## Republic of South Sudan — Staff‑Monitored Program and Request for Disbursement under the Rapid Credit Facility (content unit 1ssdea2021001) ## Source details **Canonical URL:** [Republic of South Sudan — Staff‑Monitored Program and Request for Disbursement under the Rapid Credit Facility (content unit 1ssdea2021001)](https://www.imf.org/-/media/files/publications/cr/2021/english/1ssdea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1ssdea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1ssdea2021001.pdf.json) --- ### Context - South Sudan is a very fragile post-conflict country; the Revitalized Agreement on the Resolution of the Conflict in South Sudan (R-ARCSS) led to a unity government in February 2020, but peace remains fragile. - Humanitarian and social conditions: - Floods: worst in 60 years affected more than 1 million people (about 10 percent of the population). - Displaced: about 40 percent of the population are internally displaced or live as refugees. - Poverty: more than 80 percent live below the poverty line. - Authorities’ request and program framing: - RCF assistance requested: SDR 123 million (50 percent of quota), or about US$176 million. - Proposed use: about half to support the budget and about half to replenish international reserves. - SMP period presented: March 31–December 31, 2021 to guide policy implementation and prepare for a possible ECF. ### Recent developments, outlook, and risks - Macroeconomic performance and projections: - Economic growth: 13.2 percent in FY19/20; projected contraction of 4.2 percent in FY20/21; baseline modest recovery in FY21/22. - Inflation: 125 percent in FY17/18; 35 percent in FY19/20. - Reserve money increase: about 45 percent between March and September 2020. - Downturn drivers: - Sharp decline in international oil prices following the COVID-19 pandemic. - Devastating floods that amplified food insecurity and damaged agriculture. - Balance of payments and financing needs: - Large BOP financing needs; additional food imports estimated at over US$400 million. - Donors’ commitments to date are short of needs. - RCF disbursement deemed necessary to alleviate urgent BOP needs and avoid immediate severe economic disruption. - Monetary and exchange rate developments: - Resumption of monetary financing in 2020 contributed to SSP depreciation in the parallel market and a spike in inflation; pass-through to consumer prices is high and almost instantaneous. - Monetization of the deficit was terminated starting October 2020; government refrained from accessing the BOSS overdraft, helping stabilize the parallel market exchange rate since November. - Official exchange rate has barely moved since the pandemic; parallel market premium currently over 200 percent. ### SMP and RCF rationale - Objectives: - Restore macroeconomic stability through prudent fiscal and monetary policies. - Move FX regime towards a market-based exchange rate system. - Strengthen public financial management (PFM) to address governance and corruption. - Restore credibility with donors and improve prospects for concessional financing, paving the way for an ECF. - Staff view: - Staff supports the RCF given urgent BOP need and strong policy commitments under the SMP compiled in the MEFP. - South Sudan assessed as having adequate capacity to repay the Fund. - SMP intended to run March 31–December 31, 2021 to create conditions for a medium-term reform strategy. ### Fiscal, monetary, FX policy actions and recommendations - Fiscal policy: - Execute remainder of FY20/21 and FY21/22 budgets without recourse to monetary financing; restore fiscal discipline and avoid accumulation of arrears. - Revenue mobilization measures: phasing out some tax exemptions, increasing domestic rates toward EAC levels, modernizing the National Revenue Authority (digitalization). - Prioritize wages and salaries; reduce wage and salary arrears to 3 months by end-FY20/21 (from 5 months currently) and eliminate them during FY21/22. - Limit external nonconcessional borrowing to critical infrastructure and COVID-related spending; consult IMF prior to contracting any non-concessional borrowing. - Monetary and FX policy: - Discontinue deficit monetization and implement a rules-based monetary policy framework. - Operational target: reserve money targeting with a reserve money growth target of 10 percent in 2021 (BOSS to operationalize quarterly targets). - FX reforms: immediate liberalization for private and official flows; allow banks to participate in weekly FX auctions; gradually adjust the official (reference) rate toward a unified market rate. - Use about half (US$87 million) of proposed RCF disbursement to build international reserves. - Manage impact on prices of critical goods and protect vulnerable groups via targeted mitigation measures. - Governance and PFM: - Strengthen governance and PFM: implement Treasury Single Account (TSA), improve cash management, publish monthly reports on pandemic-related spending, and publish quarterly audits by the Auditor General. - Ensure transparency in use of RCF resources; record pandemic-related transactions in IFMIS and publish procurement information including beneficial ownership within three months of contract signing. ### Key SMP modalities, monitoring, and conditionality - Program scope: - SMP duration: March 31–December 31, 2021. - Program comprises one prior action, six quantitative targets, and five structural benchmarks. - Prior action: - BOSS to issue a circular to formalize agreed FX reforms effective April 1, 2021. - Quantitative targets (exact figures): - Central government's primary cash budget deficit (ceiling, in billions of SSP): end‑Jun 2021: 10.0; end‑Sep 2021: 20.0. - Central bank net credit to the central government (ceiling, in billions of SSP): end‑Jun 2021: 0.0; end‑Sep 2021: 0.0. - Contracting or guaranteeing of non‑concessional borrowing (continuous ceiling, in millions of USD): end‑Jun 2021: 0.0; end‑Sep 2021: 0.0. - Average net international reserve (floor, in millions of U.S. dollars): end‑Jun 2021: 85.0; end‑Sep 2021: 100.0. - Clearance of salary arrears (floor, in billions of SSP): end‑Jun 2021: 7.3; end‑Sep 2021: 11.0. - Average reserve money growth (ceiling, in percentage points): end‑Jun 2021: 5.0; end‑Sep 2021: 10.0. - Structural benchmarks and timetables (selected): - Cabinet to adopt a PFM concept note including a 2021 Immediate Action Plan — June 2021. - Consolidate GoSS bank accounts in BOSS — June 2021. - Establish CMU within the Treasury — June 2021. - Pilot phase‑out of cash salary payments in MOFP — June 2021; roll out to selected MDAs — September 2021. - Reporting and data provision: - Monthly and quarterly fiscal, monetary, and FX data to be reported to IMF with specified lags; Technical Memorandum of Understanding (TMU) to define data and definitions. - First test date: June 30, 2021; review expected completed by end‑September 2021; second test date: September 30, 2021. ### Proposed RCF disbursement and fiscal impact - Proposed RCF disbursement: SDR 123 million (50 percent of quota), or about US$176 million. - Fiscal allocation: about US$89 million proposed for fiscal financing (about 60 percent of the estimated fiscal gap). - Reserve allocation: about US$87 million to support international reserve accumulation. - Remaining fiscal financing gap closure sources: - FX profits from auctioning portion of RCF, concessional loans, and further fiscal consolidation if necessary. ### Debt management and sustainability - Debt posture and recent operations: - External public debt estimated at US$1,355 million (41 percent of GDP) as of end‑June 2020. - Debt to QNB: US$627 million; oil‑related short‑term loans: US$99 million in June 2020. - South Sudan reached a debt restructuring agreement with QNB in July 2020 reducing NPV by 42 percent; government current on external debts since October 2020. - Policy commitments: - Refrain from contracting non‑concessional debt, subject to limited exceptions for debt management operations or high‑return critical investments; consult IMF prior to contracting. - Set up a debt unit at MOFP and request IMF TA to improve debt data quality and timeliness. - DSA findings and risks: - Debt assessed as sustainable with a high risk of debt distress. - Short‑term breaches in debt indicators: debt service‑to‑revenues and PV of debt‑to‑GDP breached under baseline. - Stress tests and tailored commodity‑price shock (C3) show large increases in PV of debt ratios under shock years (selected C3 outcomes: PV of debt‑to‑GDP: 47.6 (2021), 84.2 (2022), 117.4 (2023); PV of debt‑to‑exports: same series). - Downside risks: subdued oil prices, implementation slippages, political fragility, limited concessional financing. ### Monetary framework and operational priorities - Rationale and recommendation: - Money targeting is recommended as the feasible monetary policy regime given low reserves and need to eliminate fiscal dominance. - BOSS operational plan: reserve money targeting with quarterly targets and a base money growth target of 10 percent in 2021. - Operational toolkit and capacity development: - Establish a Liquidity Monitoring and Forecasting Unit; strengthen liquidity forecasting and expand monetary policy instruments. - Gradual introduction of market‑based instruments: term deposits, overnight Standing Liquidity Facility; adjustments to reserve requirement framework. - Publish monthly monetary aggregates and weekly FX auction results promptly (BOSS website). - FX market reforms: - Immediate liberalization of FX market for private and official flows; allow banks to participate in weekly FX auctions; auction portion of RCF budget allocation; gradually align the reference rate with auction rates aiming for unification around the first SMP review (September 2021) provided no monetary financing. ### Social and public spending considerations - Wages and arrears: - Wage and salary arrears: five months outstanding as of end‑January; target to reduce to 3 months by end‑FY20/21 and eliminate in FY21/22. - Use of prior RCF disbursement (Nov 2020): US$52 million used to reduce wage and salary arrears; most converted at official rate 174 SSP/US$ to clear two months of arrears. - Auctioned portion of prior RCF as of mid‑March: US$24 million auctioned at weighted average exchange rates between 80 and 90 percent of the parallel market rate. - COVID‑19 vaccination funding: - Authorities expect vaccines covering 20 percent through COVAX; national deployment plan aims to vaccinate 40 percent by end‑2022 (MEFP ¶3). - Preliminary staff estimates: distribution cost of vaccinating 40 percent is about US$32 million and procurement for additional 20 percent is about US$28 million, total about US$60 million (about 1.1 percent of GDP). - WHO estimates: about 10 percent vaccinated by June 2021, additional 10 percent by end‑2021, remaining 20 percent in 2022. - Social protection: - Consider targeted substitutes for implicit FX subsidies and expansion of cash support programs (e.g., South Sudan Safety Net Project targeting up to 430,000 people in about 65,000 households) using additional revenue from FX reform. ### Capacity development, governance, and implementation risks - PFM priorities and reforms: - Cabinet to adopt PFM concept note and Immediate Action Plan no later than end‑June 2021. - SMP‑supported PFM reforms in 2021: strengthen macro‑fiscal framework, implement TSA, improve cash management, establish public procurement and asset disposal authority, strengthen Anti‑Corruption Commission and Audit Chamber. - Transparency commitments: record pandemic spending in IFMIS; publish procurement and spending reports; Auditor General to publish quarterly audits of dedicated account spending. - Capacity development (CD): - CD to focus on governance, domestic revenue mobilization, reserve money targeting operationalization, FX market reforms, and data quality improvements. - Risk of limited absorptive capacity due to historically low CD traction, weak governance, high staff turnover, and limited institutional memory. - Governance measures: - Discontinued oil advances; established PFM Oversight Committee; plan to criminalize corruption offenses and implement asset declarations; pursue membership in regional AML body. ### Staff appraisal, scenarios, and final recommendations - Staff appraisal key findings: - Economy hit by COVID‑19 and severe floods; projected sharp contraction in FY20/21 followed by modest recovery FY21/22 with oil price recovery. - Support for no further monetary financing and prudent reserve money targeting to stabilize exchange rate and inflation. - Rebuilding international reserves is critical; use revenue windfalls to repay expensive external debt and save in the Oil Revenue Stabilization Account once budgeted spending is executed. - A unified, market‑determined exchange rate is essential to eliminate distortions and support diversification; staff welcomes FX market reforms effective from SMP start. - Strengthening PFM systems is essential for efficient public fund use and donor confidence. - Scenarios and risks: - Upside: higher oil prices and stronger peace dividends could improve outlook. - Downside: prolonged low oil prices leading to resumption of monetary financing, potential return to hostilities, interference by vested interests impeding FX reforms, inability to access concessional financing, weak implementation capacity. - Staff recommendation: - Support RCF disbursement equivalent to 50 percent of quota (SDR 123 million) and endorsement of a nine‑month SMP, conditional on steadfast implementation and accompanying technical assistance to mitigate capacity constraints. *Source: IMF staff and the authorities (content unit 1ssdea2021001).* ### 174.2 million) to South Sudan under the Rapid Credit Facility ### 174.2 million) to South Sudan under the Rapid Credit Facility ### Context - South Sudan is a very fragile post-conflict country; after five years of civil conflict the Revitalized Agreement on the Resolution of the Conflict in South Sudan (R-ARCSS) led to a unity government in February 2020, but peace remains fragile. - Humanitarian conditions are severe: the worst floods in 60 years affected more than 1 million people (about 10 percent of the population), killed livestock, destroyed food stocks, and damaged crops ahead of the main harvest season. - About 40 percent of the population remain internally displaced or live as refugees; more than 80 percent live below the poverty line. - The authorities request: RCF assistance for 50 percent of quota (SDR 123 million, or about US$176 million), of which about half will support the budget and the other half will replenish largely depleted international reserves. - A March 31-December 31, 2021 Staff-Monitored Program (SMP) is presented to guide policy implementation and prepare for a possible Extended Credit Facility (ECF). ### Recent developments, outlook, and risks - Economic impact and projections: - Economic growth rebounded to 13.2 percent in FY19/20. - Inflation declined from 125 percent in FY17/18 to 35 percent in FY19/20. - The economy is projected to contract by 4.2 percent in FY20/21. - Baseline projects a modest recovery in FY21/22 driven by expected recovery in international oil prices and commitment to terminate monetary financing. - Drivers of the downturn: - Sharp decline in international oil prices following the COVID-19 pandemic. - Devastating floods that amplified food insecurity and damage to agriculture. - Balance of payments and financing: - Large BOP financing needs; donors’ commitments to date are short of needs (additional food imports are estimated at over US$400 million). - RCF disbursement will alleviate urgent BOP needs that, if not addressed, would result in immediate and severe economic disruption. - Monetary and exchange rate developments: - Resumption of monetary financing in 2020 led to reserve money increasing by about 45 percent between March and September 2020. - This contributed to sharp SSP depreciation in the parallel market and a spike in inflation; pass-through to consumer prices is very high and almost instantaneous. - Monetization of the deficit was terminated starting October 2020; the government refrained from accessing the BOSS overdraft even for short-term cash management, helping stabilize the parallel market exchange rate since November. - Official exchange rate has barely moved since the pandemic, producing a premium in the parallel market currently over 200 percent. - Use of prior RCF disbursement: - The RCF disbursement approved in November 2020 (US$52 million) was used to reduce wage and salary arrears. - Authorities converted most of the US$52 million at the official exchange rate (174 SSP/US$) to clear two months of wage and salary arrears (five months of salary arrears remain outstanding as of end-January). - BOSS weekly FX auctions: as of mid-March, about US$24 million of the RCF disbursement has been auctioned, with the weighted average exchange rate ranging between 80 and 90 percent of the parallel market rate. - Proceeds from the difference between auction and official rates were used to reduce the outstanding stock of the MOFP overdraft to the BOSS, contributing to a reduction in reserve money and relative FX stability. - Risks: - Downside risks predominate: a prolonged period of low oil prices could lead to resumption of monetary financing, undermining recovery and raising inflation. - Potential return to hostilities (low probability but main downside risk). - Interference by vested interests could impede FX market reforms and reduce donor confidence. - Upside: higher oil prices and stronger peace dividends could improve outlook. ### Staff-Monitored Program (SMP) and RCF rationale - Objectives of SMP and RCF: - Restore macroeconomic stability through prudent fiscal and monetary policies. - Move FX regime towards a market-based exchange rate system. - Strengthen public financial management (PFM) to address governance and corruption. - Restore credibility with donors and improve prospects for concessional financing, paving the way for an ECF. - Staff view: - Staff supports the RCF given the urgent BOP need and strong policy commitments under the SMP as articulated in the Memorandum of Economic and Financial Policies. - South Sudan has adequate capacity to repay the Fund. - SMP to run March 31–December 31, 2021 to create conditions for medium-term reform strategy. ### Fiscal, monetary, and FX policy actions and recommendations - Fiscal: - Restore fiscal discipline and avoid accumulation of arrears; execute remainder of the FY20/21 and FY21/22 budgets without recourse to monetary financing. - Revenue mobilization measures including phasing out some tax exemptions have bolstered domestic non-oil revenue in recent months. - Revenue mobilization and expenditure rationalization should ensure resources for priority expenditure including vaccinations, salaries, and critical investments. - Limit external nonconcessional borrowing to finance only critical infrastructure and COVID-related spending to maintain debt sustainability. - Monetary and FX: - Discontinuation of deficit monetization is critical to enhance macroeconomic credibility. - Implement a rules-based monetary policy framework, effectively implement the reserve money targeting framework, and support a market-determined exchange rate to phase out FX market distortions and reduce vulnerabilities. - FX reforms should aim to phase out distortions, reduce vulnerabilities, and support economic diversification. - Manage impact of FX reform on prices of critical goods (box referenced in source). - Governance and public financial management: - Strengthen governance to ensure efficient use of public funds and build credibility with public and development partners. - Accelerate PFM reforms: strengthen macro-fiscal framework and budget process; implement the Treasury Single Account; improve cash management. - Ensure transparency in the use of RCF resources through publishing monthly reports on pandemic-related spending and making public quarterly audits by the Auditor General. - SMP monitoring: - SMP will foster greater transparency of government operations while strengthening governance and reducing vulnerabilities. - Regular reports and audits will ensure transparency of RCF resource use. ### Key statistics and dates (as reported) - RCF request: SDR 123 million (50 percent of quota), or about US$176 million. - Prior RCF disbursement: US$52 million (converted at official rate 174 SSP/US$). - Auctioned portion of prior RCF as of mid-March: US$24 million. - Reserve money increase: about 45 percent between March and September 2020. - Economic growth: 13.2 percent in FY19/20; projected contraction of 4.2 percent in FY20/21. - Inflation: 125 percent in FY17/18; 35 percent in FY19/20. - Flood-affected population: more than 1 million people (about 10 percent of the population). - Displaced: about 40 percent of the population internally displaced or refugees. - Poverty: more than 80 percent live below the poverty line. - SMP period: March 31-December 31, 2021. - Additional food import needs estimated at over US$400 million. - Parallel market premium relative to official rate: currently over 200 percent. - Salary arrears outstanding: five months remain outstanding as of end-January. - Date of report: March 17, 2021. *Republic of South Sudan — Staff-Monitored Program and Request for Disbursement under the Rapid Credit Facility (March 17, 2021).* ### 11. The authorities and staff agreed on macroeconomic policies and reforms underpinning ### 11. The authorities and staff agreed on macroeconomic policies and reforms underpinning ### Overview - Agreement to a nine-month SMP to: (i) foster macroeconomic stability by restoring fiscal discipline, implementing a rules-based monetary policy framework, and addressing distortions in the FX market; and (ii) increase transparency in government operations to strengthen governance and reduce opportunities for rent-seeking. - Capacity building from the Fund and other development partners will support implementation of the SMP policies and reforms. ### A. Restoring Fiscal Discipline - Fiscal policy under the SMP will support macroeconomic stabilization and debt sustainability by containing fiscal deficits and refraining from deficit monetization and non-concessional borrowing. - Authorities’ commitments: - Execute the remainder of the FY20/21 and the FY21/22 budgets without arrears accumulation and no recourse to monetary financing. - Ensure timely payments of wages and salaries starting from March 2021. - Reduce the stock of wage and salary arrears to 3 months by the end of FY20/21 (from 5 months currently). - Eliminate salary arrears during FY21/22. - Limit external borrowing to finance only critical infrastructure and COVID-related spending, and consult with the IMF prior to contracting any non-concessional borrowing. - Staff estimates: - Fiscal financing gap of about 2.3 percent of GDP in FY20/21. - Fiscal financing gap of about 2 percent of GDP in FY21/22. - Strengthening government revenue: - Oil revenues currently represent about 90 percent of total government revenue. - Non-oil revenue collections remain low compared with other countries. - Authorities have stepped up domestic revenue mobilization, generating a significant increase in non-oil revenue in FY20/21 (some SSP 1 billion per month, equivalent to about 1.1 percent of GDP per year), with additional effects expected in FY21/22. - Main non-oil measures include: (i) phasing out tax exemptions; (ii) increasing domestic rates to bring them closer to the level prevailing in other EAC countries; and (iii) modernizing the National Revenue Authority, including digitalizing tax collection and aligning customs classification with international best practice. - Authorities are considering replacing the sales tax with a value added tax (VAT) and are seeking IMF technical assistance. - FX market reforms are expected to increase the SSP equivalent of oil revenue and the SSP value of external financing, including the forthcoming disbursement under the RCF (a portion to be auctioned by the BOSS on behalf of the government). - Spending priorities and social considerations: - Wages and salaries will be prioritized; payment of wages and salaries is one of the few poverty-reducing instruments available. - Authorities intend to keep nominal wages unchanged in FY21/22, implying a significant decline in real wages given high inflation; staff urged consideration of nominal wage adjustments or expenditure reallocation to protect purchasing power. - Social support and FX reform mitigation: - Discussed compensating mechanisms to protect vulnerable groups from FX reforms, including explicit budget subsidies to replace implicit subsidies from access to FX at the official rate. - Staff advised replacing block subsidies with more targeted ones to contain fiscal cost. - FX reform expected to unlock cash-transfer programs supported by the World Bank through UNOPS targeted to the most vulnerable. - COVID-19 vaccination funding: - Authorities expect vaccines covering 20 percent of population through COVAX; national deployment plan aims to ensure 40 percent of the population are vaccinated by end-2022 (MEFP ¶3). - Preliminary staff estimates: distribution cost of vaccinating 40 percent of the population is about US$32 million and cost of procuring vaccines for the additional 20 percent is about US$28 million, for a total of about US$60 million (about 1.1 percent of GDP). - WHO estimates: about 10 percent of the population will be vaccinated by June 2021, an additional 10 percent by end-2021 and the remaining 20 percent in 2022. - Significant donor financing would be needed to fully execute the envisaged vaccination plan. - Critical infrastructure investments: - Focus on expanding the national and regional road network per the multi-year investment plan announced in 2019. - Authorities will use proceeds from 10,000 barrels of oil per day to fund such projects for the remainder of FY20/21 and for FY21/22 (less than the 30,000 barrels per day announced in 2019). ### B. Monetary and Exchange Rate Policies - Monetary framework: - Reserve money targeting is the only feasible monetary policy regime at the current juncture given low reserves and lack of policy credibility. - BOSS will operationalize a money targeting framework using reserve money as the operational target, targeting 10 percent growth in reserve money in 2021 (MEFP ¶9). - Authorities committed to no monetary financing of the deficit (MEFP ¶6); government will not access the overdraft facility at the BOSS. - With IMF technical assistance, BOSS will strengthen liquidity forecasting and expand monetary policy instruments; an agreement is being finalized for the budget to cover costs of liquidity operations by the BOSS (MEFP ¶9–10). - Rebuilding international reserves: - Authorities and staff agreed to use about half (US$87 million) of the disbursement under the proposed RCF to build international reserves. - Authorities intend to develop a plan, with IMF staff, for using revenue windfalls, including repaying expensive external debt and building buffers through reserve accumulation in the Oil Revenue Stabilization Account (MEFP ¶13). - FX market reforms to phase out distortions: - Distortions stem from a large premium of the exchange rate in the FX auctions and the parallel market relative to the indicative (official) rate—currently at over 200 percent—hampering activity, discouraging FX inflows, and creating rent-seeking. - Two key components of agreed FX reforms: - Immediate liberalization of the FX market for private and official flows (MEFP ¶11): - Allow banks to participate in weekly FX auctions organized by the BOSS starting from the beginning of the SMP and to operate freely in the FX market, including buying and selling private FX inflows and donor financial support at competitive exchange rates. - Portion of the forthcoming RCF disbursement that goes to the budget will be auctioned, as with the November 2020 RCF disbursement. - BOSS will consider increasing FX sold in weekly auctions, including part of FX from oil revenues, if needed to mop up excess liquidity consistent with reserve money targets and macro stabilization objectives. - Gradual adjustment of the official (reference) rate to allow an orderly transition to a unified exchange rate in the market (MEFP ¶12): - The reference rate will be limited to transactions between the government and BOSS. - Gradual adjustment allows time to put subsidy programs in place to protect vulnerable groups from price increases on critical goods that benefited from access to FX at the more appreciated reference rate (see Box 1). - Provided authorities adhere to no monetary financing, exchange rate unification is expected to be achieved around the time of the first SMP review (September 2021). - Fiscal cost of implicit FX subsidies and mitigation options (Box 1): - Implicit subsidy provided through the official rate to fuel and electricity sectors amounts to an estimated ¾ percent of GDP. - Fuel implicit subsidy: estimated some US$1 million per month (¼ percent of GDP per year); Trinity Energy accounts for about 30 percent of the fuel market and sells fuel at about 20 percent lower than privately run stations. - Electricity implicit subsidy: JEDCO granted access to purchase foreign exchange of US$3 million per month at the official rate; at the current 200 percent parallel market FX premium, this preferential access indicates an implicit subsidy of about US$2 million per month (½ percent of GDP per year). - Options to protect vulnerable groups: - Provide explicit subsidies to Trinity and JEDCO combined with commitment to keep prices unchanged (quick but poorly targeted). - Replace untargeted subsidies over time with targeted measures such as lifeline tariffs for electricity and water. - Expand existing cash support programs (e.g., South Sudan Safety Net Project targeting up to 430,000 people in about 65,000 households) using additional revenue from adjustment in the official rate to increase cash transfers to vulnerable groups. - Staff urges close collaboration with the World Bank in designing social safety nets and subsidies to avoid adverse distributional impacts while containing fiscal costs. ### C. Debt Management - Avoid expensive foreign borrowing to maintain debt sustainability and reduce risk of debt distress. - Authorities’ commitments and actions: - Refrain from contracting non-concessional debt subject to limited and well-targeted exceptions (MEFP ¶15). - Ended use of oil advances and cancelled the arrangement with Sahara Energy in November 2020. - Outstanding balance to be repaid with three oil cargoes in March, June, and September 2021. - South Sudan does not currently have external arrears; debt assessed to be sustainable albeit with high risk of debt distress. - Agreed to resort to non-concessional borrowing only if: - (i) debt management operations improve key liquidity and/or solvency debt burden indicators without adversely affecting the risk rating; or - (ii) finance critical investment projects with high social and economic return integral to the national development program or for critical COVID-related spending for which concessional financing is not available. - To improve debt management, authorities will set up a debt unit at the MOFP and develop a framework for monitoring debt obligations. - Authorities requested IMF technical assistance to improve the quality and timeliness of debt data. ### D. Strengthening Governance - Strengthening governance is essential for efficient use of public funds and building credibility with the public and development partners. - Actions and planned reforms: - Discontinued use of oil advances for budget financing, improving budget transparency and oil management. - Established PFM Oversight Committee, Technical Committee, and Secretariat by Executive Order of the MOFP in April 2020 to oversee budget implementation and advise on resource allocation; these include participation from government, development partners, and civil society. - Plan to strengthen the anti-corruption framework by criminalizing corruption offenses and implementing an asset declaration regime. - Bring legal and institutional frameworks in line with requirements under the United Nations Convention Against Corruption and apply for membership in the regional FATF-styled body (the Eastern and South African Anti-Money Laundering Group) (MEFP ¶16). *Source: IMF staff and the authorities (content unit 1ssdea2021001).* ### 20. The authorities have identified PFM priorities and are working with the IMF and other ### 20. The authorities have identified PFM priorities and are working with the IMF and other ### PFM priorities and planned reforms - The Cabinet will adopt a PFM concept note as soon as the COVID-related restrictions on official meetings are lifted and no later than end-June 2021. - The concept note outlines a 2021 Immediate Action Plan for reforms consistent with R-ARCSS PFM priorities. - SMP-supported PFM reforms in 2021 will focus on: - strengthening the macro-fiscal framework and budget process; - starting the implementation of the Treasury Single Account (TSA); - improving cash management practices; - establishing a public procurement and asset disposal authority; - strengthening the Anti-Corruption Commission and the Audit Chamber. - The authorities committed to take steps to increase transparency on oil production, marketing, and contracts (MEFP ¶17). ### SMP and RCF modalities, monitoring, and conditionality - Staff supports a nine-month SMP covering March 31–December 31, 2021. - Performance under the SMP will be monitored through quarterly reviews of quantitative targets and structural benchmarks (MEFP Tables 1 and 2). - A prior action for the SMP and Board consideration of the RCF request: issuance of a Circular by the BOSS containing the agreed FX reforms and making them effective on April 1, 2021. - Program design and monitoring features: - six quantitative targets and five structural benchmarks; - definitions and data requirements are specified in the Technical Memorandum of Understanding (TMU); - first test date: June 30, 2021; review expected completed by end-September 2021; - second test date: September 30, 2021; completion of the second review by end-2021 could be combined with a request for an ECF. ### Proposed RCF disbursement and fiscal impact - Proposed RCF disbursement: 50 percent of quota (SDR 123 million or about US$176 million) to provide balance of payments (BOP) and budget support. - About half (US$89 million) proposed for fiscal financing (which would close about 60 percent of the estimated fiscal gap). - Remainder (US$87 million) to support international reserve accumulation. - The remaining fiscal financing gap in FY20/21 is expected to be closed by a combination of: - FX profits related to the RCF disbursement (see ¶17 and MEFP ¶11), - concessional loans, - further fiscal consolidation if necessary. ### Risks, scenarios, and capacity to repay - Upside risk: - Faster-than-projected recovery supported by a stronger rebound in the oil sector and peace dividends; oil production is expected to increase on the back of recovering oil prices and continued progress in peacebuilding. - Downside risks: - Dominated by political risks and weak capacity: weak government unity, high governance and corruption vulnerabilities, widespread poverty and food insecurity, significant numbers of displaced people and demobilized military lacking formal job opportunities. - Weak implementation capacity could undermine reforms. - Inability to access concessional financing might trigger accumulation of arrears and monetary financing of the deficit. - Capacity to repay the Fund: - South Sudan’s capacity to repay is assessed as adequate but subject to risks (Table 7). - Debt assessed as sustainable with a high risk of debt distress. - Fund exposure expected to remain manageable, but downside risks exist due to fragile political situation and low gross international reserves. - Upside: capacity to repay strengthened following completion of financial transfers to Sudan under the Transitional Financial Arrangement in mid-2022 (around 4 percent of GDP). ### Capacity development (CD) and implementation risks - R-ARCSS and improved engagement with the Fund have boosted the authorities’ resolve for reforms; commitment to strengthening PFM is noted. - Performance in implementing recent PFM TA recommendations has been good (in contrast with past experiences). - CD activities underpinning the SMP will focus on critical needs and will be delivered gradually, in line with implementation capacity (Annex II). - Risk: Limited absorptive capacity for CD delivery due to historically low CD traction and slow implementation of TA recommendations caused by lack of leadership, weak governance, high staff turnover, and limited institutional memory. ### Staff appraisal — key findings and policy recommendations - Recent shocks and outlook: - The economy has been hit hard by the COVID-19 pandemic and devastating floods, reversing some gains from improved political stability. - The economy is expected to contract sharply in FY20/21, followed by a modest recovery in FY21/22 on the heels of oil price recovery. - Monetary and exchange rate policy: - Policy adjustments have stabilized the exchange rate in the parallel market after discontinuing monetary financing since September 2020. - Staff supports the commitment to no further monetary financing of the deficit and targeting a prudent increase in reserve money. - Fiscal policy and debt sustainability: - Creating additional fiscal space requires raising government revenue while refraining from non-concessional borrowing to maintain debt sustainability. - Staff supports domestic revenue mobilization measures, including revenue administration reforms and adjustments in tax rates towards levels prevailing in other EAC countries. - Staff urges authorities to refrain from non-concessional borrowing, including expensive and non-transparent oil advances. - Reserves and spending recommendations: - Rebuilding depleted international reserves is critical; staff urges gradual increases in international reserves. - If international oil prices continue to increase, staff urges repaying expensive external debt, saving any revenue windfall in the Oil Revenue Stabilization Account once budget-authorized spending is fully executed, and avoiding ad-hoc spending increases in FY20/21. - Exchange rate regime: - A unified and market-determined exchange rate is essential to eliminate distortions and support economic diversification. - Staff welcomes FX market reforms effective from the beginning of the SMP, including opening FX auctions to banks and allowing banks to operate freely in the FX market for private FX inflows and donor financial support. - Staff urges steadfast implementation of the adopted strategy for gradual adjustment of the reference rate until the objective of a unified exchange rates is achieved as expected around September 2021. - PFM reforms: - Strengthening PFM systems is essential for efficient use of public funds and building credibility with the public and development partners. - Staff urges timely implementation of planned PFM reforms listed above. *Source: 1ssdea2021001 - 20. The authorities have identified PFM priorities and are working with the IMF and other* ### 33. Staff supports the authorities’ request for an RCF disbursement equivalent to ### 33. Staff supports the authorities’ request for an RCF disbursement equivalent to 50 percent of South Sudan’s quota (SDR 123 million) and for a nine-month SMP ### RCF request and SMP support - Staff supports the authorities’ request for an RCF disbursement equivalent to 50 percent of South Sudan’s quota (SDR 123 million). - Staff supports a nine-month SMP. - Steadfast and successful implementation of the SMP is key to establishing a strong track record of performance. - To mitigate potential risks from capacity constraints, the IMF will support the authorities’ efforts in all policy areas covered by the SMP through tailored technical assistance. ### Macroeconomic outlook (selected indicators, 2017/18–2024/25) - Real GDP (percent change): -2.4, 3.4, 13.2, -4.2, 2.2, 2.6, 4.7, 6.0 - Oil (Real GDP percent change): 3.8, 12.7, 26.4, -3.0, 3.1, 1.2, 1.7, 5.7 - Non-oil (Real GDP percent change): -6.2, -2.7, 0.5, -5.0, 1.6, 3.6, 6.8, 6.1 - Inflation (average): 125.8, 48.9, 35.0, 45.0, 22.6, 16.0, 12.1, 11.7 - Oil GDP (percent of GDP): 73.2, 66.2, 62.4, 60.2, 61.7, 52.8, 59.8, 61.6 - Official exchange rate (SSP/US$, average): 128.0, 152.4, 160.8, 233.2, 285.9, 331.6, 371.8, 415.4 - Parallel market exchange rate (SSP/US$, average): 220.0, 251.3, 307.6 - Broad money (year-on-year change in percent): 87.2, 63.9, 27.4, 40.8, 29.4 (table entries) - Gross foreign reserves (millions of US dollars): 33.0, 31.1, 48.0, 133.2, 154.7, 190.3, 267.0, 330.5 - Gross foreign reserves (in months of imports): 0.2, 0.1, 0.1, 0.4, 0.4, 0.5, 0.6, 0.7 - Nominal GDP (billion US$): 3.5, 4.7, 4.9, 4.8, 5.5, 5.5, 5.8, 6.1 - South Sudan's oil price (U.S. dollars per barrel): 58.6, 62.9, 49.3, 47.9, 54.7, 53.4, 54.5, 55.6 - Brent price (U.S. dollars per barrel): 60.6, 64.9, 51.3, 49.9, 56.7, 54.4, 56.5, 57.6 ### Fiscal operations (central government, summary highlights) - Total revenues and grants (percent of GDP): 34.1, 31.8, 33.6, 29.5, 24.6, 31.2, 30.9, 31.8 - Of which: Oil (percent of GDP): 29.2, 27.9, 29.9, 25.5, 21.0, 27.2, 26.8, 26.3 - Non-oil tax revenue (percent of GDP): 4.4, 3.9, 3.8, 4.0, 3.6, 4.0, 4.5, 4.6 - Total expenditure (percent of GDP): 37.5, 32.9, 39.5, 27.8, 33.1, 30.9, 30.1, 31.6 - Current expenditure (percent of GDP): 37.1, 32.0, 24.6, 35.8, 23.2, 28.1, 24.4, 22.8 - Salaries (percent of GDP): 5.6, 3.4, 4.5, 4.6, 4.5, 5.2, 5.5, 5.5 - Transfers to Sudan (percent of GDP): 19.0, 13.4, 10.9, 13.1, 8.1, 10.2, 5.7, 4.4 - Overall balance (cash, percent of GDP): -3.4, -1.0, -5.8, -10.0, -3.2, -1.9, 0.4, 0.8 - Overall balance (accrual, percent of GDP): -7.3, -3.5, -2.5, -6.6, -3.2, -1.9, 1.4, 2.3 - Non-oil domestic current fiscal balance (memorandum, percent of GDP): -13.2, -14.0, -9.1, -17.8, -10.9, -13.1, -13.2, -12.7 ### Fiscal flows and FY20/21 related figures (selected) - Total revenue and grants (bn SSP, FY columns): 152.1, 226.2, 265.4, 232.8, 274.7, 489.6, 571.1, 669.0, 805.5 (table spans) - Total expenditure (bn SSP): 167.3, 233.5, 311.5, 311.9, 310.0, 519.9, 563.6, 651.6, 800.9 - Overall balance (cash, bn SSP): -15.1, -7.3, -46.1, -79.1, -35.2, -30.3, 7.5, 17.5, 4.6 - Change in arrears (bn SSP): 17.4, 17.2, -26.6, -26.6, 0.0, 0.0, -18.2, -32.5, -50.6 - Financing (bn SSP): 39.2, 41.5, 28.1, 69.1, 9.1, -1.2, -44.9, -63.4, -55.3 - Disbursement (bn SSP): 48.2, 59.1, 24.7, 179.5, 30.8, 42.9, 43.1, 48.3, 54.0 - of which: RCF (Nov 2020): 17.0 (table note) - of which: FX profit sharing: 7.9 (table note) - Amortization (bn SSP): -53.6, -60.0, -24.7, -103.1, -44.6, -44.1, -69.7, -79.3, -58.7 ### Balance of payments and external financing - Current account balance (millions of US dollars): -91, -32, -242, -317, -79, 38, 37, -111 (2017/18–2024/25 series) - Trade Balance (millions of US dollars): 149, 267, -37, -440, -61, -304, -432, -645 - Exports of goods (millions of US dollars): 2,568, 3,103, 3,089, 2,912, 3,424, 3,384, 3,515, 3,792 - Oil exports (millions of US dollars): 2,552, 3,086, 3,061, 2,883, 3,393, 3,351, 3,481, 3,756 - Imports of goods (millions of US dollars): -2,418, -2,836, -3,126, -3,352, -3,485, -3,688, -3,947, -4,437 - Gross foreign reserves (millions of US dollars): 33, 31, 48, 133, 155, 190, 267, 330 (table series) - Prospective RCF from the IMF noted in planning tables (table entries indicate prospective RCF and prospective financing lines for FY20/21 planning). ### Projected external financing requirements and FY20/21 financing gap (selected) - Current account (percent of GDP): -4.5, -6.6 (RCF vs Latest columns) - Exports of goods and services (USD million / percent of GDP): 2,534 / 59.6, 2,946 / 61.5 (RCF vs Latest) - Imports of goods and services (USD million / percent of GDP): -3,418 / -80.4, -4,044 / -84.4 (RCF vs Latest) - Secondary income balance (USD million / percent of GDP): 990 / 23.3, 1,241 / 25.9 (RCF vs Latest) - Gross financing (USD million / percent of GDP): 183 / 4.3, 127 / 2.6 (RCF vs Latest) - Financing gap (excess of financing -) (USD million / percent of GDP): 220 / 5.2, 457 / 9.5 (RCF vs Latest) - IMF (net) (USD million / percent of GDP): 0 / 0.0, 176 / 3.7 (RCF vs Latest) - Prospective RCF Disbursements (USD million / percent of GDP): 0 / 0.0, 176 / 3.7 (RCF vs Latest) - Remaining financing gap (USD million / percent of GDP): 220 / 5.2, 368 / 7.7 (RCF vs Latest) ### Monetary accounts and monetary policy framework - Monetary base (year-on-year change in percent): 67.8, 29.3, 16.9, 42.3, 10.0 - Broad money (in billions of SSP): 54.3, 89.0, 113.4, 159.7, 206.6 - Money multiplier: 0.8, 1.0, 1.1, 1.1, 1.3 - Share of foreign currency deposits to total deposits: 0.7, 0.7, 0.5, 0.4, 0.6 - Annex I summary points: - De jure, South Sudan operates a money targeting framework with a floating exchange rate. - During periods of low oil prices the authorities have resorted to monetary financing of large fiscal deficits, abandoning the money targets. - High rates of money growth during such periods have led to rapid exchange rate depreciation and inflation spikes. - Addressing fiscal dominance is a prerequisite for stabilizing the exchange rate and inflation and avoiding repeated cycles of rapid depreciation and high inflation. - Given the acute shortage of FX reserves, staff’s view is that a money targeting framework in the context of a floating exchange rate regime is the only realistic choice as an inflation anchor for South Sudan right now. - Once fiscal discipline and macro stabilization has been achieved, the authorities could consider other monetary framework alternatives – from hard pegs (e.g., currency board) to inflation targeting. - Historical note: - South Sudan introduced the South Sudanese Pound upon independence in July 2011. In the first week after independence the exchange rate was determined by a central bank auction. - The de jure exchange rate arrangement was a conventional peg against the U.S. dollar; in September 2011 the Bank of South Sudan pegged the exchange rate at 2.95 SSP per U.S. dollar. The exchange rate remained fixed to the US dollar from 2011 to mid-December 2015. *Sources: South Sudanese authorities; and IMF staff estimates and projections.* ### 2. On December 15, 2015, the BOSS moved to a de jure flexible exchange rate ### 1ssdea2021001 - 2. On December 15, 2015, the BOSS moved to a de jure flexible exchange rate ### Exchange rate reform and macroeconomic history - On December 15, 2015, the BOSS moved to a de jure flexible exchange rate arrangement and adopted a money targeting framework. - Immediately after adopting the floating exchange rate regime, the exchange rate depreciated by over 80 percent. - Under the regime the BOSS: - supplied FX to commercial banks in auctions; - determined an indicative (official) exchange rate from the auction rate and the rate charged by commercial banks; - carried out all government transactions at the indicative rate. - The reform abolished all major exchange controls and initially reduced the spread between the indicative and parallel market rates. - Following a sharp decline in international oil prices the authorities resorted to monetary financing of a large fiscal deficit, abandoning money targets; this led to: - rapid exchange rate depreciation in the parallel market; - a spike in inflation. - The BOSS abolished its foreign exchange auctions in 2017 and reintroduced a multiple exchange rate system. - Since September 2017 the exchange rate followed a depreciating trend within a 2 percent band against the U.S. dollar; the de facto exchange rate arrangement was classified as crawl-like, effective September 2017. - Money growth slowed towards end-2017, leading to gradual stabilization of the exchange rate; this stability continued until the start of the pandemic in March 2020. - Following the sharp decline in oil revenues from the pandemic, authorities resumed monetary financing of the deficit, which led to high money growth, exchange rate depreciation and rising inflation. ### Preconditions and monetary policy framework options - Fiscal sustainability and central bank independence are preconditions for success of any monetary policy framework. - Three main policy frameworks providing a nominal anchor: 1. money targeting; 2. exchange rate pegs (currency board, fixed exchange rate); 3. inflation targeting. - Assessment of exchange rate pegs for South Sudan: - Pros: clear nominal anchor; anchors inflation expectations; currency board can prohibit monetary financing of the deficit and potentially encourage more prudent fiscal behavior. - Cons: requires a much higher level of reserves to be credible. - Reserve adequacy metrics and South Sudan: - IMF metric for low-income countries experiencing credit constraints suggests reserves should be about US$2 billion under a fixed exchange rate regime. - Traditional rules of thumb: 3 months of imports or 20 percent of M2. - Reserve requirement for a currency board would be between US$½–1 billion (depending on the monetary aggregate used). - International reserves currently hovering around US$50 million or less; no prospect for a material increase soon — therefore an exchange rate peg is not feasible in the near term. ### Recommendation: money targeting as the feasible framework - Money targeting is the only feasible monetary policy regime for South Sudan at present, provided that fiscal dominance is eliminated. - International experience: money-based stabilizations in high-inflation countries have quickly reduced inflation (example cited: Peru in the early 1990s). - Rationale for South Sudan: - Rapid base money growth recently drove increases in broad monetary aggregates. - Growth in broad money contributed to the rise in the parallel market premium. - Moderating the increase in base money under money targeting, with responsible fiscal policy, can stabilize the exchange rate and inflation. - Transition strategy: - Once low inflation is achieved, consider alternative frameworks. - At low inflation, relationships between inflation and monetary aggregates become unstable; a price-based framework relying on interest rate signals may become more effective. - Reserve money is expected to be replaced with a policy interest rate as the operational target at a later stage. ### Operational aspects and toolkit adjustments - Operational requirements for implementing monetary operations: - BOSS must be equipped and organized to monitor and forecast bank reserves. - Excess reserves should serve as the operational target within the monetary targeting framework. - Measuring banks’ excess reserves requires distinguishing mandatory and voluntary holdings; Banking Supervision Department input is needed. - Recommendation to develop a dedicated Liquidity Monitoring and Forecasting Unit. - Translate the monetary program into quarterly reserve money targets consistent with reducing inflation; disaggregate into monthly operational targets. - Monitoring and update frequency: - Monetary targeting relies on daily operations and constant monitoring. - Velocity of money and money multiplier may not be stable; projections should be updated regularly. - Base money targets should be adjusted at a lower frequency—quarterly or semi-annually—to balance new information incorporation and anchoring expectations. - Monetary operational toolkit modifications: - Immediate adjustments to reserve requirement (RR) framework, with adequate compliance monitoring and punitive penalties for noncompliance. - Design adjustments to RR to address high deposit and transactional dollarization. - Gradual introduction of market-based instruments given capacity constraints: - start with a single sterilization instrument (a term deposit arrangement); - implement an overnight Standing Liquidity Facility; - these are incremental steps attainable in the near- to medium-term. ### Capacity development priorities (FY2020–22) and technical assistance areas - Main CD priorities to support R-ARCSS objectives: - strengthening governance; - improving domestic revenue mobilization; - implementing reserve money targeting framework; - alleviating distortions in the FX market; - improving quality and timeliness of data. - Specific CD requests and areas: - PFM: preparation of PFM medium-term strategy; strengthening cash management; implementing the TSA; arrears management. - Domestic revenue mobilization: modernizing the National Revenue Authority (digitalization of tax collection; regional tracking of imported goods; aligning import valuation methods); phasing out tax exemptions; harmonizing tax rates with other EAC countries; potential replacement of sales tax with VAT. - Monetary and exchange rate policies: diagnostic mission for BOSS capacity; TA on operationalizing reserve money targeting; advice on alleviating FX market distortions; improving FX auctions; developing a crisis resolution framework. - Data integrity: assistance in fiscal, monetary, external sector statistics, debt data, price statistics, and national accounts compilation. - Sectoral CD objectives (selected): - Tax policy/administration: broadening the revenue base, adopting a VAT in due course, building non-oil revenue projection models. - PFM: adopting an MTFF and a fiscal responsibility law; strengthening legislation, processes, and institutions for improved public spending efficiency. - Fiscal reporting: refine public sector institutional table; collect financial data for Budgetary Central Government; improve budget classification and reconciliation. - Monetary/macro-prudential policy: finalize core forecasting model; develop forecasting infrastructures; develop modalities for foreign exchange intermediation to support transition to flexible exchange rate; improve capacity at the BNA to interpret forecasting results. - Price statistics and national accounts: improve compilation methods; prepare for transition to 2008 SNA; publish updated GDP data as available. ### Authorities’ situational assessment and recent macro projections (Letter of Intent, March 17, 2021) - Recent context: - Formation of the unity government in February 2020 and other political steps have progressed implementation of R-ARCSS. - COVID-19 pandemic and severe floods (worst in 60 years) hit the economy, damaging crops and food stocks and raising famine risk. - Projections and fiscal impact: - Projected economic contraction of 4.2 percent in FY20/21. - Inflation is expected to increase further due to shortfall in domestic food production and exchange rate pressures. - Government revenues this fiscal year expected to decline by about 20 percent in real terms relative to last year due to decline in oil prices and oil production. - The Rapid Credit Facility (RCF) disbursement in November 2020 eased the budget impact from the collapse in oil revenue, but the fiscal financing gap remains high. *Source: IMF staff report and Letter of Intent as provided in the content unit.* ### 3. We have implemented our commitments under the first RCF disbursement, including by ### 1ssdea2021001 - 3. We have implemented our commitments under the first RCF disbursement, including by ### Implementation of commitments under the first RCF disbursement - The RCF disbursement was used to repay salary arrears, the only available vehicle to provide social support, with the payments done through the Integrated Financial Management Information System (IFMIS). - Specific actions and outcomes: - Most of the RCF disbursement (about U$46.3 million out of the US$52.3 million total disbursement) was converted in December 2020 at the official exchange rate of 174 SSP/US$. - The BOSS has started weekly FX auctions to sell some of the FX disbursed under the RCF; as of March 17, 2021, about US$24 million of the RCF disbursement has been auctioned at an exchange rate ranging between 80 and 90 percent of the parallel market rate. - The BOSS is using the proceeds from the difference between buying at the official rate and selling at a higher rate in the FX auctions to reduce the outstanding stock of the MOFP overdraft to the BOSS, consistent with the reserve money targets under the SMP. - The MOFP opened a dedicated sub-account in IFMIS to record payment of wage and salary arrears financed by the RCF disbursement. - The 2015 audited financial statement of the Bank of South Sudan (BOSS) is published on the BOSS website; audits for 2016-2018 are being finalized and planned to be published no later than end-June 2021; BOSS financial statements for 2019 and 2020 are planned to be finalized within 2021. - The BOSS will provide IMF staff access to its most recently completed audit reports and authorize IMF staff to hold discussions with the BOSS’ external auditors. ### Request for emergency RCF funding and intended use - The government requests emergency funding from the IMF under the RCF in the amount of SDR 123 million, or 50 percent of quota (about US$176 million). - Given a sizable fiscal gap in FY20/21 – SSP 26.1 billion (about 2.3 percent of GDP) – the government requests about half of this support (US$89 million) to be made available to the budget by on-lending from the BOSS to the government on the same terms as obtained from the IMF using the dedicated account at the BOSS created in November 2020. - Mechanism for budget support: - The amount of U.S. dollars allocated for budget support will be sold in FX auctions (conducted by the BOSS on behalf of the government). - The proceeds in SSP will be credited to the dedicated account at the BOSS that was created for the first RCF disbursement in November 2020. - A memorandum of understanding (MOU) between the Ministry of Finance and Planning (MOFP) and the BOSS has been prepared, stipulating responsibilities for timely servicing of financial obligations to the IMF for this disbursement. ### Transparency, procurement, and accountability commitments - Commitments on pandemic-related spending and procurement: - All such transactions will be recorded in IFMIS. - The government will publish all pandemic-related procurement contracts and other related documentation, along with the names of awarded companies and their beneficial ownership information within three months after contract signing. - The government will publish the ex-post validation of delivery of the contracts within one year after the contract signing. - Reports on pandemic-related spending will be published on a monthly basis. - The Auditor General will conduct and publish an audit of all spending from this account on a quarterly basis. - All information will be published on the website of the MOFP as soon as they are completed. ### Macroeconomic developments and outlook - Recent macroeconomic indicators and shocks: - Economic growth rebounded sharply in FY19/20 reaching 13.2 percent. - Inflation declined from 125 percent in FY17/18 to 35 percent in FY19/20. - The economy is projected to contract by 4.2 percent in FY20/21, affected by the global pandemic and devastating floods. - Facing collapse of oil exports and government revenue, and in the absence of concessional financing, the government accumulated domestic expenditure arrears and resorted to monetary financing of the deficit; this raised reserve money and led to rapid exchange rate depreciation in the parallel market and a spike in inflation. - Policy responses to stabilize the exchange rate and money growth: - The BOSS has stopped monetary financing of the fiscal deficit and resumed FX auctions in recent months, stabilizing the exchange rate in the parallel market. - In October 2020 the Cabinet directed the MOFP to stop accessing the overdraft facility at the BOSS. - The BOSS resumed FX auctions in December 2020, selling to FX bureaus some of the proceeds of the RCF disbursed in November 2020, helping stabilize reserve money balances and the parallel market exchange rate since November. ### Policy program under the Staff‑Monitored Program (SMP) and R-ARCSS commitments - SMP timeframe requested: March 31 to December 31, 2021. - Immediate program focus: - Restore macroeconomic stability. - Strengthen the monetary policy framework. - Reduce distortions in the FX market. - Strengthen governance and PFM systems. - Monetary and FX market measures: - The BOSS will operationalize a monetary policy framework based on reserve money targeting by starting to set quarterly reserve money targets and developing monetary instruments to steer reserve money consistent with the targets. - FX market reforms include putting in place institutional and operational requisites for transition to unification of exchange rate, allowing banks to operate in the FX market without restrictions, and allowing banks to participate in the weekly FX auctions currently conducted by the BOSS. - Aim for a gradual realignment of the reference exchange rate with the one prevailing in the FX auctions as discussed in the attached MEFP. - Fiscal policy commitments: - FY20/21 and FY21/22 budgets will be executed without recourse to monetary financing to stabilize the exchange rate and lower inflation. - Reforms to strengthen non-oil revenue mobilization and expenditure reallocation to ensure adequate resource allocation for priority spending including salaries, social spending, critical investments, and peacebuilding. - Refrain from contracting non-concessional debt, except for: - (i) debt management operations that improve key liquidity and/or solvency debt burden indicators without adversely affecting the risk rating; or - (ii) transactions that finance, while avoiding excessive external borrowing, critical investment projects with a high social and economic return integral to the national development program or critical COVID-related spending, and for which concessional financing is not available. - The government will consult with IMF staff prior to contracting any new non-concessional debt. - Commitment to maintain fiscal discipline for the remainder of FY20/21 and in FY21/22 and to finance fiscal deficits with non-inflationary financing. - Commitment to pay on time wages and salaries starting from March 2021, to reduce wage and salary arrears to 3 months at the end of FY20/21 (from 5 months currently), and to eliminate such arrears during FY21/22. - Revenue mobilization measures: - Oil revenues currently represent about 90 percent of total government revenue. - Phasing out tax exemptions: - A Cabinet resolution phasing out numerous tax exemptions was approved in October 2020. - Average monthly non-oil revenue following these changes has increased to about SSP 3.5 billion per month, compared to about SSP 2.6 billion on average in FY19/20. - The government will not introduce any new tax exemptions (holidays) during the SMP and will discontinue any tax exemptions/holidays not approved by the National Assembly. - Any future tax policy changes would take effect only after approval by the National Assembly. - Adjusting tax rates: - The Finance Bill for FY20/21 awaiting Cabinet approval includes increases in several tax rates, including excise and business profit tax rates. - These changes are expected to generate additional revenue of about SSP 12 billion on an annual basis. - The government plans to gradually adjust tax rates toward levels prevailing in other EAC members and to shift from sales tax to value added tax (VAT); IMF technical assistance will be sought to develop a VAT Policy Paper and VAT Bill. - Expanding digitalization and modernizing tax collection systems: - The National Revenue Authority (NRA) has recently digitalized the collection of custom duties (about 10 percent of non-oil tax revenue), including introduction of e-invoicing and operationalization of a control room for real-time collection. - With assistance from the AfDB, the NRA is working to interface its IT system with other EAC countries for regional tracking of imported goods and has aligned import valuation methods with international best practice. - Plans to expand digitalization to other domestic taxes (business profit, excise, sales, withholding taxes and other non-oil taxes). - Strengthening the NRA: - Screening former directorates of taxation and customs employees and redeploying to NRA structures based on merits and competencies. - Deploying NRA revenue officers to all revenue generating agencies, expanding digitalization, conducting training and capacity building, and enhancing taxpayer education. ### Governance and PFM reform program - PFM Concept Strategy Note and Immediate Action Plan: - The Cabinet will approve the PFM Concept Strategy Note, including an Immediate Action Plan for PFM reforms, as soon as COVID-related restrictions on official meetings are lifted and no later than end-June 2021. - Focus areas in 2021: - Strengthening the macro-fiscal framework and budget process. - Starting implementation of the Treasury Single Account. - Improving cash management practices. - Establishing a public procurement and asset disposal authority. - Strengthening the Anti-Corruption Commission and the Audit Chamber. - Starting rollout of the electronic payroll for government employees using the biometric system. - Increasing transparency on oil production, marketing, and contracts. - Development of a medium-term PFM Strategy with assistance from the IMF, World Bank, and other development partners. ### Safeguards and program monitoring - The government requests an IMF Staff‑Monitored Program (SMP) from March 31 to December 31, 2021 to support macroeconomic stabilization and to build a track record toward a future Fund-supported program. - Safeguards policy: - The BOSS is committed to undergo a safeguards assessment before approval of any new subsequent arrangement by the IMF Executive Board. - The BOSS will continue to provide IMF staff with access to its most recently completed audit reports and authorize the BOSS’ external auditors, contracted by the National Audit Chamber, to hold discussions with IMF staff. - The government will not introduce measures that compound balance-of-payments difficulties, will not impose new or intensify existing trade restrictions, and will not introduce or intensify restrictions on payments and transfers for current international transactions or multiple currency practices inconsistent with Article VIII of the IMF’s Articles or Agreement. - The GOSS authorized the IMF to publish this letter, the attached MEFP and TMU, and the related staff report, and the debt sustainability analysis (DSA) prepared by IMF and World Bank staffs, including placement of these documents on the IMF website. *Source: 1ssdea2021001 - 3.* ### 8. We will seek to contain non-priority expenditure to allow for the reallocation of ### 1ssdea2021001 - 8. We will seek to contain non-priority expenditure to allow for the reallocation of ### Fiscal priorities and reallocation of spending - Priority to ensure timely payment of wages and salaries, health and education spending, and funding of critical infrastructure investment. - Given limited scope to raise revenue and little space for borrowing in the near term, the government will: - review spending plans and seek to delay non-priority spending; - develop, in collaboration with development partners, social support programs such as a cash-transfer program supported by the World Bank through United Nations Office for Project Services to help the most vulnerable parts of the population. ### Monetary policy operational framework - The monetary policy framework under the SMP will be operationalized using reserve money targets while preparing to transition to an interest rate-based framework in the medium to long term. - The BOSS will use reserve money as the operational target and will seek to contain growth in broad money (M2) to support price stability and restore investor confidence. - Operational targets and instruments: - Target a base money growth of 10 percent in 2021. - Quarterly targets for reserve money have been set and will be disaggregated into monthly operational targets to guide frequent monetary policy discussions and operations to stabilize the exchange rate and reduce inflation. - Steps to operationalize liquidity forecasting include: - establishing a separate liquidity unit in the BOSS and creating an inter-agency liquidity working group (including the Cash Management Unit at the MOFP); - preparing a summary version of a daily liquidity monitoring table for BOSS management; - requesting daily reports from commercial banks to obtain reliable data. ### Monetary instruments and operational independence - With IMF technical assistance, BOSS will expand the range of monetary instruments (e.g., introducing BOSS bills and term deposits). - Use of these instruments to drain excess liquidity has significant financial cost; BOSS and MOFP are working to finalize an agreement to allow such costs to be borne automatically by the budget to increase the operational independence of BOSS towards achieving the inflation objective. ### FX market reforms and liberalization measures - Rationale: FX auction premium relative to the reference exchange rate creates distortions that hamper economic activity and FX inflows. - Steps to gradually liberalize the FX market: - put in place institutional and operational requisites for transition to a market-driven exchange rate and build capacity of market participants to manage exchange rate risks; - allow commercial banks to participate in the weekly FX auctions conducted by BOSS starting from the beginning of the SMP; - sell the full amount of the forthcoming RCF disbursement that goes to the budget (US$89 million) in these FX auctions; - consider increasing the amount of FX sold in weekly auctions if needed to mop up excess liquidity consistent with reserve money targets and macroeconomic stabilization objectives, including by selling part of the FX from oil revenues at the auctions; - banks will be allowed to operate in the FX market, including buying and selling private FX inflows and donor financial support at competitive exchange rates expected to be guided by auction rates and prevailing market rates; - FX auctions for banks would not include a maximum bid rate. - Formalization and timeline: - FX market reforms will be formalized in a BOSS circular (prior action) and will become effective on April 1, 2021. - IMF technical assistance requested to review and strengthen the weekly FX auction system and accommodate inclusion of banks to develop an effective interbank FX market. ### Unifying reference and auction exchange rates; consumer price considerations - Objective to unify the reference exchange rate with the FX auction rate. - Complementary policies—especially discontinuation of monetary financing of the deficit and a moderate targeted increase in reserve money—are expected to contain pressure on the parallel market exchange rate. - Policy approach: - adjust the reference rate gradually to manage any short-term impact on prices of critical goods and services that benefited from access to FX at the reference rate (e.g., petroleum products and electricity); - introduce, if needed, explicit subsidies in the budget to support vulnerable groups while managing adjustments; - committed to align the reference rate with the rate prevailing in the FX auctions towards end-September 2021; - review exchange rate policy and discuss better targeting of any explicit subsidies in the context of the first SMP review tentatively scheduled for August 2021. ### International reserves and buffers - Current assessment: international reserves fall way short of needs; target benchmark of at least US$450 million. - Planned actions: - use about half (US$87 million) of the RCF disbursement requested to build international reserves (see Table 1). - develop, in collaboration with the IMF, a plan for building economic buffers through reserve accumulation and saving oil revenue windfalls in the Oil Revenue Stabilization Account (once budget-authorized spending has been fully executed). ### Transparency of monetary and FX operations - Publish on the BOSS website: - the main monetary aggregates on a monthly basis with a lag of less than 4 weeks; - the results of FX auctions at the end of the business day on the day of the auction. ### Debt management policy - Refrain from contracting non-concessional debt subject to limited and well-targeted exceptions. - Reconstitute the Loan Committee by end-June 2021 under the Debt Management Department at the MOFP to strengthen assessment, evaluation, and monitoring of debt obligations. - Recent borrowing: - contracted in October 2020 a non-concessional loan from Afreximbank of US$250 million to mitigate the pandemic impact and oil price shock; - about US$70 million from this loan has already been withdrawn to fund critical infrastructure investments; - the remainder (net of associated transaction fees) was planned to be disbursed in FY21/22; in light of recent recovery in international oil prices, the Cabinet will consider cancelling any undisbursed amounts and return the unused funds. - Conditions for future non-concessional borrowing: - only if either: - (i) debt management operations improve key liquidity and/or solvency debt burden indicators without adversely affecting the risk rating; or - (ii) finances critical investment projects with a high social and economic return integral to the national development program or for critical COVID-related spending for which concessional financing is not available. - will consult with IMF staff prior to contracting any new non-concessional debt. - Otherwise, no new non-concessional loans during the SMP. ### Strengthening governance and PFM reforms - Anti-corruption and transparency measures: - discontinued using oil advances for budget financing; - planning to criminalize corruption offenses and implement an asset declaration regime; - planning to align legal and institutional frameworks with the United Nations Convention Against Corruption; - will apply for membership in the Eastern and South African Anti-Money Laundering Group (regional FATF-styled body). - PFM priorities and actions (supported by IMF, World Bank, and others): - Cabinet to adopt a PFM concept note that includes a 2021 Immediate Action Plan no later than end-June 2021 (structural benchmark). - Focus areas for 2021: - improve macro-fiscal framework, build a dedicated team, and improve source data (particularly on oil revenues); - develop proactive cash management through realistic cash forecasts, operationalize the TSA, channel all cash flows through the Consolidated Fund; - revive the Cash Management Committee and strengthen the Cash Management Unit (CMU) at the MOFP by the time of the first review (structural benchmark for June 2021); - CMU to prepare the FY21/22 annual cash plan as soon as preliminary budget estimates for FY21/22 have been produced (June 2021); - CMU to make by June 2021 a comprehensive review of expenditures in the cash plan and, together with Budget, make a proposal for programming expenditures according to government priorities and cash available (structural benchmark for September 2021); - requested TA from the IMF to strengthen commitment controls under IFMIS to link cash forecasts to government spending priorities and prevent accumulation of expenditure arrears; - strengthen implementation of the TSA by consolidating all government accounts held at the BOSS by the time of the first review (structural benchmark for June 2021); - gradually phase out payment in cash of salaries for government workers: pilot payment through bank accounts for MOFP employees by June 2021 and start roll out to other MDAs by September 2021 (structural benchmarks for June and September 2021); - establish a public procurement and asset disposal authority and strengthen the Anti-Corruption Commission and the Audit Chamber; - start rollout of electronic payroll for government employees using the biometric system; - enhance information on oil production and oil-related contracts, including posting on the Ministry of Petroleum website the amount of oil production and exports and new oil contracts on a monthly basis by the end of the following month starting in June 2021. ### Program modalities, monitoring, and institutional arrangements - SMP monitoring: - performance monitored through quarterly reviews of quantitative targets and structural benchmarks (Tables 1 and 2). - program comprises one prior action, six quantitative targets, and five structural benchmarks. - Technical Memorandum of Understanding (TMU) contains definitions and specifies data to be provided to IMF staff. - first test date: June 30, 2021; review expected to be completed by end-September 2021. - second test date: September 30, 2021; completion of the second review by end-2021 could be combined with a request for an ECF. - Institutional framework: - key decision makers (Minister of Finance and Planning, Minister of Petroleum, Governor of BOSS) assisted by a Technical Committee (TC) comprising senior officials from MOFP, Ministry of Petroleum, BOSS, National Bureau of Statistics, and other key institutions to monitor execution and report regularly. ### Quantitative targets (Table 1) — exact figures - Central government's primary cash budget deficit (ceiling: in billions of SSP) - end-Jun 2021: 10.0 - end-Sep 2021: 20.0 - Central bank net credit to the central government (ceiling: in billions of SSP) - end-Jun 2021: 0.0 - end-Sep 2021: 0.0 - Contracting or guaranteeing of non-concessional borrowing (continuous ceiling: in millions of USD) - end-Jun 2021: 0.0 - end-Sep 2021: 0.0 - Average net international reserve (floor: in millions of U.S. dollars) - end-Jun 2021: 85.0 - end-Sep 2021: 100.0 - Clearance of salary arrears (floor: in billions of SSP) - end-Jun 2021: 7.3 - end-Sep 2021: 11.0 - Average reserve money growth (ceiling: in percentage points) - end-Jun 2021: 5.0 - end-Sep 2021: 10.0 Notes associated with the quantitative targets (as presented): - Numbers are cumulative from March 30, 2021, unless stated otherwise. - Numbers are cumulative changes from March 30, 2021. NCG should be zero in at least half of the quarter and never higher than 5 percent of quarterly revenue. - Targets on NIR for end-June and end-September 2021 are defined as the cumulative changes of the average stock of NIR during, respectively, June and September 2021 relative to the stock of NIR on March 30, 2021. - Limits on reserve money growth for end-June and end-September 2021 are defined as the cumulative changes of the average reserve money during, respectively, June and September 2021 relative to the reserve money stock at end-March 2021. ### Prior action and structural benchmarks (Table 2) — measures and target dates - Prior action: - BOSS to issue a circular to formalize FX market reforms making them effective on April 1, 2021 (¶11 and ¶12). - Structural benchmarks and target dates: - Cabinet to adopt a PFM concept note that includes a 2021 Immediate Action Plan consistent with R-ARCSS PFM priorities — June 2021. - Consolidate GoSS bank accounts in BSS, allowing deficits on Treasury bank accounts covered from surpluses on other MoFP bank accounts — June 2021. Objective: Enhance public fund management especially on liquidity management. - Cash Management Unit (CMU) will be formally established within the Treasury with a dedicated team of staff — June 2021. Objective: Enhance public fund management especially on liquidity management. - MoFP will gradually phase out the use of cash for payment of salaries to all public servants and mandate the use of bank accounts, and: - a. Pilot these new arrangements in the MoFP — June 2021. Objective: Enhance public fund management. - b. Gradually roll-out to selected MDAs — September 2021. Objective: Enhance public fund management. *Source: Republic of South Sudan — IMF SMP content (1ssdea2021001).* ### 6. CMU will make a comprehensive review of the expenditures in the cash plan and ### 6. CMU will make a comprehensive review of the expenditures in the cash plan and together with Budget make a proposal for programming the expenditures according to GoSS priorities (¶17) ### Quantitative targets (QTs) and scope of monitoring - The SMP will be monitored based on six quarterly quantitative targets (QTs) and five structural benchmarks listed in Tables 1 and 2 of the Memorandum on Economic and Financial Policies (MEFP). - The QTs are expressed as cumulative changes of the corresponding stock variables since the beginning of the SMP, March 30, 2021. - The QTs are: - i. ceiling on the central government's primary deficit; - ii. ceiling on the central bank net credit to the central government; - iii. continuous ceiling on contracting or guaranteeing of external non-concessional borrowing; - iv. floor on the average net international reserves (NIR); - v. floor on clearance of salary arrears; and - vi. ceiling on the average reserve money growth. ### Definitions and measurement conventions - Primary cash budget deficit of the central government: - Measured as the sum of net foreign financing and net domestic financing minus interest payments. - Central government includes all line ministries and agencies controlled by the government. - Net foreign financing = disbursements minus amortization of any external loans (concessional and non-concessional), internationally-issued bonds, and other liabilities to nonresidents. - Net domestic financing = sum of net financing from the Bank of South Sudan (BOSS) and other depository corporations (ODCs). - For program purposes, all claims and liabilities of the central government to the BOSS and ODCs denominated in foreign currency will be valued at the program exchange rate of 174 SSP/US$. - Net credit to the central government by the BOSS (NCG): - Defined as change in the stock of net credit to the central government by the BOSS. - Foreign-currency claims and liabilities valued at 174 SSP/US$ for program purposes. - Net international reserves (NIR) of the BOSS: - Defined as reserve assets of the BOSS net of short-term external liabilities of the BOSS. - Reserve assets exclude pledged or otherwise encumbered foreign assets and must be denominated and settled in a convertible foreign currency. - Short-term foreign liabilities = liabilities to nonresidents with original maturities less than one year, contracted by the BOSS; SDR allocations excluded. - For program-monitoring, official reserves and short-term liabilities will be calculated in U.S. dollars by converting stocks denominated in SDR, EUR and GBP at program exchange rates of, respectively, 1.44, 0.83 and 0.71 against the US dollar. - The NIR limits for end-June and end-September 2021 are defined as the cumulative changes of the average NIR daily stocks during, respectively, June and September 2021 relative to the NIR stock at end-March 2021. - Contracting or guaranteeing of new non-concessional external debt: - Applies to debt to non-residents at non-concessional terms. - Definition of “debt” per point No. 9 of the "Guidelines on Performance Criteria with Respect to External Debt" (Executive Board Decision No. 6230-(79/140) as revised on August 31, 2009 (Decision No. 14416-(09/91))). - For program purposes, a debt is concessional if it includes a grant element of at least 35 percent. - Grant element = (PV of debt subtracted from nominal value) / nominal value, expressed as a percentage. - PV calculated by discounting future debt service using unified discount rate of 5 percent (Executive Board Decision No. 15248-(13/97)). - For debts with grant element equal or below zero, the PV will be set equal to the nominal value. - Discussion on contracting/guaranteeing new non-concessional debt only after consultation with the IMF. - Exceptions to the zero program target for non-concessional debt may apply for debt that involves either: - (i) debt management operations that improve key liquidity and/or solvency debt burden indicators without adversely affecting the risk rating; or - (ii) transactions that finance, while avoiding excessive external borrowing, critical investment projects with a high social and economic return integral to national development program or for critical COVID-related spending, and for which concessional financing is not available. - Clearance of salary arrears: - Measured by the net change in the stock of salary arrears at end-June and end-September 2021 relative to end-March 2021. - Reserve money: - Defined as the sum of local currency circulating outside of banks and total reserves for banks (required and excess) at the BOSS. - Limits on reserve money growth for end-June and end-September 2021 are defined as the cumulative changes of the average reserve money during, respectively, June and September 2021 relative to the reserve money stock at end-March 2021. ### Program monitoring, reporting, and data provision - Quarterly assessment report to be prepared by the authorities at the end of each quarter focusing on monitoring of QTs and structural benchmarks. - Information on implementation and/or execution of structural benchmarks will be reported to IMF staff within two weeks after their programmed implementation date. - Status of implementation of other structural program measures will be reported to IMF staff within the same two-week time frame. - Authorities will provide IMF staff with all information required for effective follow-up on economic policy implementation. - Authorities agree to consult IMF staff on any new external debt proposals and will report signing of any new external debt arrangements and their conditions. - Table 1: Data to be reported for program monitoring (reporting agency, type of data, frequency, submission lag) - MOFP: - Table of government fiscal operations — Monthly — 4 weeks - Estimated government tax revenue — Monthly — 4 weeks - Estimated oil production and revenue — Monthly — 4 weeks - Stock of salary arrears of the Central Government — Monthly — 4 weeks - Budget execution report — Quarterly — 4 weeks - Disbursements of External Debt including Newly Contracted Debt of Government — Quarterly — 4 weeks - Projected external debt service — Quarterly — 4 weeks - BOSS: - BOSS balance sheet — Monthly — 4 weeks - Monetary Survey — Monthly — 4 weeks - Detailed FX Auction Results — Weekly — 1 week ### Guidelines on external debt (excerpt) - Definition of "debt": - A current, i.e., not contingent, liability created under a contractual arrangement through provision of value in the form of assets (including currency) or services, requiring the obligor to make one or more payments in the future to discharge principal and/or interest. - Primary forms include: - (i) loans (including deposits, bonds, debentures, commercial loans, buyers' credits, repurchase agreements, official swap arrangements); - (ii) suppliers' credits (deferral of payment after delivery of goods/services); - (iii) leases (debt = present value at inception of all lease payments expected during agreement, excluding payments for operation, repair, or maintenance). - Under this definition, arrears, penalties, and judicially-awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. - Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. ### Debt sustainability analysis — key assessments and findings - Risk rating: - Risk of external debt distress: High - Overall risk of debt distress: High - Granularity in the risk rating: Sustainable - Application of judgment: No - Baseline changes since November 2020 assessment: - Slightly higher oil prices and higher need for food imports due to severe flooding; otherwise broadly unchanged. - Assessment summary: - South Sudan’s debt is assessed to be sustainable with a high risk of debt distress for both external and overall public debt. - There are temporary breaches in two out of seven debt indicators under the baseline scenario: - debt service-to-revenues ratio of external public debt (breach) - present value (PV) of debt-to-GDP ratio of overall public debt (breach) - These breaches suggest a high risk of external and overall public debt distress. - All external and overall public debt indicators are expected to be below the respective thresholds from 2024/25 onwards, contingent on authorities’ commitment to policy adjustment to cap the deficit over the medium term together with increased concessional financing. - Risks to the assessment are tilted to the downside, including implementation of policy adjustment and limited access to concessional loans. - Country capacity and data constraints: - Debt-carrying capacity remains rated “weak” with composite indicator score of 1.20 according to the October 2020 vintage of World Economic Outlook and the World Bank’s 2019 Country Policy and Institutional Assessment index. - DSA covers central government debt and debt issued by the central bank on behalf of the government. - Significant weaknesses in availability of debt data; complete information about SOE debt and government guarantees is unavailable, leading to omission of SOEs in the DSA. - Size of government guarantees is negligible; contingent liability stress test includes only SOE debt and financial market shocks. - Authorities receive technical assistance on Public Financial Management (PFM) reforms, including relocation of the Loan Committee to the Ministry of Finance and Planning to improve public debt and fiscal data quality. ### Debt developments and composition (figures and salient data) - South Sudan reached a debt restructuring agreement with Qatar National Bank (QNB) in July 2020. - Agreement resulted in a significant reduction of the net present value of the borrowing (42 percent). - Government started servicing the loan in October 2020 and is now current on all external debts. - External public debt estimated at US$1,355 million (41 percent of GDP) as of end-June 2020. - Debt to the World Bank (IDA) amounted to US$79 million on IDA terms. - Debt to the African Development Bank (AfDB) amounted to US$28 million. - US$150 million had been borrowed from China EXIM Bank to upgrade the Juba International Airport. - Debt to the QNB amounted to US$627 million. - Oil-related short-term loans declined from an estimated US$338 million in March 2019 to US$99 million in June 2020. - Concentration and concessionality: - In FY19/20 around 81 percent of total loans were highly non-concessional (46 percent: QNB loans; 35 percent: oil advances and Afreximbank loans). - South Sudan has not requested to participate in the Debt Service Suspension Initiative. - Text Table 1 excerpts (selected rows): - Multilateral: - IDA — US$53 million (4% share in 2017/18); US$53 million (4% share in 2018/19); US$79 million (6% share in 2019/20) - AfDB — US$28 million (2% share) across 2017/18–2019/20 - Bilateral: - China EXIM Bank — US$100 million (8% share) in 2017/18; US$150 million (13% share) in 2019/20 - Commercial: - QNB — US$627 million (52% share) across 2017/18–2019/20 - AFREXIM — US$10 million (1% share) in 2017/18; US$379 million (28% share) in 2019/20 - Oil advances — US$216 million (18% share) in 2017/18; US$997 million (28% share) in 2019/20 - Total external debt outstanding: - 2017/18: US$1,202 million — External debt to GDP ratio 37.8 - 2018/19: US$1,196 million — External debt to GDP ratio 26.7 - 2019/20: US$1,355 million — External debt to GDP ratio 28.3 - Domestic debt to GDP ratio: - 2017/18: 26.5 - 2018/19: 8.3 - 2019/20: 22.9 - Total public debt to GDP ratio: - 2017/18: 1,466 (46.1) - 2018/19: 1,424 (32.7) - 2019/20: 1,952 (40.8) - Note: Fiscal year runs from July to June. - Oil sector developments: - Latest oil production data show about 170 barrels per day (bpd) in February 2021 compared to about 165 bpd assumed in the 2020 DSA for the same period. - February 2021 WEO projected average Brent oil prices for 2021 and 2022 at 58.5 and 54.8, respectively, compared to 43.8 and 45.6 in the October 2020 WEO. - More than 90 percent of total exports and government revenue come from oil. ### Domestic debt, monetary financing, and arrears - Domestic debt prior to the COVID-19 crisis had been below 10 percent of GDP and is mostly loans from the central bank. - Government had stopped monetary financing since late 2017, helping lower inflation and stabilize the exchange rate. - COVID-19 triggered some monetary financing, increasing domestic debt by around 5 percentage points in FY19/20. - Following a Cabinet Resolution in October 2020, there has been no further monetary financing of the budget since September 2020. - While no arrears on domestic debt instruments, authorities have domestic arrears related to salaries and goods and services. - Current estimate of salary arrears is 2 percent of GDP, or 5 months of salaries. - Authorities’ PFM reform strategy includes review, verification and clearance of all other arrears. *Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA), March 17, 2021.* ### 7. The Transitional Financial Arrangement (TFA) with Sudan (around 5 percent of GDP) puts ### 1ssdea2021001 - 7. The Transitional Financial Arrangement (TFA) with Sudan (around 5 percent of GDP) puts ### Impact of the Transitional Financial Arrangement (TFA) - The Transitional Financial Arrangement (TFA) with Sudan (around 5 percent of GDP) exerts significant pressure on the budget. - Financial transfers to Sudan accounted for around 20 percent of government’s total expenditure, on average, in the past 4 years (18 percent in FY19/20). - The TFA agreement will end in mid-2022, which will open considerable fiscal space. - The forthcoming completion of the TFA will allow for: - smaller debt accumulation, - a more robust debt profile, and - thus lower borrowing cost in the relatively near future. ### Underlying macroeconomic assumptions and growth outlook - Baseline scenario assumptions: - Some recovery is expected next year, and solid growth in oil and non-oil sectors are expected over the medium term (Text Table 2). - Assuming continued progress in peace agreement and PFM reforms, despite a slowdown in FY20/21 due to the COVID-19 pandemic and severe flooding, medium-to-long-term growth prospects remain favorable as South Sudan started from a very low base following the civil war. - Progress in the peace agreement, improved macroeconomic stability, and recovery in oil prices should support an overall growth of 6 percent in the medium to long term. - Revision relative to the November 2020 DSA: - Overall growth in FY20/21 is lower by about 0.6 percentage point, as the gain from slightly higher oil production based on latest data is insufficient to offset the adverse impact of the severe flooding. - Key macro-framework comparisons (selected entries from Text Table 2; projections labeled "2021 DSA" and "2020 DSA"): - Real GDP growth (annual percent change): 2021 DSA: 13.2 -4.2 2.2 2.6 4.7 6.4 ; 2020 DSA: 13.2 -3.6 0.0 2.5 5.5 6.4 - Real oil GDP growth (annual percent change): 2021 DSA: 26.4 -3.0 3.1 1.2 1.7 5.0 ; 2020 DSA: 26.4 -5.9 0.0 3.1 6.1 5.0 - Current Account Balance (percent of GDP): 2021 DSA: -2.7 -6.6 -1.4 0.7 0.6 -1.3 ; 2020 DSA: -2.7 -4.5 -2.3 0.7 -1.3 -2.7 - Exports of goods and services (percent of GDP): 2021 DSA: 64.6 61.5 62.9 62.1 61.0 58.7 ; 2020 DSA: 64.6 59.6 61.1 61.7 61.8 59.6 - Imports of goods and services (percent of GDP): 2021 DSA: 79.5 84.4 76.8 81.0 81.8 82.2 ; 2020 DSA: 79.5 80.4 79.0 83.0 85.6 84.8 - Primary deficit (percent of GDP): 2021 DSA: -5.1 -1.9 -1.0 1.2 1.4 0.6 ; 2020 DSA: -5.1 -1.0 -0.1 2.7 2.4 0.5 - Revenue and grants (percent of GDP): 2021 DSA: 29.7 24.6 31.2 31.3 30.9 31.7 ; 2020 DSA: 29.7 27.8 29.2 29.4 29.5 29.2 - Primary expenditures (percent of GDP): 2021 DSA: 34.8 26.5 32.2 30.1 29.5 31.2 ; 2020 DSA: 34.8 28.8 29.3 26.7 27.1 28.8 ### Authorities’ financing choices and recent borrowing - The authorities remain committed not to contract oil advances and to refrain from taking highly non-concessional loans. - Status of oil advances and recent borrowing: - The authorities have almost entirely paid back the residual oil advances contracted in the past (around US$138 million remains in June 2020) and have not relied on such financing since May 2020. - November 2020 DSA had assumed access to a US$30 million loan from IDA and a US$100 million loan from a Non-Paris Club (NPC) creditor in FY20/21 and FY21/22; these assumptions are unlikely to materialize. - In the absence of access to concessional financing, the authorities contracted a US$250 million facility from Afreximbank to alleviate the cash gap in the wake of the pandemic. - US$70 million of the US$250 million facility was disbursed in FY20/21. - Although the Afreximbank loan is highly non-concessional compared to the IDA and NPC loans, the amount of disbursement is much smaller, US$70 million versus US$130 million for FY20/21. - As a result, the new Afreximbank loan does not lead to a significant change in South Sudan’s debt sustainability. - In light of the recent oil-price recovery, the authorities will consider cancelling the undisbursed amounts. If cancelled, debt sustainability would improve since the current assessment assumes the remaining Afreximbank facility would be disbursed in FY21/22. - For FY21/22 this DSA assumes US$30 million disbursement from IDA but zero from an NPC creditor; the remaining Afreximbank facility would approximately replace the earlier assumption of US$100 million NPC loan. ### Fiscal policy design and automatic adjustments - The authorities’ commitment to fiscal prudence, which underpins the DSA, is based on a combination of automatic adjustment and policy measures. - Composition of public spending incorporates a mechanical adjustment mechanism: - TFA payments to Sudan (about 4 percent of GDP) and the transfers to oil producing states (about 1 percent of GDP) are indexed to oil prices. - Payment of wages, which suffers regular delays and arrears, will be prioritized because wages are the main poverty-reducing instrument currently available to the authorities in the absence of budget-funded transfer mechanisms. ### Financing gaps and external support in FY20/21–FY21/22 - Closure of fiscal and BOP financing gaps after the first RCF disbursement will rely on: - the second RCF disbursement, - grants, - concessional loans, and - further consolidation if necessary. - Specific allocations of prospective RCF disbursement (US$177 million): - About US$90 million will be used to close around 64 percent of the fiscal financing gap in FY20/21. - US$87 million will be used to inject BOSS foreign reserves. - The remaining some US$50 million fiscal financing gap is expected to be closed by a combination of concessional loans and FX profits from the RCF disbursement which will be auctioned by BOSS on behalf of the government (MEFP ¶11). - World Bank and other support related to COVID-19: - In April 2020, the World Bank provided US$7.6 million in support for the South Sudan COVID-19 Response Plan: PHESP Contingency Emergency Response Component (US$5 million) and reprogramming from earlier Ebola CERC (US$2.6 million). - World Bank processing additional financing of US$5 million under the COVID-19 Fast Track Facility to replenish the already activated CERC. - US$1.58 million approved and transferred to WHO for personal protective equipment and diagnostics. - Project interventions expected to start disbursing in FY21/22: - Safety Net Project (US$40 million) - Enhancing Community Resilience and Local Governance Project (US$45 million) - These projects are expected to be critical for alleviating the socio-economic impact of COVID-19 in target areas. ### Realism tool assessment and staff view on projections - Realism tools flag: - Some optimism on the primary balance, - Pessimism on growth compared to historical performance. - Staff assessment: - The baseline scenario implies an improvement of the primary balance from -5.1 percent of GDP in FY19/20 to 1.2 percent of GDP in FY22/23. - Staff views this as realistic because part of the adjustment stems from mechanical impacts of oil-price recovery and the expiration of the TFA agreement with Sudan (about 4 percent of GDP). - Recent revitalized peace agreement, ongoing progress in PFM reforms, and commitment to prudent debt management and fiscal and monetary policies are expected to support fiscal adjustment. - Baseline predicts 2.1 percent real GDP growth in FY21/22, significantly lower than suggested by the realism tool (about 12 percent). - Staff considers the realism tool overly overoptimistic on growth because it is influenced by an exceptional recovery in oil production (about 25 percent) from June 2019 until the pandemic hit, which is unlikely to repeat given the recent oil price collapse and severity of the crisis. ### Debt carrying capacity and stress-test classification - South Sudan’s debt carrying capacity remains classified as weak (Text Table 3). - Basis of classification: - Composite indicator (CI) score guided by World Bank’s Country Policy and Institutional Assessment (CPIA) and other variables such as real GDP growth and import coverage of foreign exchange reserves. - South Sudan’s latest CI score is 1.20 based on the October 2020 WEO and 2019 CPIA. - This classification remains unchanged from the assessment in the 2020 DSA. *Source: IMF staff estimations and projections, and South Sudanese authorities (extracted from 1ssdea2021001).* ### 14. Given the importance of oil price developments, a tailored stress test for lower oil prices was ### 1ssdea2021001 - 14. Given the importance of oil price developments, a tailored stress test for lower oil prices was ### Tailored commodity-price stress test - The commodity price stress test features a one standard deviation decline in oil prices and a 6-year period for closing the financing gap that arises. - Commodity price shocks are based on the commodity prices outlook prepared by the IMF research department. - In tailored tests (C3. Commodity price), the PV of debt-to-GDP and other indicators show large increases under shock years (see sensitivity table results). ### External debt sustainability — baseline findings and projections - PV of external-debt-to-GDP ratio (baseline): 28 percent in FY20/21, below the indicative threshold of 30 percent. - PV of debt-to-exports ratio (baseline): 45 percent in FY20/21; projected to remain relatively stable and well below the threshold of 150 percent. - External debt liquidity indicators breach thresholds until FY23/24 under the baseline scenario due to pandemic impact on oil prices and high debt service of commercial external debt. - Debt service-to-revenue ratio: exceeds thresholds until FY23/24; projected to steadily improve and stay well below thresholds from FY24/25 onwards. - External debt service-to-exports ratio: marginally below the threshold in FY20/21; expected to improve and stay well below thresholds from FY24/25 onwards. Key baseline entries from Table 1 (selected) - PV of PPG external debt-to-GDP ratio: 31.4 (2020), 29.3 (2021), 23.9 (2022), 23.0 (2023), 21.2 (2024), 21.5 (2025), 22.2 (2026), 21.9 (2027), 21.6 (2028), 21.3 (2029), 20.1 (2030), 19.3 (2031). - PV of PPG external debt-to-exports ratio: 49.3 (2020), 47.6 (2021), 38.1 (2022), 37.1 (2023), 34.8 (2024), 34.2 (2025), 35.2 (2026), 35.3 (2027), 35.4 (2028), 35.9 (2029), 34.2 (2030), 34.1 (2031). - PPG debt service-to-exports ratio: 33.3 (2020), 10.1 (2021), 8.1 (2022), 8.4 (2023), 8.3 (2024), 5.4 (2025), 4.4 (2026), 4.6 (2027), 4.0 (2028), 4.6 (2029). - PPG debt service-to-revenue ratio: 71.8 (2020), 25.2 (2021), 16.4 (2022), 16.4 (2023), 16.5 (2024), 10.6 (2025), 8.7 (2026), 11.0 (2027), 7.7 (2028). ### Public debt sustainability — baseline findings and projections - Public sector debt breaches the indicative threshold of 35 percent in FY21/22 and FY22/23; expected to gradually decline below the threshold from FY23/24 onwards. - Public sector debt projected: increase from 33 percent in FY18/19 to 42 percent in FY20/21. - Domestic debt projected: increase from 6 percent in FY18/19 to 16 percent in FY20/21. - PV of public-debt-to-GDP ratio expected to improve to around 37 percent and remain below the 35 percent threshold from FY23/34 onwards, stabilizing at around 25 percent in the medium-to-long term. (Text preserves original phrasing "FY23/34".) - Under the most extreme shock scenario, all debt indicators are expected to breach thresholds over the projection period by a significant amount for some years. Key baseline entries from Table 2 (selected) - Public sector debt (percent of GDP): 40.4 (2020), 41.8 (2021), 38.0 (2022), 36.7 (2023), 33.0 (2024), 29.7 (2025), 28.3 (2026), 25.1 (2027), 24.6 (2028), 44.6 (note: table shows historical/projection formatting). - PV of public debt-to-GDP ratio: 44.3 (2020), 43.7 (2021), 37.1 (2022), 35.2 (2023), 31.9 (2024), 29.6 (2025), 28.3 (2026), 25.3 (2027), 24.7 (2028). - Debt service-to-revenue and grants ratio: 72.2 (2020), 25.9 (2021), 18.2 (2022), 19.1 (2023), 18.9 (2024), 18.2 (2025), 18.7 (2026), 16.9 (2027), 18.7 (2031). ### Stress test results, scenarios, and sensitivities - Applying standard stress tests on top of COVID-19 global shocks lengthens breaches in the debt service-to-exports ratio. - Under the most extreme shock scenario (combination of shocks), the PV of debt-to-GDP and debt service-to-revenue ratios breach thresholds over the projection period, by a large amount for some years. - Under a further commodity price shock, the debt service-to-exports ratio exceeds the threshold for multiple years. - PV of debt-to-exports ratio remains below the threshold under all scenarios throughout the projection period. - Sensitivity analysis highlights large increases in PV of debt and service ratios under: - A1. Key variables at historical averages - B6. Combination of bound tests (B1-B5) - C3. Commodity price tailored test (shows pronounced breaches in several years) Selected sensitivity outcomes (Table 3, C3. Commodity price) - PV of debt-to-GDP (C3 Commodity price): 47.6 (2021), 84.2 (2022), 117.4 (2023), 109.3 (2024), 97.8 (2025), 86.2 (2026), 70.2 (2027), 59.0 (2028), 50.2 (2029), 39.4 (2030), 32.2 (2031). - PV of debt-to-exports (C3 Commodity price): 47.6 (2021), 84.2 (2022), 117.4 (2023), 109.3 (2024), 97.8 (2025), 86.2 (2026), 70.2 (2027), 59.0 (2028), 50.2 (2029), 39.4 (2030), 32.2 (2031). - Debt service-to-exports (C3 Commodity price): 10.1 (2021), 11.0 (2022), 12.7 (2023), 14.0 (2024), 9.5 (2025), 10.9 (2026), 13.7 (2027), 12.5 (2028), 12.0 (2029), 11.0 (2030), 10.8 (2031). ### Risk assessment and vulnerabilities - Staff assessment: South Sudan’s external and overall public debt are sustainable with a high risk of debt distress for both external and domestic public debt. - This assessment hinges on authorities’ commitments to: - Continue avoiding oil advances; - Adopt prudent monetary and fiscal policies; - Continue PFM reforms. - With sustained commitments, access to concessional loans and significantly higher amounts of grants is expected, improving resilience and debt sustainability; risk of external debt distress expected to be moderate starting from FY24/25. - Substantial downside risks to the baseline include: - Subdued oil prices; - Extended lockdown measures; - Deadlock in implementing sustainable peace; - Lack of political commitment to implement strong macroeconomic adjustment measures; - Suboptimal resource allocation, including insufficiently efficient public investment; - Protracted rent seeking behavior and corruption. ### Authorities’ views - The authorities agreed with the DSA assessment. - They recognized the importance of: - Remaining current on their debts; - Discontinuing oil advances; - Avoiding highly non-concessional borrowings; - Implementing prudent fiscal and monetary policies discussed in the staff report to improve South Sudan’s debt sustainability. *Source: Republic of South Sudan — IMF External Debt Sustainability Analysis and Public Debt Sustainability Analysis (excerpts as provided).* ### 1. Our South Sudanese authorities appreciate the constructive engagement with Fund staf f ### 1. Our South Sudanese authorities appreciate the constructive engagement with Fund staff ### Request to the Fund and immediate context - Authorities request Executive Directors’ support for a Staff-Monitored Program (SMP) and a second disbursement under the Rapid Credit Facility (RCF-2). - Authorities request 50 percent of quota under the RCF-2 to mitigate the effects of the pandemic and multiple shocks. - The SMP is intended to anchor the authorities’ medium-term reform agenda and catalyze donor support. - Authorities state they have fulfilled commitments under the RCF-1 LOI, including ensuring full transparency in the use of COVID-related resources. - The financial audit of RCF-1 is expected to be published by end-June 2021. - Authorities commit to publish crisis mitigation transactions for RCF-2 on the government’s website. - The Bank of South Sudan (BOSS) will maintain a dedicated COVID-19 account; financial statements will be published online consistent with the PFM Act 2011. - Authorities commit to undergo a safeguards assessment ahead of an ECF arrangement. ### Impact of COVID-19, floods, and oil price collapse — key statistics and projections - First COVID-19 case reported on April 10, 2020. - South Sudan received an initial 132,000 doses of Astra Zeneca vaccines (covering 0.9 percent of the population). - Authorities hope to cover about 40 percent of the population by end-2022. - Coverage of the remaining 20 to 30 percent required for herd immunity would require sizable external support. - GDP growth rate estimated at -4.2 percent in FY20/21, down from 13.2 percent in FY19/20. - Fiscal balance projected to widen to -5.2 in FY20/21 from -3.8 percent in FY19/20. - International reserves cover about 0.4 months of imports for FY20/21. - RCF-1 first emergency financing disbursement was 15 percent of quota. - Economic activity expected to pick up if upside risks materialize, including the peace dividend, oil price recovery, and an increase in oil production. ### Government response to the pandemic and macro-financial measures - Public health and containment: - Early March 2020: High-level Taskforce on COVID-19 (HLTF) measures included closing schools, restricting gatherings, and suspending international passenger flights. - Containment measures slowed infections; the second wave necessitated renewed containment measures. - With partner support, grants provided to states for education and health sectors; RCF-1 resources helped increase poverty-reducing spending. - Monetary policy and financial sector actions: - BOSS cut policy rate from 15 percent to 13 percent and reserve requirement from 20 percent to 18 percent in April 2020. - Monetary policy rates were reversed from 13 percent to 15 percent in November 2020 to counter inflation. - BOSS urged commercial banks to undertake debt restructuring for viable but distressed customers and took measures to provide FX for medicine, electricity, and water, and to heighten supervision. - BOSS plans to operationalize reserve money targeting, with monetary policy targeting base money growth of 10 percent in 2021 and associated quarterly targets for reserve money to contain inflation. - Central bank aims to transition to an interest rate-based monetary framework and pursue operational autonomy in the medium term. - BOSS aims to reduce an existing overdraft to government and to purchase FX from oil receipts to build reserves and stabilize the FX market. - From April 2021, central bank will limit adjustment in the reference rate to smooth transactions and intervene only to correct disorderly market conditions. - The BOSS plans to open up the FX auction system, allow commercial banks to participate, and ensure FX transactions occur at a market-determined rate. - BOSS will work with commercial banks to resolve undercapitalization, encourage capital raisings and mergers, or liquidate where necessary; measures include enhancing asset quality, lowering NPLs, and strengthening bank governance. - The authorities have finalized the 2015–18 BOSS audits and expect to complete the 2019 and 2020 audits this year. ### SMP modalities and program monitoring - Leadership endorsement: The President and Council of the Ministers have endorsed the reform package under the SMP. - SMP coverage: The SMP will cover end-March through end December 2021. - Monitoring: Performance will be monitored through quarterly reviews of quantitative targets and structural benchmarks (highlighted in Tables 1 and 2 of the MEFP). - Implementation arrangements: A team comprising key economic sectors will be constituted to monitor program implementation and improve data collection and quality. - Government finds the outlined criteria for reviews feasible and instrumental for future ECF negotiations. ### Policy measures under the SMP - Fiscal policy commitments and measures: - Commitment to fiscal and debt sustainability through fiscal discipline, strong governance and transparency, and adherence to SMP policy objectives. - Authorities commit to avoiding non-concessional borrowing or oil advance contracts, relying more on grants and concessional financing. - On capital spending, borrow only for critical projects with positive returns (example: roads connecting states to Juba). - Plans to broaden the tax base and automate government processes to increase tax receipts in line with EAC convergence criteria. - NRA is digitalizing all customs receipts and plans to cover the entire country in the medium-term as peacebuilding gets entrenched. - Expectation to move from sales tax to VAT, with Fund technical support. - Commitment to expenditure rationalization to ensure debt sustainability while directing spending toward priorities such as social protection and arrears clearance. - FY20/21 budget will refrain from monetary financing and phase out tax exemptions as social spending and arrears clearance are prioritized. - Authorities will seek IMF capacity development assistance to professionalize the NRA and rebuild policy credibility. - Monetary, exchange rate, and financial sector measures: - Operationalize reserve money targeting: base money growth target of 10 percent in 2021. - Reduce government overdraft and purchase FX from oil receipts to build reserves and stabilize the FX market. - Open up the FX auction system and liberalize the FX market; permit commercial banks to participate in FX auctions and ensure market-determined FX transactions. - Revamped guidelines to authorized dealers from April 2021 to limit reference rate adjustments and intervene only to correct disorderly market conditions. - Strengthen financial stability through bank recapitalization, mergers where feasible, asset quality improvements, lowering NPLs, and enhanced governance and supervision. - Structural reforms and capacity development: - Promote good governance, strengthen AML/CFT, intensify the fight against corruption, and improve the business environment. - Finalized the Concept Note for the PFM Reform Strategy and will accelerate PFM reforms, including implementing the Immediate Action Plan approved in February 2021. - Progress: strengthen macro-fiscal framework and budget processes; operationalize the Treasury Single Account (TSA); improve cash and debt management by setting up related units. - Additional priorities: strengthen the Anti-Corruption Commission and the National Audit Chamber; support training; implement asset declaration process; criminalize corruption offenses. - Commitment to improve key economic statistics: national accounts, balance of payments, and debt. - Requested Fund TA to enhance the monetary policy framework, introduce term deposits, initiate treasury bill issuance, and complete NRA functionality to implement revenue-based reforms and enhanced automation of customs systems. ### Social protection, arrears, and social stability - South Sudan has no established social safety net system or budget-funded transfer mechanism. - The first emergency financing disbursement of 15 percent of quota enabled the government to pay part of outstanding wage and salary arrears. - Wage and salary payments fed into the traditional extended family support system, sustaining social stability and providing cash shared with relatives and friends in rural communities. - Given post-conflict fragilities, informality, and absence of government safety nets, the extended family system remains the main channel of support to vulnerable households, supplemented by limited UN feeding and similar support in settlement camps and schools. - Authorities are confident that with oil and non-oil receipts improving, all past salary arrears will be paid off in the near-to-medium term. ### Conclusion and authorities’ appeal - Authorities reaffirm commitment to prudent macroeconomic policies as a foundation for durable and inclusive growth once the pandemic subsides. - Policy efforts aim to unlock economic growth potential and attain development objectives in the National Development Strategy 2018–21, with SMP support. - Authorities seek Executive Directors’ support for the SMP and emergency financing to contain the pandemic, foster recovery, and catalyze donor and MDB support. *Source: 1ssdea2021001 - 1. Our South Sudanese authorities appreciate the constructive engagement with Fund staff* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1ssdea2021001.pdf_