## 1ssdea2021002

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### EXECUTIVE SUMMARY — Context and SMP implementation
- A 9-month Staff Monitored Program (SMP) combined with a disbursement under the Rapid Credit Facility (RCF) of 50 percent of quota (about US$174 million) was approved on March 30, 2021 to address BOP challenges and build a track record towards an upper credit tranche financial arrangement.
- Prior RCF disbursement: November 2020 of 15 percent of quota (about US$52 million) — first-ever Fund disbursement to South Sudan.
- Political progress: unity government formed in February 2020; state governors appointed in June 2020; national parliament sworn into office on August 31, 2021.
- Humanitarian situation: about 60 percent of the population facing high levels of acute food insecurity; historic flooding in August 2020 aggravated conditions.
- SMP pillars: restoring fiscal discipline, removing distortions in the FX market, and strengthening governance.
- Performance: broadly satisfactory; all end-June structural benchmarks implemented in early September.
- Missed end-June QTs: ceiling on central government cash deficit and ceiling on contracting or guaranteeing non-concessional borrowing.

### Financial support, macro effects, and recent stabilization
- RCF disbursements and oil price recovery helped ease pandemic impact and weak macro governance.
- Outcomes:
  - Exchange rate stabilized.
  - Price level started to decline.
  - Government reduced salary arrears from 5 months at end-March to 1 month at end-June 2021.
- Authorities maintained a policy of no new monetary financing of the deficit.

### FX market reforms and exchange rate developments
- Prior actions: open FX auctions to banks; allow commercial banks to buy and sell FX at market rates; gradually adjust official exchange toward market rates.
- Convergence data:
  - At SMP start (March 30, 2021): parallel market ~618 SSP/US$, official ~184 SSP/US$ (premium over 200 percent).
  - As of August 30, 2021: parallel market 409 SSP/US$ (an appreciation of about 1/3 since start).
  - As of September 1, 2020: spread between reference and parallel rates around 0.6 percent.
  - Spread between reference and auction rates around 1.2 percent as per last auction on September 13, 2021.
- Official exchange rate discontinued and replaced with a reference rate based on market rates (MEFP ¶14).

### Inflation, food prices, and monetary stance
- Inflation and monetary outcomes:
  - 12-month inflation rate in Juba fell to 23 percent in July 2021, from 94 percent in January 2021.
  - Reserve money, adjusted for exchange rate changes, contracted by over 3 percent at end-July 2021 relative to end-March 2021 (Annex I).
- Food prices:
  - Representative food consumption basket in Juba (55 percent of overall consumption basket) peaked in April and declined by 14 percent since.
  - Staff analysis: exchange-rate appreciation insulated South Sudan from concurrent rise in global food prices; without the appreciation since end-March, food prices would have increased significantly (Annex II).

### Fiscal policy and FY2021/22 draft budget
- Draft budget features:
  - Based on conservative revenue assumptions.
  - Refrains from monetary financing of the deficit and contracting new non-concessional external debt.
- Fiscal stance and projections (draft budget highlights):
  - Targets improvement in overall fiscal balance from an estimated deficit of 7 percent of GDP in FY2020/21 to a surplus of 2.6 percent of GDP in FY2021/22 (largely due to higher international oil prices and reduction of Transitional Financial Agreement (TFA) payments to Sudan).
  - Net of TFA payments, government spending in FY2021/22 is about 45 percent higher in real terms relative to FY2020/21.
- Revenue and expenditure specifics:
  - Oil price assumption: 60 US$ per barrel (slightly lower than WEO’s GAS assumption of 63 US$).
  - Non-oil revenue projection in the budget: average of 4.8 bn SSP per month vs. recent trend collection average of 6.0 bn SSP per month in Q4FY20/21.
  - Education spending rises from US$134 million (8 percent of total expenditure) to US$170 million (11 percent of total expenditure).
  - Health spending rises from US$24 million (1 percent of expenditure) to US$69 million (4 percent of total expenditure).
  - Draft budget doubles the wage bill in SSP in FY2021/22 to partially offset cumulative inflation (about 200 percent since last significant salary increase in 2017).
  - Many government workers had median monthly compensation less than 5 US$/month prior to adjustment.

### Program performance, capacity constraints, and governance actions
- Two missed end-June QTs explained:
  - Ceiling on cash deficit missed due to additional spending financed by an Afreximbank loan contracted in October 2020 and faster-than-targeted reduction of salary arrears using second RCF disbursement and FX auction gains.
  - Ceiling on contracting/guaranteeing non-concessional borrowing breached when MOFP entered an April 2021 agreement for a US$650 million external non-concessional loan and BOSS issued a sovereign guarantee in July 2021 without prior Fund consultation.
    - Authorities confirmed: no disbursements under the loan agreement and the guarantee has not been called.
    - BOSS canceled the sovereign guarantee; Ministry of Justice confirms guarantee canceled and loan agreement nullified.
    - Authorities taking remedial measures to increase transparency and oversight on public debt contracting and to strengthen debt management framework (MEFP ¶9).
    - Authorities reaffirmed commitment to consult with Fund staff before contracting new non-concessional debt (MEFP ¶10).
- Capacity development needs: stronger institutions, technical skills, and IT systems; long-term intensive engagement by Fund and development partners required.

### COVID-19 vaccination and health outlook
- As of August 31, 2021:
  - 11,436 Covid-19 cases confirmed with 120 deaths.
  - Country received 132,000 doses (0.9 percent of population) of AstraZeneca vaccines from COVAX; only 56,989 doses administered.
  - COVAX allocation of 732,000 doses would cover about 5.2 percent of the population.
  - Lack of capacity and logistics remain significant barriers to rollout.

### Staff view, risks, and outlook
- Staff supports completing first review of the SMP based on attached Memorandum of Economic and Financial Policies.
- Key authority commitments:
  - Draft FY2021/22 budget refrains from monetary financing and contracting new non-concessional loans.
  - BOSS committed to prudent monetary and exchange rate policies.
  - Authorities advancing governance reforms and implementing remedial measures related to missed QTs.
- Risks:
  - Main downside: potential return to hostilities due to difficult humanitarian and economic conditions.
  - Upside: peace dividends could exceed expectations.

### Near-term outlook and risks (Section 10)
- Growth and inflation:
  - Overall real GDP growth for FY2021/22 projected at 1 percent.
  - Growth expected to pick up in FY2022/23 as previously closed oil fields reopen as planned.
  - Inflation projected to continue to decline and stabilize at around 10 percent in the medium term, provided money growth remains prudent.
- Balance of payments and reserves:
  - Recovery of oil prices and recent SDR allocation have closed BOP gap for FY2021/22 identified at SMP approval.
  - International reserves about US$270 million; less than one month of imports.
- Risks:
  - Upside: peace dividends on growth and poverty reduction may be higher.
  - Downside: low vaccination rate risking new COVID-19 waves; political risks; reversal in oil prices; possible resumption of monetary financing; interference from vested interests and weak governance undermining PFM and FX reforms.

### Fiscal measures to close FY2021/22 financing gap
- Revenue mobilization:
  - Staff projects non-oil revenue of at least SSP 72 billion in FY2021/22 (3.2 percent of GDP), compared to SSP 58 billion (2.6 percent of GDP) in the draft budget.
  - Draft Finance Bill measures include: (i) phasing out several tax exemptions; (ii) adjusting customs valuation exchange rate to 90 SSP/US$ from 45 SSP/US$; (iii) expanding digitalization of tax collection; (iv) adjusting customs duty rates towards EAC levels (MEFP ¶8).
  - Revenue impact of these measures not incorporated in baseline due to timing uncertainty.
- TFA payment to Sudan:
  - Draft budget assumes a US$400 million transfer related to the TFA signed in 2012.
  - Information suggests outstanding balance from the TFA about US$200 million (MEFP ¶8).
  - Baseline projections assume lower spending of about US$200 million or about SSP 80 billion relative to the draft budget (Table 2a).
- Use of SDR allocation:
  - Agreed to use US$150 million (of total SDR allocation of US$334 million) to finance FY2021/22 budget; remainder to boost international reserves.
  - World Bank–executed cash transfer program targets 65 thousand households (about 3 percent of population); so far 15.2 thousand households have benefited.
- Potential spending cuts:
  - If needed, consider cuts in infrastructure spending; current allocation: 10,000 barrels per day for road projects; authorities committed to review and reduce below 10,000 barrels per day (MEFP ¶11).
  - IMF and World Bank TA requested to review public investment management framework (MEFP ¶13).
  - Staff recommends protecting education, health and targeted social assistance and expanding such spending in a deficit-neutral manner where possible.

### Wage bill and public payroll
- Authorities committed to comprehensive review of wage bill before further significant wage increases (MEFP ¶13).
- Staff supported wage adjustment to preserve real purchasing power but recommended cleansing payroll before doubling salaries in FY2021/22.
- Preconditions for future increases:
  - comprehensive assessment including payroll census;
  - institutional reforms including payment through bank accounts.
- Authorities requested IMF and World Bank TA on wage bill assessment and public employment structure (MEFP ¶13).
- Footnote: MOFP completed structure and payment of salaries through bank accounts for some ministries; work underway for rest.

### Debt management and DSA findings
- External debt stock revised up reflecting oil advances of US$539 million contracted and drawn in 2018 unknown to MOFP.
- Institutional measures:
  - Cabinet Decree October 2020 discontinued contracting new oil advances.
  - Loan Committee reconstituted under Debt Management Unit; tasked to approve external debt contracts before final approval.
  - Requested TA from Fund and World Bank on debt management strategy (MEFP ¶9).
  - Committed to commission external independent audit to take stock of all outstanding external loans and guarantees and publish results by end-2021 (structural benchmark) and prior to completion of second SMP review (LOI ¶3 and MEFP ¶9).
- DSA baseline:
  - Debt remains sustainable but with a high risk of debt distress (Annex III).
  - Discovery of higher oil advances led to breaches in debt-service-to-revenue ratio and overall public debt until FY25/26.
  - To maintain sustainability, authorities committed to refrain from contracting non-concessional debt and to gradually reduce outstanding oil advance balance by about US$100 million per year.

### Money targeting framework, reserves, and FX operations
- Use of SDR allocation:
  - Authorities and staff agreed to use more than half of SDR allocation to bolster reserves.
  - Authorities agreed to use US$184 million to strengthen external reserves.
  - Using slightly more than half of the RCF disbursement of April 2021 plus this SDR share projects international reserves to US$315 million by end-2021 (end of SMP), equivalent to about 0.8 months of prospective imports.
  - Medium-term objective: reserve cover of 4.5 months of imports (MEFP ¶16).
- Reserve money and instruments:
  - BOSS committed to no further monetization and to contain annual reserve money growth to about 10 percent (implemented as 2.5 percent quarterly growth).
  - BOSS plans to introduce term deposits (short maturity) by end-2021 and BOSS bills in 2022.
  - MoU signed on 21 September 2021 committing MOFP to cover cost of monetary operations from FY22/23 (MEFP ¶15).
- FX market operations:
  - BOSS to continue FX auctions for selling and buying FX for price discovery.
  - Plans for medium-term FX budget and transition to larger foreign exchange reserves consistent with reserve cover objective (MEFP ¶16).

### Governance, PFM, AML/CFT, and safeguards
- Auditor General (AG) and RCF audits:
  - AG completed and published audit of spending of first RCF disbursement in November 2020.
  - Audit suggests up to US$16 million out of US$52 million disbursed may not have complied with intended purpose of paying salary arrears.
  - Largest discrepancies: variances between budgeted funds and actual transfers to states (US$8.6 million) and funds used to finance State Conditional Loans (US$3.8 million).
  - Authorities committed to develop action plan with IMF and World Bank staff; AG to complete audit of second RCF disbursement by end-2021; monthly reports on RCF fund use published (MEFP ¶18).
  - Note: RCF disbursements have not been used for COVID-19 spending to date; reports do not reference COVID-19 procurement contracts or beneficial owners.
- AML/CFT strengthening:
  - Medium-term recommendations: criminalize corruption offenses and implement effective asset declaration regime; work underway with World Bank TA.
  - South Sudan under Increased FATF Monitoring; since June 2021 subject to agreed FATF action plan; approved as observer to ESAAMLG and committed to Mutual Evaluation.
  - Financial Intelligence Unit established under BOSS with three-year action plan.
- Safeguards at BOSS:
  - BOSS published audited financial statements for FY2011–18 (audit reports contain a disclaimer of opinion).
  - Prior action: BOSS adopted action plan to implement key recommendations of IMF safeguards assessment by end-2021 including finalizing 2019–2020 audited statements; hiring staff with audit/risk management background; engaging audit firm to co-source internal audit; publishing audit of internal controls; engaging external consultant or IMF TA for currency operations strategy; tender for currency printing; cost-benefit analysis of replacing low denomination banknotes with coins (MEFP ¶21).

### SMP modalities, targets, and prospects for ECF
- Staff proposals:
  - Two prior actions for first SMP review: (i) complete audit of November 2020 RCF spending and publish findings; (ii) adopt action plan to address key safeguards recommendations.
  - Set end-October quantitative targets as basis for second review and extend SMP to end-January 2022.
- Proposed end-October QTs adjustments:
  - (i) increase floor on NIR relative to original end-September target for agreed SDR reserve portion (US$184 million);
  - (ii) adjust upwards ceiling of cash deficit to account for higher end-June deficit;
  - (iii) adjust upwards floor on salary arrears to reflect faster-than-anticipated clearance.
- Medium-term needs:
  - Significant BOP gaps and large unmet financing needs to support poverty reduction and inclusive growth; will require development partner support including IMF.
- Steps for potential ECF request at end of SMP:
  - sustain fiscal and monetary discipline;
  - consolidate FX market liberalization by bolstering reserves and expanding monetary instruments;
  - strengthen debt management and oversight;
  - deepen PFM reforms and implement Safeguards Assessment recommendations;
  - strengthen anti-corruption and AML/CFT frameworks.
- Staff to prepare Country Engagement Strategy as part of second SMP review.

### Technical assistance, absorptive capacity, and program monitoring
- IMF TA areas: PFM reforms, revenue mobilization, revenue administration, operationalizing money targeting framework, liquidity forecasting, macro statistics (see Table 7 and Annex II of IMF Country Report No. 21/70).
- Authorities requested further TA on debt management, public sector pay assessment, and public investment management.
- Absorptive capacity: traction improved but remains constrained by lack of leadership, weak governance, low morale and high staff turnover.
- Monitoring and reporting:
  - Quarterly assessment reports by authorities; implementation/execution of structural benchmarks reported within two weeks after programmed dates.
  - Reporting calendar with MOFP and BOSS submission lags (monthly and quarterly items with 4-week and 1-week lags as specified).

### Key quantitative targets and outcomes (selected)
- Central government primary cash budget deficit (ceiling: in billions of SSP):
  - SMP Target End-Jun 2021: 10.0
  - Actual End-Jun 2021: 25.9
  - SMP Target End-Sep 2021: 20.0
  - Proposed End-Oct 2021: 35.9
- Contracting or guaranteeing of non-concessional borrowing (continuous ceiling: in millions of U.S. dollars):
  - SMP Target End-Jun 2021: 0.0
  - Actual End-Jun 2021: 650
  - SMP Target End-Sep 2021: 0.0
  - Proposed End-Oct 2021: 0.0
- Average net international reserve (floor: in millions of U.S. dollars):
  - SMP Target End-Jun 2021: 85.0
  - Actual End-Jun 2021: 131.0
  - SMP Target End-Sep 2021: 100.0
  - Proposed End-Oct 2021: 284.0
- Clearance of salary arrears (floor: in billions of SSP):
  - SMP Target End-Jun 2021: 7.3
  - Actual End-Jun 2021: 14.5
  - SMP Target End-Sep 2021: 11.0
  - Proposed End-Oct 2021: 14.5
- Average reserve money growth (ceiling: in percentage points):
  - SMP Target End-Jun 2021: 5.0
  - Actual End-Jun 2021: -2.6
  - SMP Target End-Sep 2021: 10.0
  - Proposed End-Oct 2021: 10.0

### Key statistics and projections (selected figures preserved exactly)
- Population (millions): 13.6; 14.0; 14.4; 14.8; 15.2; 15.7
- Real GDP (percent change): 13.2; -5.4; 1.0; 5.2; 7.4; 4.9
- Oil real GDP (percent change): 26.4; -5.9; -2.5; 5.8; 9.1; 2.8
- Non-oil real GDP (percent change): 0.5; -5.0; 3.2; 4.8; 6.0; 7.0
- Inflation (average): 33.3; 43.1; 24.0; 16.0; 12.1; 11.7
- Official exchange rate (SSP/US$, average): 160.8; 190.7; 400.0; 440.0; 484.0; 532.4
- Gross foreign reserves (millions of US dollars): 47.9; 172.2; 353.6; 445.2; 543.8; 597.3
- Gross foreign reserves (in months of imports): 0.1; 0.5; 0.9; 1.0; 1.1; 1.2
- Total revenues and grants (percent of GDP): 29.5; 31.6; 29.6; 31.9; 33.0; 33.6
- Total expenditure (percent of GDP): 39.4; 38.6; 27.0; 30.0; 31.2; 32.4
- Overall balance (cash) (percent of GDP): -9.8; -7.0; 2.6; 1.9; 1.8; 1.2
- Total public debt (percent of GDP): 51.5; 58.0; 52.2; 47.7; 42.3; 39.2
- Oil production (millions of barrels): 62.1; 58.4; 56.9; 60.2; 65.7; 67.5
- South Sudan's oil price (U.S. dollars per barrel): 49.3; 51.5; 63.1; 63.2; 64.5; 65.8
- Nominal GDP (billion US$): 4.9; 5.0; 5.3; 5.5; 5.9; 6.0
- Current account balance (including grants) (percent of GDP): -16.9; -5.0; 2.7; 3.2; 2.2; -0.4
- Current account balance (excluding grants) (percent of GDP): -36.7; -30.9; -20.3; -26.2; -27.6; -30.8

### Exchange-rate analysis and food-price pass-through (Annex I & II)
- Exchange-rate dynamics:
  - South Sudan operates a floating exchange-rate regime; exchange rate changes daily.
  - Parallel-market exchange rate appreciated from over 600 SSP/US$ at SMP adoption in March 2021 to just over 400 SSP/US$ by May and remained around this value.
  - Preliminary staff analysis: current parallel-market level broadly consistent with fundamentals; suggested fair value in 400–500 SSP/US$ range.
- Incorporating oil revenue: f(M2, Oil$) supports that fundamentals explain much of exchange-rate evolution.
- Food-price pass-through findings:
  - Between March and July 2021 parallel-market exchange rate appreciated by 35 percent, from 616 to 398 SSP/US$.
  - Food CPI for Juba peaked in April 2021 and declined thereafter; IMF staff–constructed minimum-consumption food basket for Central Equatoria shows similar pattern.
  - Food accounts for 55 percent of representative consumption basket in Juba; Food CPI declined by 14 percent between April and July 2021 and remained 11 percent above its December 2020 level.
  - Global food prices rose by 20 percent between December 2020 and July 2021, offsetting part of appreciation’s downward effect.
- Pass-through regression (selected estimated short-run pass-through):
  - ∆ln(CPI_food)_t = .638 × ∆ln(EXR)_{t−1} + 1.075 × ∆ln(GlobalFood)_{t−2}
  - Regression results: β1 (lag-1 exchange-rate effect) .731** (col 1); .638** (col 2). γ2 (lag-2 global food-price effect) .891 (col 1); 1.075* (col 2). Observations: 58; R-squared: .27 (col 1), .22 (col 2).
- Policy implications:
  - Publish monetary aggregates and BOSS financial statements regularly to reduce uncertainty.
  - Continue refraining from monetary financing and maintain target of 10 percent annual reserve money growth.
  - Use foreign exchange auctions and allow banks to operate freely to aid price discovery.
  - Appreciation alone may produce only modest declines in local food prices given rising global food prices; complementary measures needed.

*Source: 1ssdea2021002 — Excerpts from IMF staff-monitored program documentation and staff report on the Republic of South Sudan.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- A 9-month Staff Monitored Program (SMP) combined with a disbursement under the Rapid Credit Facility (RCF) of 50 percent of quota (about US$174 million) was approved on March 30, 2021 to address BOP challenges and build a track record towards an upper credit tranche financial arrangement.
- This followed a disbursement under the RCF in November 2020 of 15 percent of quota (about US$52 million), which was the first-ever financial disbursement from the Fund to South Sudan.
- Progress continued in implementing the revitalized peace agreement of 2018: unity government formed in February 2020; state governors appointed in June 2020; national parliament sworn into office on August 31, 2021.
- Humanitarian situation: about 60 percent of the population facing high levels of acute food insecurity; historic flooding in August 2020 aggravated conditions.

### SMP objectives and implementation
- SMP pillars: restoring fiscal discipline, removing distortions in the FX market, and strengthening governance.
- Performance under the SMP described as broadly satisfactory.
- Reforms targeted under all end-June structural benchmarks were implemented in early September.
- Two end-June quantitative targets were missed: the ceiling on the cash deficit of the central government and the ceiling on contracting or guaranteeing non-concessional borrowing.

### Financial support and macroeconomic effects
- RCF disbursements and oil price recovery helped ease pandemic impact and weak macroeconomic governance.
- Outcomes:
  - Exchange rate stabilized.
  - Price level started to decline.
  - Government substantially reduced salary arrears (from 5 months at end-March to 1 month at end-June 2021).
- Authorities maintained a policy of no new monetary financing of the deficit.

### FX market reforms and exchange rate developments
- Prior actions for the SMP included:
  - Opening FX auctions to banks (in addition to FX bureaus).
  - Allowing commercial banks to buy and sell FX at market rates.
  - Adjusting the official exchange gradually until convergence with market rates.
- Exchange rate convergence:
  - At SMP start (March 30, 2021): parallel market ~618 SSP/US$, official ~184 SSP/US$ (premium over 200 percent).
  - As of August 30, 2021: parallel market 409 SSP/US$ (an appreciation of about 1/3 since start).
  - As of September 1, 2020: spread between reference and parallel rates around 0.6 percent.
  - Spread between reference and auction rates around 1.2 percent as per last auction on September 13, 2021.
- Official exchange rate discontinued and replaced with a reference rate based on market rates (MEFP ¶14).

### Inflation and food prices
- Impact of exchange-rate appreciation and monetary discipline:
  - 12-month inflation rate in Juba fell to 23 percent in July 2021, from 94 percent in January 2021.
  - Reserve money, adjusted for exchange rate changes, contracted by over 3 percent at end-July 2021 relative to end-March 2021 (Annex I).
  - Price of the representative food consumption basket in Juba (55 percent of overall consumption basket) peaked in April and declined by 14 percent since.
  - Staff analysis suggests exchange-rate appreciation helped insulate South Sudan against the concurrent rise in global food prices; without the appreciation since end-March, food prices would have increased significantly (Annex II).

### Fiscal policy and FY2021/22 draft budget
- Cabinet approved in September a draft FY2021/22 budget that:
  - Is based on conservative revenue assumptions.
  - Refrains from monetary financing of the deficit and contracting new non-concessional external debt.
- Fiscal stance and projections (draft budget highlights):
  - Targets improvement in overall fiscal balance from an estimated deficit of 7 percent of GDP in FY2020/21 to a surplus of 2.6 percent of GDP in FY2021/22 (largely due to higher international oil prices and reduction of Transitional Financial Agreement (TFA) payments to Sudan).
  - Net of TFA payments, government spending in FY2021/22 is about 45 percent higher in real terms relative to FY2020/21.
- Revenue assumptions:
  - Oil price assumption: 60 US$ per barrel (slightly lower than WEO’s GAS assumption of 63 US$).
  - Non-oil revenue projection in the budget: average of 4.8 bn SSP per month vs. recent trend collection average of 6.0 bn SSP per month in Q4FY20/21.
- Expenditure changes:
  - Education spending rises from US$134 million (8 percent of total expenditure) to US$170 million (11 percent of total expenditure).
  - Health spending rises from US$24 million (1 percent of expenditure) to US$69 million (4 percent of total expenditure).
  - Draft budget doubles the wage bill in SSP in FY2021/22 to partially offset cumulative inflation (about 200 percent since last significant salary increase in 2017).
  - Despite increases, spending for salaries remains lower than most Sub-Saharan Africa countries; many government workers had median monthly compensation less than 5 US$/month prior to adjustment.

### Program performance, capacity, and governance
- Program performance broadly satisfactory; institutional capacity is very limited.
- Two missed end-June quantitative targets explained:
  - Ceiling on cash deficit missed due to additional spending financed by an Afreximbank loan contracted in October 2020 and faster-than-targeted reduction of salary arrears using the second RCF disbursement and FX auction gains.
  - Ceiling on contracting new non-concessional borrowing breached when MOFP entered an April 2021 agreement for a US$650 million external non-concessional loan and BOSS issued a sovereign guarantee in July 2021 without prior Fund consultation.
    - Authorities confirmed: no disbursements under the loan agreement and the guarantee has not been called.
    - BOSS canceled the sovereign guarantee; Ministry of Justice confirms guarantee canceled and loan agreement nullified.
    - Authorities taking remedial measures to increase transparency and oversight on public debt contracting and to strengthen debt management framework (MEFP ¶9).
    - Authorities reaffirmed commitment to consult with Fund staff before contracting new non-concessional debt (MEFP ¶10).
- Capacity development needs:
  - Further reforms require stronger institutions, technical skills, and IT systems.
  - Long-term intensive engagement and capacity development by the Fund and development partners will be needed.

### COVID-19 vaccination rollout and health outlook
- As of August 31, 2021:
  - 11,436 Covid-19 cases confirmed with 120 deaths.
  - Country received 132,000 doses (0.9 percent of population) of AstraZeneca vaccines from COVAX; only 56,989 doses administered.
  - COVAX allocation of 732,000 doses would cover about 5.2 percent of the population.
  - Lack of capacity and logistics remain significant barriers to vaccination rollout.

### Staff view, risks, and outlook
- Staff supports completing the first review of the SMP based on policies in the attached Memorandum of Economic and Financial Policies.
- Key policy commitments by authorities:
  - Draft budget for FY2021/22 refrains from monetary financing of the deficit and contracting new non-concessional loans.
  - Bank of South Sudan (BOSS) committed to continued prudent monetary and exchange rate policies to support price and exchange rate stability.
  - Authorities taking further steps to advance governance reforms.
  - Remedial measures taken related to the two missed quantitative targets.
- Risks:
  - Main downside risk: potential return to hostilities due to difficult humanitarian and economic conditions.
  - Upside possibility: peace dividends could prove higher than expected.

*Source: 1ssdea2021002 - EXECUTIVE SUMMARY*

### 10.      The authorities and staff agreed that the near-term outlook is for moderate economic

### 10.      The authorities and staff agreed that the near-term outlook is for moderate economic

### Near-term outlook and risks
- Overall real GDP growth for FY2021/22 is projected at 1 percent.
- Growth is expected to pick up in FY2022/23 as previously closed oil fields reopen as planned.
- Inflation is projected to continue to decline and stabilize at around 10 percent in the medium term, provided money growth remains prudent.
- The recovery of oil prices and the recent SDR allocation have closed the BOP gap for FY2021/22 identified at the time of SMP approval.
- South Sudan’s international reserves are about US$270 million; less than one month of imports, leaving it vulnerable to shocks and large unmet financing needs.
- Risks:
  - Upside: peace dividends on growth and poverty reduction may be higher than currently assumed.
  - Downside: low vaccination rate risking new COVID-19 waves; materialization of political risks; reversal in upward trend of global oil prices; possible resumption of monetary financing of the deficit; interference from vested interests, weak governance and capacity constraints undermining PFM and FX reforms.

### Fiscal policy: measures to close FY2021/22 financing gap
- Revenue mobilization:
  - Staff projects non-oil revenue of at least SSP 72 billion in FY2021/22 (3.2 percent of GDP), compared to SSP 58 billion (2.6 percent of GDP) in the draft budget.
  - Draft Finance Bill measures include: (i) phasing out several tax exemptions; (ii) adjusting the exchange rate used for customs valuations to 90 SSP/US$ from 45 SSP/US$ currently (compared to a market exchange rate of over 400 SSP/US$); (iii) expanding digitalization of the tax collection system; (iv) continuing to adjust custom duty rates towards East African Community (EAC) levels (MEFP ¶8).
  - The revenue impact of these measures is not incorporated in the baseline fiscal projections due to timing uncertainty but represents important upside potential.
- TFA payment to Sudan:
  - Draft budget assumes a US$400 million transfer to Sudan related to the TFA signed in 2012.
  - Information suggests outstanding balance from the TFA is about US$200 million (MEFP ¶8).
  - Baseline fiscal projections assume lower spending in FY2021/22 of about US$200 million or about SSP 80 billion relative to the draft budget (Table 2a).
- Use of SDR allocation for budget financing:
  - Authorities and staff agreed to use US$150 million (out of the total SDR allocation of US$334 million) to finance the FY2021/22 budget; the remainder to boost international reserves.
  - This will create space for priority social spending and to pay for maturing non-concessional borrowing without the need for any new external financing (MEFP ¶11).
  - World Bank–executed cash transfer program targets 65 thousand households (about 3 percent of population); so far 15.2 thousand households have benefited.
- Potential spending cuts:
  - If additional measures are needed, consideration of cuts in infrastructure spending is most realistic.
  - Current allocation: 10,000 barrels per day for road projects; authorities committed to review execution rate and reduce it below 10,000 barrels per day (MEFP ¶11).
  - Authorities requested IMF and World Bank TA to review public investment management framework (MEFP ¶13).
  - Staff recommends protecting spending on education, health and targeted social assistance and exploring ways to expand such spending in a deficit-neutral manner.

### Wage bill and public payroll
- Authorities committed to conduct a comprehensive review of the wage bill before further significant wage increases (MEFP ¶13).
- Staff supported wage bill adjustment to preserve real purchasing power but recommended cleansing the public sector payroll before doubling of salaries in FY2021/22.
- The doubling of salaries in the FY2021/22 budget proceeded under political pressure; future increases should be preceded by:
  - comprehensive assessment of the public sector wage bill, including a census of the public sector payroll;
  - completion of institutional reforms including payment for government workers through bank accounts.
- Objective: appropriately pay productive government workers while keeping the overall wage bill size consistent with public debt sustainability.
- Authorities requested TA from the IMF and the World Bank to assess the public sector wage bill and design a strategy for public sector employment structure, including salary payment (MEFP ¶13).
- Footnote: Ministry of Finance and Economic planning has completed the structure and payment of salaries through bank accounts for some ministries; work underway for the rest.

### Debt management and DSA findings
- External debt stock revised up, reflecting oil advances of US$539 million contracted and drawn in 2018 that were unknown to MOFP.
- Authorities’ measures:
  - Cabinet Decree of October 2020 discontinued contracting new oil advances.
  - Reconstitution of the Loan Committee under the Debt Management Unit of the MOFP; Loan Committee tasked with approving any external debt contract before final approval.
  - Requested TA from the Fund and World Bank on formulating a debt management strategy consistent with maintaining public debt sustainability (MEFP ¶9).
  - Committed to commission an external independent audit to take stock of all outstanding external loans and guarantees and publish results by end-2021 (structural benchmark) and prior to completion of the second review of the SMP (LOI ¶3 and MEFP ¶9).
- DSA baseline:
  - South Sudan’s debt remains sustainable but with a high risk of debt distress (Annex III).
  - Discovery of higher stock of oil advances led to breaches in the debt-service-to-revenue ratio and overall public debt until FY25/26.
  - To maintain debt sustainability, authorities committed to refrain from contracting non-concessional debt including new oil advances, and to gradually reduce the outstanding oil advance balance by about US$100 million per year.
- DSA assumptions note (footnote):
  - Average crude oil prices in calendar year 2021, 2022, and 2023 are projected to be around 64, 63, and 60 US$ per barrel, respectively, compared to 59, 55, and 53 US$ per barrel as of the previous DSA.
  - New DSA baseline utilizes US$150 million of the expected SDR allocation for budget support.

### Money targeting framework and FX market reforms
- Use of SDR allocation for reserves:
  - Authorities and staff agreed to use more than half of the SDR allocation to bolster international reserves.
  - Authorities agreed to use US$184 million to strengthen the external reserve position.
  - Using slightly more than half of the RCF disbursement of April 2021 and adding this share of the SDR allocation would bring international reserves to a projected US$315 million by end-2021 (end of SMP), equivalent to about 0.8 months of prospective imports.
  - Authorities’ medium-term objective: achieve a reserve cover of 4.5 months of imports (MEFP ¶16).
- Reserve money and monetary instruments:
  - BOSS committed to no further monetization of the fiscal deficit and to contain annual reserve money growth to about 10 percent (implemented as 2.5 percent quarterly growth).
  - BOSS plans to introduce term deposits with short maturity, to be followed in 2022 by BOSS bills, to steer reserve money towards targets.
  - BOSS and MOFP signed an MoU on 21 September 2021 committing MOFP to cover the cost of monetary operations from FY22/23 onwards (MEFP ¶15).
- FX market operations:
  - BOSS will continue to use FX auctions for selling and buying FX for price discovery.
  - Plans to develop a medium-term FX budget to estimate a sustainable level of FX interventions.
  - Transition towards building larger foreign exchange reserves consistent with reserve cover objective and clearer communication of policy stance (MEFP ¶16).

### Governance, PFM, and AML/CFT
- Auditor General (AG) actions and RCF audit:
  - AG completed and published audit of spending of the first RCF disbursement in November 2020.
  - Audit suggests up to US$16 million out of the US$52 million disbursed may not have been in compliance with intended purpose of paying salary arrears.
  - Largest discrepancies: variances between budgeted funds and actual transfers from Central Government to states (US$8.6 million) and funds used to finance State Conditional Loans (US$3.8 million).
  - Report recommends measures to ensure fidelity of payments against earmarked monies; authorities committed to develop an action plan with IMF and World Bank staff.
  - AG to complete an audit of spending financed by the second RCF by end-2021; authorities published monthly reports on RCF fund use (MEFP ¶18).
  - Note: RCF disbursements have not been used for COVID-19 spending to date; reports do not reference COVID-19 procurement contracts or beneficial owners.
- Strengthening anti-corruption and AML/CFT:
  - Medium-term recommendation: criminalize corruption offenses and implement an effective asset declaration regime in line with international best practices; work underway with World Bank TA.
  - South Sudan under Increased FATF Monitoring to address strategic deficiencies in AML/CFT regime, posing financial and reputational risks.
  - Since June 2021 South Sudan subject to an agreed FATF action plan; approved as observer to ESAAMLG and committed to a Mutual Evaluation by ESAAMLG.
  - Financial Intelligence Unit established under BOSS with a three-year action plan.
- Safeguards and BOSS transparency:
  - BOSS published audited financial statements for FY2011–18 (audit reports contain a disclaimer of opinion).
  - Prior action: BOSS adopted action plan to implement key recommendations of the IMF safeguards assessment mission by end-2021, including:
    - finalize and publish audited statements for 2019 and 2020;
    - hire staff with auditing and risk management background and engage an audit firm to co-source internal audit activities;
    - publish audit of BOSS internal controls, including tracking of encumbrances and guarantees;
    - engage external consultant or request IMF TA to assist in developing a strategy for currency operations;
    - contract reputable manufacturer through tender for currency printing with bid reviews;
    - conduct cost-benefit analysis of replacing low denomination banknotes with coins (MEFP ¶21).

### SMP modalities, targets, and prospects for ECF
- Staff proposals for SMP review and extension:
  - Set two prior actions for completion of first SMP review.
  - Set quantitative targets (QTs) for end-October as basis for second review (MEFP Table 1).
  - Extend the SMP to end-January 2022.
- Prior actions for first SMP review:
  - (i) complete audit of spending financed by RCF disbursed in November 2020 and publish findings and recommendations;
  - (ii) adopt an action plan to address key recommendations of the Safeguards Assessment mission (as in ¶21).
- Proposed end-October QTs adjustments:
  - (i) increase the floor on NIR relative to original target for end-September for the part of SDR allocation (US$184 million) agreed to be saved as reserves;
  - (ii) adjust upwards the ceiling of the cash deficit for the central government to account for higher end-June deficit relative to program target;
  - (iii) adjust upwards the floor on salary arrears to reflect faster-than-anticipated clearance of arrears by authorities.
- Medium-term BOP and financing needs:
  - BOP gap for FY21/22 identified at SMP approval is estimated closed due to oil price recovery and SDR allocation.
  - South Sudan has significant medium-term BOP gaps and large unmet financing needs to support poverty reduction and inclusive growth; will require financial support from development partners including the IMF.
- Progress toward potential ECF:
  - SMP-supported reforms have stabilized the economy, reduced FX market distortions, and initiated governance reforms.
  - Remaining steps required for a potential ECF request at end of SMP include:
    - (i) sustaining fiscal and monetary discipline to consolidate macro stabilization gains;
    - (ii) consolidating FX market liberalization by bolstering reserves and expanding monetary instruments;
    - (iii) strengthening debt management and oversight;
    - (iv) deepening PFM reforms and implementing Safeguards Assessment recommendations;
    - (v) strengthening anti-corruption and AML/CFT frameworks.
  - Staff will prepare as part of the second SMP review a Country Engagement Strategy to integrate policy advice, financial support, and capacity building for medium- to long-term Fund engagement.

### Capacity development
- Authorities have requested IMF and World Bank TA on: public investment management framework review; debt management strategy formulation; assessment of the public sector wage bill; and assistance on safeguards and currency operations (MEFP ¶9, ¶13, ¶21).
- BOSS has established a Financial Intelligence Unit and developed a three-year action plan; authorities are engaging with ESAAMLG and FATF processes.

*Source: 1ssdea2021002 - Excerpt (Sections 10–F) of Republic of South Sudan SMP review*

### 25.      The Fund is providing extensive technical assistance to the South Sudan but limited

### 1ssdea2021002 - 25.      The Fund is providing extensive technical assistance to the South Sudan but limited

### Technical assistance and absorptive capacity
- The Fund is providing TA in many areas, including on PFM reforms, revenue mobilization, revenue administration, operationalizing the money targeting framework, liquidity forecasting, and macroeconomic statistics (see Table 7 and Annex II of IMF Country Report No. 21/70).
- Authorities have requested further TA on debt management, public sector pay assessment, and public investment management.
- Traction of CD has improved recently but remains an issue due to the lack of leadership, weak governance, low morale and high staff turnover.
- Mission discussed strategies with the authorities to improve absorptive capacity to best make use of available TA.

### Macroeconomic outlook, risks, and humanitarian situation
- South Sudan’s economy is projected to recover, but there are significant downside risks.
- Higher oil prices and the recent reduction of wage arrears are boosting domestic demand and contributing to higher non-oil real GDP growth.
- Downside risks highlighted: a possible breakdown of the peace process or a new wave of COVID-19 infections.
- Humanitarian situation: about 60 percent of the population facing high levels of acute food insecurity.

### FX reforms, inflation, and recent stabilization
- FX reforms introduced at the beginning of the SMP achieved convergence of the official and market exchange rates, eliminating the significant premium in the parallel market relative to the official rate.
- The market exchange rate has appreciated since the start of the SMP at end-March 2021 as a result of macro stabilization and FX market reforms.
- This contributed to a significant decline in inflation, with domestic prices (including those for food) falling in recent months.

### Fiscal policy stance and recommendations
- Draft budget for FY2021/22 is based on conservative revenue assumptions and refrains from monetary financing of the deficit and contracting new non-concessional external debt.
- Staff urges authorities to proceed expeditiously with envisaged reviews of spending on wages and infrastructure to improve spending efficiency and maintain public debt sustainability.
- To preserve exchange rate and price stability, BOSS should adhere to its plans for steady growth in reserve money (10 percent per year) and continue to use FX auctions when selling and buying FX to facilitate price discovery.

### Public debt concerns and debt management recommendations
- Discovery of previously unknown contracts for oil advances implies a greater-than-expected burden on public finances.
- The loan agreement of US$650 million and issuance of a sovereign guarantee without consultation with Fund staff indicate weaknesses in central control over debt contracting and management.
- Going forward recommendations:
  - No new debts should be incurred without the approval of the newly established Loan Committee, the Cabinet of Ministers, and the National Assembly.
  - No new oil advances should be contracted.
  - Authorities encouraged to restructure outstanding oil advances where possible, seek a steady reduction in the outstanding stock of such obligations, and create greater transparency about the use of oil exports.

### PFM and governance reforms
- Initiation of PFM reforms is promising, including:
  - improving cash management practices,
  - strengthening spending controls,
  - starting implementation of the TSA,
  - discontinuing use of nontransparent oil advances for budget financing,
  - starting publication of budget implementation updates,
  - initiating reforms to strengthen the AML/CFT framework.
- Recent publication of the audit by the Auditor General on the use of RCF funds disbursed in November 2020 is an important step toward fiscal transparency and accountability.
- Staff urges effective follow-up by appropriate institutions on audit findings.
- Staff also urges prompt implementation of main recommendations of the Safeguards Assessment report and to address necessary reforms in the AML/CFT action plan to bolster the ability to investigate and prosecute money laundering, corruption and other major financial crimes and protect the integrity of the financial system.

### Program support, financing needs, and engagement
- Staff supports authorities’ requests for completion of the first review of the SMP given strong performance and commitment to program objectives.
- South Sudan needs significant BOP support over the medium term: very low reserves and large unmet financing needs that are essential to support poverty reduction, economic convergence, and inclusive growth.
- If performance under the SMP is satisfactory, the second review of the SMP could be combined with a request for an ECF.
- Staff will prepare a Country Engagement Strategy to help integrate policy advice, financial support, and capacity building to anchor Fund engagement in the medium to long term.

### Key statistics and projections (selected figures preserved exactly as in source)
- Population (millions): 13.6; 14.0; 14.4; 14.8; 15.2; 15.7
- Real GDP (percent change): 13.2; -5.4; 1.0; 5.2; 7.4; 4.9
- Oil real GDP (percent change): 26.4; -5.9; -2.5; 5.8; 9.1; 2.8
- Non-oil real GDP (percent change): 0.5; -5.0; 3.2; 4.8; 6.0; 7.0
- Inflation (average): 33.3; 43.1; 24.0; 16.0; 12.1; 11.7
- Official exchange rate (SSP/US$, average): 160.8; 190.7; 400.0; 440.0; 484.0; 532.4
- Gross foreign reserves (millions of US dollars): 47.9; 172.2; 353.6; 445.2; 543.8; 597.3
- Gross foreign reserves (in months of imports): 0.1; 0.5; 0.9; 1.0; 1.1; 1.2
- Total revenues and grants (percent of GDP): 29.5; 31.6; 29.6; 31.9; 33.0; 33.6
- Total expenditure (percent of GDP): 39.4; 38.6; 27.0; 30.0; 31.2; 32.4
- Overall balance (cash) (percent of GDP): -9.8; -7.0; 2.6; 1.9; 1.8; 1.2
- Total public debt (percent of GDP): 51.5; 58.0; 52.2; 47.7; 42.3; 39.2
- Oil production (millions of barrels): 62.1; 58.4; 56.9; 60.2; 65.7; 67.5
- South Sudan's oil price (U.S. dollars per barrel): 49.3; 51.5; 63.1; 63.2; 64.5; 65.8
- Nominal GDP (billion US$): 4.9; 5.0; 5.3; 5.5; 5.9; 6.0
- Current account balance (including grants) (percent of GDP): -16.9; -5.0; 2.7; 3.2; 2.2; -0.4
- Current account balance (excluding grants) (percent of GDP): -36.7; -30.9; -20.3; -26.2; -27.6; -30.8

*Source: IMF staff report excerpts from the Republic of South Sudan country documentation.*

### Annex I. What Explains Changes of the Exchange Rate in the

### Annex I. What Explains Changes of the Exchange Rate in the Parallel Market in the Republic of South Sudan?

### Exchange-rate dynamics and context
- South Sudan operates a floating exchange-rate regime; the exchange rate changes on a daily basis in response to demand and supply factors.
- Heavy reliance on oil and the inherent volatility of oil prices imply shocks in the FX market in South Sudan are expected to be more pronounced than in most other countries.
- The parallel-market exchange rate appreciated from over 600 SSP/US$ at the time the SMP was adopted in March 2021 to just over 400 SSP/US$ by May and has remained around this value since.

### Staff analysis and main findings
- The level of the parallel-market exchange rate is a concern only if it is misaligned relative to fundamentals (for example, if it led to FX shortages when overvalued) or if there are large abrupt changes.
- Preliminary staff analysis suggests the current level of the exchange rate is broadly consistent with the evolution of fundamentals since the pandemic.
  - Evolution of the parallel-market exchange rate was closely correlated with that of M2 until September 2020.
  - The Bank of South Sudan (BOSS) stopped monetary financing in October 2020, but the parallel-market rate continued to rise for a few months, reflecting uncertainty on the rate of money growth due to lack of publicly available information on monetary aggregates until May 2021 when BOSS resumed publication.
  - The overshooting of the parallel-market rate during that episode appears to have been mostly, if not all, corrected; the current level seems what the quantity theory of money would have predicted (M0 and M2 lines).

### Incorporating oil revenue
- Extending the analysis to include oil revenue (f(M2, Oil$)) supports the assessment that fundamentals explain much of the exchange-rate evolution.
  - The f(M2, Oil$) line suggests a slightly higher depreciation in October and November relative to what is suggested by growth of M0 or M2, but does not change the tentative conclusion.
- Conclusion: the parallel-market exchange rate overshot fundamentals during September 2020–March 2021, but is now back at a broadly “fair value.”
  - The level of the exchange rate suggested by M0, M2, and f(M2, Oil$) is somewhere in the 400–500 SSP/US$ range.

### Annex II — Exchange-rate pass-through into Juba food prices (key findings)
- Between March and July 2021 the parallel-market exchange rate appreciated by 35 percent, from 616 to 398 SSP/US$.
- South Sudan relies on imports for a sizeable portion of food demand; appreciation would be expected to exert downward pressure on domestic food prices.
- Observed movements:
  - The official Food CPI for Juba reached a peak in April 2021 and has been declining since.
  - An IMF staff–constructed minimum-consumption food basket for Central Equatoria shows a similar pattern: leveling off in spring and decline since April.
  - Food accounts for 55 percent of the representative consumption basket in Juba; the decline in Food CPI since April accompanied a decline in overall CPI.
- Magnitude of pass-through has been modest relative to historical experience:
  - Food CPI declined by 14 percent between April and July 2021 and remained 11 percent above its December 2020 level.
  - Global food prices rose by 20 percent between December 2020 and July 2021, which offset part of the appreciation’s downward effect.

### Pass-through regression, specification, and results
- Data and sample: monthly Juba Food CPI, parallel exchange rate (SSP/US$), and global food-price index for December 2015 to December 2020.
- Estimated regression (lag selection: start with L = 2, drop insignificants at 15 percent):
  - Estimated short-run pass-through used to derive expected changes from January 2021 onwards:
    - ∆ln(CPI_food)_t = .638 × ∆ln(EXR)_{t−1} + 1.075 × ∆ln(GlobalFood)_{t−2}
- Selected regression output (columns (1) and (2) summary shown in source):
  - β1 (lag-1 exchange-rate effect): .731** (column (1)); .638** (column (2))
  - β2 (lag-2 exchange-rate effect): .198 (column (1), not significant in final)
  - γ2 (lag-2 global food-price effect): .891 (column (1)); 1.075* (column (2))
  - Observations: 58; R-squared: .27 (col 1), .22 (col 2)
  - Robust standard errors reported in parentheses; significance: * at 1%, ** at 5%; *** at 10%.

### Comparison of actual and predicted Juba food-price changes (Jan–Jul 2021)
- Combining the estimated pass-through with observed exchange-rate appreciation and global food-price increases yields expected changes in the Juba Food CPI roughly in line with actual observations from December 2020 to July 2021.
- Decomposition:
  - Exchange-rate appreciation exerted downward pressure on Juba food prices since May 2021.
  - Rising global food prices exerted upward pressure, producing a net increase in prices since December 2020 and only a modest decline from April levels.

### Policy-relevant implications (as reflected in the broader document)
- Monetary and FX policy measures that enhance transparency and anchor expectations can help align market outcomes with fundamentals:
  - Publication of monetary aggregates and BOSS financial statements at regular intervals to reduce uncertainty about money growth.
  - Continued refraining from monetary financing of the deficit and maintaining a target of 10 percent annual reserve money growth to guide expectations on exchange rate and inflation (as stated in the Letter of Intent).
  - Foreign exchange auctions and allowing banks to operate freely in the FX market to aid price discovery.
- Given the offsetting impact of global food-price increases, appreciation alone may produce only modest declines in local food prices; complementary measures (e.g., addressing import costs, improving market functioning) may be required to deliver larger domestic price declines.

*International Monetary Fund; Annex I and Annex II, staff analysis and regression results as provided in the source content.*

### 3.5 billion per month earlier in the year, reflecting improved collection due to advances in

### 1ssdea2021002 - 3.5 billion per month earlier in the year, reflecting improved collection due to advances in

### Fiscal performance and end-June 2021 targets
- Central government primary cash budget deficit at end-June 2021: SSP 25.9 billion (ceiling: SSP 10 billion).
  - Contributors to breach: additional spending on road and agriculture projects; transfers to the Youth and Women Empowerment Fund financed by the Afreximbank loan contracted in October 2020; faster-than-targeted reduction of salary arrears financed by the RCF disbursed in April 2021.
- MOFP entered agreement for an external non-concessional loan worth US $650 million in April 2021 without prior consultation with Fund staff; BOSS issued a sovereign guarantee related to this loan in July 2021.
  - No amounts disbursed under the loan agreement; guarantee has not been called.
  - Sovereign guarantee cancelled; Ministry of Justice confirms guarantee canceled and loan agreement nullified.
- Commitment reaffirmed: no other non-concessional external loan contracted or guaranteed since the start of the SMP; commitment to consult Fund staff before contracting any new non-concessional debt.

### Debt management, strategy, and audit commitments
- Historical context: large stock of expensive non-concessional debt reflecting limited central oversight.
- Institutional measures:
  - Loan Committee reconstituted under the Debt Management Unit at MOFP (Presidential decree signed October 28, 2019); tasked with approving external debt contracts before Cabinet and Assembly approval, consistent with the PFM Act of 2011.
- FY2021/22 budget proposals:
  - Reduce principal of outstanding commercial debts by US$250 million.
  - Reduce principal of oil advances by about US$150 million.
  - Seek to restructure by end-2021 all remaining oil advances as needed.
- Technical assistance and audit:
  - Request IMF technical assistance during remainder of SMP on reducing cost of servicing existing debts, formulating a debt management strategy, and enhancing debt data recording, monitoring, reporting and disclosure.
  - Commit to commission, with the National Audit Chamber and in consultation with IMF staff, an audit by an external independent auditor to take stock of all outstanding external loan agreements and guarantees and to complete and publish results by end-2021 (proposed structural benchmark).

### Policy on new non-concessional borrowing
- Commitment: will not contract or guarantee new non-concessional loans for duration of SMP unless either:
  - (i) debt management operations improve key liquidity and/or solvency debt burden indicators without adversely affecting the risk rating; or
  - (ii) loans finance critical investment projects with high social and economic returns integral to national development or for critical COVID-related spending, and concessional financing is not available.
- Further constraints:
  - Seek to avoid non-concessional borrowing with high effective interest rates due to hidden fees and short maturities.
  - Continue to refrain from contracting oil advances (Cabinet Resolution of October 2020).
  - Will consult IMF staff prior to contracting or guaranteeing any new non-concessional debt.

### Revenue measures, expenditure priorities, and use of SDR allocation
- Revenue and fiscal space drivers:
  - Higher international oil prices; exploring avenues to raise oil output.
  - Improved non-oil revenue collection and measures in the draft Finance Bill to increase non-oil revenue, including:
    - Adjust exchange rate for assessing customs duties from 45 SSP/US$ to 90 SSP/US$ as a first step toward aligning with market rate currently over 400 SSP/US$.
    - Increase customs duty rates on several products to align with East African Community external tariffs.
    - Further digitalization of the tax system.
  - Payments to Sudan under the Transitional Financial Arrangement (TFA) expected to end around mid-FY2021/22; budgeted US$400 million for TFA contingencies but expected outstanding amount as of end-July 2021 closer to US$200 million.
- Use of SDR allocation:
  - South Sudan received around US$334 million (6.8 percent of GDP) from latest SDR allocation.
  - Propose to use US$150 million to support FY2021/22 budget to finance priority social spending and maturing non-concessional borrowing without new external financing.
  - Remainder (about US$184 million) to be used to bolster foreign exchange reserves.
  - Commit to transparency: communicate plans for use, publish special accounting and reports on utilization, and have MOU between MOFP and BOSS stipulating responsibilities for servicing IMF obligations for this use of SDR proceeds.

### Social spending, public wages, and public investment management
- Fiscal priorities in FY2021/22 budget:
  - Increase allocations for education by US$36 million and health by US$45 million relative to last year.
  - Draft budget doubles the wage bill in SSP in FY2021/22 relative to FY2020/21.
- Measures to contain fiscal impact:
  - Review execution rate of public investment and reduce use of oil exports earmarked for road infrastructure below current target of 10,000 barrels per day.
  - Higher oil price expected to enable maintaining investment spending even with lower barrels earmarked.
- Public sector wage and payroll reforms:
  - Commit to refrain from further salary increases until cash salaries have been phased out and a census of the public-sector payroll conducted.
  - Seek reduction in number of workers in parallel to future wage increases to have appropriately paid productive government workers while keeping wage bill consistent with public debt sustainability.
  - Request TA from IMF and World Bank to assess public sector wage bill and to assess public investment management framework.

### Exchange rate, monetary policy, and reserves
- Exchange rate regime and monetary policy:
  - Official exchange rate discontinued and replaced with a reference rate based on weighted average of transaction rates in foreign exchange by banks and FX bureaus.
  - Banks can operate freely in FX market; foreign exchange auctions to continue to aid price discovery.
  - Public commitment to current target of 10 percent annual reserve money growth to guide private-sector expectations on exchange rate and inflation.
  - Policy of no further BOSS credit extended to the government to continue.
- New monetary instruments and operations:
  - BOSS plans to introduce by end-2021 term deposits with short maturity; followed in first half of 2022 by BOSS bills.
  - MOU signed on September 21, 2021 between BOSS and MOFP commits MOFP to cover cost of such monetary operations from FY2022/23 onwards.
- Use of SDR remainder to build reserves and reserve targets:
  - After allocating US$150 million to repay high-interest debts, remaining amount about US$184 million to bolster FX reserves.
  - Current foreign reserves: about 0.4 month of imports.
  - Proposed use of SDR allocation will raise reserves to 0.8 months of imports.
  - Long-term objective: reserve cover of 4.5 months of imports (consistent with EAC convergence criterion).
  - Plan to develop a medium-term FX budget to estimate sustainable level of interventions and reconcile reserve path with inflows/outflows.
- Locked accounts access:
  - Outstanding balance on locked accounts at BOSS: US$ 90 million.
  - Commercial banks will be allowed to access these accounts subject to compliance with prudential limits on FX net open positions and minimum reserve requirements.

### Governance, transparency, and AML/CFT measures
- BOSS institutional capacity and transparency:
  - Audited BOSS financial statements for 2011-18 published on BOSS website; audits for 2019-20 expected to be published before end of year.
  - Data on monetary aggregates and FX auction outcomes published regularly on BOSS website.
- RCF audit and reporting:
  - Auditor General’s report on RCF disbursed in November 2020 finds up to US$16 million out of US$52 million disbursed may not have been spent to repay salary arrears; recommendations made to improve compliance.
  - MOFP commits to publish monthly reports on use of RCF funds on MOFP website, including procurement contracts, successful bidders and ex-post verification where applicable.
  - MOFP commits to facilitate an audit of spending financed by the RCF disbursed in April 2021 and provide funding to permit completion by end-2021.
- Treasury Single Account (TSA) and cash management:
  - Implementation of a TSA completed as originally envisaged by end-June structural benchmark; extension to all central government accounts at commercial banks by end-2021.
  - MOU between MOFP and BOSS clarifies TSA arrangements and daily reporting of consolidated balances to Treasury; Treasury payments constrained by available balance previous day minus a buffer.
  - Cash Management Unit (CMU) established in MOFP Treasury with at least two full-time staff; will provide monthly cash plan updates and comprehensive reviews starting September 2021.
- IMF safeguards and internal audit actions at BOSS (prior actions and timetable):
  - Coordinate with external auditors to finalize audits of BOSS for 2019 and 2020 and publish by end-Oct 2021.
  - Hire additional staff with backgrounds in audit and risk management.
  - Engage an audit firm to co-source internal audit activities and build capacity.
  - Publish by end-November 2021 results of the audit of BOSS’ internal controls over administration and reconciliation of bank accounts in FY2020.
  - Engage by end-November 2021 an external consultant or request IMF TA to assist in developing a strategy to address currency operations vulnerabilities; send tender requests to reputable currency manufacturers by end-November 2021 and conduct review of bids; conduct by end-November 2021 a cost-benefit analysis of replacing low denomination banknotes with coins.
- AML/CFT strengthening:
  - Commit to urgently pursue items in AML/CFT Action Plan agreed with FATF.
  - Commit to identify and designate by end of 2021 the regulatory authorities who will assume AML/CFT supervisory responsibilities for financial institutions and designated non-financial businesses and professions.

### Key quantitative targets and outcomes (selected entries from Table 2)
- Central government's primary cash budget deficit (ceiling: in billions of SSP)
  - SMP Target End-Jun 2021: 10.0
  - Actual End-Jun 2021: 25.9
  - SMP Target End-Sep 2021: 20.0
  - Proposed End-Oct 2021: 35.9
- Central bank net credit to the central government (ceiling: in billions of SSP)
  - SMP Target End-Jun 2021: 0.0
  - Actual End-Jun 2021: 0.0
  - SMP Target End-Sep 2021: 0.0
  - Proposed End-Oct 2021: 0.0
- Contracting or guaranteeing of non-concessional borrowing (continuous ceiling: in millions of U.S. dollars)
  - SMP Target End-Jun 2021: 0.0
  - Actual End-Jun 2021: 650
  - SMP Target End-Sep 2021: 0.0
  - Proposed End-Oct 2021: 0.0
- Average net international reserve (floor: in millions of U.S. dollars)
  - SMP Target End-Jun 2021: 85.0
  - Actual End-Jun 2021: 131.0
  - SMP Target End-Sep 2021: 100.0
  - Proposed End-Oct 2021: 284.0
- Clearance of salary arrears (floor: in billions of SSP)
  - SMP Target End-Jun 2021: 7.3
  - Actual End-Jun 2021: 14.5
  - SMP Target End-Sep 2021: 11.0
  - Proposed End-Oct 2021: 14.5
- Average reserve money growth (ceiling: in percentage points)
  - SMP Target End-Jun 2021: 5.0
  - Actual End-Jun 2021: -2.6
  - SMP Target End-Sep 2021: 10.0
  - Proposed End-Oct 2021: 10.0

*Republic of South Sudan — Excerpt from IMF staff-monitored program documentation.*

### 1. Completing the audit of the spending of the November 2020 RCF disbursement

### 1. Completing the audit of the spending of the November 2020 RCF disbursement

### Prior actions and implementation status
- Prior Action: Completing the audit of the spending of the November 2020 RCF disbursement and publish its findings and recommendations — Completed.
- Prior Action: Adopting a timetable to address the key recommendation of the safeguards assessment mission detailed in ¶20 — Completed.
- Cabinet to adopt a PFM concept note that includes a 2021 Immediate Action Plan for reforms in this area consistent with R-ARCSS PFM priorities — Jun-21 Met.
- Consolidate GoSS bank accounts in BOSS, allowing deficits on Treasury bank accounts covered from surpluses on other MOFP bank accounts — Jun-21 Not met. Implemented with delay in September 2021.
- Cash Management Unit (CMU) will be formally established within the Treasury with a dedicated team of staff — Jun-21 Met.
- 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 — Jun-21 Not met. Implemented with delay in September 2021.
  - b. Gradually roll-out to selected MDAs — Sep-21 In progress.
- CMU will make a comprehensive review of the expenditures in the cash plan and together with the Budget make a proposal for programming the expenditures according to GoSS priorities — Sep-21 In progress.
- Conduct an audit by an external independent auditor to take stock of all outstanding external loan agreements and guarantees and publish the results of the audit (¶9) — Dec-21 Proposed.

### Technical Memorandum of Understanding — Quantitative targets and key definitions
- SMP monitoring framework:
  - Six quarterly quantitative targets (QTs) and five structural benchmarks (listed in Tables 1 and 2 of the MEFP). QTs are expressed as cumulative changes since the beginning of the SMP, March 30, 2021.
  - The QTs are:
    - ceiling on the central government’s primary deficit;
    - ceiling on the central bank net credit to the central government;
    - continuous ceiling on contracting or guaranteeing of external non-concessional borrowing;
    - floor on the average net international reserves (NIR);
    - floor on clearance of salary arrears;
    - ceiling on the average reserve money growth.
- Measurement and valuation rules:
  - Primary cash budget deficit = net foreign financing + net domestic financing − interest payments.
  - Net foreign financing = disbursements − amortization of external loans (concessional and non-concessional), internationally-issued bonds, and other liabilities to nonresidents.
  - Net domestic financing = net financing from the Bank of South Sudan (BOSS) and other depository corporations (ODCs); claims/liabilities in foreign currency valued at the program exchange rate of 174 SSP/US$.
  - Net credit to central government by BOSS excludes the part of the new SDR allocation used for budget financing; foreign-currency claims/liabilities valued at 174 SSP/US$.
  - NIR of the BOSS = reserve assets of BOSS − short-term external liabilities of BOSS; excludes pledged/encumbered foreign assets and SDR allocations.
  - For program-monitoring, convert SDR, EUR and GBP stocks into U.S. dollars at program exchange rates of, respectively, 1.44, 0.83 and 0.71 against the US dollar.
  - NIR limits for end-June and end-September 2021 are defined as cumulative changes of the average NIR daily stocks during, respectively, June and September 2021 relative to the NIR stock at end-March 2021.
  - Reserve money = local currency outside banks + total reserves for banks at the BOSS; components denominated in foreign currency valued at 174 SSP/US$.
- Non-concessional external debt:
  - Debt definition per 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, calculated using the unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97).
  - Continuous ceiling on contracting/guaranteeing non-concessional external borrowing assessed from March 30, 2021.
  - Exceptions to zero program target for non-concessional debt may apply for (i) debt management operations that improve key liquidity and/or solvency debt burden indicators without adversely affecting the risk rating; or (ii) transactions financing critical investment projects integral to national development or critical COVID-related spending when concessional financing is not available.
- Clearance of salary arrears measured by net change in stock of salary arrears at end-June and end-September 2021 relative to end-March 2021.

### Program monitoring and reporting requirements
- Quarterly assessment report to be prepared by the authorities at the end of each quarter focusing on QTs and structural benchmarks.
- Implementation/execution of structural benchmarks reported to IMF staff within two weeks after their programmed implementation date; status of other structural program measures reported within the same time frame.
- Authorities will consult IMF staff on any new external debt proposals and report signing of any new external debt arrangements and their conditions.
- Table 1 reporting calendar (selected items and submission lags):
  - 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.
  - BOSS:
    - Projected external debt service — Quarterly — 4 weeks.
    - BOSS balance sheet — Monthly — 4 weeks.
    - Monetary Survey — Monthly — 4 weeks.
    - Detailed FX Auction Results — Weekly — 1 week.

### Debt Sustainability Analysis (DSA) update — findings and scenarios
- Risk ratings:
  - Risk of external debt distress — High.
  - Overall risk of debt distress — High.
  - Granularity in the risk rating — Sustainable.
  - Application of judgment — No.
- Key findings:
  - South Sudan’s debt remains assessed to be sustainable with a high risk of debt distress for both external and overall public debt.
  - Relative to March 2021 assessment, the risk of debt distress has increased despite the new SDR allocation partly used for debt management.
  - The increase in risk reflects the discovery of higher outstanding oil advances contracted in 2018 but not reported to MOFP and thus not included in the March 2021 DSA.
  - Temporary breaches in three out of seven debt indicators under the baseline scenario: debt service-to-revenues ratio of external public debt, debt service-to-exports ratio of external public debt, and present value (PV) of debt-to-GDP ratio of overall public debt. 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 respective thresholds from 2026/27 onwards, conditional on robust oil prices and authorities’ policy adjustment to cap the deficit with increased concessional financing.
  - Risks are tilted to the downside: implementation of policy adjustment, limited access to concessional loans, oil price volatility, and sustainability of relative peace and security.
- Specific revisions and assumptions:
  - Newly discovered outstanding oil advance of about US$539 million contracted in 2018 (found by the newly established Debt Management Unit (DMU)).
  - This DSA update assumes a 10-percent effective interest rate on the newly discovered oil advance.
  - Compared with the March 2021 DSA, the current DSA incorporates significantly higher oil prices throughout the forecast period in line with revised WEO projections and a faster convergence of exchange rates in the market.
  - In the previous DSA baseline there were temporary breaches in two out of seven indicators (debt service-to-revenues ratio of external public debt in FY20/21 to FY23/24 and present value of debt-to-GDP ratio of overall public debt in FY20/21). In the current DSA the higher stock of oil advances prolongs the breach in the debt-service-to-revenue ratio and the overall public debt breach to FY25/26.
- Authorities’ strategy and assumed path for oil advances:
  - Authorities committed to refrain from contracting highly non-concessional debt including new oil advances (discontinued following a Council of Ministers Resolution of October 2020).
  - DSA assumes authorities will reduce outstanding oil advances by about US$100 million per year in FY2021/22 to FY2022/24.
  - DSA assumes authorities will reduce outstanding oil advances by about US$200 million per year in FY2024/25 and FY2025/26.
  - Authorities expect to fully pay down the outstanding oil advances by June 2026.
- Debt-carrying capacity indicator:
  - South Sudan’s debt-carrying capacity remains rated “weak” with composite indicator score of 1.29 according to the April 2021 vintage of the World Economic Outlook and the World Bank’s 2019 Country Policy and Institutional Index.

*Source: 1ssdea2021002 - 1. Completing the audit of the spending of the November 2020 RCF disbursement (TMU and DSA excerpts).*

### 4.      The authorities are taking steps to strengthen the institutional framework for debt

### 1ssdea2021002 - 4.      The authorities are taking steps to strengthen the institutional framework for debt

### Institutional actions on debt approval and oversight
- The authorities have tasked the recently reconstituted Loan Committee under the Debt Management Unit of the MOFP to approve any external debt contract by South Sudan before they are sent for final approval by the Council of Ministers and the Assembly.
- The authorities have committed to commissioning an independent audit that will take stock of all outstanding external loan agreements and guarantees by end-2021.

### Technical assistance and debt strategy
- The authorities have requested TA from the Fund and the World Bank on reducing the cost of servicing debts and formulating a debt management strategy consistent with maintaining public debt sustainability.

### DSA baseline and financing assumptions
- The new DSA baseline utilizes US$150 million of the expected SDR allocation for budget support.
- Footnote guidance: For the 10-percent effective interest rate to hold, the level of oil advance facility should be reduced to the level of outstanding amount on an annual basis. Since some fees are proportional to the level of facility (which can be much larger than the outstanding loan), effective interest rate would be much higher for small amount of outstanding loan but high level of loan facility.

### Related analytical outputs in the DSA (summary of relevant diagnostics and projections)
- The document contains decompositions of public debt by creditor and a range of macroeconomic assumptions and projections (e.g., Real GDP growth, Real oil GDP growth, Current Account Balance, Exports and Imports as percent of GDP, Primary deficit, Revenue and grants, SSD Oil prices) across vintages (Sep 2021 DSA and Mar 2021 DSA) and projection years (including FY20/21–22/23 and beyond).
- Stress tests and tailored scenarios are presented for FY2022–32 covering: commodity price shocks, combined shocks, natural disasters, and other tailored tests. Notes specify that all additional financing needs generated by shocks are assumed to be covered by PPG external MLT debt in the external DSA and that default terms of marginal debt are based on baseline 10-year projections.
- The DSA includes baseline projections and sensitivity analyses for key debt indicators (PV of PPG external debt-to-GDP, PV of PPG external debt-to-exports, PPG debt service-to-exports, PPG debt service-to-revenue) and public sector debt sustainability indicators (PV of public debt-to-GDP, PV of public debt-to-revenue and grants, debt service-to-revenue and grants, gross financing need) for FY2021–42.

*Source: IMF staff report text and accompanying DSA tables and figures included in the provided content unit.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1ssdea2021002.pdf_