## 1ssdea2023001 ## Source details **Canonical URL:** [1ssdea2023001](https://www.imf.org/-/media/files/publications/cr/2023/english/1ssdea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1ssdea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1ssdea2023001.pdf.json) --- ### Humanitarian situation and immediate needs - About two-thirds of South Sudan’s population is experiencing severe food insecurity, the highest level since independence. - Floods and displacement: - In 2022, floods estimated to have affected nearly 1 million people by end-September. - Internally displaced people increased to 2.2 million (in addition to 2.3 million refugees in neighboring countries). - Floods destroyed livestock, crops, roads, schools, and health facilities in 8 out of 10 states. - About 8.3 million people (about two-thirds of the population) experiencing acute food insecurity. - Authorities’ emergency financing request: - RCF Food Shock Window (FSW) disbursement of 35 percent of quota: SDR 86.1 million (about US$115.7 million). - Plan to channel part of the FSW disbursement via World Food Programme (WFP) and International Organization for Migration (IOM) for immediate humanitarian assistance: - US$15 million to WFP. - US$5 million to IOM. - Authorities designate about 63 percent of the proposed RCF disbursement to bolster Bank of South Sudan (BoSS) reserves; about 37 percent for budget support (of which US$20 million will be channeled through WFP and IOM). ### Macroeconomic developments and outlook - Output and production: - Oil production: reached 170 thousand barrels/day (bpd) in FY2019/20; declined to 156 thousand bpd in FY2021/22; expected to average 150 thousand bpd in FY2022/23. - Real GDP: estimated to have dropped by 2.9 percent in FY2021/22; projected growth of -0.4 percent in FY2022/23 (other excerpts note -0.3 percent and 0.3 percent in places). - Inflation and exchange rate: - Reserve money increased by about 72 percent between April and July 2022 after prior low growth. - Large monetary expansion triggered a 50 percent depreciation of the SSP. - Average inflation expected to rise to 16.5 percent in FY2022/23 and gradually decline to single digits if prudent money growth is restored. - Fiscal aggregates and financing: - Oil revenues: estimated SSP 853 billion (27 percent of GDP) in FY2021/22 (budgeted SSP 544 billion). - Non-oil revenues: SSP 83 billion (3 percent of GDP) in FY2021/22 (budgeted SSP 58 billion). - Total revenues estimated to have exceeded the budget by over 55 percent in FY2021/22. - Staff estimates a fiscal financing gap of about 2.9 percent of GDP in FY2022/23 after accounting for certain adjustments; other sections cite a financing gap of SSP 254 billion (about 5 percent of GDP) or SSP 255 billion under unchanged policies. - Sudan cumulative debt to South Sudan as of end-FY2021/22: US$300 million (4 percent of South Sudan’s GDP); could increase by about US$500 million per year at current oil prices until agreement reached (staff assumption, absent further information). - Balance of payments and reserves: - BOP gaps above 2 percent per year projected over the medium term. - Gross international reserves currently below one month of imports; authorities to designate about 63 percent of RCF disbursement to bolster reserves. ### Performance under SMP and PMB design - SMP achievements since March 2021: - Liberalization and unification of FX market since August 2021; eliminated a premium of over 200 percent between official and parallel rates present at SMP start. - Clearance of all domestic salary arrears that stood at 5 months in January 2021. - Revenue and customs reforms increased non-oil revenue collection by 74 percent in real terms between FY2021/22 and FY2020/21. - Increased transparency of oil revenue and government operations. - SMP slippages: - Temporary resumption of overdrafts from BoSS and use of oil advances in final quarter of FY2021/22. - Several quantitative targets for the third SMP review were missed (central government cash deficit, borrowing from central bank, reserve money growth, contracting of sovereign guarantees/non-concessional loans). - PMB (9-month) objectives and modalities: - PMB period: February–November 2023. - Macro goals: safeguard macroeconomic stability, maintain debt sustainability while enhancing social spending, predictable monetary growth and FX reserve accumulation, address bank undercapitalization, and improve transparency and governance. - Program monitoring: quarterly reviews with seven quantitative targets and five structural benchmarks; technical memorandum defines targets and benchmarks. - Prior actions for approval: action plan for AG recommendations on RCF disbursements; draft legislation to discontinue BoSS issuance of sovereign guarantees; publication of external debt stocktake; appointment of PPDA Board. - Proposed PMB quantitative targets (selected): - Non-oil primary balance (floor, in billions of SSP): End-Mar 2023: -830.0; End-Jun 2023: -996.0. - Central bank net credit to central government (ceiling, in billions of SSP): 178.0 (End-Mar 2023 and End-Jun 2023). - Average net international reserve (floor, in millions of U.S. dollars): End-Mar 2023: 141.5; End-Jun 2023: 151.5. - Reserve money growth (ceiling, in percent): End-Mar 2023: 5.0; End-Jun 2023: 7.5. - Salary payments to central government workers (floor, in billions of SSP): End-Mar 2023: 106.7; End-Jun 2023: 142.3. - Priority social spending (floor, in billions of SSP): End-Mar 2023: 112.1; End-Jun 2023: 149.4. ### Fiscal policy measures to close financing gap and protect social spending - Revenue measures under consideration: - Gradually adjust customs valuation exchange rate from current 90 SSP/US$ (market over 700–770 SSP/US$ reported) toward market rates. - Staff estimate: raising customs exchange rate to 200 SSP/US$ would create up to SSP 1.9 billion in additional revenues per month (about 0.5 percent of GDP annually) but would also raise inflation by 4 percentage points within two quarters. - Increase customs duty rates for some products to align with East African Community rates. - Review and rescind discretionary tax exemptions (reported as 20 percent of gross customs revenues on average, 0.1 percent of GDP). - Expand digitalization of tax system (e-tax). - Expenditure measures under consideration: - Reduce crude oil allocation to oil-for-infrastructure from 20,000 bpd to 15,000 bpd — would free up SSP108.6 billion (2.1 percent of GDP) in one estimate and SSP 107.1 billion in another. - Cut planned transfers to the Future Generation Fund and Oil Stabilization Fund (10 percent and 15 percent shares) to reduce financing needs (one estimate: SSP 157 billion). - Seek international intermediation to resolve credits with Sudan for oil taken in excess of transit fees (accumulated amount taken by Sudan over US$400 million as of end-October 2022; accumulated amount owed to South Sudan exceeds US$300 million as of end-2022). - Social spending and salaries: - Spending on health, education, and social and humanitarian aid averaged 3.4 percent of GDP during FY2018/19–FY2021/22. - Off-budget international donor support reported at US$1.4 billion (about 25 percent of GDP) in FY2021/22 and expected to remain similar in FY2022/23. - PMB sets a floor for priority social spending; authorities committed to channel US$20 million of the FSW disbursement to WFP and IOM. - Authorities exploring options to raise public salaries sustainably in a deficit-neutral manner. ### Debt management, guarantees, and sovereign debt risks - Debt stocktake and guarantees: - International auditor stocktake broadly confirms external debt report published mid-2022; external auditor stocktake published as prior action for RCF and PMB. - BoSS has outstanding sovereign guarantees worth US$450 million on its books (mostly in favor of domestic firms). - Authorities tabled BoSS Act amendments to remove BoSS ability to issue guarantees; adoption by National Assembly is a structural benchmark. - Ministerial Order by end-March 2023 to set working methods and role chart of Technical Loan Committee; develop and adopt by end-March 2023 an action plan to strengthen institutional framework for debt issuance and management and formulate a debt management strategy. - Borrowing stance and program rule: - Commitment to refrain from contracting non-concessional external borrowing or expensive oil advances during PMB, except for: - (i) debt management operations that improve key liquidity/solvency indicators without adversely affecting risk rating; or - (ii) financing of critical investment projects with high social and economic returns where concessional financing not available. - Program target: zero contracting/guaranteeing of non-concessional debt (continuous ceiling: 0.0 million US$), with monitoring and reporting requirements. - Debt sustainability: - Debt assessed as sustainable but at high risk of unsustainable dynamics; DSA shows vulnerability to commodity price, contingent liability, and primary balance shocks. - After FSW disbursement, Fund credit outstanding under emergency financing instruments would reach 100 percent of quota; credit outstanding expected to peak at 246 million SDRs in FY2022/23–FY2024/25, corresponding to: - 4.2 percent of GDP (in FY2024/25); - 6.9 percent of exports of goods and services; - 13.9 percent of government revenues. - DSA classification: debt carrying capacity classified as weak; composite indicator CI = 1.33 (down from 1.36). ### Monetary and financial sector policies - Reserve money and monetary framework: - BoSS target: annual reserve money growth below 10 percent to bring inflation sustainably into single digits. - Reserve money targeting framework to be operationalized; joint BoSS-MoFP Liquidity Working Group compiling liquidity forecasts. - Term Deposit Facility (TDF): - Rollout started September/October 2022 with 14-day and 28-day maturities. - BoSS mopped up about SSP 23.7 billion as of end-November 2022 at average annualized interest rates below 10 percent. - Plans to expand maturities to 90-day and 180-day to pave way for re-introduction of treasury bills. - FX auctions and reserves: - FX auctions continuing at reduced volumes; BoSS scaling back auction volumes to grow FX reserves. - Current gross international reserves below one month of imports; authorities designate about 63 percent of proposed RCF disbursement to bolster reserves. - Banking sector undercapitalization and supervision: - Several licensed commercial banks accounting for 6 percent of system assets and 12 percent of deposits appear undercapitalized. - BoSS revoked licenses of 2 inactive banks and reviewing licenses of inactive, critically undercapitalized banks. - By June 2023, BoSS Board to approve time-bound strategy for addressing banking sector undercapitalization (structural benchmark). - BoSS to enforce publication of audited financial statements by all commercial banks and publish quarterly Financial Soundness Indicators (FSI). ### Transparency, PFM, and governance actions - Measures completed and in progress: - Publication of budget execution reports for FY2020/21, FY2021/22, and Q1 FY2022/23. - Publication of Auditor General’s reports on RCF disbursements and an external auditor’s stocktake of external loan agreements (prior actions). - Establishment/updating of consolidated database of external debt obligations; adoption of debt module in IFMIS; quarterly publication of debt reports. - Operationalizing IFMIS to record infrastructure spending including oil-for-infrastructure scheme. - PPDA Board appointment (President to appoint; appointment noted as completed on February 17, 2023 in one section). - Safeguards and audits: - BoSS signed MoU with Auditor General for appointment of international audit firm to audit BoSS financial statements from CY2022 onwards. - BoSS to adopt remaining safeguards recommendations by end-March 2023, including strengthening currency operations and co-sourcing internal audit activities. - Auditor General audits showed 29 percent of spending financed by the second RCF disbursement was “non-compliant”; authorities developed an action plan to provide missing documentation and implement AG recommendations. - Prior actions include gradual rollout of salaries through commercial banks by end-June 2023 and issuance of biometric IDs to central government employees. - Reporting and monitoring: - Reporting requirements to IMF include monthly tables of fiscal operations, government tax and non-oil revenue, oil production and revenue, stock of salary arrears, and BoSS balance sheet and monetary surveys with specified submission lags. ### Social sectors, education, health, and social protection - Social spending and donor support: - Spending on health, education, and social and humanitarian aid averaged 3.4 percent of GDP during FY2018/19–FY2021/22. - Off-budget international donor support amounted to US$1.4 billion (about 25 percent of GDP) in FY2021/22. - Education indicators: - 62 percent of primary school-aged children out of school (highest globally). - Primary school enrollment: 30 percent female; 40 percent male. - COVID-19 school closures lasted 14 months for the majority. - Over 89 percent of primary students and 93 percent of secondary students are overage. - One-third of schools are damaged or destroyed. - Health indicators: - Only 44 percent of population within reach of health facilities. - UHC effective coverage index about 41 percent. - Routine immunization rate 44 percent. - Child mortality rate 78 per 1,000 live births; maternal death rate 789 per 100,000 births. - 1 in 10 children die before age five. - Social protection system: - No comprehensive social safety net in place; NSPPF adopted in 2015 pledges 1 percent of yearly budget to MGCSW (implementation slow). - Major social programs largely donor-funded (World Bank, WFP, FCDO, GAC). - Program specifics include SSSNP, WFP FFA, WFP USN, and WFP SFP with stated transfer amounts (e.g., SSSNP Labor-Intensive Public Works pays US$361.80 per beneficiary family). - Policy recommendations: - Increase social spending and ringfence priority social spending (education, health, social and humanitarian sectors) under PMB quantitative targets. - Develop national identification system or social registry to improve targeting. - IMF engagement to support improved efficiency (e.g., performance-based financing) and rely on partners for program design and implementation. ### Risks, downside scenarios, and policy responses - Main downside risks highlighted: - Potential return to full-scale civil conflict (low probability but main downside risk). - A fall in oil prices or prolonged slump in oil production. - Discovery of undisclosed government liabilities or contingent liabilities (mitigated by external debt stocktake). - Weak institutional capacity, frequent turnover of officials, and fragile peace could hamper reform implementation. - Climate-related natural disasters and intensifying spillovers from Russia’s war in Ukraine (high likelihood; high impact on food and fuel prices). - Policy responses and contingency measures: - Use windfall hydrocarbon earnings to rebuild macro buffers when available. - Maintain prudent reserve money growth (below 10 percent) and expand BoSS toolkit (TDF, FX auctions). - Strengthen PFM, debt management, transparency, and anti-corruption measures. - Continue Fund and partner technical assistance focused on debt management, cash management, banking supervision, and PFM reforms. ### Capacity development and IMF support - Capacity development priorities: - Debt management institutions and strategy. - Cash management and Treasury Single Account (TSA). - Banking supervision and reform; crisis resolution for undercapitalized banks. - Statistics: monetary, financial, balance of payments, CPI, and national accounts. - AML/CFT legal framework, FIU operationalization, and national risk assessment. - Delivery modalities: - Peripatetic visits from HQ and AFRITAC East. - FAD to place a long-term resident expert in Juba for TA on budget execution, expenditure controls, cash management, TSA, and fiscal reporting. - Preference by authorities for longer-term, in-person TA with sequenced small increments due to low absorptive capacity. _Italic: IMF staff summary: EXECUTIVE SUMMARY, Republic of South Sudan, February 21, 2023._ ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Dire and deteriorating humanitarian situation - About two-thirds of South Sudan’s population is experiencing severe food insecurity, the highest level since independence. - Contributing factors: - Severe multi-year floods due to climate shocks. - Inter-communal violence in parts of the country. - Impact of Russia’s war in Ukraine contributing to high global food and fuel prices. - Flood and displacement statistics and impacts: - In 2022, floods estimated to have affected nearly 1 million people by end-September. - Internally displaced people increased to 2.2 million (in addition to 2.3 million refugees in neighboring countries). - Floods destroyed livestock, crops, roads, schools, and health facilities in 8 out of 10 states. - About 8.3 million people (about two-thirds of the population) experiencing acute food insecurity. ### Mixed record of reform implementation - Key reforms since start of the Staff-Monitored Program (SMP) in March 2021: - Liberalization of the FX market and unification of the official and parallel exchange rates since August 2021, eliminating a premium of over 200 percent between the official and parallel market exchange rate at the beginning of the SMP. - Clearance of all domestic salary arrears that stood at 5 months in January 2021. - Revenue and customs administration reforms resulting in a real-term increase in non-oil revenue collection by 74 percent between FY2021/22 and FY2020/21. - Increased transparency of oil revenue and government operations. - Fiscal slippages and setbacks: - Temporary resumption of overdrafts from the central bank and return to the use of oil advances to finance the budget during the final quarter of FY2021/22. - Several quantitative targets for the third SMP review were missed. - Corrective steps taken: - New leadership since August 2022 at the Ministry of Finance and Planning (MoFP) and the Bank of South Sudan (BoSS). - Implementation of more stringent cash management practices. - Cessation of monetary financing, which has stabilized the exchange rate and domestic prices. ### Request for Rapid Credit Facility (RCF) and Staff-Managed Program with Board involvement (PMB) - Authorities’ requests: - A disbursement of 35 percent of quota (SDR 86.1 million or about US$115.7 million) through the Food Shock Window (FSW) of the Rapid Credit Facility (RCF) to address urgent balance-of-payments needs, partly arising from the global food shock. - To channel part of the FSW disbursement via the World Food Programme (WFP) and International Organization of Migration (IOM) using their systems for immediate humanitarian assistance. - Completion of the existing SMP and a new nine-month Staff Program Monitoring with Board Involvement (PMB) to lay the ground for an eventual Extended Credit Facility (ECF). - Rationale: - Urgent BOP needs driven by the need to raise social and development spending, the burden of highly non-concessional past borrowing, and the imperative to raise reserves from their current low levels. - An FSW disbursement would help prevent imminent economic disruption. ### Staff’s view and risk assessment - Staff supports the authorities’ request for the RCF given the urgent nature of the BOP need and based on strong policy commitments under the PMB as articulated in the attached Memorandum of Economic and Financial Policies. - Capacity to repay the Fund: South Sudan has adequate capacity to repay the Fund, but subject to risks. - Main downside risks: - Potential return to full-scale civil conflict due to very difficult humanitarian conditions (low probability but main downside risk). - A fall in oil prices. - A prolonged slump in oil production. - Upside risk: - Peace dividends could prove higher than expected. ### Recent economic developments - Output and production: - Oil production: reached 170 thousand barrels/day (bpd) in FY2019/20; expected to average 150 thousand bpd in FY2022/23. - Real GDP estimated to have dropped by 2.9 percent in FY2021/22. - Agricultural production stagnant and below its pre-civil war peak. - Fiscal developments FY2021/22: - Oil revenues increased from SSP 544 billion in the budget to an estimated SSP 853 billion (27 percent of GDP). - Non-oil revenues: SSP 83 billion (3 percent of GDP), outperforming the budgeted SSP 58 billion. - Total revenues estimated to have exceeded the budget by over 55 percent. - Oil resources earmarked for capital spending doubled to 20,000 bpd during the second half of the financial year. - Continued significant transfers to Sudan despite the end of the Transitional Financial Arrangement (TFA). - Large principal repayments and other factors created sizeable unanticipated financing needs, causing the authorities to resort to oil advances and monetary financing in the second half of FY2021/22. - As of end-FY2021/22 the cumulative debt by Sudan amounted to US$300 million (4 percent of South Sudan’s GDP) and would increase by about US$500 million per year at current oil prices until agreement is reached (staff assumption, absent further information). - Monetary and price developments: - Reserve money increased by about 72 percent between April and July 2022 after remaining significantly below the BoSS 10 percent annual growth target since March 2021. - The large monetary expansion triggered a 50 percent depreciation of the SSP. - Historical evidence suggests changes in the value of the SSP fully pass through into domestic food prices within 6 months. - CPI inflation accelerated since April; food and fuel prices in Juba and other cities registered sharp increases reflecting exchange rate depreciation and lagged global food price effects. ### Performance under the SMP and structural benchmarks - Quantitative targets for the third review of the SMP: - Met: floors on arrears clearance and reserve accumulation for end-August 2022. - Missed: ceilings on the central government cash deficit, borrowing from the central bank, reserve money growth, and contracting of sovereign guarantees or non-concessional external loans. - Causes: temporary resumption of overdrafts from BoSS and use of oil advances for bridge financing. - Structural benchmarks (SBs) for the third review: - The authorities met one SB and implemented the other three with a delay. - Examples of completed actions: - BoSS signed an MoU with the Auditor General to facilitate appointment of an international external audit firm for the audits of BoSS financial statements from CY2022 onwards. - MoFP published on its website the Auditor General’s report on spending out of the April 2021 RCF disbursement and published budget implementation reports for FY2020/21 and FY2021/22 and for Q1 of FY2022/23. - An international auditor completed in December 2022 a stock take of all outstanding external loan agreements; the report was published by the authorities as a prior action for the RCF and PMB. ### Outlook and risks - Short-term and medium-term outlook: - Real GDP projected to stagnate with a growth rate of -0.4 percent in FY2022/23. - Oil production expected to recover from FY2023/24 as flooding recedes. - Over time, the main engine of the economy projected to shift gradually from oil to agricultural production. - Average inflation expected to rise to 16.5 percent in FY2022/23 mainly due to the recent SSP depreciation, and gradually decline to single digits on the assumption that the restoration of prudent money growth proves lasting. - Contingent factors: - Continued robust non-oil growth but declining oil production and high inflation in the short term. - South Sudan’s natural endowments leave scope for agricultural productivity growth as domestic security conditions improve. *IMF staff summary: EXECUTIVE SUMMARY, Republic of South Sudan, February 21, 2023.* ### 11. Sizeable medium-term BOP gaps remain. This reflects several factors, including social and ### 11. Sizeable medium-term BOP gaps remain. This reflects several factors, including social and ### Medium-term balance of payments (BOP) position and risks - BOP gaps above 2 percent per year are projected over the medium term. - Drivers of medium-term BOP gaps: - Social and development spending needs. - Debt service obligations on a large stock of non-concessional external debts. - Need to raise reserves from their current low level of below one month of imports. - Projected decline of oil prices and a downward trend for international aid. - Continued transfers to Sudan in excess of transit fees, which improve the current account balance but constrain government fiscal space and resources available to support imports. - Aid and export outlook: - Aid was temporarily bolstered during the Covid-19 pandemic and the fallout from the war in Ukraine, but is ultimately expected to resume its secular decline from very high levels. - The value of exports, after peaking in FY2021/22 and FY2022/23 thanks to high oil prices, is projected to decline gradually thereafter. - Downside risks to the outlook (Annex III): - Debt assessed as sustainable but at high risk of unsustainable dynamics; contingent on assumptions about fiscal consolidation, oil revenues, and GDP growth. - Low-probability but high-impact risks: a return to full-scale civil conflict (recent surge in violence in Upper Nile State illustrates fragility). - A fall in oil prices or prolonged slump in oil production could shortfall public revenue and trigger policy slippages. - Discovery of undisclosed government liabilities could render debt unsustainable (mitigated by a debt stocktake by an external independent auditor). ### Macroeconomic program framework: PMB (9-month) - Authorities and IMF staff agreed on macroeconomic policies and reforms underpinning a 9-month PMB aimed at: - Safeguarding macroeconomic stability to foster strong and inclusive growth through: fiscal policies that maintain debt sustainability while enhancing social spending; a monetary policy that grows the money supply predictably and facilitates accumulation of FX reserves; financial policies addressing undercapitalization of domestic banks. - Improving transparency and economic governance. - Capacity development from the Fund and other development partners will guide implementation. ### Fiscal policy for sustainable and inclusive growth - Fiscal stance and financing gap: - Targeting debt sustainability will guide fiscal policy under the PMB. - Staff analysis of the budget approved by Parliament implies a projected surplus of about 3 percent of GDP. - Debt amortization is projected to be 5 percent of GDP. - Absent a new settlement with Sudan, South Sudan will continue to build credit with Sudan for deliveries of crude oil in excess of transit fees. - After accounting for borrowing from the BoSS to clear expenditure arrears in July-August 2022 and the projected FSW disbursement, staff estimates a fiscal financing gap of about 2.9 percent of GDP in FY2022/23. - Measures being weighed to close the gap while limiting spending to available cash from oil and non-oil revenue: - Increasing revenues: - Significant scope to increase non-oil revenues, currently well below peer countries. - Ongoing revenue and customs administration reforms include an e-tax system for online registration, filing, and payment. - Exploring adjustments including: - Gradually adjusting upwards the exchange rate used for assessing customs value from the current rate of 90 SSP/US$ (compared to over 700 SSP/US$ prevailing in the market). - Increasing custom duty rates for some products to align with East African Community rates. - Reviewing tax exemptions at the discretion of MoFP, currently reported as 20 percent of gross customs revenues on average (0.1 percent of GDP). - Expanding digitalization of the tax system. - Pace of measures must be balanced against inflationary impact. Staff estimates: raising the customs exchange rate to 200 SSP/US$ would create up to SSP 1.9 billion in additional revenues per month (or about 0.5 percent of GDP on an annual basis) but would also raise inflation by 4 percentage points within two quarters. - Reducing expenditures: - Reduce crude oil allocation to the oil-for-infrastructure scheme and cut planned savings in the Future Generation Fund and the Oil Stabilization Fund. - Cutting oil-for-infrastructure allocation from 20,000 barrels to 15,000 barrels per day would free up SSP108.6 billion (2.1 percent of GDP). - Authorities seeking international intermediation to reach agreement with Sudan on payments for credits accumulated for deliveries in excess of transit fees and on equitable oil transit arrangements going forward — possible fiscal upside relative to baseline. ### Social spending, salaries, and protection of priority spending - Social spending: - Spending on health, education, and social and humanitarian aid averaged 3.4 percent of GDP during FY2018/19–FY2021/22. - Budget outturns show that low budgeted social spending tends to be crowded out by overspending in other sectors. - Population relies primarily on off-budget international donor support for basic nutrition and healthcare needs. - Reported off-budget international donor support amounted to US$1.4 billion (about 25 percent of GDP) in FY2021/22 and is expected to remain at similar levels in FY2022/23. - PMB commitments for social spending: - PMB sets a floor for priority social spending (health, education, social and humanitarian sectors) as a quantitative target to ringfence funds. - Authorities committed to channel US$20 million of the FSW disbursement to the WFP and IOM to address food insecurity. - Remainder of proposed FSW funds to budget to be used predominantly for the Ministry of General Education and Instruction and the Ministry of Health, in line with FY2022/23 allocations. - Public salaries: - Authorities exploring options to increase public salaries sustainably in a deficit-neutral manner so as not to increase the fiscal financing gap; strategy supported by IMF staff. - Public salaries remain very low by regional standards and their purchasing power will be eroded by double-digit inflation in FY2022/23. ### Cash management, public investment, and procurement - Arrears and cash management: - Authorities cleared all domestic salary arrears as of end-August 2022 and reduced foreign-currency salary arrears to 24 months with a plan to clear a further 6 months in FY2022/23. - PMB sets a floor on salary payments to central government workers to establish timely salary payments. - Cash Management Unit (CMU) preparing monthly cash plans with TA from AFRITAC East; Cash Management Committee (CMC) uses plans to guide spending authorizations in line with budget allocations. - Line ministries given responsibility for execution of their budget allocations; MoFP and BoSS collaborating to progress the creation of a Treasury Single Account (TSA) with TA from AFRITAC East. - Public investment: - Public investment accounted for one-third of spending in FY2021/22. - Authorities are ready to consider curbs in investment spending in FY2022/23 given competing needs. - Oil-for-infrastructure project being moved from Office of Presidential Affairs to Ministry of Roads and Bridges for greater oversight. - Steps to operationalize Public Procurement and Disposal Authority (PPDA) including appointment of its Board as a prior action for the RCF and PMB to allow adoption of Public Procurement Regulations and Standard Procurement Documents (prepared with World Bank assistance). ### Debt management and borrowing stance - Commitment to refrain from contracting non-concessional external borrowing or expensive oil advances. - Weaknesses in current debt governance: - Constitution and Public Finance Management Act require Parliament approval for external borrowing, but no formal procedure for borrowing or debt monitoring, recording, and reporting exists. - Loan Committee at MoFP lacks power to approve/monitor new debt contracts; Debt Management Unit not fully operationalized. - Technical assistance and structural benchmarks: - Multi-part FAD-MCM TA on debt management and strategy underway. - Development of a time-bound action plan to strengthen institutional framework for debt issuance and management and formulate a debt management strategy set as a structural benchmark for the first review of the PMB. - Financing guidance: - Financing needs should be addressed through fiscal consolidation, development of a domestic market, and concessional borrowing. - Under PMB, non-concessional loans should only be considered for: (i) debt management operations that improve key liquidity and/or solvency indicators without adversely affecting risk rating; or (ii) financing of critical investment projects with high social and economic return integral to national development program or for critical health or social spending for which concessional financing is not available. - The attached DSA shows debt dynamics under a worst-case scenario of covering projected financing gaps mostly through non-concessional borrowing for the two allowed cases under the PMB. ### Enhancing monetary and financial stability - Reserve money and monetary framework: - BoSS reserve money target: annual reserve money growth will be held below 10 percent, with a view to bringing inflation sustainably into single digits. - BoSS tracking reserve money growth and other indicators; joint BoSS-MoFP Liquidity Working Group being operationalized to compile liquidity forecasts. - Term deposit facility (TDF): - Rollout of TDF starting September 2022 with 14-day and 28-day maturities. - BoSS has mopped up about SSP 23.7 billion as of end-November 2022 at average annualized interest rates of below 10 percent. - Uptake suggests improving private-sector confidence; interest in expanding maturities to 90-day and 180-day could pave way for re-introduction of treasury bills. - FX auctions and reserves: - FX auctions continuing but at reduced volumes reflecting improved FX liquidity and prudent SSP liquidity management by BoSS. - BoSS scaling back auction volumes from highs in summer 2022 and contemplating further reductions in light of improved FX liquidity to grow FX reserves. - Current gross international reserves at below one month of imports do not provide adequate protection against oil price shocks. - Authorities designated about 63 percent of the proposed RCF disbursement to bolster BoSS reserves. - Exposure to oil shocks and climate risks: - Heavy reliance on oil exports makes South Sudan highly susceptible to oil price shocks. - South Sudan also remains highly exposed to climate shocks. ### Banking sector undercapitalization and supervisory actions - Undercapitalization: - Several licensed commercial banks, accounting for 6 percent of system assets and 12 percent of deposits, appear to be undercapitalized. - While not systemic, undercapitalization hampers financial development and banking sector capacity to support growth. - Supervisory measures and benchmarks: - BoSS revoked licenses of 2 inactive domestic banks that never commenced operations; reviewing licenses of inactive, critically undercapitalized banks. - By June 2023, BoSS Board will approve a time-bound strategy for addressing banking sector undercapitalization as one of the SBs of the PMB. - BoSS will enforce publication of audited financial statements by all commercial banks and has commenced regular publication of quarterly Financial Soundness Indicators (FSI) on its website. ### Strengthening PFM, transparency, and governance - Recent transparency improvements: - Publication of budget execution reports for FY2020/21, FY2021/22, and first quarter of FY2022/23. - Annual Petroleum Reports through FY2020/21 available from Ministry of Petroleum website. - External debt and guarantees stocktake by international auditor published as a prior action for the RCF and PMB. - These documents provide comprehensive overviews of public revenues, expenditures, and external obligations. - Commitments under PMB: - Release budget execution reports including spending under oil-for-infrastructure scheme in line with Parliamentary timeframe. - Publish quarterly debt reports on MoFP website. - Commence publication of quarterly oil reports including reconciliation of oil output and revenues by June 2023 as a SB under the PMB. - Revised R-ARCSS Road Map envisages submission of membership application to the Extractive Industries Transparency Initiative (EITI) by end-February 2023. *Republic of South Sudan — IMF Program Monitoring with Board Involvement: selected findings and policy measures as summarized from the provided chapter.* ### 25. With the help of Fund TA, the authorities will improve the process of assessment, ### 25. With the help of Fund TA, the authorities will improve the process of assessment, approval and contracting of external loans and guarantees ### Debt management, stocktake, and sovereign guarantees - The debt stocktake performed by the international auditor broadly confirms the external debt report published by the authorities in mid-2022. - The international auditor stocktake is a one-time exercise; Fund TA is supporting strengthening of debt management within the MoFP, with the recommendation that authorities perform and publish an internal stocktake quarterly. - The quarterly internal stocktake was identified as a short-term recommendation by the Fund TA, with implementation by June 2023. - The BoSS has on its books outstanding sovereign guarantees, issued mostly in favor of domestic firms, worth US$450 million in total. - Authorities believe these guarantees are unlikely to be called before they expire, but their existence highlights a loophole in the BoSS Act that allows the BoSS to issue sovereign guarantees outside the regular budgetary process and may expose the government to sizeable contingent fiscal liabilities. - As a prior action, authorities have tabled a proposed package of changes to the BoSS Act with the Constitutional Review Committee, including an amendment that removes the ability of the BoSS to issue guarantees. - Adoption by the National Assembly of these amendments will be a structural benchmark for the first review of the PMB (Table 6). - The list of remaining valid guarantees issued by BoSS is being reviewed by the Council of Ministers, with a view to rescind any guarantees that do not serve a well-specified development purpose or present unacceptable contingent fiscal liabilities. - Going forward, sovereign guarantees should: - be issued under strictly limited conditions; - be proposed by the Loan Committee; and - require approval by the Council of Ministers and Parliament. - In cooperation with an ongoing IMF TA mission on debt management, as a structural benchmark for the PMB (Table 6) the authorities will develop and adopt by end-March 2023 an action plan to strengthen the institutional framework for debt issuance and management and formulate a debt management strategy. ### Auditor General audits, documentation, and payroll measures - The Auditor General’s (AG) audits of the two previous RCF disbursements have been published. - The audit of the second RCF concludes that 29 percent of spending financed by this RCF disbursement was “non-compliant” for various reasons, including lack of adequate supporting documentation. - In coordination with the AG office, the authorities have developed, as a prior action, an action plan (MEFP ¶15) to provide the missing documentation and to implement the main recommendations of the AG reports, including: - (i) the gradual rollout of payment of salaries for all central government employees through commercial banks by end-June 2023; and - (ii) commencing the process of issuing biometric identifications to all central government employees with technical support from the World Bank. ### BoSS safeguards and audit arrangements - The BoSS committed to expediting implementation of recommendations from the 2021 Safeguard Assessment. - The audited financial statement for 2021 are being finalized by the external auditor and will be published shortly. - The BoSS signed a Memorandum of Understanding with the AG’s office to ensure the appointment of a reputable international audit firm to audit BoSS financial statements from CY2022 onwards. - Implementation of the safeguards assessment recommendations has been slow and the BoSS internal control environment, including governance arrangements, remains weak. - By end-March 2023, the BoSS will adopt key remaining safeguards recommendations, including: - strengthening of currency operations; and - the co-sourcing of internal audit activities (MEFP ¶19). - The authorities have requested IMF technical assistance on enhancing currency operations and are finalizing the terms of reference regarding a co-sourcing arrangement for internal audit activities. ### AML/CFT framework and FIU operationalization - South Sudan is on a FATF list of jurisdictions under increased monitoring (“grey list”); progress on their FATF action plan to address identified AML/CFT deficiencies has been limited. - The newly established FIU has been furnished with a budget and premises and is committed to reengage with stakeholders in the coming months. - FIU leadership plans to request technical assistance as needed—including from the Fund—in the areas of the legal framework and operational aspects, such as structuring the FIU and conducting the national risk assessment. - Authorities need to allocate more resources and improve coordination among agencies to bring laws and institutions into compliance with international standards. - A comprehensive national strategy endorsed by the highest levels of government would be critical to outline key steps to achieve compliance, specifying institutional responsibilities, timelines, and review measures. - Such efforts would better prepare South Sudan for the future mutual evaluation with the Eastern and Southern Africa Anti Money Laundering Group (ESAAMLG), of which South Sudan is now a member. ### PMB modalities, program coverage, and conditionality - Staff supports the authorities’ request for a 9-month PMB, covering the period of February-November 2023. - Approval by management of the PMB and Board consideration of the FSW request are proposed to be subject to four prior actions, relating to: - an action plan for the implementation of the AG recommendations on the two RCF disbursements; - tabling of draft legislation to discontinue the BoSS issuance of sovereign guarantees; - publication of the external debt stocktake report; and - appointment of the Board of the PPDA (Table 6). - Performance under the PMB will be monitored through quarterly reviews of quantitative targets and structural benchmarks (MEFP Tables 5 and 6). - The program has seven quantitative targets and five structural benchmarks. - To reduce procyclicality to oil prices, the PMB targets the non-oil primary fiscal deficit instead of the primary deficit targeted in the SMP. - The Technical Memorandum of Understanding (TMU) contains definitions of the quantitative targets and structural benchmarks. - Test and review dates: - First test date: March 31, 2023; review expected to be completed by June 15, 2023 (Table 7). - Second test date: June 30, 2023; completion of the second review by November 15, 2023 could be combined with a request for an ECF. ### Emergency financing, FSW access, and planned use of funds - Staff proposes access under the RCF through the FSW for 35 percent of quota. - Rationale: South Sudan is experiencing a major food crisis, with two-third of the population experiencing acute food insecurity (IPC/CH phase 3 or above), qualifying the country for access through the FSW. - Proposed access: SDR86.1 million or about US$115.7 million. - After the FSW disbursement, Fund credit outstanding under emergency financing instruments would reach 100 percent of quota, enabling eligibility for a PMB. - Authorities’ planned allocation of the RCF disbursement: - about 37 percent for budget support (of which US$20 million will be channeled through the World Food Programme and International Organization for Migration, LOI ¶4); - remaining 63 percent to raise the level of BoSS reserves. - The disbursement designated for budget support will enable authorities to avoid a premature fiscal contraction and allocate immediately: - US$15 million to the WFP; and - US$5 million to the IOM to bolster humanitarian operations during 2023. - Authorities will sign Memoranda of Understanding with both organizations to specify use of funding injections. - The remainder of the budget support will be used predominantly to finance education spending (LOI ¶4). - Authorities will request the Auditor General to complete by end-September 2023 an audit of all central government spending funded from the RCF disbursement as a structural benchmark (LOI ¶5). ### Risks to program implementation and debt sustainability - Risks to program implementation are skewed to the downside. - Key risk factors: - Frequent turnover of high-level officials and weak institutional and technical capacity. - Political risks from fragile peace. - Deterioration of external economic conditions given South Sudan’s limited resilience could trigger accumulation of arrears or monetary financing. - An unexpectedly strong recovery in oil production or prolonged oil price boom could undermine incentives for economic and governance reform. - Debt and Fund exposure: - South Sudan’s capacity to repay its obligations to the Fund is adequate but subject to high risks. - South Sudan’s debt is considered sustainable, although at high risk of debt distress (see attached DSA). - After the FSW disbursement, credit outstanding to the Fund is expected to peak at 246 million SDRs in FY2022/23-FY2024/25, which corresponds to: - 4.2 percent of GDP (in FY2024/25); - 6.9 percent of exports of goods and services; and - 13.9 percent of government revenues. - The debt sustainability assessment relies on current assumptions on fiscal consolidation, oil revenues, and GDP growth, resulting in a large decrease in debt-to-GDP ratio over the next 20 years. - Considerable downside risks: large-scale conflict, volatility in oil prices or a decrease in oil production, climate-related disasters, and policy slippages. - Continuing Fund TA on debt and cash management will help enhance institutional capacity and support continued debt sustainability and South Sudan’s capacity to repay the Fund. ### Capacity development priorities - Capacity development will be critical for further IMF engagement. - Focus areas: - debt management institutions and strategy; - cash management; and - banking supervision and reform (aligned with program objectives, Annex VI). - Delivery modalities: - peripatetic visits of experts from HQ and AFRITAC East; - FAD will place shortly in Juba a long-term resident expert to provide TA on budget execution, expenditure controls, cash management and TSA, and fiscal reporting. ### Staff appraisal and policy recommendations - Context: - Since 2019 South Sudan has faced overlapping shocks from COVID-19, historic flooding, and Russia’s war in Ukraine, compounding a difficult humanitarian situation and fragile peace settlement. - Real GDP contracted for two consecutive years and is expected to see a third, albeit modest, contraction in FY2022/23. - Potential exists for robust medium-term growth under supportive policies given South Sudan’s ample natural resources. - SMP reform progress was mixed: - Notable achievement: unification of the official and parallel exchange rates in mid-2021. - Money growth was kept steady for the first 12 months of the SMP, briefly achieving low single-digit inflation rates. - All domestic salary arrears have been cleared and foreign-currency salary arrears have been reduced significantly. - Resumption of non-concessional oil-backed borrowing and monetary financing in mid-2022 constituted significant slippage. - Fiscal recommendations to ensure macroeconomic stability and debt sustainability: - Close the remaining fiscal financing gap of 5 percent of GDP in FY2022/23. - Options include: - revenue-raising measures (such as adjustment of the outdated exchange rate used for customs valuations or eliminating some current tax exemptions); - reducing the large share of oil used for investment spending; - pursuing a new and equitable settlement on transit fees with Sudan. - Social protection and wages: - Fiscal adjustment should protect social spending and the purchasing power of public salaries. - Authorities’ ambition to raise public salaries in a deficit-neutral manner is appropriate. - Careful cash planning is essential to avoid recurrence of salary arrears or the need to use expensive oil advances as bridge financing. - Monetary and reserve policy: - Prudent money growth is essential to keep inflation in check; the operational money targeting framework aims to keep money growth below 10 percent per year. - Authorities should invest in bolstering BoSS capacity and expand the monetary toolkit beyond FX auctions; the new TDF is a welcome first step. - Gradual accumulation of an adequate buffer of FX reserves is recommended. - PFM and governance reform: - Strengthening PFM systems is essential for transparency, effectiveness, and credibility with stakeholders. - The PMB proposes a program of reforms including steps to: - increase oil-sector transparency; - strengthen the debt management framework; - broaden the use of bank payments and biometric identification for public sector employees; - enhance BoSS safeguards; and - raise resilience of the domestic banking sector. - Follow-through on this reform agenda under the PMB would raise prospects for robust and inclusive growth and help build credibility with international donors. *1ssdea2023001 - 25. With the help of Fund TA, the authorities will improve the process of assessment,* ### 40. Staff supports the authorities’ request for an RCF disbursement through the Food ### 1ssdea2023001 - 40. Staff supports the authorities’ request for an RCF disbursement through the Food Shock Window equivalent to 35 percent of South Sudan’s quota (SDR86.1 million or about US$115.7 million) and for a nine-month PMB ### RCF Food Shock Window request and program monitoring with Board involvement (PMB) - Staff supports the authorities’ request for an RCF disbursement through the Food Shock Window equivalent to 35 percent of South Sudan’s quota (SDR86.1 million or about US$115.7 million). - Staff supports a nine-month PMB. - Steadfast and successful implementation of the PMB would establish the track record required to support the authorities’ request for an ECF. - IMF support to mitigate implementation risks and build capacity will include tailored technical assistance. ### Fiscal position and key fiscal statistics (selected excerpts) - Total revenue and grants (percent of GDP shown across years): 29.5; 34.5; 30.1; 16.5; 31.5; 30.8; 30.5; 29.4; 28.3. - Total oil revenues (percent of GDP shown across years): 25.5; 29.8; 27.4; 14.2; 28.5; 27.2; 26.5; 25.0; 23.6. - Non-oil tax revenue (percent of GDP shown across years): 4.0; 4.8; 2.7; 2.3; 3.1; 3.5; 4.0; 4.4; 4.7. - Total expenditure (percent of GDP shown across years): 39.4; 38.2; 36.7; 23.9; 28.5; 23.9; 23.2; 22.7; 24.1. - Current expenditure (percent of GDP shown across years): 35.7; 27.3; 24.0; 16.0; 15.9; 15.1; 14.7; 14.3; 14.6. - Net acquisition of non-financial assets (percent of GDP shown across years): 3.8; 11.0; 12.7; 7.9; 11.8; 8.4; 8.0; 8.0; 9.5. - Overall balance (cash) (percent of GDP shown across years): -9.9; -3.7; -6.6; -7.4; 3.0; 6.8; 7.3; 6.6; 4.2. - Financing: Domestic (net) and Foreign (net) shown separately; Disbursement lines include references to RCF-1, RCF-2, and “of which: Proposed RCF-FSW” (value shown in table). ### Balance of payments and external sector highlights - Current account balance (in millions of U.S. dollars, annual by fiscal year): -965; -252; -105; 542; 497; 490; 364; 88. - Trade Balance (millions of U.S. dollars): -715; -199; 282; 682; 533; 502; 361; 190. - Exports of goods (millions of U.S. dollars across years): 3,089; 3,467; 4,954; 5,068; 4,738; 4,628; 4,572; 4,557. - Oil exports (same series): 3,061; 3,440; 4,924; 5,029; 4,688; 4,568; 4,503; 4,476. - Non-oil exports (same series): 27; 27; 30; 39; 51; 60; 69; 81. - Imports of goods (millions of U.S. dollars across years): -3,804; -3,667; -4,673; -4,387; -4,205; -4,126; -4,211; -4,467. - Current transfers (net, millions of U.S. dollars across years): 957; 1,115; 1,260; 1,581; 1,644; 1,653; 1,703; 1,714. - Workers' remittances (net): 77; 68; 310; 112; 514; 316; 2184 (note: numbers shown in table as 777; 683; 101; 125; 143; 162; 184 — preserve each number as in table). - Gross foreign reserves (millions of U.S. dollars across years): 130; 172; 160; 218; 295; 432; 486; 563. - South Sudan oil price (dollars per barrel; weighted average) across years: 49.35; 55.98; 66.59; 71.98; 72.97; 78.27; 74.87; 72.1. - Oil production (millions of barrels across years): 62.1; 61.5; 56.9; 54.8; 56.6; 58.4; 60.2; 62.1. - Nominal GDP (billions of U.S. dollars across years): 4.9; 5.2; 7.3; 7.8; 7.6; 7.6; 7.9; 8.4. ### Program targets, quantitative targets, and proposed PMB indicators - Under the proposed PMB (end-Mar 2023 / end-Jun 2023 proposed): - Non-oil primary balance (floor: in billions of SSP): -830.0; -996.0. - Central bank net credit to the central government (ceiling: in billions of SSP): 178.0; 178.0; 178.0. - Contracting or guaranteeing of non-concessional debt by the central government (continuous ceiling: in millions of U.S. dollars): 0.0; 0.0; 0.0. - Average net international reserve (floor: in millions of U.S. dollars): 97.5; 141.5; 151.5. - Reserve money growth (ceiling: in percent): ...; 5.0; 7.5. - Salary payments to central government workers (floor: in billions of SSP): ...; 106.7; 142.3. - Priority social spending (floor: in billions of SSP): ...; 112.1; 149.4. - SMP quantitative targets (selected historical outcomes and compliance notes): - Central government's primary cash budget deficit (ceiling, in billions of SSP): target 10.0; end-June 2021 actual 25.9 (Not met); end-Oct 2021 target 35.9 actual 32.0 (Met); end-Aug 2022 target 25.0 actual 73.4 (Not met). - Central bank net credit to the central government (ceiling, in billions of SSP): multiple entries with met/not met status; ceiling adjustments noted. - Average net international reserve (floor: in millions of U.S. dollars): targets and actuals include 85.0 target / 131.0 actual (Met); 284.0 target / 406.0 actual (Met); 170.0 target / 266.7 actual (Met). - Reserve money growth (ceiling: percentage points): 5.0 target / -2.6 actual (Met); 10.0 target / -5.4 actual (Met); 15 target / 105 actual (Not met). ### Structural benchmarks, governance, and transparency actions - SMP structural benchmarks (status highlights): - Publish findings and recommendations of the audit of the spending of the April 2021 RCF disbursement: Aug-22 Not met; implemented with a delay in December 2022. - BoSS to sign an MoU with the Auditor General to ensure timely appointment of an international external audit firm for BoSS financial statements from CY2022 onwards: Oct-22 Met. - Publication of budget execution reports for FY2020/21 and FY2021/22: Oct-22 Not met; implemented with a delay in January 2022. - Completion of an audit by an independent external auditor to take stock of all outstanding external loan agreements and guarantees and publish results: Nov. 15, 2022 Not met; the external auditor report was published as prior action for the RCF and PMB. - PMB structural benchmarks and prior actions: - Adopt action plan for implementation of recommendations in Auditor General’s audit report of the two RCF disbursements: Prior action Met. - Submit proposed revisions to the BoSS Act (including removal of Section 10(3) to prevent BoSS issuing sovereign guarantees): Prior action Met. - Publish the audit report submitted by the external auditor in December 2022: Prior action Met. - Board of the Public Procurement and Disposal Authority to be appointed: Proposed Prior action (Improve governance). - MoFP to develop and adopt by end-Mar 2023 an action plan to strengthen institutional framework for debt issuance and management, and formulate a debt management strategy: Proposed Mar-23 (Maintain debt sustainability). - National Assembly to adopt amendments to the BoSS Act by May-2023 (Improve governance). - BoSS to adopt action plan to implement recommended banking sector reforms by Jun-23 (Support financial stability). - Publish all signed oil production sharing agreements and quarterly oil sector reports by Jun-23 (Enhance transparency). - Completion and publication of an audit of the spending of the new RCF disbursement under the FSW by Sep-23 (Ensure transparency and accountability in the spending of emergency resources). ### Fragility, governance, and social context (Engagement Strategy Annex I summary) - Socioeconomic context and food insecurity: - At independence in 2011 South Sudan ranked among the world’s poorest countries; production capacity in the oil sector deteriorated over the following decade. - Persistent gap between per-capita cereal requirement and output; 60 percent of the population experience acute food insecurity for at least part of the year. - Off-budget donor support of US$1.4 billion per year provides basic food, health and education for a large share of the population. - Drivers and consequences of fragility: - Overly centralized state with limited legitimacy and checks on the Executive; constitution not drafted and elections not held. - Rent extraction by vested interests; U.S. Government sanctions cited for several individuals and companies. - Violent conflict, including gender-based violence; disputes over land and cattle, incomplete demobilization, circulation of weapons, high youth unemployment. - Large and partially unified security forces; army unification process announced April 2022 but remains incomplete. - Legacy dependence on Sudan for pipelines and port facilities; unresolved political bargaining with Sudan has fiscal and regional implications. - Weak public financial management: procurement, fiscal reporting, cash and debt management weaknesses; uncertainty over full extent of external debt. - Economy highly reliant on oil: oil contributes about 60 percent of GDP, 95 percent of exports and 90 percent of government revenue. - Large displaced population: South Sudan estimated to host approximately 1.5 million internally displaced persons. *Source: IMF staff report excerpt.* ### 2.3 million of its citizens live as refugees in neighboring countries (more than 50 percent of ### 1ssdea2023001 - 2.3 million of its citizens live as refugees in neighboring countries (more than 50 percent of ### Humanitarian and social vulnerability - 2.3 million of its citizens live as refugees in neighboring countries (more than 50 percent of whom are children). - 8.3 million people out of a population of 13 million rely on some form of humanitarian aid. - Recent floods described as the worst since the 1960s: the UN estimates that the floods have affected at least 800,000 people and driven more than 200,000 from their homes in 2021. - Disaster fallouts have overtaken conflict as a cause for new displacements in recent years. ### Key economic development objectives - Macroeconomic stability: - Ensure stable prices, no recourse to monetary financing, and an end to ad-hoc borrowing and spending to build economic resilience and increase donor and investor confidence. - Agricultural productivity: - About 80 per cent of the population lives in rural areas where subsistence agriculture is the backbone of livelihoods. - Constraints: insecurity, lack of access to land, absence of land-tenure regulation. - Opportunities: invest in irrigation, improve yields through seed selection and provision, develop aquaculture, exploit agroforestry opportunities. - Protect and enhance social spending: - Government expenditure on health, education, water and sanitation, and agriculture and rural development is virtually absent, creating reliance on international humanitarian aid. - Greater government share of social spending could unlock donor support for longer-term development. - Foster private-sector development: - Infrastructure underdevelopment has reduced investor confidence, hampered investment and increased the cost of doing business. - Economic diversification: - Potential in non-oil sectors such as agriculture, fisheries, and mining given geographical and geological advantages. ### Institutional and governance priorities - Establishment of power-sharing institutions: - New constitution needs calibration to avoid “winner-takes-all” politics and balance power between the President, Parliament, and the States. - De-concentration of political power: - Strengthen representation of States and subnational communities to improve resource distribution and targeting. - Restoration of state monopoly on security: - Civilian disarmament efforts need to continue, with improved income opportunities for the demobilized. - Increased transparency: - The dominant oil sector needs full accounting of government revenues and their use; create fora beyond Parliament for public policy discussion and civil-society scrutiny. - Tackling corruption risks: - Establish and strengthen watchdog institutions and commit to regional and global transparency standards such as the Extractive Industry Transparency Initiative (EITI) and Financial Action Task Force (FATF). - Strengthening of property rights: - Establish an effective, integrated, socially legitimate system for resolving disputes over land and natural resources. ### Role of the Fund: lessons and engagement strategy - Lessons from recent Fund engagement (two RCFs in November 2020 and March 2021 and an SMP combined with the second RCF): - Timing: Timely international support was key; RCF disbursements and SDR allocation supported authorities during deteriorating conditions. - Pace: The pace of reform should be commensurate with capacity; set realistic objectives respecting political and resource constraints. - Inclusion of stakeholders: Include relevant stakeholders, especially development partners; coordinate, communicate, share information, and educate about the IMF approach. - Capacity development (CD): Sequenced, hands-on CD improves absorption capacity and reform implementation. - Three main pillars for future Fund engagement: - Sustain monetary stability and the reformed market: restore central bank credibility, accumulate reserve buffers, gradually expand monetary policy toolkit and monitoring. - Enhance efficiency of fiscal operations: improve budget planning and debt management. - Guide improvements in governance: central bank operations, financial-sector supervision, fiscal transparency and oil revenue management. - Capacity-building priorities: - Tailored CD program with incremental TA delivery; in-person, longer-term hands-on TA has delivered tangible benefits and is preferred by authorities. - Near-term priorities: cash management, banking supervision, crisis management, and public debt management. ### Risks and conditionality for deeper engagement - Political and institutional risks: - Collapse of the peace process could halt or reverse reforms. - Frequent turnover of high-level officials and weak institutional/technical capacity may slow reforms. - External economic risks: - Deterioration in external conditions may undermine macroeconomic stability given limited resilience. - A prolonged oil price boom may reduce incentives for economic and governance transformation. - Financing risk: - Further financing risks adding senior debt without long-term benefits if it does not promote progress. - Design considerations for a potential financing program: - Maintain continued macroeconomic stability and a predictable, transparent FX regime as preconditions. - Build on RCF spending audits to facilitate civil-society scrutiny and prepare for a reconstituted National Assembly and elections. - Improve technical and institutional capacity to unlock deeper structural changes. - Calibrate engagement to establish track record necessary to unlock on-budget donor support for development projects. ### Annex II — Reserve money and the exchange rate: empirical findings - Empirical exchange-rate regression (monthly data October 2011 to June 2022): - lnSS_t = − 16.594 + 1.296 lnM_t − .357 lnP_t^O* + .367 r_t^* + e_t - Coefficient statistical significance: All coefficients statistically significant at the 1% level. - Parenthetical reported standard errors/metrics: (.718) (.021) (.091) (.038) as given in the source. - R^2 is .97. - Variation in reserve money explains 86 percent of the variation in the exchange rate over the sample period. - Regression implication: a one percent increase in reserve money leads to a 1.3 percent depreciation of the SSP. - Drivers of recent SSP movements: - April–November 2020 depreciation primarily due to monetary loosening (expansion of reserve money). - November 2020–August 2021 appreciation driven by reduction in reserve money and higher oil prices. - Since April 2022 depreciative pressure due to sizeable increase in reserve money and rising US interest rates. - Valuation and outlook: - Even reversing recent monetary expansion would be unlikely to restore SSP to values seen in first half of the year (in the range SSP/USD 400-450). - Given levels of reserve money, US interest rates and oil prices as of June 2022, a valuation of the SSP in the range SSP/USD 600-650 seems appropriate. - Further US monetary tightening or decline in oil prices could exert additional depreciative pressure. ### Annex III — Risk Assessment Matrix (selected risks and policy responses) - Conjunctural shocks and scenarios: - Intensifying spillovers from Russia’s war in Ukraine - Likelihood: High - Expected Impact: High. Increased food and fuel prices and more inflationary pressure on the poor and vulnerable; higher global oil prices may strengthen fiscal and external accounts. - Policy response: Use windfall hydrocarbon earnings to rebuild macroeconomic buffers. Clear salary arrears and adopt temporary fiscal measures to protect food security for vulnerable population. - Local COVID-19 outbreaks - Likelihood: Medium - Expected Impact: Medium-High. Hampering economic activity, more pressure on public resources, larger economic scarring, higher unemployment and poverty rate. - Policy response: Increase spending on health and social protection. Accelerate vaccination coverage (including boosters). Seek donor support for medical needs. - Systemic social unrest - Likelihood: High - Expected Impact: High. Fuelled by increasing prices, shortages, inadequate healthcare, low food security. - Policy response: Improve adequacy of social spending. Gradually move to an efficient social safety net. Reprioritize spending. - Structural risks: - Natural disasters related to climate change - Likelihood: Medium - Expected Impact: High. Pressure on public expenditures during flood or famine, lower agricultural output, increased food inflation, negative effects on poor and vulnerable groups. - Policy response: Use targeted programs to help vulnerable groups. Build buffer to cushion against next natural disaster. - Domestic risks: - Political tension and deterioration of security situation - Likelihood: Medium - Expected Impact: High. Diversion of resources to internal conflict could lower oil production, reduce investment, cause economic instability and increase poverty. - Policy response: Keep implementing the peace agreement and seek reconciliation. Focus on economic stabilization, fair sharing of oil revenues, and good governance. - Delays in improving governance or capacity - Likelihood: Medium-High - Expected Impact: High. Diversion of resources from development, entrenched rent-seeking, pressures on current expenditures, lower quality public investment. - Policy response: Strengthen anti-corruption efforts, improve transparency, focus on strengthening economic institutions, and foster progress in business environment. ### Annex IV — Fiscal policy anchoring (overview) - Fiscal position and challenges: - Fiscal position is weak and highly vulnerable; fiscal policy has been procyclical, fluctuating with oil prices and production volumes. - Budget discipline and sound Public Financial Management (PFM) are lacking, posing challenges to fiscal sustainability and inclusive long-term growth. - Priority: - Designing an adequate fiscal strategy enabling the Ministry of Finance and Planning to perform its functions is a top priority. - Comparative note: - The annex provides an overview of IMF recommendations to some resource rich countries on use of fiscal rules as part of their fiscal frameworks (excerpt of Table 1 is present in the source). *REPUBLIC OF SOUTH SUDAN — INTERNATIONAL MONETARY FUND* ### 3.9 percent of ### 3.9 percent of ### Fiscal frameworks — selected country experiences (concluded) - Angola (2018 EFF) - Anchor and rules are easy to measure and communicate. - Public debt/GDP ratio < 65 percent by 2024. - Budget Balance; Non-Oil Primary Fiscal deficit. - 2,488 billion Kwanzas by December 2018; 1992 billion by December 2019; and 2384 billion by December 2020. - With 0.3 percent adjustment in 2021 to accommodate pandemic related spending. - Tailored to accommodate pandemic shock and related spending needs. - Republic of Congo (2022 ECF) - Fiscal sustainability: Debt to GDP ratio at 68 percent in 2027. - Budget Balance; Revenue Rule; Change in Non-Oil Primary Fiscal deficit; Non-oil revenues; External borrowing ceiling. - 4 percent by 2027 and a total deficit of 15.3 percent in 2022 budget. - Floor of 120 b CFAF by end-Mar 2022, and 182 b by end-Mar 2023. - Zero. Revenue rule to support non-oil revenue mobilization. - Qatar (2022 AIV) - Non-Hydrocarbon primary balance at 30 percent of NH-GDP (PIH derived). - Budget Balance; Expenditure rule. - Non-hydrocarbon primary balance; Expenditure growth. - NHPB of around 35 percent of NH-GDP in 2023. - 1 percent expenditure real growth annually. - Objective to de-link spending from oil market volatility. - Saudi Arabia (2022 AIV Recommendation) - Net Financial Asset (PIH derived). - Expenditure rule. - Spending ceiling 1.5–2 percent real Exp growth, annually. - Rule is de-linked from oil market volatility. ### Background — social conditions and trends - Conflict and displacement - Since December 2013, conflict has displaced more than four million people, with over 2 million fleeing to neighboring countries. - Livelihoods and food insecurity - Around 85 percent of the remaining population is involved in agriculture at the subsistence level. - 82 percent experiencing some degree of food insecurity, and 25 percent severely food insecure. - More than 60 percent of the population lives below the poverty line. - Social spending trends (2018/19–2021/22) - Social spending has been rising slowly in recent years. - Education spending is the largest component of social spending in government expenditure; health and social protection-humanitarian rank second and third. - Health and social protection spending have stagnated or dropped in some years, whereas education budget has increased steadily. - With the exception of 2021/22, budget outturn for social spending is substantially lower than budget allocation due to fluctuations in oil revenues, donor funding shortfalls, lower fiscal space, and low government capacity. ### Education — key facts and constraints - Out-of-school and enrollment - South Sudan has the world's highest proportion of primary school-aged children out of school (62 percent). - Primary school enrollment: 30 percent for female and 40 percent for male. - COVID-19 school closures lasted 14 months for the majority of students and disrupted education of over 2 million more children. - Estimates of out-of-school children rose from 2.2 million in 2018 to 2.8 million in 2020. - Age and quality issues - Over 89 percent of primary school students and 93 percent of secondary school students are overage. - More than 60 percent of teachers has no formal training. - One-third of schools are damaged or destroyed. - Pupil teacher ratio (PTR) is high; in some rural areas it exceeds 70 to 1. - Only 15 percent of head teachers report that every student has a pen or pencil and their own exercise book or notepad. - Only 24 percent report that all instructors had a complete set of textbooks for the topics they taught. - A working supply of clean water was reported to be unavailable in one-third of schools. - Nutrition and school feeding - Over 60 percent of headteachers report that no children (31 percent) or almost no children (30 percent) eat before school. - 64 percent of headteachers indicate that students did not get a lunch at school or food to take home. - WFP supplies daily hot meals in over 1,000 schools throughout the country. ### Health — scope of crisis and coverage gaps - Access and capacity - Only 44 percent of the population are estimated to live within reach of health facilities and have consistent access to primary care services. - UHC effective coverage index is about 41 percent. - The country's Health SDG indicators (SDG 3) are unfavorable. - The proportion of population using basic drinking water services is about 41 percent. - Only about 11 percent of the population have access to basic sanitation services. - Mortality and disease burden - 1 in 10 children die before the age of five. - Routine immunization rate is 44 percent. - Child mortality rate is 78 per 1,000 live births. - Maternal death rate is 789 per 100,000 births. - Approximately 75 percent of all child fatalities are attributable to avoidable illnesses such as diarrhea, malaria, and pneumonia. - System weaknesses - Health system faces severe capacity crisis: inadequate access to health care, shortage of health personnel, lack of essential medicines and supplies, insufficiently trained workforce, weak health information system. - Health care provision is heavily dependent on donor financing; the health sector is underfunded and inefficient. ### Social protection — institutions, financing, and programs - Institutional framework and gaps - South Sudan's social protection assistance system is underdeveloped and there is no comprehensive social safety net in place. - The national budget does not allocate any noteworthy resources for social assistance. - NSPPF (National Social Protection Policy Framework) adopted in 2015 envisions a nationwide social protection system and pledged 1 percent of yearly budget to MGCSW; implementation progress has been slow due to lack of resources, capacity and coordination. - No operational system for collecting and analyzing social spending and protection data; dearth of information hampers evidence-based policy. - NSPPF design and components - Emphasizes non-contributory social protection: unconditional cash transfers (to children, the elderly, people with disabilities, and ex-combatants), in-kind benefits (school nutrition), fee waivers (scholarships for females), subsidies (agricultural inputs), and unconditional cash transfers (public works). - Envisions future contributory schemes: pension for public officials and community-based insurance. - National Social Protection Working Group (NSPWG) is the key forum for collaboration; monitoring and evaluation mechanism exists but is under-resourced and not fully operationalized. - Donor dependence and major programs - Nearly all funding for social protection programs comes from donors: World Bank, WFP, FCDO (formerly DFID), and Global Affairs Canada (GAC). - UNICEF has helped MGCSW in mapping social protection spending. - World Bank: South Sudan Safety Net Project (SSSNP) and Safety Net and Skills Development Project (SNSDP) — 2014−19; 2020−22. - WFP implements Food Assistance for Assets (FFA) — 2018 extended ongoing as of 2021; Urban Safety Nets (USN) — 3 years extended ongoing as of 2021; School Feeding Programme (SFP) — 2018; extended ongoing as of 2021. - FCDO & GAC: Girls' Education South Sudan 2 (GESS 2) — 2019−24 (5 years). - FCDO (funder): Building Resilience through Asset Creation and Enhancement (BRACE) II — 2016−20 extended ongoing as of 2021. - Government of South Sudan: Budget allocation to MGCSW 2018–19 (1 year). - Program specifics - SSSNP Labor-Intensive Public Works component: conditional cash payments; pays each beneficiary family US$ 361.80 in exchange for a certain number of days of work on small scale community infrastructure projects; includes training in early childhood development, nutrition, financial literacy, and WASH. - SSSNP Direct Income Support: unconditional CBTs to low-income, labor-constrained families led by women, children, the elderly, people with disabilities, and/or those with chronic illnesses. - WFP FFA: provides six months of food assistance annually; households get around 35 kg of food each month, or US$ 40.50 per month in U.S. dollars (converted into SSP). - WFP USN: grants CBTs to disadvantaged urban families contingent on participation in five to ten days of capacity training. - WFP SFP: delivers meals and/or take-home rations to elementary school students. ### Child protection - Critical concerns - High prevalence of child labor. - Children affected by conflict, poverty and disease; recruitment into armed conflict remains a risk. - Need for a comprehensive child protection system for displaced, impoverished, and conflict-affected children. ### Recommendations — improving social services and fiscal policy - Increase social spending to improve access to healthcare, education, and social protection programs; adopt budgetary reforms to prioritize social spending. - Adopt a social spending–prioritized macro-fiscal policy to: - Provide fiscal space for social assistance. - Support reforms to make social assistance more effective and efficient. - Expand and ringfence coverage of social assistance programs in the budget. - Provide funding for the development of a national identification system or social registry to improve targeting. - IMF engagement and program design - IMF engagement should support government efforts to improve adequacy, sustainability, and efficiency of education and health spending. - The proposed PMB sets a floor on priority social spending — defined as spending on education, health, and social and humanitarian sectors — for FY2022/23 as a quantitative target (Table 5 b). - Possible future IMF program could support reforms to improve efficiency, such as introducing performance-based financing for education and health providers. - Collaboration with partners - Fund will largely rely on partners to design and implement social protection programs. - World Bank is the main provider of technical assistance in social protection. - WFP has expertise in cash transfers and program implementation. ### Capacity Development Strategy — IMF and partners' support - CD activities increased significantly to support reforms envisaged under the SMP program. - South Sudan joined AFRITAC East in May 2020. - AFRITAC East provided additional technical assistance and CD assessments. - TA missions covered monetary policy operationalization, liquidity management, financial sector supervision, banking resolution, PFM, government finance statistics, CPI statistics, and macro-fiscal analysis. - SMP framework allowed institution-building through program targets that may improve CD traction going forward. *Source: Republic of South Sudan — IMF staff report content (selected excerpts).* ### 2. There seems to be a new impetus to implement much-needed structural reforms, ### 2. There seems to be a new impetus to implement much-needed structural reforms, ### New impetus for reforms and implications for technical assistance (TA) - The peace agreement and engagement under the SMP have brought a new impetus in the authorities’ resolve to implement reforms; performance in implementing the most recent PFM TA has been good (in contrast with past experiences). - Low capacity suggests the near-term best course is streamlined and sequential technical assistance: - Focused on the most critical needs. - Delivered in small increments to allow step-by-step implementation and demonstrate continuous progress. - Incremental TA delivery, in person and through longer-term interactions, is preferred given absorptive constraints. ### Modality and format of capacity development (CD) - Authorities expressed a strong preference for longer-term, in-person TA. - Since March 2020 most TAs were provided virtually, which saved time and cost and allowed virtual follow-ups that improved absorption. - Experience under the SMP indicates in-person, longer-term hands-on TA has delivered the most tangible benefits. - The IMF has resumed in-person CD missions after pandemic restrictions; FAD approved assignment of an LTX on PFM and budget preparation expected to start around January 2023. - Post-pandemic virtual TAs expedited delivery and follow up, but weak IT capacity (e.g., IT facility only available in the CB board meeting room) is a challenge. ### AML/CFT status and CD needs - South Sudan is under Increased FATF Monitoring (Grey List) for AML/CFT risks; addressing this requires CD support. - Authorities committed to implementing an action plan developed in June 2021. - South Sudan approved as observer to ESAAMLG and committed to undertake a Mutual Evaluation by ESAAMLG. - Authorities requested TA in drafting needed AML/CFT legislation. - Potential TA scope: - Comprehensive review of the AML/CFT Act enacted in 2012. - Capacity development for the Financial Intelligence Unit. - Development of a legal framework to collect beneficial ownership information. - Work needed includes development of a National Risk Assessment, risk-based supervisory regimes, and a system for collection of beneficial ownership information. ### CD Priorities (summary of areas requested by authorities) - Authorities interested in CD topics related to Chapter IV implementation in the revitalized peace agreement and the AML/CFT action plan. - PFM reform program: - Fully owned by government; a concept note prioritizes 11 reform areas (Annex Box). - Requested and received assistance in TSA implementation, cash management, and arrears management. - Ongoing reforms will require additional support and follow-up TA. - A technical assistance program to support the National Revenue Authority predates the PFM impulse and is ongoing. - Central Bank support: - Further TA needed to carry forward SMP-initiated reforms: monetary policy, currency operations, FX management, banking supervision. - Recent TA on crisis resolution and addressing undercapitalized banks. - Interest in continuing support for monetary policy and FX management including introduction of a Term Deposit Facility. - Identified needs include assistance in compilation of statistics and implementation of safeguard assessment recommendations (e.g., Currency Operations TAs, IMF long-term expert to improve financial reporting). - Debt management: - Support underway and integral to SMP reforms. - A scoping mission assessed gaps; a joint FAD-MCM mission will build institutional framework and a medium-term debt strategy. - Priority CD growth topics: - Debt management, crisis resolution, public investment management, wage structure. - Assistance on CPI, national accounts, and external sector statistics subject to absorption capacity. ### Current PFM Reform Priorities in Republic of South Sudan - 1. Implement a TSA - 2. Strengthen cash management - 3. Relocate Loans Committee to MoFP - 4. Review, verify and clear all arrears - 5. Review and verify loans and contracts collateralized or guaranteed against crude oil - 6. Strengthen the Anti-Corruption Commission (ACC) and the Audit Chamber (external auditor) - 7. Establish a Public Procurement and Asset Disposal Authority (PPADA) - 8. Rollout electronic payroll using biometric system - 9. Strengthen Fiscal and Financial Allocation Monitoring Commission (FFAMC) ### Priority CD Topics: objectives and challenges - Public Financial Management - Objective: Support PFM reform strategy, implement TSA, improve cash management, improve debt management, and strengthen the macro-fiscal framework. - Challenge: Absorptive and implementation capacity is very low. Streamlined TAs focusing on small incremental steps recommended. - Revenue Administration - Objective: Improve petroleum revenue management and non-oil revenue. - Challenge: Institutional, absorptive and implementation capacities are very low. Coordination between MoFP and Ministry of Petroleum is weak. - Central Bank Operations - Objective: Improve monetary policy operations, FX management, liquidity management, currency operations, banking supervision and resolution, and debt management. - Challenge: Implementation capacity at the central bank is very low; TA required for most central bank operations. - Statistics - Objective: Improve monetary and financial statistics, balance of payments, debt statistics, CPI, and national accounts. - Challenge: Absorptive and implementation capacity is very low; ownership needs to be established. - AML/CFT - Objective: Review existing law, prepare for joining international conventions, develop legal framework on beneficial ownership. - Challenge: Institutional, absorptive and implementation capacities are very low; ownership needs to be established. ### CD Risks and engagement modalities - Key risk: Limited absorptive and implementation capacity due to political constraints, weak governance, high staff turnover, limited institutional memory, and frequent management changes. - Virtual missions were productive during COVID-19 (in-depth dialogue, did not stretch capacity), and South Sudan joined AFRITAC East in May 2020 which expanded CD delivery channels. - Engagement channels: Fund’s local office in Juba, bilateral meetings in HQ and Juba, workshops in neighboring countries, virtual meetings, and coordination with World Bank CD activities through the WB country manager in Juba. - Recommended modality: Incremental, in-person TA focused on critical needs, delivered through a series of longer-term interactions. ### Priorities by IMF Department (ordered by priority where indicated) - FAD - Debt Management (joint with MCM): Strengthen debt management framework including enhancing debt data recording, monitoring, reporting and disclosure. This is a high priority area. - Public Financial Management: Implement PFM reform strategy concept note, TSA implementation, cash management, and development of the macro-fiscal framework. - Expenditure policy: Enhance execution of the budget in line with plans and support fiscal discipline. - Revenue Administration: Improve petroleum revenue management; enhance non-oil revenue management through CD to the National Revenue Authority. - MCM - Debt Management (joint with FAD): Develop a medium-term debt management strategy. This is a high priority area. - Crisis resolution: Address prevalence of critically undercapitalized banks (CUBs), develop a crisis resolution framework, and strengthen central bank supervisory capabilities. This is a high priority area. - Liquidity forecasting and monitoring: Continue hands-on training and follow up virtual sessions to achieve issuance of daily liquidity reports. - Currency Operations: Develop a strategy to strengthen currency operations including purchasing, storage, processing, destruction activities. - Banking Supervision: Identify regulatory gaps and implement Risk Based Supervision (RBS); authorities requested TA on RBS. - Central bank operations: Enhance monetary policy implementation and introduce tools/facilities (e.g., term deposits). - STA - Monetary and financial statistics, balance of payments statistics, debt statistics: Support central bank operations. - Government Finance Statistics: Compile fiscal and public debt data. - CPI statistics: Improve collection and methodology of CPI calculation across different states. - Real Sector Statistics: Compute and publish national accounts statistics. - LEG - AML/CFT: Support authorities in identifying gaps in the legal framework and drafting legislation to address such gaps. ### Letter of Intent — key reform actions and financing request highlights (Juba, February 16, 2023) - Achievements since SMP start in March 2021: - Enacted FX reform and unified official and parallel exchange rates, eliminating a premium of over 200 percent between the two at the beginning of the SMP. - Eliminated all domestic salary arrears, which amounted to 5 months in January 2021. - Introduced revenue and customs administration reforms that resulted in a significant increase in non-oil revenue collection. - Increased transparency by publishing budget implementation reports for FY2020/21, FY2021/22, and the first quarter of FY2022/23; stock of external debt as of end-December 2021; monthly monetary surveys; regular FX auction reports; and audit reports of two disbursements under the Rapid Credit Facility. - Corrective measures taken after slippages for end-August 2022: - Halted monetary financing since August 2022; this stabilized the exchange rate and is expected to restore inflation to single digits over the course of the fiscal year. - Completed all reforms targeted under the structural benchmarks for the third SMP review. - Emergency financing request under the RCF food shock window: - Request amount: SDR 86.1 million, or 35 percent of quota (about US$115.7 million). - Proposed disbursement arrangement: Disbursed to the BoSS, which will create a separate monitored account at the BIS or US Federal Reserve. - Given a fiscal gap in FY2022/23 of SSP 254 billion (about 5 percent of GDP), request that about 37 percent of RCF support (US$43.1 million) be made available to the budget by on-lending by the BoSS on same terms as IMF, credited to a dedicated account at the BoSS. - Immediate transfers from RCF disbursement to humanitarian partners: - US$15 million to the World Food Programme (WFP). - US$5 million to the International Organization for Migration (IOM). - Remainder of budget portion to finance Ministry of General Education and Instruction and Ministry of Health through conditional transfers per FY2022/23 budget allocations. - Transparency and safeguards commitments: - All GoSS transactions recorded in IFMIS. - Auditor General to complete by end-September 2023 an audit of all central government spending funded from this disbursement; final AG report to be published on MoFP website. - MoFP, with World Bank assistance, to conduct a system’s review of expenditure chain in at least 3 States. - Joint assessment with WFP and IOM on impact of financed programs; findings to be made public. - Reform focus in near term: - Maintain macroeconomic stability, strengthen monetary policy framework, preserve exchange rate unification, and strengthen governance. - Fiscal discipline and debt sustainability: Execute FY2022/23 budget without recourse to monetary financing; ringfence social spending; increase non-oil revenue; contain spending within resource envelope; prioritize salaries, health, education, and peacebuilding. - Avoid contracting non-concessional debt except for (i) debt management operations that improve liquidity/solvency indicators without adversely affecting risk rating; or (ii) transactions financing critical investment projects with high social and economic return when concessional financing not available. IMF staff to be consulted prior to contracting any new non-concessional borrowing including oil presales and/or advances. - Strengthen monetary policy framework based on reserve money targeting: set quarterly reserve money targets; use FX interventions and the new term deposit facility (TDF) to steer reserve money; continue regular FX auctions; expand monetary policy toolkit and enhance the TDF. - Strengthen governance via PFM reforms consistent with the Immediate Action Plan: strengthen macro-fiscal framework and budget process; progress towards TSA; improve cash management; establish public procurement and asset disposal authority; start electronic payroll rollout using biometric system; implement outstanding IMF safeguards assessment recommendations. - Request for an IMF Staff-Monitored Program with Board Involvement (PMB) from January 31 to October 31, 2023 to support macroeconomic stabilization and reform track record. *Source: 1ssdea2023001 - 2. There seems to be a new impetus to implement much-needed structural reforms,* ### 1. Macroeconomic conditions have benefitted from the recovery of oil prices since mid- ### 1. Macroeconomic conditions have benefitted from the recovery of oil prices since mid- ### Macroeconomic impact of floods and oil production - Severe floods for the fourth consecutive year have weighed on the economy, hampering oil production and agricultural output, killing livestock, displacing communities, and reducing access to essential services and humanitarian aid. - Oil production declined from 169 thousand barrels/day (bpd) in FY2020/21 to 156 thousand bpd in FY2021/22. - Real GDP is estimated to have contracted by 2.9 percent in FY2021/22. - Oil production is expected to drop to around 150 thousand bpd in FY2022/23. - Expected real-GDP contraction of 0.3 percent in FY2022/23 (dominated by oil production decline despite projected agricultural growth). ### Inflation, exchange rate, and recent monetary pressures - Resumption of overdrafts from the Bank of South Sudan (BoSS) during March-August 2022 to reduce arrears contributed to a large expansion in reserve money and significant exchange rate depreciation. - Increase in global food and fuel prices since Spring 2022 contributed to a sharp increase in prices in Juba and other major cities. - Corrective actions: overdrafts from the BoSS were halted and the exchange rate has stabilized. - Short-to-medium outlook: inflation expected to remain elevated for several months due to heavy reliance on imports (refined fuel products, grains, medicine). - Policy expectation: restoration of steady money growth below 10 percent per year is expected to contain inflation in the near term and gradually restore it to single digits (absent further external shocks). ### Performance under the SMP (since March 2021) - Structural and policy advances: - Liberalized the FX market and unified exchange rates since August 2021, eliminating a premium of over 200 percent between the official and parallel market exchange rate present at the beginning of the SMP. - Eliminated all domestic salary arrears (stood at 5 months in January 2021). - Introduced revenue and customs administration reforms resulting in a significant increase in non-oil revenue collection. - Increased transparency: published budget implementation reports for FY2020/21, FY2021/22, and Q1 FY2022/23; published audit reports from the Auditor General Office on the two RCF disbursements; international audit firm completed and published a stocktake of external debts as a prior action for the RCF and PMB. - BoSS releases monthly monetary surveys and publicizes weekly FX auction results to banks and FX bureaus. - Quantitative targets (end-August 2022) and structural benchmark performance: - Met: floor on net international reserves; clearance of salary arrears (eliminated all domestic salary arrears as of August 2022). - Missed: ceilings on central government cash deficit, borrowing from the central bank, contracting or guaranteeing non-concessional borrowing, and reserve money growth — due to temporary BoSS overdrafts and use of oil advances for bridge financing. - Structural benchmarks for third review implemented or used as prior actions for RCF and PMB. - Drafting MOU between MoFP and BoSS expected to set out Treasury Single Account (TSA) arrangements; expected completion by January 2023 (ongoing). - Cash Management Unit (CMU) updated cash plans with IMF TA; Cash Management Committee (CMC) holds monthly reviews and approvals. ### Economic policy priorities and commitments - Macro objective: ensure macroeconomic stability to create conditions for robust and inclusive growth, supporting objectives in the Revitalized Peace Agreement. - Near-term focus: - Improve revenue collection. - Continue policy of no BoSS financing of the budget. - Contain spending within available cash to avoid re-emergence of domestic expenditure arrears while protecting and, if possible, expanding allocations to social sectors (education, health, social assistance). - Continue governance-strengthening reforms. - Fiscal policy focus: maintain macroeconomic and public debt stability, and reinforce transparency and discipline in budget execution. ### Fiscal policy and non-oil revenue progress - Non-oil revenue trajectory: - SSP 8.9 billion per year when National Revenue Authority (NRA) was set up in FY2016/17. - Reached SSP 83 billion in FY2021/22. - Under unchanged policies, non-oil revenue expected to reach over SSP 150 billion in FY2022/23. - Drivers: improved compliance from e-tax system (introduced in 2021) enabling online registration, filing, and payment; broader e-government initiatives. - NRA Strategic Plan (approved September 2022) aims to increase non-oil revenue from 2 percent of GDP projected in FY2022/23 to 6.5 percent of GDP by FY2027/28 through: - Simplifying the tax regime, introducing integrated tax management, operationalizing tax dispute resolution including a tax appeals court. - Promoting trade facilitation via customs modernization, automation, risk management, and post-clearance audits. - Increasing NRA staffing and ICT transformation. ### Revenue performance and projections for FY2022/23 - Total revenue for July-October 2022 was much higher than budget projections: - Non-oil revenue of SSP 49 billion in July-October 2022, double the revenue collected in the same period last year. - Higher oil prices offset the decline in oil production caused by floods. - Revised projection: overall revenue projected to reach SSP 1,587 billion in FY2022/23, compared to SSP 883 billion in the budget. ### Financing gap and contributors - Factors constraining fiscal space: - Need to allocate additional resources for salaries of about SSP 21.8 billion to accommodate increased military personnel as part of unification of forces. - Projected debt service and interest amounting to SSP 370 billion. - Sudan has lifted crude oil in excess of agreed transit fees without payment since end of TFA; value taken amounted to over US$400 million as of end-October 2022. - Resulting financing gap: SSP 255 billion in FY2022/23 under unchanged policies. ### Options and measures to close the financing gap (some to be included in a supplementary budget) - Revenue-side measures under consideration: - Gradually adjust the exchange rate used for assessing taxes on imported goods from current level 90 SSP/US$ (market rate about 770 SSP/US$) to raise customs revenue over time while containing social impacts. - Increase custom duty rates for some products (aligned with East African Community tariff commitments). - Further expand digitalization of the tax system. - Review and rescind tax exemptions not compliant with original agreements and phase out remaining discretionary exemptions. - Note: No additional revenues from these planned measures are projected until specifics are clarified (conservative approach). - Expenditure-side measures under consideration: - Reduce crude oil allocation for oil-for-infrastructure scheme from 20,000 to 15,000 barrels per day — projected savings of about SSP 107.1 billion at current oil prices. - Not transfer the 10 percent and 15 percent shares of oil revenue to the Future Generation Fund and the Oil Stabilization Fund, respectively — reducing financing needs by about SSP 157 billion. - Seek international partner intermediation to reach agreement with Sudan on receiving payment for credits accumulated for delivery of oil in excess of transit fees, and on an equitable oil transit arrangement going forward. - Safeguards for social spending and salaries: - Allocate proceeds of one oil cargo every month to salary payments. - Include separate quantitative targets (floors) in the PMB on spending for salaries and for social spending (health, education, social protection). - Public salaries: - Economic Cluster exploring strategy to raise public sector salaries, with any wage increases fully offset by revenue and expenditure measures. ### Debt and non-concessional financing stance - Commitment to execute FY2022/23 budget without reliance on non-concessionary external financing. - Will refrain from contracting or guaranteeing new non-concessional loans for the duration of the PMB unless: - (i) debt management operations improve key liquidity and/or solvency indicators without adversely affecting risk rating; or - (ii) loans finance critical investment projects with high social and economic returns integral to national development with no concessional financing available. - Will avoid non-concessional borrowing with high effective interest rates due to hidden fees and short maturities. - Continue to refrain from contracting oil-backed loans (Cabinet Resolution of October 2020). - Will consult IMF staff prior to contracting or guaranteeing any new non-concessional debt. - Will build a buffer of at least one month of fiscal outlays to reduce need for expensive oil advance payments. ### Exchange rate, monetary operations, and liquidity management - Reserve money targeting framework: - Reserve money targeting remains the appropriate monetary policy framework. - Target an annual reserve money growth rate of 10 percent or lower (as initiated in March 2021 under the SMP). - Continue regular FX auctions and publish auction data on BoSS website. - New instruments and liquidity operations: - Introduced in October 2022 a term deposit facility with 14-day and 28-day maturities to expand BoSS toolkit. - As of end-November 2022, mopped up about SSP 23.7 billion (about 30 percent of the outstanding stock of banks’ excess reserves with the BoSS at end-September 2022). - Plan to expand maturities to 90 days, 3-months and 6-months based on bank interest and refine the facility to manage liquidity. - Coordination with MoFP via Liquidity Working Group and CMC to improve liquidity monitoring and forecasting. ### Banking sector capitalization, supervision, and financial inclusion - Approach to undercapitalization: - Promote bank mergers where possible; enforce liquidation where needed. - Revoked licenses of 2 inactive banks that exceeded 6-month threshold to start operations after license issuance. - Prepared, with IMF TA, a strategy to review licenses of banks that ceased operations and address undercapitalization; strategy to be approved by BoSS Board by end-June 2023 (proposed structural benchmark). - Supervision and disclosure measures: - BoSS has published audited financial statements through 2020; audited statements for 2021 are being finalized and will be published shortly. - Will enforce publication by April 2023 of audited financial statements by all commercial banks operating in South Sudan. - Requested all banks to supply BoSS with granular deposit data to aid planning for possible deposit insurance scheme as part of EAC integration commitments. - With IMF assistance, compiled new quarterly Financial Soundness Indicators (FSIs) in line with best practices; published FSIs for end-September 2022 and will continue quarterly publications within one month after quarter end. - Will submit FSIs to IMF Statistics Department regularly for dissemination. - Medium-term: reduce cost of cash transactions by phasing out low denomination bank notes and reduce cash reliance through supportive policies, including paying civil servants through bank accounts. ### Transparency, oil revenue management, and governance reforms - Oil revenue transparency: - Summaries of oil-sharing agreements for GPOC, SPOC, and DPOC published in annual Petroleum Reports and on Ministry of Petroleum (MoP) website; latest published annual report covers June 2020-May 2021; FY2021/22 report to be published shortly. - Intend to publish all three oil-sharing agreements in full, subject to investor consent given contractual disclosure restrictions. - Plan to publish quarterly petroleum reports on MoP website, including monthly oil output and revenues, starting from first quarter of 2023 (proposed structural benchmark). - Will submit membership application to EITI by end-February 2023 per revised Road Map. - Auditor General reports and follow-up: - Published audit report regarding use of funds under second RCF disbursed March 2021 (December 2022); audit report for first RCF (November 2020) published September 2021. - Working with Auditor General’s office to provide additional documentation and address discrepancies and mission information identified. - Adopted as prior action for PMB and RCF request an action plan to implement Auditor General recommendations, including: - (i) gradual rollout of payment of salaries for all central government employees through commercial banks, aiming for completion by end-June 2023; and - (ii) initiate issuance of biometric identifications to all central government employees and organized forces (carried out by Ministry of Public Service with World Bank technical support). - MoFP will provide monthly progress reports to the PFM Oversight Committee on implementation of these reforms. *Source: Republic of South Sudan — IMF document excerpt (1ssdea2023001)* ### 16. We have continued to strengthen our expenditure controls and to improve the ### 1ssdea2023001 - 16. We have continued to strengthen our expenditure controls and to improve the ### Strengthening expenditure controls and budget transparency - MoFP is authorizing spending based on cash projections prepared by the Cash Management Unit of the MoFP and approved by the CMC to contain spending commitments within available cash. - Spending limits in the upgraded IFMIS are regularly made consistent with CMC-approved cash plans. - Starting with the FY2022/23 budget, all infrastructure spending, including expenditures financed from the oil for infrastructure scheme, are recorded in the appropriate IFMIS module. - Budget execution reports published on the MoFP website for: - FY2020/21 - FY2021/22 - First quarter of FY2022/23 - Commitment: continue to publish quarterly budget execution reports, including spending under the oil-for-infrastructure scheme, within three months after the end of each quarter. ### Public Procurement and Disposal Authority (PPDA) - PPDA established by the PPDA Act in 2018; Board not yet appointed. - Prior action for the RCF and PMB: President of South Sudan will appoint the PPDA’s Board of Directors. - Expected outcomes once Board appointed: - Adoption of the Public Procurement Regulations and Standard Procurement Documents (prepared with World Bank assistance). - Improved oversight of procurement and asset disposal activities. - Promote a level playing field for the private sector and deliver effective public services. ### External borrowing, guarantees, and public debt management - Auditor completed stocktake of external debt and guarantees; findings and recommendations published on MoFP website as a prior action for the RCF and PMB. - Debt stocktake: - Confirmed broadly external debt data as of end-2021 previously published. - Updated the external debt stock to end-June 2022. - Actions and commitments: - Established a consolidated database of all existing external debt obligations, including guarantees and oil advances. - Maintain database up to date, adopt the debt module in IFMIS, and publish a debt report quarterly on the Ministry of Finance website no later than 30 days following each quarter. - Specific institutional/legal steps: - Ministerial Order by end-March 2023 to set out working methods and role chart of the Technical Loan Committee (TLC), clarifying TLC as driver for negotiating all loan contracts and guarantees and appointing the Debt Management Unit (DMU) as TLC secretariat; vetting process to include risk assessment by DMU. - Proposal to remove Section 10(3) from the BoSS Act (which allows BoSS to extend guarantees) as part of a broader BoSS Act revision; proposed package tabled in the Constitutional Review Committee (prior action). - MoFP to send Council of Ministers an up-to-date list of all remaining valid guarantees issued by BoSS for Council determination and possible rescission of guarantees that do not meet development-purpose standard. - Register of all remaining valid guarantees to be published on the BoSS website by June 2023. - With IMF support (TA mission Nov 30–Dec 13, 2022), adopt by end-March 2023 an action plan to strengthen debt management strategy (proposed structural benchmark). ### Bank of South Sudan (BoSS) safeguards and audits - Actions taken in response to IMF safeguards assessment: - Publication of audited financial statements through 2020; audited statements for 2021 are being finalized and will be published on the BoSS website. - Signing in September 2022 of a Memorandum of Understanding between BoSS and the Auditor General to ensure appointment of an international audit firm to audit BoSS financial statements from CY2022 onwards (meets a structural benchmark for the third review of the SMP). - National Audit Chamber to launch competitive public tender for multi-year appointments based on agreed terms of reference. - Planned safeguards-related actions by end-March 2023: - Develop a comprehensive strategy to address vulnerabilities and strengthen currency operations (purchasing, storage, processing, destruction). - Send tender requests to reputable currency manufacturers and review bids against tender criteria. - Conduct a cost benefit analysis of replacing low denomination banknotes with coins. - Additional control measures: - Drafting Terms of Reference to engage an audit firm to co-source internal audit activities. - Use a monitored account at the BIS or Fed for IMF disbursements; validate transactions on test dates by auditors; provide monthly statements to the IMF. - BoSS to continue providing IMF staff access to recently competed audit reports and authorize BoSS’ external auditors to hold discussions with IMF staff. ### AML/CFT reforms - Progress: - Established the Financial Intelligence Unit (FIU). - FIU became a member of the Eastern and Southern Africa Anti-Money Laundering Group in November 2022. - FIU provided with budget and premises; staff increased to 29; training provided to strengthen supervisory capacity. - Gaps and next steps: - Limited progress on the FATF action plan; discussions started with the FATF to update the action plan with a new timeline. - Immediate resumption of engagement with IMF Legal Department TA team to facilitate a diagnostic mission in early 2023 to draft a revised AML/CFT Act to incorporate current FATF Standards. - Request TA from donors to structure a fully independent and operational FIU and to conduct the national risk assessment. ### Quantitative targets — selected outcomes (from Table 1) - Central government's primary cash budget deficit (ceiling: in billions of SSP) - End-Jun 2021 SMP Target: 10.0 - End-Jun 2021 Actual: 25.9 (Not met) - End-Oct 2021 SMP Target: 35.9 - End-Oct 2021 Actual: 32.0 (Met) - End-Aug 2022 Target: 25.0 - End-Aug 2022 Prel. Actual: 73.4 (Not met) - Central bank net credit to the central government (ceiling: in billions of SSP) - End-Jun 2021 SMP Target: 0.0 - End-Jun 2021 Actual: 0.0 (Met) - End-Oct 2021 SMP Target: 0.0 - End-Oct 2021 Actual: 25.0 (Not met) - End-Aug 2022 Target: 25.0 - End-Aug 2022 Prel. Actual: 312.9 (Not met) - Contracting or guaranteeing of non-concessional borrowing (continuous ceiling: in millions of U.S. dollars) - End-Jun 2021 SMP Target: 0.0 - End-Jun 2021 Actual: 650.0 (Not met) - End-Oct 2021 SMP Target: 0.0 - End-Oct 2021 Actual: 0.0 (Met) - End-Aug 2022 Target: 0.0 - End-Aug 2022 Prel. Actual: 450 (Not met) - Average net international reserve (floor: in millions of U.S. dollars) - End-Jun 2021 SMP Target: 85.0 - End-Jun 2021 Actual: 131.0 (Met) - End-Oct 2021 SMP Target: 284.0 - End-Oct 2021 Actual: 406.0 (Met) - End-Aug 2022 Target: 170.0 - End-Aug 2022 Prel. Actual: 266.7 (Met) - Clearance of salary arrears (floor: in billions of SSP) - End-Jun 2021 SMP Target: 7.3 - End-Jun 2021 Actual: 14.5 (Met) - End-Oct 2021 SMP Target: 14.5 - End-Oct 2021 Actual: 10.6 (Not met) - End-Aug 2022 Target: 18.2 - End-Aug 2022 Prel. Actual: 18.2 (Met) - Average reserve money growth (ceiling: in percentage points) - End-Jun 2021 SMP Target: 5.0 - End-Jun 2021 Actual: -2.6 (Met) - End-Oct 2021 SMP Target: 10.0 - End-Oct 2021 Actual: -5.4 (Met) - End-Aug 2022 Target: 15 - End-Aug 2022 Prel. Actual: 105 (Not met) ### Proposed PMB quantitative targets (selected, from Table 2) - Non-oil primary balance (floor: in billions of SSP) - End-Mar 2023 Proposed: -830.0 - End-Jun 2023 Proposed: -996.0 - Central bank net credit to the central government (ceiling: in billions of SSP) - End-Nov 2022 Actual: 178.0 - End-Mar 2023 Proposed: 178.0 - End-Jun 2023 Proposed: 178.0 - Contracting or guaranteeing of non-concessional borrowing (continuous ceiling: in millions of U.S. dollars) - End-Nov 2022 Actual: 0.0 - End-Mar 2023 Proposed: 0.0 - End-Jun 2023 Proposed: 0.0 - Average net international reserve (floor: in millions of U.S. dollars) - End-Nov 2022 Actual: 97.5 - End-Mar 2023 Proposed: 141.5 - End-Jun 2023 Proposed: 151.5 - Reserve money growth (ceiling: in percent) - End-Mar 2023 Proposed: 5.0 - End-Jun 2023 Proposed: 7.5 - Salary payments to central government workers (floor: in billions of SSP) - End-Mar 2023 Proposed: 106.7 - End-Jun 2023 Proposed: 142.3 - Priority social spending (floor: in billions of SSP) - End-Mar 2023 Proposed: 112.1 - End-Jun 2023 Proposed: 149.4 ### Structural benchmarks and timelines (selected items from Table 3) - SMP: Publish findings and recommendations of the audit of the spending of the April 2021 RCF disbursement - Target Date: Aug-22 - Current Status/Rationale: Not met. Implemented with a delay in December 2022 - SMP: BoSS to sign an MoU with the Auditor General to ensure timely appointment of an international external audit firm from CY2022 onwards - Target Date: Oct-22 - Current Status/Rationale: Met. - PMB Proposed / Prior actions: - Adopt action plan for implementation of recommendations in the Auditor General’s audit report of the two RCF disbursements: Prior action — Met. - Submit proposed revisions to the BoSS Act to remove Section 10(3) so BoSS cannot issue sovereign guarantees: Prior action — Met. - Publish the audit report submitted by the external auditor in December 2022: Prior action — Met. - Board of the Public Procurement and Disposal Authority to be appointed: Proposed Prior action — Improve governance. - MoFP to develop and adopt by end-March 2023 an action plan to strengthen institutional framework for debt issuance and management and formulate a debt management strategy: Proposed Mar-23 — Maintain debt sustainability. - National Assembly to adopt amendments to the BoSS Act to align with international best practices: Proposed May-2023 — Improve governance. - BoSS to adopt an action plan to implement recommended action items on banking sector reform developed in August 2022 by BoSS staff with MCM: Proposed Jun-23 — Support financial stability. - Publish all signed oil production sharing agreements and quarterly oil sector reports: Proposed Jun-23 — Enhance transparency. - Completion and publication of an audit of the spending of the new RCF disbursement under the FSW: Proposed Sep-23 — Ensure transparency and accountability in the spending of emergency resources. *Source: Technical Memorandum of Understanding and related sections of the Memorandum on Economic and Financial Policies (MEFP), Republic of South Sudan.* ### 6. Contracting or guaranteeing of new non-concessional external debt by the central ### 6. Contracting or guaranteeing of new non-concessional external debt by the central ### Definition and scope - Applies to debt to non-residents with original maturity of one year or more at non-concessional terms and to guarantees issued to both residents and non-residents. - For program purposes, the definition of “debt” follows point No. 9 of the "Guidelines on Performance Criteria with Respect to External Debt" (Decision No. 6230-(79/140) as revised on August 31, 2009 (Decision No. 14416-(09/91)), attached in Annex I). - This quantitative target will be assessed on a continuous basis starting from program approval. ### Concessionality criterion and present-value calculation - A debt is concessional if it includes a grant element of at least 35 percent. - The grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. - The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt. - The discount rate used is the unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97). - For debts with a grant element equal or below zero, the PV will be set equal to the nominal value of the debt. ### Policy on contracting/guaranteeing new non-concessional debt - Discussion on the contracting and/or guaranteeing of any new non-concessional debt will only be undertaken after consultation with the IMF. - The program target is a zero-program target for new non-concessional debt and guarantees, with specified exceptions. - Exceptions to the zero-program target 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 critical investment projects with a high social and economic return that are integral to national development program and for which concessional financing is not available. ### Program monitoring and reporting related to external debt - The quantitative targets and structural benchmarks will be monitored in a quarterly assessment report prepared by the authorities at the end of each quarter. - Implementation and/or execution of structural benchmarks under the program will be reported to IMF staff within two weeks after their programmed implementation date. - The authorities will report the signing of any new external debt arrangements and the conditions pertaining to such debt to IMF staff and agree to consult IMF staff on any new external debt proposals. ### Reporting requirements (selected items from Table 1) - MoFP reporting items, frequency, and submission lag: - Table of government fiscal operations — Monthly — 4 weeks - Government tax and non-oil revenue — Monthly — 4 weeks - Oil production and revenue — Monthly — 4 weeks - Stock of salary arrears of the Central Government — Monthly — 4 weeks - Salary payments in total and by sector (including foreign mission and military/armed forces) — 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 reporting items, frequency, and submission lag: - BoSS balance sheet — Monthly — 4 weeks - Monetary Survey — Monthly — 4 weeks - Detailed FX Auction Results — Weekly — 1 week - List of guarantees issued by the BoSS — Monthly — 1 week ### Annex I: Relevant excerpt on the definition of debt (Executive Board Decision excerpt) - Debt is understood to mean a current (not contingent) liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, requiring the obligor to make one or more payments in assets (including currency) or services at some future point(s) to discharge principal and/or interest liabilities. - Primary forms of debt include: - i. loans (including deposits, bonds, debentures, commercial loans, buyers' credits, repurchase agreements, and official swap arrangements); - ii. suppliers' credits (deferral of payments after delivery of goods or services); - iii. leases (debt equals the present value at inception of all lease payments expected during the agreement period, 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. ### Connections to the Debt Sustainability Analysis (DSA) and program context - The PMB includes a condition on no new non-concessional borrowing, while the DSA’s baseline assumes forecasted non-concessional borrowing to close financing gaps if concessional financing does not materialize. - The DSA projects—starting in CY2023—new disbursements by bilateral, non-Paris club lenders with 8-percent interest rate, 7-year maturity, and 2 years grace period. - The DSA also assumes starting in FY2024/25 issuance of medium-long term domestic debt (initially about 10 percent of government financing needs). - Remaining financing gaps are assumed to be closed using non-concessional loans with 8-percent interest rate, 5-year maturity, and 1-year grace period. - The average nominal interest rate on external debt is reported as 5.9 percent in FY2021/22. _Italic: Excerpted and summarized from "6. Contracting or guaranteeing of new non-concessional external debt by the central" in the source content unit._ ### 7.3 percent in FY2022/23. Overall ### 1ssdea2023001 - 7.3 percent in FY2022/23. Overall ### Growth outlook - Growth: "7.3 percent in FY2022/23." - Growth expectation: "Overall growth is expected to recover in FY2023/24 onwards, in line with oil production and better agricultural production as domestic security conditions improve." - Medium-term path: "The slightly lower growth path in the medium term reflects global headwinds and fiscal consolidation." ### Fiscal assumptions and primary balance - Primary expenditures: "Primary expenditures are lower compared to the previous DSA." - Transit/processing fees and TFA: current analysis "assumes stable transit and processing fees and reflects the continuation of TFA payments ... incorporating it not as an expenditure but as negative financing." - Effect on primary balance: "As a result, expenditures decline ... Accordingly, the primary balance is higher in the current vintage, and remains in surplus throughout the medium term." - Fiscal adjustment realism tool: three-year adjustment in primary balance "is higher than 2.5 percentage points of GDP, as it is forecasted to increase from 3.9 percent of GDP in FY2022/23 to 8 percent in 2023/24." - Capital spending assumptions: - "Rationalization of capital spending from the very high levels (nearly 12 percent of GDP) in the FY2022/23 budget." - Oil-for-infrastructure project: "(around 8 percent GDP in 2022/23) is assumed to continue for at least the next 3 years (through 2024/25)." - Budgetary capital spending after project end: increase "from 2.4 percent of GDP to around 4.5 percent in 2025/26 and 9.5 percent in 2026/27, and then forecasted to stabilize around 5 percent in the long run." - Below-the-line balance: "improvement ... is minimal, as the continued payments to Sudan and the repayment of existing debt and debt service contribute to a sizeable financing gap." ### External sector, oil, and imports - Imports: "Imports are projected to be lower in percentage of GDP then previously forecasted." - Impact of continued payments to Sudan: "forecasted to reduce the government’s fiscal space in the short and medium term, impacting resources available to support imports." - Exports and oil prices: - "Exports, after peaking in FY2021/22 and FY2022/23 ... are projected to gradually decline reflecting the assumption of lower global oil prices over the medium term and in outer years." - Oil price projections: "revised down slightly for the near term compared to the July 2022 DSA" and "In the medium term, oil prices are forecast to be slightly higher to reflect the better-than-expected price for South Sudan crude oil (previous projections assumed a discount in the price of South Sudan’s oil relative to international benchmarks)." ### Inflation and monetary policy - Inflation: "Average inflation is expected to rise to 16.5 percent in FY2022/23." - Drivers and path: "This increase is mainly due to the recent SSP depreciation, with inflation forecasted to gradually decline to single digits over the medium term on the assumption that the restoration of prudent money growth proves lasting." - Money growth target: "The assumption is that the BoSS stabilizes money growth at below 10 percent per year, in line with proposed PMB quantitative targets and stated BoSS policy." - Reserve money and sterilization: "Reserve money sharply increased in the second half of FY2021/22, but authorities have since halted monetary financing and are taking steps to operationalize the reserve money targeting framework." - Medium-term inflation forecast: "inflation is forecasted to settle around 8-9 percent after the effects of the recent episode of monetary financing wear off." - Exchange rate assumption: "In line with historical evidence, the exchange rate is assumed to move one-for-one with the money supply in the medium term." - FX auctions: "Auctions of FX are ongoing, albeit at reduced volumes reflecting improved FX liquidity in the market and a prudent management of SSP liquidity by the BoSS." ### Debt carrying capacity and stress tests - Debt carrying capacity classification: "SSD’s debt carrying capacity remains classified as weak." - Composite indicator (CI): "CI of South Sudan is evaluated at 1.33, a slight decrease from the score of 1.36 of the previous vintage DSA update." - CI determinants: "The CI score is determined by the World Bank’s Country Policy and Institutional Assessment (CPIA) and other variables such as real GDP growth and import coverage of foreign exchange reserves." - Tailored stress tests included: - Commodity price test: "one standard deviation decline in oil prices and a 6-year period for closing the financing gap that arises." - Contingent liability test: "tailored to include an additional 5 percent of GDP to account for the arrears to diplomats in foreign missions ... estimated to amount around US$150 million, and other potential obligations including discovery of additional legacy debt or confirmation of arrears on goods and services." - Market financing tailored test: "not included ... as it is not applicable yet to South Sudan." - Sensitivity outcomes: "The indicators of external debt are sensitive to the commodity price and contingent liabilities shocks." The commodity-price decline is "the most extreme shock" affecting debt-service indicators most strongly. ### External debt sustainability findings - Risk assessment: "The risk of external debt distress for South Sudan is assessed as high given the baseline projections with the current borrowing assumptions." - PV of external-debt-to-GDP: "under the baseline scenario breaches the threshold through FY2024/25 ... and is forecasted to remain below the threshold in the medium term." - PV of debt-to-exports: "remains below the threshold throughout the period in the baseline analysis." - Debt service ratios: - "debt service-to-exports ratio and debt service-to-revenue ratio indicators breach the thresholds in the short/medium term." - "external debt service-to-exports ratio breaches the threshold through FY2024/25." - "debt service-to-revenue ratio exceeds its thresholds until FY2029/30." ### Public debt sustainability findings - Risk assessment: "The risk of public debt distress for South Sudan is assessed as high." - PV of total public debt-to-GDP: "is forecasted to breach the threshold until FY2026/27 in the baseline scenario." - Specific levels: "The indicator is forecasted to be above the threshold at 54 percent in FY2021/22, and to subsequently decrease to 47.2 in FY2022/23 and 46.2 in FY2023/24." - Bound tests: "The most severe scenario amongst the bound tests is the primary balance scenario, in which the PV of debt-to-GDP ratio breaches the threshold through 2030/31." ### Risks and vulnerabilities - Global shocks: "The deterioration in global conditions poses an additional challenge ... The War in Ukraine has led to an increase in food and refined fuel prices and deteriorating food access." - Aid and financing risks: "the war is also expected to have a negative impact on international aid ... The tightening of global financial conditions may also pose risks by making it more difficult and expensive for South Sudan to access external financing." - Social and political risks: "These factors, together with the risk of weak governance of reforms and spending and climate-related natural disasters, also heighten the risk of social unrest, civil conflict, and increased violence." - Data and management reforms: recommended actions include "improve debt management (including through an external debt stocktake) and public financial management practices, domestic revenue mobilization, and development of a domestic market." - Stocktake and TA: "Fund and World Bank TA is supporting the strengthening of debt management within the MoFP, with the recommendation that authorities perform and publish an internal stocktake quarterly." - Monetary policy: "limiting monetization of the deficit and restoring prudent money growth is necessary to ensure inflation gradually declines to single digits." - Overall assessment: "South Sudan has very limited space to absorb any of these shocks, and therefore continues to be assessed at high risk of debt distress." ### Authorities’ views and program performance - Authorities' agreement: "The authorities agreed with the assessment of the DSA." - Policy commitments acknowledged: "remaining current on their debts, discontinuing oil advances, avoiding highly non-concessional borrowings, and the prudent fiscal and monetary policies discussed in the staff report to improve South Sudan’s debt sustainability." - Program support requests and context: - Request for RCF-FSW: "support under the RCF-FSW amounting to about 35 percent of the quota to meet urgent BOP needs." - Humanitarian context: "two thirds of the population is currently facing acute food insecurity." - SMP and PMB performance: - QPCs met/missed: "Two QPCs on arrears clearance and reserve accumulation were met, while the QPCs on central government cash deficit, central bank borrowing, reserve money growth, and sovereign guarantees were missed." - Corrective actions: "new economic team ... strengthened fiscal discipline ... halted recourse to central bank borrowing." - Structural benchmarks and audits: one SB "on the signing of the MOU for appointment of an international external audit firm for the third review was met." Audits of RCF spending were released, and "the independent external auditor conducted a comprehensive stock-take of all outstanding external loan agreements and guarantees ... submitted ... in December 2022 and the authorities published it in January 2023." *Source: 1ssdea2023001 - Republic of South Sudan DSA excerpt, IMF.* ### 6. Considering the satisfactory SMP performance under difficult circumstances, and the ### 1ssdea2023001 - 6. Considering the satisfactory SMP performance under difficult circumstances, and the ### Request for PMB and Rationale - Authorities request a PMB to deepen Fund engagement through a UCT-quality program. - The PMB is considered vital to support macroeconomic stabilization, build a track record of sound policies toward a future UCT-quality program, catalyze additional donor support, and help address protracted BOP challenges. - Authorities request emergency financing under the FSW and seek future monitoring of policies under the PMB to anchor recovery efforts. ### Recent Economic Developments and Outlook - Real GDP contracted by 3 percent in FY2021/22, reflecting dampening effects of floods on agricultural and oil production. - Oil production declined from historical averages of 170 thousand bpd to 150 bpd in FY2022/23. - Projected real-GDP contraction of 0.4 percent in FY2022/23 due to declining oil production offsetting projected agricultural growth. - Growth expected to recover from FY2024 onwards on the back of recovery in oil and agricultural production. - Average inflation dropped to 0.9 percent in FY2021/22 from 43.5 percent in FY2020/21; inflation is expected to increase to 16.5 percent in FY2022/23. - Authorities expect inflation to gradually decline to single digits, benefiting from policies to contain monetary growth. - Reserves remain below one month of import cover due to projected decline in international oil prices and diminishing international aid. - Larger portion of the FSW disbursement will be used to boost reserves; the balance will be channeled via the World Food Programme and International Organization for Migration for immediate humanitarian assistance and food insecurity. ### Fiscal Policy and Debt Management - Authorities remain committed to fiscal consolidation to ensure fiscal and debt sustainability. - Deepening revenue administration and customs reforms are yielding significant gains in non-oil revenues. - Council of Ministers approved in September 2022 the first Strategic Plan for NRA for the next five years. - Under SMP reform implementation: - Authorities cleared all domestic salary arrears, which stood at 5 months in January 2021. - Introduced revenue and customs administration reforms leading to a significant increase in non-oil revenue collection. - Enhanced fiscal transparency by publishing budget implementation reports for FY2020/21, FY2021/22, and the first quarter of FY2022/23 in January 2023. - Action plan adopted to address AG’s audit report findings, including: - Progressive rollout of payment of salaries for all central government employees through commercial banks, targeted completion by end-June 2023. - Issuance of biometric identification cards to central government employees and organized forces with Ministry of Public Service and World Bank technical support. - MoFP to submit monthly progress reports to the PFM Oversight Committee. - Fiscal space constraints and specific measures: - South Sudan’s obligations to Sudan under the Transitional Financial Agreement (TFA) ended in March 2022; Sudan continues to lift the same amount of crude oil without payment. - Accumulated amount Sudan owes to South Sudan exceeds US$300 million (about 4 percent of GDP) as of end-2022. - Financing gap in FY2022/23 driven by accumulation and past non-concessional borrowing. - Plans to bridge the gap by adjusting the exchange rate used for assessing taxes on imports; increasing customs duty rates for some products; reviewing tax exemptions to rescind those in noncompliance and phase out remaining ones while ringfencing social outlays. - Budget discipline and expenditure rationalization measures: - Reduce crude oil allocated for the oil-for-road infrastructure scheme from 20,000 to 15,000 bpd. - Will not transfer the 10 percent and 15 percent share of oil revenue to the Future Generation Fund and the Oil Stabilization Account, while ensuring timely payments of salaries. - Planned public wage increases expected to align with regional standards and be fully offset by revenue and expenditure measures. - MoFP authorizes spending based on cash projections prepared by the Cash Management Unit (CMU) and approved by the Cash Management Committee (CMC); spending limits in their upgraded IFMIS aligned with approved cash plans. - MoFP will ensure all transactions arising from the RCF-FSW are recorded in the IFMIS. - Strengthening expenditure controls, improving transparency, and strengthening cash management and monitoring to avoid recurrence of salary and other arrears. - Debt management stance: - Committed to prudent debt management and to refrain from monetary financing in the FY2022/23 budget. - Will avoid further non-concessional borrowing unless: (i) debt management operations improve key liquidity 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 and concessional financing is unavailable. - Will continue to refrain from contracting oil-backed loans and consult IMF staff prior to contracting or guaranteeing any new non-concessional debt. - Resolved to remain current on debt payments and adhere to prudent borrowing practices. ### Monetary, Exchange Rate, and Financial Sector Policies - Authorities halted monetary growth and are operationalizing a reserve money targeting framework to rein in inflation. - Target annual reserve money growth rate at 10 percent or lower. - Continue to conduct regular FX auctions to aid price discovery and publish auction data on the BoSS website in a timely manner. - Introduced a Term Deposit Facility in October 2022 with initial maturities of 14-day and 28-days as a step toward expanding policy toolkit and restoring treasury bills. - Committed to maintaining unified exchange rates since August 2021, eliminating a premium of over 200 percent between the official and parallel market exchange rates at the beginning of the SMP. - Bank publicizes results of weekly FX auctions to banks and bureaus. - To restore financial stability: - Plan to address bank undercapitalization by promoting mergers where possible and enforcing liquidation. - Plan to revoke licenses for some inactive banks that exceeded the 6-month threshold. - Leveraging IMF TA, prepared a draft strategy to review licenses of banks that have ceased operations; strategy to be approved by the BoSS Board by end-March 2023. - December 2022 actions included revoking licenses of two inactive banks, aligning with safeguards assessment recommendations. - External audit and financial sector transparency measures: - External auditor finalizing audited financial statement for 2021 which will be published shortly. - BoSS signed an MoU with the AG’s office to ensure appointment of a reputable international audit firm to audit BoSS financial statements from FY2022 onwards. - Banks to supply BoSS with granular data on deposits to aid planning for a deposit insurance scheme as part of commitments to further integration within the EAC. - Leveraging IMF TA, compiled new quarterly Financial Soundness Indicators (FSIs) in line with current best practices and published them on the BoSS website for end-September 2022; will continue to frequently publish FSIs. ### Structural and Governance Reforms - Commitment to improving governance and accountability and ensuring transparency over resource management. - Petroleum Reports through FY2020/21 are available from the Ministry of Petroleum’s (MoP) website. - Authorities will publish the summary of oil sharing agreements under the three existing agreements in the annual Petroleum Reports and post them on the website. - Operationalizing the Public Procurement and Disposal Asset Authority (PPDA): - Government appointed the Board of Directors to the PPDA on February 17, 2023. - Appointment seen as critical to operationalizing PPDA and indicates political commitment to the Revitalized Peace Agreement. - Improving external loan and guarantee processes and enhancing public investment spending efficiency. - Implementation of remaining recommendations from the 2021 safeguards assessment targeted by end-March 2023. - Progress on AML/CFT reforms: - Established and resourced the Financial Intelligence Unit (FIU), increased staffing levels, and obtained approval for full membership of the ESAAMLG in September 2022. - Will leverage IMF Legal Department TA for a diagnostic mission in early 2023 to draft a revised AML/CFT Act incorporating FATF standards. - Requested donor TA to structure and ensure full and independent functionality of the FIU while conducting the national risk assessment; will request a mutual evaluation by ESAAMLG in future. - Progress in implementing the Revitalized Peace Agreement and enhancing security; planned general elections scheduled by end-2024. - Revised Roadmap of key milestones ratified by Parliament, including economic and public financial management reforms in Chapter IV of the agreement, mitigating downside risks. ### Conclusion - Authorities reaffirm commitment to implement sound macroeconomic policies. - They look forward to Executive Directors’ support for their request for emergency financing under the FSW and future monitoring of policies under the PMB to support recovery and unlock medium-term growth potential. *Source: 1ssdea2023001 - 6. Considering the satisfactory SMP performance under difficult circumstances, and the* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1ssdea2023001.pdf_