## 1sdnea2020002

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---

### Selected Governance indicators — introduction and context
- Governance weaknesses and corruption undermine economic growth, amplify income inequality, and erode public trust in institutions.
- IMF revised its “Framework for Enhanced Engagement on Governance” to address governance and corruption when they are macroeconomically critical; Sudan is assessed as a priority for such engagement.
- Overarching challenges: fragility, lack of transparency and accountability, poor data quality, and limited institutional capacity.
- A broader IMF governance diagnostic mission was requested by the authorities and planned for the first half of 2020.

### Definition and implications of governance and corruption
- Governance (IMF definition): the institution mechanisms and established practices through which a country exercises governmental authority, discharges responsibility, and manages public resources.
- Good governance characteristics: participatory; consensus oriented; accountable; transparent; responsive; effective and efficient; equitable and inclusive; follows the rule of law.
- Corruption (IMF/IFI definition): “the abuse of public office for private gain” (IMF 2016).
- When systemic and severe, corruption:
  - Prevents countries from realizing their potential and achieving sustainable and inclusive growth.
  - Favors large income distribution disparities.
  - Weakens the state’s capacity to collect revenue, reduces equity and efficiency of public expenditure, discourages private investment, creates inflation, and undermines trust in public institutions.
- In fragile contexts like Sudan, governance shortcomings and corruption are mutually reinforcing and create a difficult-to-break vicious circle.

### Fiscal governance: PFM, procurement, and taxation — key shortcomings
- Public Financial Management (PFM) and procurement should be transparent, cost-effective, monitorable, and accountable; stakeholders should have free and easy access to relevant documents.
- Key shortcomings in Sudan’s fiscal governance:
  - Weaknesses in the quality and timeliness of fiscal data.
  - Lack of an organized structure of checks and balances.
  - Absent or insufficient publicity of information and lack of transparency in procedures.
  - Limited progress on incorporating a medium-term fiscal framework into budget planning.
  - Need to strengthen macro-fiscal unit for policy formulation.
  - Single Treasury Account (TSA) not fully implemented at central government level; requires improved cash forecasting, extension of cash ceilings from one to three months for ministries/departments/agencies, and better payment management.
  - Reports of the Auditor General lacked traction or publicity despite highlighting weaknesses and, in some cases, a series of financial irregularities.
  - Procurement and investment often performed with a closed group of pre-identified companies; tenders advertised without adequate publicity, contracts monitored by service recipients, unclear mechanisms to address underperformance, delays or cost overruns.
  - Lack of digitalization and accessible archives prevents efficiency analyses and monitoring of ongoing projects; projects are very scarcely monitored after contract signing.
- Authorities have announced the need to revise procurement and investment regulation to incorporate international best practices; IMF and World Bank have been providing technical assistance.

### Tax system, revenue performance, and effects on firms — findings
- Tax collection is low, at about 6 percent of GDP in 2019.
- Income tax accounts for less than 10 percent of tax revenue.
- The informal sector is large: UNDP 2018 estimates it at more than 60 percent of GDP.
- Indirect taxes (customs, excises, VAT) are the main tax sources but have “too many rates”, are subject to frequent changes, and are deeply impacted by multiple currency practices.
- Firms rate “customs and trade regulations” and “tax administration” as their biggest obstacles for doing business.
- Sudan Enterprise Surveys 2015: 662 firms were interviewed from September 2014 through February 2015.
- Trading across borders is one of Sudan’s worst performing indicators in the World Bank’s Doing Business report (World Bank Group 2019).

### Policy implications and preliminary recommendations (governance & PFM)
- Rebuild a trusted framework of good governance based on transparent and accountable procedures.
- Implement a clear communication campaign and involve private sector and civil society as watchdogs of institutions.
- Prioritize PFM and procurement reforms:
  - Fully implement the Single Treasury Account at central government level.
  - Improve cash forecasting and extend cash ceilings for ministries, departments, and agencies to three months.
  - Increase publicity, transparency, and third-party monitoring of procurement and public investment processes.
  - Digitalize records and create accessible archives to enable efficiency analysis and project monitoring.
- Simplify and rationalize the tax system to reduce complexity, limit exemptions and tax holidays, and broaden the tax base.
- Tailor Fund advice to fragile settings: phase reforms realistically, ensure authorities’ ownership, and couple reforms with capacity development to avoid reversals.

*Prepared by Marta Spinella and Mizuho Kida, with contributions from Arz Murr; extracted from "ENHANCING GOVERNANCE AND REDUCING THE OPPORTUNITIES FOR CORRUPTION IN SUDAN", February 6, 2020.*

### Weak governance and corruption — impact on public expenditure and investment
- Governance weaknesses and corruption can reduce the fairness and efficiency of public expenditure by diverting spending away from public services toward large infrastructure projects and defense systems where collecting substantial bribes is easier (Delavallade 2006).
- Inefficient governance weakens public service delivery and facilitates corruption; weak monitoring and accountability can cause large leakages so only a fraction of spending reaches intended beneficiaries (Reinikka and Svensson 2004).
- Poor project selection, inadequate procurement procedures, off-budget financing, and lack of checks and balances can reduce the efficiency of public investment (IMF 2016).
- Large Sudanese parastatal SOE system appears particularly vulnerable to inefficiencies and abuses due to opacity and preferential allocation of contracts.
- The General Auditor chamber has signaled these shortcomings but with very little traction until now.
- New government committed to far-reaching reforms; an IMF diagnostic governance mission tabled for the first half of 2020 is expected to help prioritize measures.

### Service delivery and public investment efficiency — DEA findings
- Sudan spends less on basic education and health than other countries in the region.
- Service delivery is weak, resulting in lower access to most basic services.
- Data Envelopment Analysis (DEA) benchmarking shows Sudan operates far from the local efficiency frontier; peer countries operating on the efficiency frontier produce the same level of public capital with up to 70 percent less spending.
- DEA model: input-oriented; inputs include public capital and per capita GDP; model uses variable returns to scale.

### Financial sector oversight and sanctions effects
- Sudan subject to international sanctions since 1997; United States revoked trade and financial sanctions in 2017, but other jurisdictions retained sanctions and the United States kept Sudan on its list of state sponsors of terrorism (SSTL), hampering debt relief negotiations.
- Two decades of sanctions led to exit of most correspondent banking relationships (CBRs) and continue to cost heavily in lost trade, investment, and humanitarian aid (IMF 2017).
- Financial system is small and financial inclusiveness is very low, especially outside major urban centers.
- Weak governance, supervisory forbearance, and an inadequate AML/CFT framework increase risk of corruption, money laundering and terrorist financing.

### Banking sector governance and supervisory shortcomings
- Weak governance and supervisory shortcomings can:
  - Deeply affect system stability and growth.
  - Reduce availability of credit.
  - Favor cronyism in lending practices and lead to accumulation of nonperforming Loans (NPL).
- Sudan is a fully Islamic financial system, complicating comparisons of international soundness indicators.
- Recent stress testing showed the system to be more fragile than previous reported data suggested.
- Supervisory practices affected by significant shortcomings, lack of capacity, and continued turnover of limited personnel.
- Authorities have requested IMF technical assistance to revise the Central Bank’s Law.

### Central Bank governance and operations — legal and operational issues
- No IMF safeguards assessment has been performed since Sudan was in arrears with the IMF and other multilateral donors since 1984.
- Bank of Sudan Act (2002) deficiencies:
  - Does not stipulate operational independence, financial autonomy, accounting reporting principles and transparency, and internal and external controls.
  - Objectives, functions and powers of the central bank are not clearly stated (Art. 6).
  - Oversight board lacks practical independence; oversight powers can be delegated to the Chairman (CBOS governor).
  - Internal audit is subordinate to the Governor’s office.
  - Senior officials are appointed and removed by the Presidency; high turnover of Governors nearly paralyzed operations in the last years of President Bashir's power.
  - No provision on conflict of interest or other ethics rules.
  - Reporting framework not in line with best practices; data quality and timeliness are poor and often difficult to reconcile across institutions.
- CBOS supervisory issues:
  - CBOS is majority shareholder in several banks and financial institutions, creating conflict of interest with supervisory role.
  - Law does not ban commercial bank shareholders from being appointed as executive officials.
- External audit and publicity:
  - CBOS audit subject to General Audit Chamber but required standards and transparency regime not specified.
  - Governor must present annual statements and a report to the National Assembly; unclear if or how public.
  - Financial statements audit by National Audit Chamber are not subject to publication.
  - Recent General Auditor report highlights shortcomings and calls for amending the Central Bank of Sudan Law; recommendations received very little traction until recently.
- Fiscal dominance and inflation:
  - Protracted crisis and lack of CBOS autonomy led government to rely on seigniorage and quasi-fiscal financing with high monetization of fiscal deficits (Blackburn and others 2008).
  - Inflation averaged 33 percent since the 1970s and 23 percent in the last ten years.
  - Inflation exceeded 70 percent in 2018 and is projected around 60 percent in 2019.
- Multiple currency practices (MCP):
  - Government maintains several exchange rates:
    - central bank’s official and commercial bank exchange rate (SDG 45/US$)
    - customs exchange rate (SDG 15/US$)
    - fuel import rate (SDG 6.7/US$)
    - parallel market rate (around SDG 80/US$), at which about 80 percent of total transactions take place
  - Latest budget prepared using an exchange rate of SDG 55/US$.
  - MCP estimated to raise corruption risk and has contributed to expansion of the informal economy, smuggling of exports, loss of migrants’ remittances from formal channels and exacerbated foreign exchange shortages (Ebaidalla 2015).
- Authorities indicated plans to reform the Central Bank Law and requested IMF support.

### Market regulation, business constraints, and rule of law
- Inadequate governance and corruption discourage private investment; burdensome regulation and red tape create opportunities for corruption (Mauro 1997).
- Corruption rated as a “major” or “very severe” constraint by 65 percent of firms—higher than the regional average of 41 percent.
- Concerns greatest among smaller firms and firms in the services sector.
- Rule of law principles highlighted; Sudan has scored very poorly on compliance with rule of law best practices in the past.
- New government committed to enforce a fair, accountable and transparent new set of measures; IMF governance mission requested for first half of 2020.

### AML framework and anti‑corruption measures — findings
- AML measures that can support anti‑corruption: scrutiny of transactions of politically exposed persons (PEPs); reporting of suspicious transactions; criminal justice actions against proceeds of corruption.
- Implementation of preventive measures and PEPs:
  - Customer due diligence (CDD) implementation is not effective, including by nonbank institutions.
  - Reporting of suspicious transactions is overall insufficient and limited to banks.
  - Publication of PEP comprehensive asset declarations would facilitate domestic and foreign identification and reporting of unexplained discrepancies to FIUs.
- Beneficial ownership transparency:
  - Challenges obtaining adequate, accurate and current beneficial ownership information.
  - A national registry or FATF‑covered mechanisms would assist domestic and foreign institutions, law enforcement, journalists and civil society.
- Criminal justice actions:
  - Parallel financial investigations are not common practice when criminal conduct is being investigated.
  - Number of convictions for money laundering and confiscations of proceeds of corruption are limited.
  - Recommendation: AML framework should be more effectively used to prosecute corruption.

### Governance reform priorities and sequencing — recommendations
- For fragile states with limited capacity, reforms must be carefully calibrated and sequenced to avoid failure or quick reversal.
- Recommended starting points:
  - create a sound and more robust governance framework,
  - reinforce institutional capacity,
  - invest in human capital.
- Immediate action:
  - increase timeliness, quality and integrity of data and statistics,
  - build a culture of transparency and accountability in public institutions and agencies.
- Stakeholder engagement:
  - actively engage civil society and private stakeholders in designing policy strategy and implementation plans.
- Core principles: transparency, accountability and comprehensive communication.
- Specific actions:
  - (i) significant and systemic improvements in transparency and data reporting;
  - (ii) regulatory alignment with international best practices (UNCAC compliance and peer review report, supervisory and accounting compliance with international standards, progress in AML/CFT implementation);
  - (iii) domestic law alignment to incentivize non‑corrupt behavior (such as through tax provisions);
  - (iv) institutional enhancement (capacity development, checks‑and‑balances, better reporting and enforcement of sanctions).
- Additional priority: undertake a detailed and comprehensive inventory of challenges preventing effective functioning of public institutions with continued participation of civil society and private stakeholders.

### Fiscal and public finance governance — targeted recommendations
- Rationalize tax exemptions and phase out tax holidays to strengthen governance, boost fiscal revenues, and reduce perceptions of corruption and tax avoidance.
- Reduce the number of corporate tax rates and introduce a presumptive tax for small businesses to simplify the tax system and expand the tax base.
- Strengthen customs and tax administration:
  - Firms in Sudan on average make 42 payments and spend more than 23 days (180 hours) a year to comply with tax regulations (World Bank Group 2017).
  - Reduce the number of steps to comply, introduce electronic filing and payment systems, accompany reforms with taxpayer education, personnel training and improvements in internal control and oversight.
- Eliminate off‑budget subsidies; substantial portion of fuel subsidies recorded on the central bank’s balance sheet, not in the budget.
- Strengthen PFM and procurement:
  - Improving public investment management could close as much as two‑thirds of the efficiency gap (IMF 2015).
  - Measures: publish detailed project information throughout project life; greater use of open tenders; improve project evaluations and require prefeasibility studies for large projects; support the auditor‑general’s office; enhance technical capacity in line ministries.
  - Redesign procurement: create an independent, fully staffed and specialized unit covering project design to final disbursement and quality controls; consider a procurement audit.
  - Pursue full disclosure on SOEs, their shareholders, balance sheets and interlinkages.
- Unify multiple exchange rates to boost competitiveness, reduce rent‑seeking, and encourage investment; assessing import duty and oil revenues at market rates would generate a large revenue windfall.
- Enforce limits on central bank financing of the budget and relieve the central bank of quasi‑fiscal activities to strengthen operational independence and contain inflation.

### Revenue mobilization — background, cross‑country comparison and targets
- Tax revenue mobilization remains a key macroeconomic and developmental challenge.
- Gaspar et al (2016) identify a tax “tipping point” of about 12.75 percent of GDP.
- For Sudan:
  - total tax‑to‑GDP ratio in 2018 is at similar level to that in 2007 at about 5.4 percent.
  - income taxes and international trade taxes declined: income taxes from 0.8 percent in 2007 to 0.5 percent in 2018; international trade taxes from 1.8 percent in 2007 to 1.3 percent in 2018.
- Multiple exchange rate practices have suppressed fiscal revenues substantially: significantly overvalued official exchange rate for government transactions results in an estimated revenue loss of about 5 percent of GDP.
- Cross‑country comparison:
  - Sudan’s tax‑to‑GDP ratio at the bottom among comparable countries and remains far below averages of non‑resource‑rich MCD countries, SSA countries, and countries with similar per capita income.
- Tax subcategory (2000–18 averages):
  - PIT averaged 0.14 percent of GDP.
  - CIT amounted to 0.6 percent of GDP.
  - VAT collection remained at about 3 percent of GDP.
  - Taxes on international trade amounted to 1.9 percent of GDP.
- These are well below comparator averages (examples cited but not reproduced here).

### Tax policy and administrative reforms — priorities and specific proposals
- Removal of all tax exemptions is urgent and should be one of the first policy actions.
- Personal Income Tax (PIT):
  - Current: 85 percent of public employees are exempted from paying taxes; only 15 percent of employees are captured in the current PIT system.
  - About 55 percent of total employees exempted from PIT (income from agricultural sector and public employees age 50 years and above).
  - Tax brackets are narrow; current highest PIT rate is 15 percent.
  - Staff proposal: a more progressive PIT system with top income earners paying higher tax rates of 30 percent.
  - Potential revenue impact: removing PIT exemptions could broaden the tax base by an additional 55 percent or more.
- Corporate Income Tax (CIT):
  - Recommendation: unify the 5 CIT rates to at least 15 percent.
  - Include all agricultural activities in the tax system; apply a 15 percent CIT tax rate on agricultural activities.
  - Rationale: agriculture represents about 31 percent of GDP but does not contribute any CIT.
- International trade taxes and exemptions:
  - Eliminating exemptions on international trade taxes could boost tax revenue by an additional 1.2 percent of GDP.
  - Based on Sudan customs’ monthly financial performance report 2017:
    - Revenue loss of imports tax exempted from customs duty amounted to about 43 percent of import duty collected.
    - Revenue loss of imported value added tax (VAT) is recorded to be 37 percent of imported VAT collected.
  - Largest exemption-related revenue losses:
    - Exemptions from investment law: about 32.7 percent loss in revenue.
    - Financial sector exemptions: about 22 percent loss in revenue.
  - Administrative measures: full implementation of a risk management function at customs; control of the free zones to limit potential revenue leakages.
- Exchange rate liberalization and tax administration strengthening — staff estimates:
  - Import-related tax revenue boosted by at least 3.2 percent of GDP with full exchange rate liberalization and stronger tax administration.
  - Additional 1.8 percent of GDP expected from oil-related revenue when exchange rate is fully liberalized.
  - Context: despite a 168 percent devaluation at the beginning and last quarter of 2018 (from SDG 6.67 to SDG 18 per US$ to SDG 45 per US$), import-related tax revenue remained subdued in 2018 — with a decline of about 0.02 percent of GDP — due to weak tax administration and compliance.
- Administrative focus: strengthen taxpayer segmentation, electronic filing/payment systems, taxpayer education, personnel training, and internal control improvements.

### Successful experiences and mobilization options — lessons and policy options
- Fragile states and LICs increased tax revenue through improved revenue administration and tax policy reforms (examples: Liberia and Burkina Faso increased tax‑to‑GDP ratios by at least 5 percentage points between 2008 and 2012).
- Policy options for Sudan:
  - modernize tax administration and customs,
  - reduce exemptions and tax holidays,
  - consolidate and rationalize tax rates,
  - introduce presumptive taxation for small businesses,
  - invest in electronic filing/payment systems and taxpayer education,
  - unify exchange rates and reassess revenue at market rates,
  - strengthen AML/CFT measures, beneficial ownership transparency, and criminal justice use of AML tools.

### Crude supply, refineries, exchange rates and fuel pricing — key figures
- Refineries must process about 80 percent or more of full capacity, or 77,000 bpd of crude oil, to maintain proper operation.
- Government share of crude oils dropped to close to 40,000 bpd; purchases from foreign partners and conversion of South Sudan payments into crude oil transported in Sudanese pipelines used.
- 14,000 bpd in 2019 was diverted to the refineries from South Sudan payments.
- Processing fees used to measure cost of domestic production: US$6.99 per barrel in 2018 and 2019; US$4.42 in 2016 and 2017.
- Exchange rates in use:
  - domestic refineries convert cost using SDG 18/US$;
  - exchange rate used for importing other materials: SDG 45/US$;
  - government paid foreign partners using SDG 26/US$;
  - Central Bank’s cost of obtaining foreign exchange from domestic gold miners is at parallel market exchange rate (about SDG 85/US$ in December 2019).
  - Figure note: international prices evaluated at exchange rate of SDG 82/US$.
- Domestic vs international fuel prices (SDG/litre and percent price increase as presented):
  - Gasoline: Current domestic 6.44 — Current international 4.66 — Price increase 124.9 — Share in total consumption (percent) not provided here.
  - Diesel: 4.34 — 3.69 — 1054.7
  - Fuel oil: 4.33 — 2.56 — 55.2
  - Kerosene: 4.14 — 0.18 — 60.2
  - LPG: 5.22 — 4.93 — 12.7

### Fuel distribution costs, fees, and transfers
- MOFEP bears full cost of diesel and gasoline transportation and distribution from Port of Sudan and distribution center to different cities, at about SDG 1.8 per ton per km.
- Distribution margins charged by private companies determined by government and adjusted when companies need to increase capital investment.
- Fees, taxes and transfers between MOEM and MOFEP include:
  - Fuel stabilization fees: SDG 620 per ton for gasoline, SDG 536 per ton for diesel, SDG 80 per ton for LPG.
  - Development tax: 13 percent of C&F import price for LPG and gasoline.
  - Custom fees: 10 percent of C&F import price.
  - Fuel fees: SDG 960/ton for LPG, SDG 5956.65 for gasoline, SDG 3207.96 per ton for diesel.
  - Berth fees and crossing fees for LPG and gasoline imports: SDG 41/ton and SDG 2.5/ton respectively.
  - Value added tax (VAT): 17 percent; sea port VAT SDG 7.41/ton on diesel, gasoline and LPG imports.
  - VAT on domestically produced fuels: SDG 86.29 per ton for LPG, SDG 154.62 per ton for gasoline, SDG 85.06 for diesel.
  - Supply of crude oil calculated at international price and converted to SDG using SDG 18/US$.

### Fuel consumption trends, power sector and distributional impacts
- Fuel consumption increased steadily except in 2012.
- Gasoline consumption volume increased on average at 12 percent in the past 20 years.
- Diesel consumption increased on average at 8 percent in the past 20 years.
- Hydropower accounts for 60 percent of total electricity generation; hydropower could not meet domestic demand.
- State-owned electricity generation company uses fuel oil from refineries for power generation and does not pay for supply of fuel oil or crude oil.
- MOFEP used crude oil from South Sudan (14,000 bpd in 2019) and imported fuel oil for power generation.
- World Bank report: in 2017 revenue from sale of electricity could only cover 21 percent of cost of operation.
- Average electricity tariff is about US$0.007/kWh in 2018 (calculated using the official exchange rate of SDG 45/US$).
- 2014/15 NHBPS: only 5.7 percent and 2.6 percent of households own motor vehicles and motor cycles, respectively.
- World Bank study: top 20 percent of households receive more than eight times the fuel subsidy received by the bottom 40 percent.
- On average, fuel expense makes up only 1.5 percent of total household expense.
- Cheaper fuel prices have motivated smuggling of fuels to neighboring countries.

### Fiscal cost, transparency of subsidies and reform ingredients
- Total fuel subsidies in 2019 estimated by IMF staff at about SDG 215 billion, or 10.6 percent of GDP.
- MOFEP reported outcome for 2019 budget was SDG 52 billion.
- Recording energy subsidies is challenging due to complex transactions and multiple exchange rates; substantial portion of subsidies from exchange rate differences are recorded on the Central Bank’s balance sheet.
- IMF methodology: estimate full fuel subsidies by evaluating gap between cost of production (including cost of supply at international prices, refining costs, transportation and distribution costs, tax payments and importing cost) and domestic retail prices.
- International experience (IMF paper on 28 country reform episodes):
  - 12 countries successfully reduced subsidies, 11 partially successful, 5 unsuccessful.
  - Common ingredients for successful reform:
    - Comprehensive energy sector reform plan with clear long-term objectives and impact analysis.
    - Transparent and extensive communication and consultation with stakeholders.
    - Phasing-in price increases over time.
    - Improving efficiency of state-owned enterprises to reduce producer subsidies.
    - Measures to protect the poor through targeted cash or near-cash transfers, or expanding existing targeted programs.
    - Institutional reforms that depoliticize energy pricing, e.g., automatic pricing mechanisms.
- Specific considerations for Sudan:
  - Persistent large macroeconomic imbalances and continued depreciation complicate subsidy reforms.
  - Recent regime change creates a window of opportunity for fundamental reforms.
  - Energy subsidy reform should be part of a comprehensive economic reform package including exchange rate reforms.
  - Given high poverty ratio and large gaps between domestic fuel prices and break-even prices, removal of subsidies should be conditional on:
    - An expanded social safety net prior to subsidy reforms;
    - An extensive information and communication campaign prior to subsidy reforms.

### Oil sector governance reform recommendations
- Reform SOEs to operate on commercial basis, incentivizing long-term development targets and investment strategies.
- Streamline function of MOEM and return it to a genuine ministry regulating the sector and providing strategic views on energy sector development.
- Establish clear lines of responsibility between MOFEP and MOEM regarding energy sector regulation.
- Improve transparency and enhance auditing in the oil sector to allow more public analysis and scrutiny.

*International Monetary Fund — Sudan country analysis excerpt; source: 1sdnea2020002*

### 1. Selected Governance indicators ____________________________________________________ 7

### 1. Selected Governance indicators

### A. Introduction and context
- Governance weaknesses and corruption undermine economic growth, amplify income inequality, and erode public trust in institutions.
- The IMF revised its “Framework for Enhanced Engagement on Governance” to address governance and corruption when they are macroeconomically critical; Sudan is assessed as a priority for such engagement.
- Sudan faces overarching challenges: fragility, lack of transparency and accountability, poor data quality, and limited institutional capacity.
- A broader IMF governance diagnostic mission was requested by the authorities and planned for the first half of 2020.

### B. Definition and implications of governance and corruption
- Governance (IMF definition): the institution mechanisms and established practices through which a country exercises governmental authority, discharges responsibility, and manages public resources.
- Good governance characteristics: participatory; consensus oriented; accountable; transparent; responsive; effective and efficient; equitable and inclusive; follows the rule of law.
- Corruption (widely accepted IMF/IFI definition): “the abuse of public office for private gain” (IMF 2016).
- When systemic and severe, corruption:
  - Prevents countries from realizing their potential and achieving sustainable and inclusive growth.
  - Favors large income distribution disparities.
  - Weakens the state’s capacity to collect revenue, reduces equity and efficiency of public expenditure, discourages private investment, creates inflation, and undermines trust in public institutions.
- In fragile contexts like Sudan, governance shortcomings and corruption are mutually reinforcing and create a difficult-to-break vicious circle.

### C. Fiscal governance: findings on PFM, procurement, and taxation
- Public Financial Management (PFM) and public procurement should be transparent, cost-effective, monitorable, and accountable; stakeholders should have free and easy access to relevant documents.
- Key shortcomings in Sudan’s fiscal governance:
  - Weaknesses in the quality and timeliness of fiscal data.
  - Lack of an organized structure of checks and balances.
  - Absent or insufficient publicity of information and lack of transparency in procedures.
  - Limited progress on incorporating a medium-term fiscal framework into budget planning.
  - Need to strengthen macro-fiscal unit for policy formulation.
  - Single Treasury Account (TSA) not fully implemented at central government level; requires improved cash forecasting, extension of cash ceilings from one to three months for ministries/departments/agencies, and better payment management.
  - Reports of the Auditor General lacked traction or publicity despite highlighting weaknesses and, in some cases, a series of financial irregularities.
  - Procurement and investment often performed with a closed group of pre-identified companies; tenders advertised without adequate publicity, contracts monitored by service recipients, unclear mechanisms to address underperformance, delays or cost overruns.
  - Lack of digitalization and accessible archives prevents efficiency analyses and monitoring of ongoing projects; projects are very scarcely monitored after contract signing.
- These governance inadequacies can be exploited to facilitate corruption, further decreasing efficiency and eroding public trust.
- Authorities have announced the need to revise procurement and investment regulation to incorporate international best practices; IMF and World Bank have been providing technical assistance.

### D. Tax system, revenue performance, and effects on firms
- A complex and opaque tax system can:
  - Facilitate corruption and reduce the state’s capacity to raise revenue.
  - Encourage perceptions of corruption, increase opportunities for bribery and tax avoidance, and harm the culture of compliance.
- Sudan’s tax performance and structure (as reported):
  - Tax collection is low, at about 6 percent of GDP in 2019.
  - Income tax accounts for less than 10 percent of tax revenue.
  - The informal sector is large: UNDP 2018 estimates it at more than 60 percent of GDP.
  - Indirect taxes (customs, excises, VAT) are the main tax sources but have “too many rates”, are subject to frequent changes, and are deeply impacted by multiple currency practices.
- Firm perceptions and survey evidence:
  - Firms rate “customs and trade regulations” and “tax administration” as their biggest obstacles for doing business.
  - Based on Sudan Enterprise Surveys 2015: 662 firms were interviewed from September 2014 through February 2015; the numbers indicate percent of firms surveyed that identified the obstacle as among the top 10 constraints.
  - Trading across borders is one of Sudan’s worst performing indicators in the World Bank’s Doing Business report (World Bank Group 2019).

### E. Policy implications and preliminary recommendations (from the text)
- Rebuild a trusted framework of good governance based on transparent and accountable procedures.
- Implement a clear communication campaign and involve private sector and civil society as watchdogs of institutions.
- Prioritize PFM and procurement reforms:
  - Fully implement the Single Treasury Account at central government level.
  - Improve cash forecasting and extend cash ceilings for ministries, departments, and agencies to three months.
  - Increase publicity, transparency, and third-party monitoring of procurement and public investment processes.
  - Digitalize records and create accessible archives to enable efficiency analysis and project monitoring.
- Simplify and rationalize the tax system to reduce complexity, limit exemptions and tax holidays, and broaden the tax base to increase revenues.
- Tailor Fund advice to fragile settings: phase reforms realistically, ensure authorities’ ownership, and couple reforms with capacity development to avoid reversals.

*Prepared by Marta Spinella and Mizuho Kida, with contributions from Arz Murr; extracted from "ENHANCING GOVERNANCE AND REDUCING THE OPPORTUNITIES FOR CORRUPTION IN SUDAN", February 6, 2020.*

### 13.      Weak governance and corruption

### 13.      Weak governance and corruption

### Impact on public expenditure and investment
- Governance weaknesses and corruption can reduce the fairness and efficiency of public expenditure by diverting spending away from public services (education, health, sanitation) toward large infrastructure projects and defense systems where collecting substantial bribes is easier (Delavallade 2006).
- Inefficient governance weakens public service delivery and facilitates corruption; weak monitoring and accountability can cause large leakages in side-payments and bribes to local officials so that only a fraction of spending reaches intended beneficiaries (Reinikka and Svensson 2004).
- Poor project selection, inadequate procurement procedures, off-budget financing, and lack of checks and balances can reduce the efficiency of public investment (IMF 2016).
- The large Sudanese parastatal SOE system appears particularly vulnerable to inefficiencies and abuses due to opacity and preferential allocation of contracts.
- The General Auditor chamber has signaled these shortcomings but with very little traction until now.
- The new government committed to engage in a far-reaching set of reforms; an IMF diagnostic governance mission tabled for the first half of 2020 is expected to help prioritize necessary measures.

### Service delivery and public investment efficiency
- Sudan spends less on basic education and health than other countries in the region (Figure 3).
- Service delivery is weak, resulting in lower access to most basic services (Figure 4).
- Cross-country benchmarking using Data Envelopment Analysis (DEA) shows Sudan operates far from the local efficiency frontier (Figure 5).
  - Peer countries operating on the efficiency frontier produce the same level of public capital with up to 70 percent less spending.
- Governance shortcomings and corruption are among potential contributing factors of inefficiency, together with:
  - Lack of institutional capacity
  - Lingering effects of the civil war
  - Difficulties in transporting materials to remote areas
  - Shortages of materials and skilled professionals
- DEA implementation notes:
  - Uses an input-oriented DEA model; efficiency scores interpreted as the proportional amount by which the country could reduce public capital inputs while producing the same level of infrastructure services.
  - Inputs include public capital and per capita GDP; model uses variable returns to scale.

### Financial sector oversight
- Sudan’s financial sector has been subject to international sanctions since 1997; although the United States revoked trade and financial sanctions in 2017, other jurisdictions retained sanctions and the United States kept Sudan on its list of state sponsors of terrorism (SSTL), hampering debt relief negotiations.
- Two decades of sanctions led to the exit of most correspondent banking relationships (CBRs) and continue to cost heavily in lost trade, investment, and humanitarian aid (IMF 2017).
- The financial system is small and financial inclusiveness is very low, especially outside major urban centers.
- Corruption can:
  - Slow financial market development
  - Increase vulnerability to money laundering and terrorist financing
  - Make foreign banks reluctant to do business due to sanctions risk
- Weak governance, supervisory forbearance, and an inadequate AML/CFT framework increase the risk of corruption and of attracting criminals and money launderers.
- Corruption and lack of financial inclusiveness can create a vicious circle:
  - Undeveloped financial system facilitates cash usage which can hide corrupt activities
  - Illicit activities slow financial sector development by encouraging cash use instead of banking

### Banking sector governance and supervisory shortcomings
- Weak banking sector governance and regulatory/supervisory shortcomings can:
  - Deeply affect system stability and growth
  - Reduce availability of credit to the economy
  - Favor cronyism in lending practices
  - Lead to accumulation of nonperforming Loans (NPL)
- Sudan is a fully Islamic financial system, complicating comparisons of international soundness indicators and supervisory rules.
- A recent stress testing showed the system to be more fragile than previous reported data suggested.
- Supervisory practices are affected by significant shortcomings, lack of capacity, and continued turnover of limited personnel, hindering development of specialized competencies.
- Authorities have requested IMF technical assistance to revise the Central Bank’s Law to strengthen effectiveness and supervisory action.

### Central Bank governance and operations
- The Central Bank of Sudan (CBOS) has never undergone an IMF safeguards assessment because Sudan was in arrears with the IMF and other multilateral donors since 1984; knowledge of CBOS governance and operations is based on bilateral surveillance missions and desk analysis.
- Main elements of the legal framework:
  - The Bank of Sudan Act (2002) does not stipulate operational independence, financial autonomy, accounting reporting principles and transparency, and internal and external controls.
  - Objectives, functions and powers of the central bank are not clearly stated (Art. 6).
  - The oversight board lacks practical independence from executive management; oversight powers can be delegated to the Chairman (the CBOS governor).
  - Internal audit is subordinate to the Governor’s office, undermining effectiveness and impartiality.
  - Senior officials are appointed and removed by the Presidency, obligated to respond to the Presidency, and to act in representation of ministries and governmental institutions (lack of autonomy from political power).
  - High turnover of Governors in the last years of President Bashir's power nearly paralyzed central bank operations.
  - No provision on conflict of interest or other ethics rules.
  - Reporting framework of the CBOS is not in line with best practices; data quality and timeliness are poor and often difficult to reconcile across institutions.
- Supervisory activity:
  - The CBOS is the majority shareholder in several banks and financial institutions, creating a conflict of interest with its role as supervisor and regulator.
  - Supervisory activities are hindered by high rotation and lack of personnel, loose application of regulations and poor quality of data.
  - The central bank law does not ban commercial bank shareholders from being appointed as executive officials, which could impair supervisory practices.
- External audit and publicity:
  - The Central Bank Law subjects CBOS to audit by the General Audit Chamber under the General Audit Chambers Act, 1999, but required standards and transparency regime are not specified.
  - The governor must present annual statements and a report to the National Assembly, but it is unclear whether the report should be made public or in which form.
  - Financial statements audit of the CBOS by the National Audit Chamber are not subject to publication.
  - A recent General Auditor report highlights governance and accounting shortcomings and calls for corrections including amending the Central Bank of Sudan Law; recommendations have received very little traction until recently.
- Fiscal dominance:
  - Protracted economic crisis and lack of CBOS autonomy led the government to rely on seigniorage and quasi-fiscal financing, with high monetization of fiscal deficits (Blackburn and others 2008).
  - Fiscal dominance weakened central bank independence and monetary policy credibility, increasing inflationary expectations and facilitating multiple exchange rates.
  - Inflation is entrenched, averaging 33 percent since the 1970s and 23 percent in the last ten years.
  - Following continued monetization of fiscal deficits, inflation exceeded 70 percent in 2018 and is projected around 60 percent in 2019.
  - Under the fixed exchange rate regime, persistently high inflation resulted in a long period of significant real exchange rate overvaluation and a parallel exchange rate system.
- Multiple currency practices (MCP):
  - Government maintains several exchange rates:
    - central bank’s official and commercial bank exchange rate (SDG 45/US$)
    - customs exchange rate (SDG 15/US$)
    - fuel import rate (SDG 6.7/US$)
    - parallel market rate (around SDG 80/US$), at which about 80 percent of total transactions take place
  - The latest budget has been prepared using an exchange rate of SDG 55/US$.
  - MCP raises corruption risk by encouraging rent-seeking and large speculation, facilitating income polarization.
  - MCP use has contributed to expansion of the informal economy, smuggling of exports, loss of migrants’ remittances from formal channels and exacerbated shortages of foreign exchange (Ebaidalla 2015).
- Recent developments:
  - Authorities indicated plans to reform the Central Bank Law to bring it in line with international best practices and improve CBOS governance and operations.
  - Authorities have requested IMF support in revising the new law.

### Market regulation and business constraints
- Inadequate governance and corruption discourage private investment; burdensome regulation and red tape create opportunities for corruption, acting as a tax on profitability (Mauro 1997).
- Lack of governance, weak checks and balances on investments and expenditure, and high perceived corruption create uncertainty about returns to investment through delays in licensing, customs clearance, unpredictable policies, or uneven enforcement.
- Corruption diverts talent from more productive activities.
- Sudanese businesses report corruption among their top five constraints (Figure 2).
  - Corruption was rated as a “major” or “very severe” constraint by 65 percent of firms—higher than the regional average of 41 percent.
  - Concerns are greatest among smaller firms and those in the services sector; within services, wholesale and retail firms are more likely to report corruption as a major or severe constraint.
  - A separate survey found a very large proportion of informal sector firms saying corruption was their most severe constraint (World Bank 2009).
- These facts underscore corruption’s potential importance as an impediment to job creation in Sudan.

### Rule of law and anti-corruption enforcement
- Rule of law principles: accountability to publicly promulgated laws, equal enforcement, independent adjudication, consistency with international human rights norms, supremacy of law, equality before the law, accountability, fairness, separation of powers, participation in decision-making, legal certainty, avoidance of arbitrariness, procedural and legal transparency.
- Rule of law is critical for peacebuilding, sustainable development in LICs and fragile countries by improving safety, access to fair legal systems, reducing violence and conflict, promoting economic investment, encouraging inclusive growth and eradicating poverty.
- Sudan has scored very poorly on compliance with rule of law best practices in the past; criticism particularly severe regarding objectivity and impartiality of the judiciary and the police forces.
- This chapter did not assess the judiciary and police due to lack of direct information.
- The new government is committed to enforce a fair, accountable and transparent new set of measures and actions in this sector.
- A forthcoming IMF macro-diagnostic governance mission requested for the first half of 2020 is intended to provide a thorough evaluation and a set of recommendations to accompany authorities in reform efforts.

*Source: 13. Weak governance and corruption — 1sdnea2020002*

### 29.      The AML framework includes a set of measures that can support efforts to counter

### 1sdnea2020002 - 29.      The AML framework includes a set of measures that can support efforts to counter

### AML framework and anti‑corruption measures
- The AML framework includes measures that can support efforts to counter corruption, such as:
  - scrutiny of transactions of politically exposed persons (PEPs),
  - reporting of suspicious transactions,
  - criminal justice actions against proceeds of corruption and criminals.

### Implementation of preventive measures and PEPs (findings)
- Effective implementation of preventive measures is key, particularly for PEPs.
- When implementing customer due diligence (CDD), institutions should:
  - identify customers, including PEPs,
  - apply ongoing monitoring to identify suspicious behavior,
  - report suspicious transactions to the financial intelligence unit (FIU).
- In Sudan:
  - implementation of CDD is not effective, including by nonbank institutions.
  - reporting of suspicious transactions is overall insufficient and limited to banks.
  - implementation of requirements on PEPs would be facilitated by the publication of PEP’s comprehensive asset declarations to assist domestic banks and financial institutions abroad to identify Sudanese PEPs, compare declared assets with assets in their books, and report unexplained discrepancies to FIUs.
  - such foreign law enforcement enforcement actions could create incentives for better governance in Sudan while domestic anti-corruption frameworks are being strengthened.

### Beneficial ownership and transparency (findings)
- Transparency on beneficial ownership of legal persons and arrangements is necessary to prevent misuse for laundering proceeds of corruption.
- The 2012 FATF standards require heightened scrutiny of PEP transactions and adequate transparency of company ownership.
- In Sudan, financial and non-financial institutions face challenges obtaining adequate, accurate and current information on beneficial ownership, including when beneficial owners may be PEPs.
- Making beneficial ownership information readily available through a national registry or other FATF‑covered mechanisms should assist domestic and foreign financial institutions, law enforcement agencies, journalists and civil society in identifying legal persons and arrangements connected to PEPs.

### Criminal justice actions against money laundering (findings)
- Effective criminal justice actions against money launderers can dissuade corruption.
- In Sudan:
  - it is not common practice to launch parallel financial investigations of money laundering when criminal conduct is being investigated.
  - the number of convictions for money laundering and confiscations of proceeds of corruption and proceeds of crime more generally are limited.
- Recommendation: the AML framework should be more effectively used to prosecute corruption.

### Concluding remarks and governance reform priorities (findings and recommendations)
- For a complex fragile state with limited institutional capacity such as Sudan, reforms must be carefully calibrated and sequenced to avoid reform failure or quick reversal.
- Recommended starting points:
  - create a sound and more robust governance framework,
  - reinforce institutional capacity,
  - invest in human capital.
- Most immediate action:
  - increase the timeliness, quality and integrity of data and statistics,
  - build a culture of transparency and accountability in public institutions and agencies.
- Stakeholder engagement:
  - actively engage civil society and private stakeholders in designing policy strategy and implementation plans to avoid reform failure.
- Core principles for governance and anti‑corruption reforms:
  - transparency, accountability and comprehensive communication.
- Specific actions called for:
  - (i) significant and systemic improvements in transparency and data reporting;
  - (ii) regulatory alignment with international best practices (through UNCAC compliance and peer review report, supervisory and accounting compliance with international standards, continued progress in the implementation of AML/CFT best practices);
  - (iii) domestic law alignment to incentivize non‑corrupt behavior (such as through tax provisions);
  - (iv) institutional enhancement (capacity development, creation of checks‑and‑balances, better reporting and enforcement of sanctions).
- Additional priorities:
  - undertake a detailed and comprehensive inventory of challenges preventing the effective functioning of public institutions with continued participation of civil society and private stakeholders.

### Fiscal and public finance governance recommendations (findings and recommendations)
- Rationalize tax exemptions and phase out tax holidays to:
  - strengthen governance,
  - boost fiscal revenues,
  - reduce perceptions of corruption and tax avoidance.
- Reduce the number of corporate tax rates and introduce a presumptive tax for small businesses to:
  - simplify and enhance transparency of the tax system,
  - improve compliance,
  - expand the tax base.
- Strengthen customs and tax administration:
  - firms in Sudan on average make 42 payments and spend more than 23 days (180 hours) a year to comply with tax regulations (World Bank Group 2017).
  - reduce the number of steps to comply, introduce electronic filing and payment systems, accompany reforms with taxpayer education, personnel training and improvements in internal control and oversight.
- Eliminate off‑budget subsidies:
  - a substantial portion of fuel subsidies are recorded on the central bank’s balance sheet, not in the budget.
  - shifting these costs onto the budget and recognizing full costs would improve accountability and reduce unsustainable spending.
- Strengthen PFM and procurement:
  - improving public investment management could close as much as two‑thirds of the efficiency gap (IMF 2015).
  - effective measures: increase transparency by publishing detailed project information throughout project life; greater use of open tenders; improve project evaluations and require prefeasibility studies for large projects; support the auditor‑general’s office; enhance technical capacity in line ministries.
  - redesign procurement: entrust to an independent, fully staffed and highly specialized unit covering project design to final disbursement and quality controls; consider a procurement audit.
  - pursue full disclosure on SOEs, their shareholders, balance sheets and interlinkages with relevant institutions.
- Unify multiple exchange rates:
  - a unified market‑based exchange rate would boost competitiveness, reduce rent‑seeking, and encourage investment.
  - assessing import duty and oil revenues at a market‑determined exchange rate would generate a large revenue windfall.
- Enforce limits on central bank financing of the budget:
  - reinforce limits on central bank monetization of fiscal deficits to contain inflation.
  - relieve the central bank of responsibility for subsidies and other quasi‑fiscal activities and strengthen operational independence to improve credibility and price stability mandate delivery.

### Revenue mobilization — background and recent trends (findings)
- Tax revenue mobilization remains a key macroeconomic and developmental challenge for Sudan.
- Evidence from Gaspar et al (2016) identifies a tax “tipping point” of about 12.75 percent of GDP.
- For Sudan:
  - total tax‑to‑GDP ratio in 2018 is at similar level to that in 2007 at about 5.4 percent.
  - the share of income taxes and international trade taxes declined: income taxes (personal –PIT and corporate –CIT) and international trade taxes declined from 0.8 percent and 1.8 percent in 2007 to 0.5 percent and 1.3 percent in 2018 respectively.
- Multiple exchange rate practices have suppressed fiscal revenues substantially:
  - the significantly overvalued official exchange rate for government transactions results in an estimated revenue loss of about 5 percent of GDP.
- Tax performance is relatively stagnant and significantly below potential; cross‑country evidence suggests scope for Sudan to double its tax revenue to levels comparable to other non‑resource‑rich countries.

### Revenue mobilization — cross‑country comparison (findings)
- Sudan’s tax‑to‑GDP ratio is at the bottom among countries with similar characteristics and per capita GDP and remains far below the averages of non‑resource‑rich MCD countries, SSA countries, and countries with similar per capita income.
- Sudan has remained below the 12.75 percent of GDP tax tipping point.
- Tax subcategory performance (2000–18 averages):
  - PIT averaged 0.14 percent of GDP.
  - CIT amounted to 0.6 percent of GDP.
  - VAT collection remained at about 3 percent of GDP.
  - Taxes on international trade amounted to 1.9 percent of GDP.
- These subcategory levels are well below comparator averages (examples cited: PIT 2.6 percent of GDP for non‑resource‑rich MCD and SSA; CIT 2.8 percent for comparators; VAT below comparator averages by about 4 percent of GDP).

### Tax rates and administrative context (findings)
- Tax rates in Sudan are generally on the low side among comparators.
- Table 1 entry for Sudan is listed as: Sudan 101517 (Corporate Income Tax, Personal Income Tax, Value Added Tax).
- While Sudan’s VAT rates are comparable and in line with international standards, CIT and PIT rates are lower than those prevailing in most comparator countries.

### Successful experiences and mobilization options (findings and recommendations)
- Fragile states and LICs have increased tax revenue through:
  - improved revenue administration (modernizing tax administration, improving tax compliance, combating tax evasion and corruption),
  - tax policy reforms (removing huge tax exemptions, changing tax rates, broadening the tax base).
- Examples: Liberia and Burkina Faso increased tax‑to‑GDP ratios by at least 5 percentage points between 2008 and 2012.
- Policy options for Sudan (implied from successful country experiences and earlier recommendations):
  - modernize tax administration and customs,
  - reduce exemptions and tax holidays,
  - consolidate and rationalize tax rates,
  - introduce presumptive taxation for small businesses,
  - invest in electronic filing/payment systems and taxpayer education,
  - unify exchange rates and reassess revenue at market rates,
  - strengthen AML/CFT measures, beneficial ownership transparency, and criminal justice use of AML tools to support anti‑corruption and revenue efforts.

*International Monetary Fund — Sudan country analysis excerpt*

### 9. Improving tax performance in Sudan will entail overcoming many obstacles. Sudan will

### 1sdnea2020002 - 9. Improving tax performance in Sudan will entail overcoming many obstacles. Sudan will

### Tax policy and administrative reforms: overall diagnosis and priority action
- Sudan must embark on a combination of tax policy and administrative reforms to overcome:
  - weak administrative capacity,
  - generous tax exemptions,
  - poor tax compliance,
  - limited skilled human resources.
- Removal of all tax exemptions is urgent and should be one of the first policy actions of the authorities.

### Personal Income Tax (PIT): current problems and proposed reform
- Current PIT scheme characteristics and problems:
  - 85 percent of public employees are exempted from paying taxes given that most employees earn below the tax-free threshold and are in the agricultural sector.
  - Only 15 percent of employees are captured in the current PIT system.
  - About 55 percent (income from agricultural sector and public employees age 50 years and above) of total employees are exempted from PIT.
  - Tax brackets are narrow, and the 15 percent highest PIT rate does not indicate a progressive tax system.
- Staff proposal for PIT:
  - A more progressive PIT system which broadens the tax brackets and makes top income earners pay higher tax rates of 30 percent.
- Potential revenue impact of removing PIT exemptions:
  - Steps to remove PIT exemptions could broaden the tax base by an additional 55 percent or more.

### Corporate Income Tax (CIT): unification and base broadening
- Current recommendations:
  - Unify the 5 CIT rates to at least 15 percent.
  - Include all agricultural activities in the tax system.
  - Apply a 15 percent CIT tax rate on agricultural activities as a feasible policy to boost CIT revenue significantly.
- Rationale:
  - Agriculture represents about 31 percent of GDP but does not contribute any CIT, which is likely to promote rent-seeking behavior that creates corruption and weaker governance.

### International trade taxes and exemptions: scale of revenue loss and control measures
- Eliminating exemptions on international trade taxes could boost tax revenue by an additional 1.2 percent of GDP.
- Based on Sudan customs’ monthly financial performance report 2017:
  - Revenue loss of imports tax exempted from customs duty amounted to about 43 percent of import duty collected.
  - Revenue loss of imported value added tax (VAT) is recorded to be 37 percent of imported VAT collected.
- Largest exemption-related revenue losses:
  - Exemptions from investment law: about 32.7 percent loss in revenue.
  - Financial sector exemptions: about 22 percent loss in revenue.
- Recommended administrative measures:
  - Full implementation of a risk management function at customs.
  - Control of the free zones to limit potential revenue leakages.

### Exchange rate liberalization, tax administration strengthening, and revenue gains
- Staff estimates for revenue gains with full exchange rate liberalization and stronger tax administration:
  - Import-related tax revenue boosted by at least 3.2 percent of GDP.
  - An additional 1.8 percent of GDP is also expected from oil-related revenue when exchange rate is fully liberalized.
- Context on recent exchange rate movements and import-related revenue:
  - Despite a 168 percent devaluation of the exchange rate at the beginning and last quarter of 2018 (from SDG 6.67 to SDG 18 per US$ to SDG 45 per US$), import-related tax revenue remained subdued in 2018 — with a decline of about 0.02 percent of GDP — due to weak tax administration and compliance.
- Administrative focus:
  - Strengthen taxpayer segmentation to identify and address compliance risk especially for large and medium taxpayers.

### Key statistics and figures cited
- PIT capture and exemptions:
  - 85 percent of public employees exempted from paying taxes.
  - Only 15 percent of employees captured in current PIT system.
  - About 55 percent of total employees exempted from PIT (agricultural sector and public employees age 50 years and above).
- Proposed top PIT rate: 30 percent.
- Current highest PIT rate: 15 percent.
- CIT reform target rate: at least 15 percent (unify 5 CIT rates).
- Agriculture share of GDP: about 31 percent.
- Potential revenue gains:
  - Trade tax exemptions elimination: additional 1.2 percent of GDP.
  - Import-related tax revenue from full exchange rate liberalization: at least 3.2 percent of GDP.
  - Additional oil-related revenue from full exchange rate liberalization: 1.8 percent of GDP.
  - Import-related tax revenue decline in 2018: about 0.02 percent of GDP (despite a 168 percent devaluation noted).
- Exemption-related customs and VAT revenue losses (2017 basis):
  - Customs duty: 43 percent revenue loss relative to import duty collected.
  - VAT imports: 37 percent revenue loss relative to imported VAT collected.
  - Investment law exemptions: 32.7 percent loss.
  - Financial sector exemptions: 22 percent loss.

### Conclusions and medium-term outlook
- Sudan is behind its comparators in tax revenue mobilization with substantial opportunity to raise tax revenue.
- Causes of low tax revenue:
  - Inadequacies and weaknesses in tax administration and policy over past decades.
  - Huge cut in oil revenue and declining donor support increasing the urgency to mobilize tax revenue.
- Targets and timelines:
  - To attain a target of about 13 percent tax-to-GDP ratio in Sudan may take more than a medium-term horizon.
  - A steadfast improvement in tax policy alone could achieve about 50 percent of this target over the short-term.

*Source: IMF staff estimates and analysis as presented in the provided content unit.*

### 10. The MOFEP has had to make various efforts to supply crude oil for the domestic

### 10. The MOFEP has had to make various efforts to supply crude oil for the domestic refineries

### Crude supply and refinery utilization
- Refineries must process about 80 percent or more of full capacity, or 77,000 bpd of crude oil, to maintain proper operation.
- Government share of crude oils dropped to close to 40,000 bpd, prompting purchases from foreign partners and conversion of South Sudan payments under the Oil Agreement into crude oil transported in the Sudanese pipelines.
- 14,000 bpd in 2019 was diverted to the refineries from South Sudan payments.

### Exchange rates, pricing, and processing costs
- Domestic refineries use exchange rate of SDG 18/US$ to convert cost of crude oil and calculate processing fees.
- Processing fees used to measure cost of domestic production: US$6.99 per barrel in 2018 and 2019; US$4.42 in 2016 and 2017.
- Exchange rate used for importing other materials: SDG 45/US$.
- Government paid foreign partners for their crude oil in domestic currency by using exchange rate of SDG 26/US$.
- Government purchased foreign exchange from Central Bank at exchange rate of SDG 18/US$.
- Central Bank’s cost of obtaining foreign exchange from domestic gold miners is at parallel market exchange rate (about SDG 85/US$ in December 2019).
- Figure note: international prices evaluated at exchange rate of SDG 82/US$.

### Domestic vs international fuel prices (as presented)
- Fuel type — Current domestic prices (SDG/litre) — Current international prices (SDG/litre) — Price increase (percent) — Share in total consumption (percent)
  - Gasoline: 6.44 — 4.66 — 124.9
  - Diesel: 4.34 — 3.69 — 1054.7
  - Fuel oil: 4.33 — 2.56 — 55.2
  - Kerosene: 4.14 — 0.18 — 60.2
  - LPG: 5.22 — 4.93 — 12.7

### Financial flows and distribution costs
- The MOFEP bears the full cost of diesel and gasoline transportation and distribution from Port of Sudan and distribution center to different cities, at about SDG 1.8 per ton per km.
- Distribution margins charged by private companies are determined by the government and adjusted when companies need to increase capital investment.

### Fees, taxes, and transfers between MOEM and MOFEP
- Monthly committee comprising representatives from MOFEP and MOEM settles claims and charges between them.
- MOFEP pays refinery processing fees to MOEM; MOEM pays various fees and taxes from revenues of domestic fuel sales, including:
  - Fuel stabilization fees (difference between current domestic fuel prices and those existing in 2013): SDG 620 per ton for gasoline, SDG 536 per ton for diesel, SDG 80 per ton for LPG.
  - Development tax: 13 percent of C&F import price for LPG and gasoline.
  - Custom fees: 10 percent of C&F import price.
  - Fuel fees for both imported and domestically produced fuels: SDG 960/ton for LPG, SDG 5956.65 for gasoline, SDG 3207.96 per ton for diesel.
  - Berth fees and crossing fees for LPG and gasoline imports: SDG 41/ton and SDG 2.5/ton respectively.
  - Value added tax (VAT): 17 percent; sea port VAT SDG 7.41/ton on diesel, gasoline and LPG imports.
  - VAT on domestically produced fuels: SDG 86.29 per ton for LPG, SDG 154.62 per ton for gasoline, SDG 85.06 for diesel.
  - Supply of crude oil calculated at international price and converted to SDG using SDG 18/US$.

### Fuel consumption trends and power sector use
- Fuel consumption increased steadily except in 2012.
- Gasoline consumption volume increased on average at 12 percent in the past 20 years.
- Diesel consumption increased on average at 8 percent in the past 20 years.
- Hydropower accounts for 60 percent of total electricity generation; hydropower could not meet domestic demand.
- State-owned electricity generation company uses fuel oil from refineries for power generation and does not pay for supply of fuel oil or crude oil.
- MOFEP used crude oil from South Sudan (14,000 bpd in 2019) and imported fuel oil for power generation.
- World Bank report: in 2017 revenue from sale of electricity could only cover 21 percent of cost of operation.
- Average electricity tariff is about US$0.007/kWh in 2018 (calculated using the official exchange rate of SDG 45/US$), described as the lowest in Sub-Sahara Africa.
- Power exchange agreement with Ethiopia: government agreed to provide 12,000 barrels of gasoline per month to Ethiopia in exchange for electricity; Ethiopia sends electricity based on a gasoline import price marked down by US$20.

### Fiscal cost and transparency of subsidies
- Total fuel subsidies in 2019 estimated by IMF staff at about SDG 215 billion, or 10.6 percent of GDP.
- MOFEP reported outcome for 2019 budget was SDG 52 billion.
- Recording energy subsidies is challenging due to complex transactions and multiple exchange rates; substantial portion of subsidies from exchange rate differences are recorded on the Central Bank’s balance sheet.
- IMF staff methodology: estimate full fuel subsidies by evaluating gap between cost of production (including cost of supply at international prices, refining costs, transportation and distribution costs, tax payments and importing cost) and domestic retail prices.

### Distributional impacts and smuggling
- 2014/15 National Household Budget and Poverty Survey (NHBPS): only 5.7 percent and 2.6 percent of households own motor vehicles and motor cycles, respectively.
- World Bank study: top 20 percent of households receive more than eight times the fuel subsidy received by the bottom 40 percent.
- On average, fuel expense makes up only 1.5 percent of total household expense.
- Cheaper fuel prices have motivated smuggling of fuels to neighboring countries.

### International experience and ingredients for successful subsidy removal
- IMF paper identifying 28 country reform episodes: 12 countries successfully reduced subsidies, 11 partially successful, 5 unsuccessful.
- Common ingredients for successful reform:
  - A comprehensive energy sector reform plan with clear long-term objectives incorporating an analysis of the impact of reforms;
  - Transparent and extensive communication and consultation with stakeholders;
  - Phasing-in price increases over time;
  - Improving the efficiency of state-owned enterprises to reduce producer subsidies;
  - Measures to protect the poor through targeted cash or near-cash transfer, or, if this option is not feasible, a focus on existing targeted programs that can be expanded quickly;
  - Institutional reforms that depoliticize energy pricing, such as the introduction of automatic pricing mechanisms.

### Specific considerations for Sudan’s subsidy reform
- Sudan has persistent large macroeconomic imbalances due to past mismanagement and lack of external investment and financing; weak economic condition and continued depreciation of Sudanese currency would complicate subsidy reforms.
- Recent regime change creates a window of opportunity for fundamental reforms.
- Energy subsidy reform should be included in a comprehensive economic reform package which also tackles exchange rate reforms.
- Given high poverty ratio and large gaps between domestic fuel prices and break-even prices, removal of subsidies should be conditional on other key policy actions, notably:
  - An expanded social safety net prior to subsidy reforms;
  - An extensive information and communication campaign prior to subsidy reforms.

### Oil sector governance reform recommendations
- Reform state-owned enterprises (SOEs) to allow them to operate on commercial basis, incentivizing long-term development targets and investment strategies.
- Streamline function of MOEM and return it to a genuine ministry in charge of regulating the sector and providing strategic views on energy sector development.
- Establish clear lines of responsibility between MOFEP and MOEM with regard to energy sector regulation.
- Improve transparency and enhance auditing in the oil sector to allow more public analysis and scrutiny.

*Source: IMF staff summary of chapter on Sudan energy sector and subsidies.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1sdnea2020002.pdf_