), 1.1 (2018/19), 0.7 (2019/20), 2.2 (2020/21), 2.9 (2021/22), 3.7 (2022/23). - Overall balance (cash, percent of GDP): -0.3 (2016/17), -2.8 (2017/18), 0.0 (2018/19), -0.6 (2019/20), 0.0 (2020/21), 0.2 (2021/22), 1.2 (2022/23). - Overall balance (accrual, percent of GDP): -4.8 (2016/17), -6.1 (2017/18), -2.5 (2018/19), -1.3 (2019/20), 0.5 (2020/21), 0.2 (2021/22), 1.2 (2022/23). Key fiscal levels in nominal SSP (Table 2a excerpt, selected rows): - Total revenue and grants (In billions of South Sudanese pounds): 100.8 (2016/17 Act.), 152.1 (2017/18 Est.), 216.3 (2018/19 Budget), 224.6 (2019/20 Proj.), 292.6 (2020/21), 380.8 (2021/22), 472.2 (2022/23), 553.4 (projection row included). - Total oil revenues (In billions SSP): 90.7 (2016/17), 130.3 (2017/18), 191.3 (2018/19), 195.6 (2019/20), 255.3 (2020/21), 337.2 (2021/22), 423.3 (2022/23), 498.0 (projection row included). - Total expenditure (In billions SSP): 101.7 (2016/17), 167.3 (2017/18), 194.5 (2018/19), 224.9 (2019/20), 298.0 (2020/21), 380.5 (2021/22), 469.3 (2022/23), 537.3 (projection row included). - Transfers to Sudan (In billions SSP): 44.1 (2016/17), 84.6 (2017/18), 88.9 (2018/19), 95.0 (2019/20), 108.5 (2020/21), 133.4 (2021/22), 149.0 (2022/23), 87.4 (a row value present). Memorandum fiscal items: - Non-oil domestic current fiscal balance (In billions SSP): -45.5 (2016/17), -58.8 (2017/18), -65.7 (2018/19), -90.3 (2019/20), -124.6 (2020/21), -162.5 (2021/22), -208.6 (2022/23), -260.5 (row present). ### Monetary developments - Broad money (annual percent change): 87.2 (2016/17), 64.3 (2017/18), 33.4 (2018/19), 20.4 (2019/20), 14.1 (2020/21). - Monetary base (annual percent change): 96.6 (2016/17), 34.0 (2017/18), 19.1 (2018/19), 16.3 (2019/20), 12.9 (2020/21). - Gross foreign exchange reserves (Millions of U.S. dollars): 28.3 (2016/17), 33.0 (2017/18), 41.3 (2018/19), 72.3 (2019/20), 137.2 (2020/21), 253.1 (2021/22), 513 (2022/23). - Gross reserves (months of imports): 0.1 (2016/17), 0.1 (2017/18), 0.1 (2018/19), 0.2 (2019/20), 0.4 (2020/21), 0.8 (2021/22), 1.4 (2022/23). Monetary survey (selected June series, In billions of SSP unless otherwise indicated): - Broad money: 29.0 (Jun 2016), 54.3 (Jun 2017), 89.2 (Jun 2018), 119.0 (Jun 2019), 143.2 (Jun 2020), 163.4 (Jun 2021). - Monetary base: 34.0 (Jun 2016), 66.8 (Jun 2017), 89.5 (Jun 2018), 106.6 (Jun 2019), 123.9 (Jun 2020), 139.8 (Jun 2021). - Net foreign assets (Jun series, percent of GDP row context): Net foreign assets listed as -20.5, -72.8, -74.9, -99.7, -122.8, -135.6 (years sequence). - Money multiplier (memo): 0.9 (Jun 2016), 0.8 (Jun 2017), 1.0 (Jun 2018), 1.1 (Jun 2019), 1.2 (Jun 2020), 1.2 (Jun 2021). - Share of foreign currency deposits to total deposits: 0.6, 0.7, 0.7, 0.6, 0.7, 0.7 (Jun sequence). ### External sector and balance of payments (selected) - Current account balance (including grants, percent of GDP): -3.0 (2016/17), -4.5 (2017/18), -6.4 (2018/19), -1.8 (2019/20), -1.9 (2020/21), -1.9 (2021/22), -0.7 (2022/23). - Current account balance excluding grants (percent of GDP): -37.5 (2016/17), -32.9 (2017/18), -27.9 (2018/19), -27.1 (2019/20), -26.2 (2020/21), -29.8 (2021/22), -26.0 (2022/23). - Exports of goods and services (percent of GDP): 54.3 (2016/17), 68.7 (2017/18), 60.3 (2018/19), 64.4 (2019/20), 75.6 (2020/21), 84.3 (2021/22), 88.9 (2022/23). - Imports of goods and services (percent of GDP): 80.0 (2016/17), 83.5 (2017/18), 70.0 (2018/19), 75.6 (2019/20), 84.9 (2020/21), 95.7 (2021/22), 96.9 (2022/23). - Oil production (millions of barrels, projections memo): 42.0 (2016/17), 43.5 (2017/18), 48.6 (2018/19), 56.4 (2019/20), 62.0 (2020/21), 64.8 (2021/22), 67.2 (2022/23), 70.0 (2023/24). - South Sudan's oil price (U.S. dollars per barrel, memo): 42.3 (2016/17), 53.4 (2017/18), 56.9 (2018/19), 52.6 (2019/20), 52.3 (2020/21), 51.5 (2021/22), 51.9 (2022/23), 53.1 (2023/24). - Current account balance (millions of USD, memo): -95.8 (2016/17), -156.7 (2017/18), -298.1 (2018/19), -86.5 (2019/20), -83.4 (2020/21), -76.9 (2021/22), -30.5 (2022/23), -181.3 (2023/24 projection shown). Balance of payments (selected, In millions of U.S. dollars): - Exports of goods (total): 1,719 (2016/17), 2,348 (2017/18), 2,766 (2018/19), 3,001 (2019/20), 3,288 (2020/21), 3,390 (2021/22), 3,578 (2022/23). - Oil exports: 1,694 (2016/17), 2,333 (2017/18), 2,749 (2018/19), 2,967 (2019/20), 3,243 (2020/21), 3,339 (2021/22), 3,488 (2022/23). - Imports of goods: -1,986 (2016/17), -2,214 (2017/18), -2,495 (2018/19), -2,712 (2019/20), -2,886 (2020/21), -2,965 (2021/22), -3,037 (2022/23). - Trade balance: -267 (2016/17), 134 (2017/18), 270 (2018/19), 289 (2019/20), 402 (2020/21), 425 (2021/22), 541 (2022/23). - Gross foreign reserves (millions of US dollars): 28.3 (2016/17), 33.0 (2017/18), 41.3 (2018/19), 72.3 (2019/20), 137.2 (2020/21), 253.1 (2021/22), 513 (2022/23). ### Medium-term macroeconomic framework (selected projections) - Nominal GDP (billions of South Sudanese Pounds): 276 (2016/17), 532 (2017/18), 713 (2018/19), 713 (2019/20 row), 1,063 (2020/21), 1,205 (2021/22), 1,363 (2022/23), 1,543 (2023/24). - GNI per capita (US dollars): 231 (2016/17), 233 (2017/18), 280 (2018/19), 273 (2019/20), 253 (2020/21), 234 (2021/22), 232 (2022/23), 236 (2023/24). - Real GDP (percent change, projections): 3.4 (2018/19), 8.1 (2019/20), 6.6 (2020/21), 5.5 (2021/22), 5.6 (2022/23), 5.0 (2023/24). - Gross foreign reserves (in USD mill): 28.3 (2016/17), 33.0 (2017/18), 41.3 (2018/19), 72.3 (2019/20), 137.2 (2020/21), 253.1 (2021/22), 513.5 (2022/23), 819.7 (2023/24). ### Implementation of the IMF 2016 Article IV Consultation recommendations (Annex I) Fiscal Policy: - Eliminate the need to borrow from the BSS: Met - Eliminating fuel subsidies to Nile Petroleum: Met - Reduce the cost of operating foreign diplomatic missions (0.4 percent of GDP in 2016/17 budget): Ongoing Public Financial Management: - Reduce domestic financing to 1 percent of GDP: Status not specified in table (row present). - Remit all revenue collected to the consolidated treasury account: Met - Register all civil servants (including military) on payroll system; Not met - Complete payroll audit and remove ghost workers: Not met - Establish Treasury Single Account (TSA) structure: Not met - Verify the 2015/16 non-salary arrears and form a clearance plan: Not met - Enact the Public Procurement Bill: Met - Enact the Public Financial Management and Accountability Act (PFMAA): Met Monetary and Financial Policies: - Eliminating BSS direct lending to government: Met - Finance the deficit through Treasury bills: Not met Exchange Rate Policy and External Stability: - BSS continue to conduct regular auctions with smaller amounts to send price signals to the market: Not met - Ensure that the spread between the official and parallel rates is reduced by allowing the auction and indicative rates to reflect market conditions: Not met Rebuilding buffers and refocusing on economic development: - Reprioritizing budgetary spending: Not met - Rebuilding foreign exchange reserves: Not met Managing Oil Revenue: - Implement the PRMA in full and seek the necessary technical support: Not met - Reforming the domestic oil sector: (status row present) - Raise pump prices to cost-recovery level to help alleviate supply shortages and informal trade: Met - Review domestic fuel prices periodically: Met - Subject Nilepet to external audits: Not met *Source: Republic of South Sudan — International Monetary Fund, staff estimates and projections.* ### Annex II. External Sector Assessment ### Annex II. External Sector Assessment ### Overall assessment - Based on data as of December 2018, the external position of South Sudan is weaker than implied by fundamentals and desirable policies, with nearly depleted foreign reserves and an overvalued official exchange rate. - The civil conflict, subdued oil prices and policy slippages have led to economic instability and depletion of economic buffers in recent years. - Restoration of external stability will require a return to lasting peace and implementation of economic stabilization policies. ### Applicability of standard tools - Standard tools (External Balance Assessment (EBA) and EBA-lite) are not applicable to South Sudan due to: - insufficient data, - uncertainty about policy variables, - high inflation, - extreme volatility of nominal macroeconomic variables, including the exchange rate. - The assessment is therefore based on descriptive analysis. ### Exchange rate dynamics and parallel market - The gap between the official (indicative) rate and the parallel market rate remains high, indicating the official rate set by the BSS is overvalued. - The parallel market premium has been rising since the civil conflict escalated in July 2016 and peaked at about 120 percent in mid-2018. - The increase in oil prices and improved outlook for a peace settlement led to a marked decline in the premium since the second half of 2018. - The bilateral real official exchange rate has appreciated: - The real appreciation of the official (indicative) exchange rate accelerated after April 2017 when the BSS abolished BSS foreign exchange auctions and required commercial banks to surrender foreign exchange purchased from “special account” holders at the official (indicative rate). - By end-2018, the real exchange rate had appreciated by 80 percent since April 2017. - By contrast, the real parallel market rate has remained stationary over a long period, indicating the parallel market rate against US$ has roughly reflected developments in relative price levels between South Sudan and the US. ### External balances and oil dependence - South Sudan is an oil dependent country, with oil exports accounting for about 97 percent of total exports of goods and services. - The current account balance deteriorated from 1.7 percent of GDP in 2015/16 to -4.5 percent of GDP in 2017/18. - Imports have been partly financed by large inflows of donor grants, but the deficit has been burdened by large Transitional Financial Arrangement (TFA) transfers to Sudan. - The current account deficit is expected to narrow in the coming years with higher oil exports, and a structural change is envisaged with the completion of the TFA payments to Sudan, expected in 2021/22. ### Reserve adequacy - Foreign exchange reserves have steadily declined since the outset of the civil conflict in 2013. - The current level of US$30–70 million (less than one week of next year’s imports of goods and services) is inadequate by any measure. - Given dependence on oil exports and importation of almost all goods for domestic consumption, South Sudan needs substantial foreign exchange buffers. - The “rule of thumb” of three months of imports would likely be suboptimal; in the medium and long term, a level of reserves closer to the average of peer sub-Saharan African countries (4 months of imports cover) would be preferable. ### Business environment and governance - South Sudan ranked in the bottom tier of economies in the World Bank’s Doing Business Indicators in 2019 and performs worse than its regional peers. - Improvements in the business environment have been recognized, but access to basic infrastructure, such as electricity and water, remains necessary to strengthen competitiveness. - According to World Bank’s Global Indicators of Regulatory Governance, South Sudan’s regulatory governance is much poorer than its regional peers and low-income countries. - There is an urgent need to strengthen government institutions and transparency to improve the business climate and competitiveness. ### Policy recommendations and priorities - Short-term measures: - Restore fiscal discipline. - Refrain from central bank financing. - Allow for greater exchange rate flexibility. - Medium-term measures: - Diversify away from dependence on oil for external stability and sustainable economic growth. - Annex III Risk Assessment Matrix recommended responses (selected, by source of risk): - For sharp tightening of global financial conditions (Medium likelihood; Medium impact): Advance non-oil revenue reforms; keep public spending under control; maintain coordination with Sudan. - For weaker-than-expected global growth (Medium likelihood; Medium impact): Tighten fiscal policy through spending cuts and improving non-oil revenue collection. - For large swings in energy prices (Medium likelihood; High impact): Tighten fiscal policy, rebuild buffers when possible, and improve governance to regain access to external financing. - For continued political instability (High likelihood; High impact): Implement agreement on peace and reconciliation; focus on economic stabilization, fair sharing of oil revenues, and good governance. - For tension with Sudan over transfers, pipelines, territory, or borders (Medium likelihood; High impact): Advance non-oil revenue reforms; keep public spending under control; maintain coordination with Sudan. - For delays in improving governance or capacity (High likelihood; High impact): Strengthen anti-corruption efforts, implement agreed transparency reforms, strengthen key economic institutions, enforce petroleum and public financial management laws, and foster improvements in business environment. *Source: Annex II. External Sector Assessment (based on data as of December 2018).* ### Annex IV Table: Capacity Development Strategy for 2019–21 Summary ### Annex IV Table: Capacity Development Strategy for 2019–21 Summary ### Public Financial Management (including petroleum revenue management issues) - Objectives: - Improve budget preparation, execution and control. - Improve coverage and quality of fiscal reporting. - Improve integrated cash and debt management. - Strengthen PFM laws and institutions. - Collect and report oil revenue. ### Monetary and Foreign Exchange Operations - Objectives: - Improve monetary and exchange rate regimes. - Development of monetary instruments: implementation of reserve requirements and central bank facilities. - Foreign exchange auctions: Review BSS foreign exchange auctions and surrender of FX by banks to BSS. ### Banking Supervision - Objectives: - Strengthen on-site and off-site supervisory practices. - Financial analysis of banks (including construction and use of financial soundness indicators). - Review of the CAMEL system and prudential framework. - Adopt risk-based supervision. ### Payments Systems - Objectives: - Develop a payments and settlements system and electronic clearing of domestic transactions. ### Government Finance Statistics (GFS) - Objectives: - Improve fiscal reporting based on the Government Finance Statistics Manual 2001 (GFSM 2001) and GFSM 2014. - Follow-up on progress since the previous mission. - Attention to compilation and dissemination of quarterly GFS. - Assess available source data and provide recommendations toward broadening the institutional coverage of GFS. - Hands-on training on GFS. ### Debt Management - Objectives: - Construct database and maintenance system for foreign debt. ### Short-term Macroeconomic Framework - Objectives: - Develop and monitor a short-term integrated macroeconomic framework. - Strengthen coordination between institutions. - Conduct training. ### Tax and Customs Administration - Objectives: - Refine action plans for tax and customs administration reform. - Support NRA implementation and advice on priorities to enhance tax administration. ### National Accounts Statistics - Objectives: - Assist in the development and improvement of national accounts statistics. - Outcome: compiling and disseminating annual GDP by production and by expenditure approaches. ### External Sector Statistics - Objectives: - Compile and disseminate reliable external sector data on annual basis. ### Authorities’ Views - Findings: - Authorities appreciated the SSTF’s capacity development support. - Authorities stressed the need for continued SSTF engagement in institutional capacity building and policy framework development. - Authorities expressed interest in receiving TA support from East AFRITAC once South Sudan is approved as a member. - Authorities noted high level of staff turnover in governmental institutions exacerbates the current challenging situation. ### Relations with the Fund — Key Facts and Financials (as of March 31, 2019) - Membership status: Joined on April 18, 2012. - General Resources Account (SDR Million / % Quota): - Quota 246.00 100.00 - Fund Holdings of Currency 246.00 100.00 - Reserve Tranche Position 0.00 0.00 - SDR Department (SDR Million / % Allocation): - Net Cumulative Allocation 105.41 100.00 - Holdings 0.42 0.40 - Outstanding Purchases and Loans: None - Latest Financial Arrangements: None - Projected Payments to Fund (SDR million; based on current use of resources and present holdings of SDRs) — Charges/Interest: - 2019: 0.90 - 2020: 1.21 - 2021: 1.21 - 2022: 1.21 - 2023: 1.21 - Total: 0.90 1.21 1.21 1.21 1.21 ### Exchange Rate Arrangement — Historical and Current Practices - Timeline and arrangements: - South Sudan introduced the South Sudanese Pound upon independence in July 2011. - September 2011: BSS pegged the exchange rate at 2.95 SSP per U.S. dollar; de jure arrangement was a conventional peg against the U.S. dollar. - Initial central bank auction shortly after independence led to jump from 2.9 to 3.5 SSP/US$; rate fixed again at 2.96 SSP/US$. - Fixed to US dollar from 2011 to mid-December 2015 despite foreign exchange receipt shocks. - Mid-December 2015: de jure floating exchange rate regime introduced, leading to an 84 percent depreciation. - Under new regime, BSS supplies foreign exchange to commercial banks in auctions; an indicative market rate determined from auction rate and rate charged by commercial banks. - All government transactions use the official (indicative) rate. - Reform reduced spread between official (indicative) and parallel market rates; included abolishing exchange controls. - Excessive expansionary monetary policy continued to exert downward pressure on the exchange rate and undermined convergence of official (indicative) and parallel market rates. - De facto exchange rate arrangement reclassified to other managed from conventional peg, effective on December 15, 2015. - Continued deterioration in security and economic situation led to re-introduction of a multiple exchange rate system with BSS abolishing foreign exchange auctions in 2017. - Exchange restrictions and multiple currency practice (MCP): - South Sudan maintains exchange restrictions and an MCP under transitional arrangements of Article XIV. - Exchange restrictions: absolute ceilings on availability of foreign exchange for certain invisible transactions (travel, remittances for living expenses of students and families residing abroad, transfers of salaries by foreign workers). - MCP arises from spread of more than 2 percent between parallel market exchange rate and formal commercial exchange market rate. - South Sudan maintains MCPs and exchange restriction subject to Fund’s approval under Article VIII: - MCPs arise from spread larger than 2 percent between (i) the official (indicative) rate and commercial banks’ (market) rate, and (ii) between the official (indicative) rate and the parallel market rate. - Exchange restriction arises due to prioritization of FX allocation by the BSS for external government payments and payments for certain essential commodities. ### Capacity Development — IMF Engagement - Programmatic support: - October 2012: Fund launched a five-year dedicated capacity building program supported by a multi-donor trust fund. - South Sudan expected soon to be approved as a member of the East Africa Technical Assistance Center. - Headquarters Missions and Short-Term Experts (September 2015––April 2019) — Departments and purposes (selected): - STA: September 2015, April 2016, August 2017, July 2018 — National Accounts - MCM: October 2015 — Payments system - MCM: May 2015, June 2016 — TA needs assessment and evaluation - STA: November 2015, December 2017 — Government Finance Statistics - MCM: November 2015, April 2017, January 2018, April 2019 — Monetary and foreign exchange operations - STA: November 2015, April 2016 — Balance of payments - MCM: January 2016 — Assessment of exchange rate reform - FAD: April 2016 — Strengthening the tax audit program - FAD: May 2016 — Fiscal reporting, budgetary framework, and cash management - FAD: May 2016 — Joint tax policy and revenue administration - MCM: March 2017, April 2018 — Bank supervision training - STA: March 2017 — Monetary and financial statistics - FAD: April and June 2017, April 2018 — Workshop on cash management, TSA, arrears, commitment control and fiscal reporting - STA: March 2018 — Financial Soundness Indicators - STA: August 2018 — External sector statistics - MCM: December 2018 — Debt management - FAD: February 2019 — Assessment of tax and customs operations and the next steps of reform - MCM: March 2019 — Project assessment mission; Bank supervision - FAD: April 2019 — PFM reform - Long-Term Advisors (February 2012––February 2017) — selected roles and periods: - February 2012–December 2013: Monetary and financial statistics - March 2012–September 2013: Central bank organization - February 2013–August 2014: Macroeconomic framework - May 2013–December 2013: Banking supervision - September 2014–September 2016: Central bank accounting - September 2014–September 2016: Banking supervision - October 2014–October 2016: Monetary and foreign exchange operations - October 2014–October 2015: Monetary and financial statistics - February 2015–February 2017: Macroeconomic framework - May 2015–November 2016: Reserve management ### Resident Representation - The Fund’s Office in South Sudan is no longer headed by a resident representative. - Mr. Hoth Chany, local economist, functions as officer-in-charge. - Last resident representative: Mr. Philippe Egoume (appointed in September 2014). - Preceding resident representative at membership in April 2012: Mr. Joseph Karangwa. ### Statistical Issues — Key Findings and Needs - Overall: - Data provision has serious shortcomings that significantly hamper surveillance. - Except for consumer prices, monetary, and exchange rate data, other macroeconomic data have important weaknesses in quality, periodicity, and timeliness. - Progress made between 2011 and 2013 was partly reversed in 2014 due to displacement of civilians, exile of local statisticians, and interruption of TA. - TA missions resumed after end of hostilities in 2015, with significant progress; missions suspended mid-2016 until end-2018. - Real Sector Statistics: - Price indexes: - Monthly Consumer Price Index (CPI) covering Juba, Wau, and Malakal compiled (data for Malakal imputed since 2014 because of the conflict), based on the 2009–10 Household Budget Survey. - A new household survey will be needed when peace and security are established to ensure appropriate weights. - Import price indexes not available; will require substantial investment in source data development (particularly at customs). - Monthly CPI figures available on the National Bureau of Statistics (NBS) website, albeit with lags. - GDP/GNP/National Income: - NBS compiles and publishes GDP at current and constant (2009) prices from the expenditure side, but figures are weak due to lack of source data. - Preliminary estimates on income (mainly profits to direct investors in the oil sector) facilitate estimation of GNI. - Work on source data and production-based GDP estimates is a priority; will require, inter-alia, an agriculture survey and continued TA. - A national accounts mission is proposed under the trust fund during the first half of FY 2020. - Government Finance Statistics (GFS): - GFS are virtually non-existent due to lack of dedicated GFS staff at the Ministry of Finance. - Last GFS mission took place in December 2017; developed a medium-term Result Based Management (RBM) action plan and roadmap for GFSM 2014 implementation. - None of the mission’s recommendations have been implemented so far, largely because of lack of human and technical resources. - A joint FAD/STA mission is planned for end-April 2019 to assist authorities in improving GFS data and fiscal reporting. - Monetary and Financial Statistics: - Bank of South Sudan (BSS) reports SRFs 1SR, 2SR, 5SR, and 6SR for publication in IMF's IFS monthly with an average lag of three months. - Data for other financial corporations are not available; sector remains relatively small. - BSS reports data on some key series and indicators of the Financial Access Survey (FAS), including two indicators of the U.N. Sustainable Development Goals. - Financial Soundness Indicators (FSIs): - BSS compiled 11 of the 12 core FSIs and 6 of the 13 encouraged FSIs for deposit takers, with quarterly frequency. - BSS has used FSIs internally but has not granted approval to publish data on IMF’s FSI website. - External Sector Statistics (ESS): - Data on ESS are scant. - BSS has been producing balance of payments statistics; data for 2014–17 have been disseminated. - August 2018 ESS and national accounts missions worked jointly on issues related to oil exports, imports, and humanitarian aid received from abroad; produced improved balance of payments estimates for 2015 to 2017. - Enhancements made to source data for oil export and humanitarian aid reflecting information from the Ministry of Petroleum and the Customs Authority. - Profit repatriated by the oil company was estimated and included in revised balance of payments estimates for 2015 to 2017. - Data on direct investment flows and positions are virtually nonexistent; international investment position statistics (IIP) not compiled. - Data Standards and Quality: - South Sudan does not yet subscribe to the General Data Dissemination System (GDDS). ### Republic of South Sudan: Table of Common Indicators Required for Surveillance (As of April 30, 2019) — Selected Entries - Exchange Rates: Date of Latest Observation: Current; Date Received: Current; Frequency of Data: D; Frequency of Reporting: M; Frequency of Publication: M - International Reserve Assets and Reserve Liabilities: Date of Latest Observation: Current; Date Received: Current; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: N/A - Reserve/Base Money: Mar 2019; Date Received: Apr 2019; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Broad Money: Mar 2019; Date Received: Apr 2019; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Consolidated Balance Sheet of the Banking System: Mar 2019; Date Received: Apr 2019; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Interest Rates: Mar 2019; Date Received: Apr 2019; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Consumer Price Index: Feb 2019; Date Received: Apr 2019; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M - Revenue, Expenditure, Balance, and Composition of Financing––General Government: Feb 2019; Date Received: Mar 2019; Frequency of Data: M; Frequency of Reporting: Q; Frequency of Publication: N/A - External Current Account: 2018; Date Received: Mar 2019; Frequency of Data: A; Frequency of Reporting: A; Frequency of Publication: A - Exports and Imports of Goods and Services: 2018; Date Received: Mar 2019; Frequency of Data: A; Frequency of Reporting: A; Frequency of Publication: A - GDP/GNP: 2017; Date Received: Oct 2018; Frequency of Data: A; Frequency of Reporting: A; Frequency of Publication: A - Domestic Government Debt: Mar 2019; Date Received: Mar 2019; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: N/A - Gross External Debt: Mar 2019; Date Received: Mar 2019; Frequency of Data: N/A; Frequency of Reporting: N/A; Frequency of Publication: N/A - International Investment Position: N/A across observation, reception, frequency, reporting, publication ### Debt Sustainability Analysis — Key Conclusions and Context - Joint Bank-Fund DSA (May 15, 2019) — Risk ratings: - Risk of external debt distress: In debt distress - Overall risk of debt distress: In debt distress - Granularity in the risk rating: Unsustainable - Application of judgment: No - Context and drivers: - Combined impact of civil conflict, large fall in oil prices, and high levels of fiscal spending left South Sudan in debt distress in 2016. - Several thresholds were breached; external and domestic debt arrears accumulated. - Since 2016, fiscal situation improved somewhat; economic and security outlooks more positive after signing a peace agreement in September 2018. - South Sudan still has substantial external and domestic debt arrears. - Implementation of the peace agreement is putting substantial pressure on government spending in the near term. - Expected depletion of oil would pose challenges to fiscal sustainability in the long term. - Result: South Sudan continues to be in external and overall debt distress and debt is assessed to be unsustainable. - Debt coverage and data limitations: - DSA covers central government debt. - Significant weaknesses in availability of debt data. - Complete information about SOE debt and government guarantees is unavailable, though size is negligible. - Contingent liability stress test includes only SOE debt and financial market shocks. - External debt is defined using the currency criterion. - Background on debt developments: - Macroeconomic conditions deteriorated in 2012 due to prolonged oil production shutdown. - Civil conflict erupted in December 2013, causing further harm. - Sharp drop in international oil prices from mid-2014 and an overvalued exchange rate contributed to continued deterioration and rapid depletion of foreign exchange reserves. - A short-term trade facility provided by Qatar National Bank (QNB) fell into arrears in 2015. - South Sudan fell behind on payments to Sudan in 2015 and 2016 under the Transitional Financial Arrangement (TFA); categorized as being in debt distress in the 2016 DSA. - Note on TFA arrears: Under the 2012 agreement with Sudan, South Sudan pays US$9.10 per barrel for oil transit and US$15 per barrel in transitional financial transfers. In 2015/16, South Sudan accumulated payment arrears on the TFA and transit fees to Sudan of US$291 million. The arrears were cleared by end-2018. *Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA); May 15, 2019.* ### 3. South Sudan’s external public debt, including arrears, was estimated at ### 3. South Sudan’s external public debt, including arrears, was estimated at ### Debt stock as of end-March 2019 - Total external public debt, including arrears: US$1,196 million (34 percent of GDP) as of end-March 2019. - External debt composition (US$ millions), including arrears: - World Bank (IDA): 53 - AfDB: 28 - China Exim Bank: 150 - QNB: 627 - Oil‐related advances: 338 - Arrears to QNB: 175 - Total external debt stock, including arrears: 1,196 - (in percent of GDP in US$): 34.4 ### Domestic debt and arrears - Total domestic debt stock, excluding arrears (SSP millions): 38,670 - Borrowing from Bank of South Sudan: 38,668 - Borrowing from commerical banks: 2 - Arrears/1: 17,200 - (in percent of GDP in local currency): 7.3 - Note: 1/Estimate and subject to verification ### Recent developments in central government financing - After the policy announced in 2016 to stop direct borrowing from the BSS, central government financing from the banking system declined substantially. - BSS net credit to the central government declined from 13 percent of GDP in 2015/16 to 0.9 percent in 2018/19. - The stock of domestic debt amounted to about SSP 38.7 billion by March 2019 (9 percent of GDP), almost entirely from the BSS, with the commercial banks accounting for only SSP 2 million. - The stock of domestic arrears is estimated at about 3.2 percent of GDP, but domestic payment arrears still need to be verified. ### Outlook and key assumptions - Baseline assumptions: - The revitalized peace agreement, signed in September 2018, will be broadly implemented and the cessation of hostilities will hold. - Implementation of economic stabilization policies and peace will allow oil production to recover above pre-2016 levels. - Improved government oil revenue will reduce the risk of recourse to deficit financing from the central bank. - Higher oil export will support a gradual increase in foreign exchange reserves. - External support: - South Sudan will likely require inflows from donors to finance the peace process. - Baseline assumes some inflows to support macroeconomic stabilization, resettlement of internally displaced and returning refugees, construction of feeder roads and rural infrastructures, and disarmament, demobilization and reintegration of former combatants. - Medium-term projection: - The economy is projected to grow at close to 4 percent annually through the late 2020s when oil production is projected to reach a peak. - Oil production is expected to decrease in aging fields after peaking in the late 2020s; non-oil sectors are projected to grow to partially offset falling oil production. - Government expected to shift composition of spending towards social and infrastructure spending and foster transparency and accountability. - Downside risks: - Restoring peace and security remains a primary challenge; little progress in implementing governance and security arrangements since the revitalized peace agreement. - Without action to end the conflict and stabilize the economy, a post-conflict path for the economy remains uncertain. ### Box 1 — Key Macroeconomic Assumptions (as stated) - Real sector: - After negative growth in 2018, real GDP is projected to recover and expand by an average of 4.3 percent through 2029. - Oil production is projected to increase gradually with the peak at 204,000 barrels per day in 2028. - After 2028, oil production is projected to fall gradually to below 70,000 barrels per day by end of 2030s. - During 2030-2039, real GDP is projected to increase by an average of 3.6 percent. - Fiscal sector: - Total revenue and grants are projected to rise from 34.3 percent of GDP in 2018 to 42.4 percent of GDP in 2025, and thereafter gradually decrease to 14.1 percent of GDP by the end of 2030s as oil revenues decrease. - Noninterest expenditure is projected to remain high in the short and medium term due to the costs for the implementation of peace and reconstruction. - South Sudan is projected to experience prolonged primary deficits in 2030s because of the decline in oil revenue. - External sector: - Exports of goods and services as a share of GDP are projected to increase in the short and medium term. - The share of imports of goods and services to GDP is projected to increase in the short and medium term because of scaling up of public (and later private) investment and return of refugees and internally displaced people. - Current transfers to Sudan under the TFA are expected to be paid off by 2021/22. Budgetary external borrowing is assumed to rise as the peace process takes hold. - The completion of transfers to Sudan under the TFA depends on international oil prices. ### Debt sustainability analysis — key findings - Debt carrying capacity: - South Sudan’s Composite Indicator (CI) score: 1.42 — classified as “weak.” - DSA thresholds used: - Present value of public and publicly guaranteed (PPG) external debt-to-GDP: 30 percent - Present value of PPG external debt-to-exports: 140 percent - PPG external debt service-to-exports: 10 percent - PPG external debt service-to-revenue: 14 percent - Baseline projections: - PV of debt-to-GDP ratio gradually increases toward mid-2020s, then declines slowly thereafter; remains above thresholds during 2021-2028, peaking at about 9 percentage points above the threshold in 2024. - Debt service-to-exports ratio and debt service-to-revenue ratio are above thresholds in the early years because of repayments of short-term oil-related loans; projected to increase after mid-2020s as grace periods expire and export-to-GDP and revenue-to-GDP ratios decrease. - PV of debt-to-exports ratio remains below thresholds throughout the sample period under the baseline. - Stress tests: - Stress tests confirm breaches of thresholds in most indicators. - In PV of debt-to-GDP, debt service-to-exports, and debt service-to-revenue, both the historical scenario and the most extreme shock test show breaches. - In PV of debt-to-exports ratio, the historical scenario shows breaches after 2028. - Drivers of debt accumulation: - Over the last 5 years, accumulation primarily driven by current account deficits and negative real GDP growth. - Looking forward, improved current account and positive real GDP growth expected to partly offset debt accumulation mainly caused by unfavorable nominal interest rates. - Public debt outlook: - External debt accounts for about 80 percent of PPG debt in 2018. - Public debt projected to increase gradually toward late-2020s, then increase rapidly thereafter due to higher primary deficit linked to decline in oil production. - PV of debt-to-GDP ratio decreases in 2019 as central government financing from the banking system declined, but remains above threshold (35 percent of GDP) throughout the sample period and is projected to increase rapidly after 2030. - Sensitivity: - Indicators of public debt are very sensitive to non-debt flows; declines in non-debt flows such as foreign direct investments can have an explosive impact on PV of debt-to-GDP and PV of debt-to-revenue ratios. ### Assessment and policy implications - Current status: - South Sudan remains in debt distress for external and overall debt; debt is assessed to be unsustainable. - External and domestic arrears remain and debt indicators breach thresholds under the baseline scenario except for the PV of debt-to-export ratio. - Very low level of foreign reserves: less than a week of prospective import cover. - Preconditions for improvement: - Clearing external and domestic arrears is a pre-requisite for improvement of the debt distress rating. - Paying or restructuring existing debt arrears is required to clear arrears and help regain donor confidence. - It is important that newly-contracted loans are concessional, to the extent possible. - Risks to the baseline: - Subdued oil prices. - Deadlock in implementing sustainable peace. - Lack of political commitment to implement strong macroeconomic adjustment measures. - Under-investment for enhanced oil recovery. - Protracted rent seeking behavior and corruption. - Conditional pathway to external viability: - With secured peace by the revitalized peace agreement, a cautious borrowing strategy, fiscal discipline, and a relatively stable external environment, South Sudan could attain external viability over a relatively short period. *International Monetary Fund — Republic of South Sudan: Public Debt Stocks as of End-March 2019 (chapter content).* ### 22. The authorities agree with the assessment of the DSA. They recognize that the mechanical risk ### 22. The authorities agree with the assessment of the DSA ### Authorities' assessment and policy priority - The authorities agree with the assessment of the DSA. - The mechanical risk ratings indicate South Sudan is at high risk of debt distress, and South Sudan is assessed to be in debt distress due to arrears on external and domestic debt. - The authorities recognize the importance of clearing debt arrears to improve South Sudan’s risk rating. ### External debt sustainability — baseline indicators (selected) - External debt (nominal): 2018: 38.0; 2019: 34.5; 2020: 37.1; 2021: 39.5; 2022: 42.2; 2023: 44.0; 2024: 44.6; 2029: 37.7; 2039: 38.2; Historical (another entry): 18.9; 2029 (alternate): 40.7. - PV of PPG external debt-to-GDP ratio: 2018: 32.4; 2019: 25.9; 2020: 27.3; 2021: 31.9; 2022: 36.1; 2023: 37.7; 2024: 39.0; 2029: 30.0; 2039: 31.6. - PV of PPG external debt-to-exports ratio: 2018: 47.1; 2019: 43.0; 2020: 42.5; 2021: 42.3; 2022: 42.8; 2023: 42.4; 2024: 42.3; 2029: 35.0; 2039: 73.8. - PPG debt service-to-exports ratio: 2018: 8.8; 2019: 15.1; 2020: 9.4; 2021: 7.7; 2022: 5.3; 2023: 3.9; 2024: 3.0; 2029: 8.4; 2039: 7.8. - PPG debt service-to-revenue ratio: 2018: 17.7; 2019: 28.8; 2020: 18.9; 2021: 16.3; 2022: 11.3; 2023: 8.5; 2024: 6.5; 2029: 18.0; 2039: 23.7. - Gross external financing need (Million of U.S. dollars): 2018: 347.0; 2019: 573.9; 2020: 345.7; 2021: 239.6; 2022: 86.0; 2023: -71.4; 2024: -150.8; 2029: 336.5; 2039: 277.4. ### Key macroeconomic assumptions (selected) - Real GDP growth (in percent): 2018: -2.4; 2019: 3.4; 2020: 8.1; 2021: 6.6; 2022: 5.5; 2023: 5.6; 2024: 5.0; 2029: -0.9; 2039: 5.8; Historical alternate: -7.2; Projection alternate: 5.7. - GDP deflator in US dollar terms (change in percent): 2018: 9.9; 2019: 28.8; 2020: -5.6; 2021: ...; 2022: -11.7; 2023: -12.2; 2024: -4.7; 2029: -1.6; 2039: 1.5; alternate: 1.1; another entry: -1.2. - Effective interest rate (percent): 2018: 0.6; 2019: 12.9; 2020: 2.2; 2021: 3.4; 2022: 4.7; 2023: 5.3; 2024: 5.4; 2029: 4.3; 2039: 3.7; alternate: 0.3; projection alternate: 5.6. - Growth of exports of G&S (US dollar terms, in percent): 2018: 35.7; 2019: 16.9; 2020: 8.9; 2021: 10.5; 2022: 3.3; 2023: 6.1; 2024: 7.0; 2029: -4.7; 2039: 1.0; extreme: 226.4; alternate: 8.8. - Growth of imports of G&S (US dollar terms, in percent): 2018: 12.0; 2019: 11.7; 2020: 10.2; 2021: 5.6; 2022: 4.4; 2023: 2.0; 2024: 8.0; 2029: -1.3; 2039: 2.8; alternate: -2.7; projection: 7.0. - Grant element of new public sector borrowing (in percent): 2018: ...; 2019: 10.2; 2020: 12.5; 2021: 11.4; 2022: 20.4; 2023: 29.4; 2024: 29.4; 2029: 27.3; 2039: 19.3; alternate: ...; projection: 18.9. - Government revenues (excluding grants, in percent of GDP): 2018: 34.3; 2019: 31.5; 2020: 32.0; 2021: 35.8; 2022: 39.2; 2023: 40.6; 2024: 42.1; 2029: 40.0; 2039: 14.1; alternate: 22.8; projection: 36.9. - Aid flows (in Million of US dollars): 2018: 0.0; 2019: 76.6; 2020: 70.0; 2021: 60.5; 2022: 60.0; 2023: 60.0; 2024: 60.0; 2029: 60.0; 2039: 60.0. - Grant-equivalent financing (in percent of GDP): 2018: ...; 2019: 1.1; 2020: 0.9; 2021: 0.9; 2022: 0.9; 2023: 1.1; 2024: 1.0; 2029: 0.9; 2039: 0.9; alternate: ...; projection: 1.0. - Nominal GDP (Million of US dollars): 2018: 3,471; 2019: 4,624; 2020: 4,719; 2021: 4,441; 2022: 4,113; 2023: 4,140; 2024: 4,274; 2029: 5,156; 2039: 8,436. - Nominal dollar GDP growth: 2018: 7.2; 2019: 33.2; 2020: 2.1; 2021: -5.9; 2022: -7.4; 2023: 0.6; 2024: 3.3; 2029: 0.6; 2039: 7.0; alternate: -9.8; projection: 4.3. ### Public sector debt framework — baseline indicators (selected) - Public sector debt 1/: 2018: 46.3; 2019: 38.8; 2020: 41.0; 2021: 42.7; 2022: 49.5; 2023: 55.3; 2024: 57.0; 2029: 57.4; 2039: 77.1; Historical alternate: 28.1; Projection alternate: 51.0. - Change in public sector debt: 2018: -14.3; 2019: -7.5; 2020: 2.2; 2021: 1.7; 2022: 6.9; 2023: 5.8; 2024: 1.7; 2029: 2.2; 2039: 2.0. - Identified debt-creating flows: 2018: -12.9; 2019: -8.1; 2020: 5.2; 2021: 2.1; 2022: 2.4; 2023: 1.6; 2024: 0.5; 2029: 3.4; 2039: 1.9. - Primary deficit: 2018: 3.1; 2019: -0.4; 2020: 0.5; 2021: -0.1; 2022: -0.3; 2023: -1.2; 2024: -0.6; 2029: 0.2; 2039: 3.1; alternate: 1.5; projection alternate: -0.6. - Revenue and grants: 2018: 34.3; 2019: 31.5; 2020: 32.0; 2021: 35.8; 2022: 39.2; 2023: 40.6; 2024: 42.1; 2029: 40.0; 2039: 14.1. - PV of public debt-to-GDP ratio 2/: 2018: 43.8; 2019: 32.6; 2020: 37.5; 2021: 39.8; 2022: 45.6; 2023: 51.1; 2024: 52.9; 2029: 50.4; 2039: 71.3. - PV of public debt-to-revenue and grants ratio: 2018: 127.8; 2019: 103.6; 2020: 117.0; 2021: 111.1; 2022: 116.4; 2023: 126.0; 2024: 125.4; 2029: 126.1; 2039: 507.1. - Debt service-to-revenue and grants ratio 3/: 2018: 35.4; 2019: 47.0; 2020: 41.4; 2021: 41.4; 2022: 29.5; 2023: 37.3; 2024: 34.5; 2029: 53.3; 2039: 182.2. - Gross financing need 4/: 2018: 15.3; 2019: 14.4; 2020: 13.8; 2021: 14.7; 2022: 14.4; 2023: 15.8; 2024: 15.4; 2029: 19.2; 2039: 28.8. ### Public sector macro-fiscal assumptions (selected) - Real GDP growth (in percent): 2018: -2.4; 2019: 3.4; 2020: 8.1; 2021: 6.6; 2022: 5.5; 2023: 5.6; 2024: 5.0; 2029: -0.9; 2039: 5.8; alternate: -7.2; projection: 4.8. - Average nominal interest rate on external debt (in percent): 2018: 0.9; 2019: 1; 2020: 4.1; 2021: 2.4; 2022: 4.1; 2023: 5.4; 2024: 5.6; 2029: 5.7; 2039: 4.4; alternate: 3.8; projection: 0.5; another projection: 5.8. - Average real interest rate on domestic debt (in percent): 2018: -1.4; 2019: 12.1; 2020: 0.4; 2021: 1.7; 2022: 3.0; 2023: 3.3; 2024: 3.3; 2029: 2.4; 2039: 1.8; alternate: -1.6; projection: 3.8. - Inflation rate (GDP deflator, in percent): 2018: 64.6; 2019: 55.5; 2020: 18.6; 2021: 9.2; 2022: 7.5; 2023: 7.2; 2024: 7.8; 2029: 6.5; 2039: 6.1; alternate: 77.8; projection: 13.2. - Growth of real primary spending (deflated by GDP deflator, in percent): 2018: -0.5; 2019: -14.1; 2020: 13.2; 2021: 17.0; 2022: 14.8; 2023: 6.8; 2024: 10.9; 2029: -1.5; 2039: -2.2; alternate: 7.6; projection: 6.0. - Primary deficit that stabilizes the debt-to-GDP ratio 5/: 2018: 17.4; 2019: 7.1; 2020: -1.7; 2021: -1.7; 2022: -7.1; 2023: -7.1; 2024: -2.3; 2029: -2.0; 2039: 1.1; alternate: -2.8; projection: -1.5. ### Stress tests, sensitivity analysis, and scenarios (high-level) - Figures and tables present a battery of stress tests and sensitivity analyses for 2019–29 covering: - Alternative scenarios (e.g., key variables at historical averages). - Bound tests (shocks to real GDP growth, primary balance, exports, other flows, one-time 30 percent nominal depreciation, combinations). - Tailored tests (combined contingent liabilities, commodity price shocks, natural disasters—where applicable). - Selected sensitivity results (PV of PPG external debt-to-GDP ratio, selected years): - Baseline: 2019: 25.9; 2020: 27.3; 2021: 31.9; 2022: 36.1; 2023: 37.7; 2024: 39.0; 2025: 38.2; 2026: 36.8; 2027: 34.3; 2028: 31.4; 2029: 30.0. - Example alternative: Key variables at historical averages produces elevated ratios (e.g., 2023: 45.1; 2024: 55.0; 2029: 137.4). - The most extreme stress tests for various indicators are identified: - For PV of debt-to-GDP ratio and debt service indicators, “Most extreme shock” is often the Combination of shocks or Exports shock. - Commodity price shocks use magnitudes based on IMF research department commodity outlook. ### Drivers of debt dynamics (summary from figures) - Debt dynamics drivers decomposed into: - Current account + FDI, nominal interest rate, real GDP growth, price and exchange rate changes, and residual. - The current DSA assumes more external financing for the peace process than the previous DSA, which increases Gross Nominal PPG External Debt and Gross Nominal Public Debt relative to the previous DSA. ### Key policy implication highlighted by the authorities - Clearing external and domestic debt arrears is recognized by authorities as important to improve South Sudan’s risk rating and reduce the high risk of debt distress. *Sources: Country authorities; and staff estimates and projections.* ### Introduction ### Introduction ### Authorities' engagement and context - The South Sudanese authorities appreciate the constructive engagement during the recent Article IV Consultation and welcome the resumption of onsite surveillance by the Fund. - They broadly agree with the staff’s assessment of economic challenges and the key policy recommendations. - South Sudan is emerging from a protracted internal conflict which created significant institutional capacity gaps, and huge development challenges; the country continues to face significant humanitarian challenges. - The continued decline in international oil prices since 2014 has undermined fiscal and export revenues, thereby generating exchange rate and inflationary pressures. - The signing of the Revitalized Agreement on the Resolution of the Conflict in South Sudan (R-ARCSS) in September 2018 has improved prospects for peace, and created an environment for increased oil production. - Authorities are directing efforts towards restoring economic stability, rebuilding international reserves, improving the management of oil resources, enhancing public financial management, and regaining access to external support from development partners. - These reform measures are consistent with the key objectives of the National Development Strategy (2018–21), which aims to consolidate peace and unlock the country’s economic growth potential. ### Recent Economic Developments and Outlook - Real GDP is estimated to grow by 3.4 percent in 2018/19, following the cessation of hostilities and reopening of damaged oil wells. - Oil production increased from 120, 000 barrels per day in 2017/2018 to 145,000 barrels per day in early 2019. - Economic growth is expected to accelerate to 8.1 percent in 2020 conditional on the peace dividend, increased oil production and public investment projects. - Inflation declined from a peak of 550 percent in 2016 to 40 percent in December 2018, largely reflecting the discontinuation of central bank financing of the budget deficit. - Inflation is expected to decline further to 26.4 percent in 2019 as the authorities continue to implement a tight monetary policy stance. - The current account deficit is expected to continue to worsen, reaching 6.4 of GDP in 2018/19. - Improved export performance is expected to narrow the deficit to 1.8 percent of GDP in 2019/2020. - Gross reserves are projected to modestly increase from 0.1 months of import in 2018/2019 to 0.2 months of import in 2019/2020. ### Fiscal Policy and Public Financial Management (PFM) Reforms - Authorities are committed to restoring fiscal discipline, mobilizing domestic revenues, and containing expenditures. - The establishment of the National Revenue Authority (NRA) in 2018 has greatly improved collections of non-oil revenues. - Operationalization of a Treasury Single Account (TSA) early in 2019 is expected to enhance fiscal discipline. - Planned measures include broadening the tax base, improving tax administration, automating corporate taxes, and completing the functionality of NRA by hiring adequately qualified staff; recruitment of Commissioners and deputies of the NRA is ongoing. - A strategy to deal with and limit oil advances has been prepared and submitted to Cabinet for approval. - Authorities intend to sell oil at the spot market prices with gross proceeds transferred directly to the Treasury Oil Account at the Central Bank. - Expenditure rationalization measures will prioritize social, peace-related, and growth-enhancing development expenditures. - Measures planned to contain spending include cleaning the civil service payroll, downsizing diplomatic missions, limiting foreign travel, and developing a credible arrears clearance plan. - The Cash Management Committee (MoFP, BSS and other bodies) continues to implement spending controls, including prioritizing expenditure. - Budget provisions have been made for clearance of arrears owed to the Qatar National Bank, and to fully pay the Transitional Financial Arrangement (TFA) fees to Sudan by 2021/2022. - The Council of Ministers has established an Arrears Clearance Committee to ascertain the stock of arrears and restructure arrears to commercial banks. - Fuel subsidies to Nilepet have been removed; removal of remaining subsidies on public transport and hospitals is not an immediate priority. ### Monetary, Exchange Rate, and Financial Sector Policies - The Bank of South Sudan (BSS) has maintained a tight monetary policy stance consistent with disinflationary efforts. - Authorities plan to strengthen the monetary policy toolkit, including reserve requirements, voluntary term deposits, and FX intervention. - Commercial banks will continue to be required to meet minimum reserve requirements which remain at 20 percent of deposits. - Foreign exchange market supply shortfalls reflect capital flow reversals, declining remittances, and limited Central Bank sales given low reserves. - Authorities recognize the disparity between the official and parallel exchange rate; rates in both markets are expected to converge with implementation of the peace agreement and renewed FX inflows from oil revenues. - Plans to build FX buffers include establishing a foreign exchange auction based-system with input from Fund TA and reviewing the Special Accounts Scheme to create more transparency in the FX market. - BSS issued a circular on new minimum capital requirements effective end-December 2019: $30 million for foreign banks and $15 million for domestic banks. - BSS is finalizing the bank resolution framework for troubled banks. - All 14 commercial banks which are non-compliant with the BSS minimum statutory requirements have been presented with options: (i) raise capital, (ii) merge with others or (iii) be liquidated. - Desk officers have been deployed to monitor activities at commercial banks; plans are underway for BSS to adopt comprehensive banking resolution regulations. - BSS will continue to enhance onsite supervision while laying the foundation for risk-based supervision. - Authorities are encouraging commercial banks to address elevated NPLs, including strengthening lending practices and implementing recovery efforts. ### Structural Reform Measures - Authorities plan to complete outstanding BSS and Nilepet financial audits through to 2018. - A Commissioner for the Financial Intelligence Unit (FIU) has been appointed to facilitate implementation of the 2012 Anti-money Laundering Act. - Steps are being taken to strengthen institutions, address governance vulnerabilities, and enhance the asset declaration process. - A portion of oil proceeds has been ring-fenced for development of roads to connect urban with rural areas and facilitate transportation of agricultural produce, addressing infrastructural gaps and reducing the cost of doing business. - Economic diversification is a medium-term agenda item; policy efforts will be geared towards promoting increased activity in the agriculture, mining, fishing and construction sectors. ### Conclusion - Authorities view the signing of the R-ARCSS as an important milestone towards improved growth and peace prospects. - They recognize the enormity of the attendant challenges and the important role of the international community in providing resources to finance the country’s development and humanitarian needs. - They value Fund policy advice and look forward to completion of the 2019 Article IV Consultation. *Source: 1ssdea2019001 - Introduction* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1ssdea2019001.pdf_