## _cr05187

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---

### Executive Summary — performance under the 2003 SMP
- Policy performance in 2003 was in line with the program; all quantitative targets were met except the target on contracting nonconcessional external debt.
- Sudan made the agreed payment of $27 million to the Fund.
- Real GDP growth: 6 percent (2003).
- Inflation (average CPI, 2003): 7.7 percent (compared with 8.3 percent in 2002 and 7 percent under the program).
- Fiscal outcome: overall fiscal balance in surplus at 1 percent of GDP (2003); balanced budget under the program was 0.0 percent of GDP.
- Non-oil domestic balance: -7.3 percent of GDP (2003), 2 percentage points of GDP higher than in 2002.
- Oil sector: oil GDP growth 13 percent (2003); production rose from 232,000 bpd to 300,000 bpd between 2002 and 2004; government’s oil share rose from 120,000 bpd to 213,000 bpd.
- Structural benchmarks: most implemented; exceptions included expenditure management and fiscal reporting and incomplete audit/consolidation of SPC subsidiaries’ accounts.

### Recent macroeconomic and external developments (2003–Q1 2004)
- External current account deficit (cash basis): 4.9 percent of GDP (2003) down from 6.2 percent (2002).
- Usable official reserves rose by $283 million to $527 million (end-2003), equivalent to 1.8 months of imports (2003) compared with 1.0 month in 2002; above the program target of $456 million.
- Exchange rates: nominal U.S. dollar rate appreciated by 1 percent (2003); nominal and real effective exchange rates depreciated by 9.7 percent and 4.5 percent, respectively (2003).
- Broad money growth: 30.3 percent (annual basis) at end-December 2003 versus a program target of 23 percent; without BOS mop-up measures projected broad money would have reached about 35 percent by end-2003.
- Reserve money: grew 27 percent (annual basis) at end-December 2003 versus 22 percent at end-2002.
- Q1 2004: exchange rate vis-à-vis the U.S. dollar appreciated by 0.3 percent; inflation rose to 9.2 percent (year-on-year) by end-March; broad money growth reached 36 percent (year-on-year) by end-March, fueled largely by foreign exchange inflows.

Monetary table (Dec 2002 – Dec 2003, SDD billions)
- Reserve money: Dec. 2002 = 280.3; Program Dec. 2003 = 335.4; Dec. 2003 = 354.8; Percent change (from end-2002) = 26.6
- NFA (excluding valuation adjustment): Dec. 2002 = 169.9; Dec. 2003 = 247.1; Percent change = 45.5
- NDA: 393.4 (Dec. 2002); Program 460.5; Dec. 2003 = 487.0; Percent change = 23.8
- Broad money: Dec. 2002 = 563.3; Program Dec. 2003 = 694.3; Dec. 2003 = 734.1; Percent change = 30.3
  - Credit to government: Dec. 2002 = 130.8; Program = 101.4; Dec. 2003 = 111.7; Percent change = -14.6
  - Credit to nongovernment: Dec. 2002 = 198.9; Dec. 2003 = 312.1; Percent change = 56.9

### Fiscal developments and public finances (2003 outcomes; 2004 projections and measures)
- Total revenue (2003): 16.8 percent of GDP (oil 8.8 percent; non-oil 8.0 percent).
- Total expenditures (2003): 15.8 percent of GDP (current 12.7 percent; capital 3.1 percent).
- Balance (excluding OSA): 0.2 percent of GDP (2003).
- OSA balance: rose by SDD 36 billion (0.8 percent of GDP) to SDD 45.2 billion (1 percent of GDP) by end-December 2003.
- Total expenditures exceeded target by 2.3 percent of GDP due to emergency flood and humanitarian/security spending.
- 2004 fiscal projections and composition:
  - Overall fiscal deficit expected at about 1.2 percent of GDP (2.3 percent of GDP excluding OSA), largely due to foreign-financed development expenditures on the Merowe dam.
  - Non-oil domestic deficit projected to rise by 1.5 percentage points to 8.8 percent of GDP in 2004.
  - Domestically financed fiscal deficit (excluding the OSA) to be contained at about 1.0 percent of GDP.
  - Revenues: non-oil revenues estimated to rise by 1 percentage point of GDP to close to 9 percent in 2004; oil revenue expected to increase by 1 percentage point of GDP to 9.8 percent in 2004.
  - Program assumes an average annual price of Sudanese oil of $28.2 per barrel.
  - OSA benchmark price raised by $2 per barrel to $24; OSA expected to accumulate an additional SDD 55.5 billion (1.1 percent of GDP) in 2004.
  - Expenditures: current expenditures expected to rise from 12.7 percent of GDP in 2003 to 14.3 percent in 2004.
  - Public sector wages and pensions initially budgeted to rise by 50 percent, later moderated to 38 percent after mission advice.
  - Transfers to the states budgeted to increase by 0.8 percent of GDP.
  - Military spending budgeted to remain at about 2.5 percent of GDP.
  - Spending on social programs to increase to 1.7 percent of GDP (from 1.2 percent in 2003).
  - Development spending projected to increase by 2.5 percentage points of GDP to 5.6 percent, largely because of the foreign-financed Merowe dam project (1.7 percent of GDP).
- Revenue measures and tax reforms:
  - Authorities launched direct tax reforms; large taxpayer unit established; reforms to IEA incentive regime implemented (tightening exemption criteria, centralizing authority to grant exemptions, setting limits on renewing exemptions).
  - Box 1 tax measures being implemented in 2004 include: eliminating the 10 percent privilege tax rate on professionals; imposing an excise tax on petroleum products; raising excise on sugar; raising crude oil selling price to refineries; enforcing departmental fee collection; abolishing corporate tax exemptions for rehabilitation purposes; eliminating non-oil related tax privileges of the four major oil distribution companies; banning, through a cabinet decision, all exemptions granted outside the IEA.
  - Tax administration measures include: making the Large Taxpayer Unit fully operational by mid-2004 (covering about 200 largest entities accounting for about 60 percent of business and profit taxes and 70 percent of VAT collections); broadening definition of large taxpayers to include individuals; introducing a taxpayer identification number; beginning to transfer VAT collected by customs to the tax directorate on a daily basis; launching a pilot audit enforcement project; applying ASYCUDA++ nationwide.

### Monetary policy, BOS operations, and banking sector developments
- BOS liquidity measures in late-2003: reducing lending to government, open market sales of government securities, recalling BOS loans to banks.
- Monetary operations reforms completed: establishment of a Monetary Operations Unit (MOU) at the BOS; launch of Government Investment Certificates (GICs); amendment of central bank law to establish central bank independence and strengthen banking regulations; enactment of an anti-money laundering law.
- BOS reforms planned: transform MOU into a monetary operations division (MOD) by end-September 2004; create daily-maintained database supporting MOD and flash reporting.
- Monetary policy targets:
  - For 2004: broad money growth target of 22 percent.
  - Authorities committed to tighten monetary policy if necessary; liquidity absorption measures to be intensified in H1 2004.
  - Exchange rate: managed-float maintained; intra-day fluctuation margin to widen gradually from ±2 percent to ±3 percent during 2004.
- Banking soundness indicators (end-year, in percent):
  - Capital adequacy ratio: 2000 = 7.0; 2001 = 11.0; 2002 = 9.0; 2003 = 9.9
  - Ratio of nonperforming to total loans: 2000 = 17.0; 2001 = 16.0; 2002 = 12.7; 2003 = 11.4
  - Ratio of loan provisions to bad loans: 2000 = 29.0; 2001 = 23.0; 2002 = 24.0; 2003 = 22.0
- Banking system: 17 out of 24 banks complied with capital adequacy requirements; BOS measurements rated 14 banks as fair or better; BOS penalized noncompliant banks (including withholding dividend distributions).

### Privatization, investment, and external financing
- Privatization progress (2003–early 2004):
  - Gross privatization proceeds estimated at SDD 9.9 billion in 2003 ($38 million) compared with a projected SDD 6 billion ($23 million).
  - Major receipts from Duty-Free Shops and Free Zone, the Sudanese Estate Bank, and Atbara Cement Factory.
  - Sudanese Estate Bank and Atbara Cement Factory are now 100 percent foreign-owned.
  - Khartoum Bank: 20 percent of shares privatized thus far.
  - Expected gross receipts from privatization: more than 50 percent increase to about $60 million in 2004; planned companies to privatize in 2004 include the Bank of Khartoum, Sudanese Telecommunication Company, and Rabak Cement Factory.
- New financing contracted (Q1 2004): credit line from the EXIM bank of India for $50 million (grant element 16 percent) and a supplier credit line from China for $95.8 million (grant element 13 percent). A memorandum envisages additional infrastructure financing of about $150 million (decision pending).

### Trade regime, WTO accession, and external debt management
- Trade and tariffs:
  - Authorities recognize need for further trade liberalization but are concerned about revenue losses and resource requirements for peace and poverty reduction.
  - Medium-term tariff reform program in context of 2005 budget to further reduce tariff protection, coordinated with strengthened taxation.
  - Sudan’s simple average tariff is 22.6 percent; four nonzero tariff rates: 3, 10, 25, and 45 percent. Sugar imports subject to a stabilization tax in addition to the 45 percent import duty.
  - WTO accession: plans to submit two final documents by mid-2004.
- External debt management and policy actions:
  - Authorities will formulate and implement a new external borrowing policy consistent with repayment capacity and long-term debt sustainability.
  - Establish a high-level Debt Policy and Monitoring Committee (senior MOFNE and BOS officials) in Q2 2004 to formulate and implement external debt and new borrowing policies by September 2004.
  - Prepare a three-year rolling ceiling on external borrowing to be incorporated in the 2005 budget.
  - Mission urged improved capacity for post-peace negotiation and implementation of HIPC-related debt rescheduling and relief agreements.
  - Authorities stated they will not contract or guarantee new external debt on nonconcessional terms; mission cautioned against nonconcessional borrowing.
- Debt service and creditor relations:
  - Improved external position expected to increase external debt service capacity by $50 million in 2004 (to about $297 million).
  - Debt service/net current receipts ratio projected to decline from 15.6 percent in 2003 to 14.8 percent in 2004.
  - Resumption of payments in 2003 to World Bank ($5.5 million) and AfDB ($3 million); 2004 payments to multiple creditors projected with total payments to non-World Bank/AfDB creditors of $82 million and new disbursements over $300 million.
  - Largest payment in 2004 would be to China: $102 million, mainly to service Khartoum oil refinery construction loans.
  - Payments to the Fund: authorities proposed increasing the payment to the Fund to $30 million (from $27 million in 2003).

### Preparing for peace — budgetary and financing implications
- Authorities prepared an amended budget to be presented to parliament upon completion of the peace agreement.
- Amended budget to mobilize additional resources of about 1 percent of GDP in the second half of 2004 via revenue measures and spending reallocations; identified revenue measures that could generate about 0.2 percent of GDP in H2 2004 (not included in program projections).
- If revenue measures are not approved, expenditures would be reduced across most sectors while protecting social and key development programs.
- Authorities expect a substantial financing gap and hope for timely international assistance.

### Structural reforms, oil transparency, and public expenditure management
- Structural priorities for 2004:
  - Tax reforms (direct tax reform, IEA incentive reforms), large taxpayer unit operationalization, introduction of taxpayer identification numbers, VAT and excise measures.
  - Improvements in cash management and fiscal reporting: establish cash management unit (CMU), appoint cash release committee, issue regulations, prepare monthly fiscal reports within 2–3 weeks after month end, align budget classification with GFS by 2006.
  - Oil sector transparency: audit SPC subsidiaries and align accounts with international standards; timetable of 2004 actions prepared.
  - Public expenditure management: National Revenue Fund (NRF) to pool nationally collected revenues and put all revenues and expenditures on-budget; immediate measures include establishing CMU and action plans for fiscal reporting.
- Box 2 PEM benchmarks and timing:
  - By end-April 2004: fully constitute CMU, issue ministerial decree, appoint cash release committee, draft action plan.
  - By end-June 2004: CMU to prepare monthly fiscal budget cash plan for second half of year, approve via cash release committee, present to BOS; begin daily transfers of VAT collected by customs; activate large taxpayer unit.
  - By end-December 2004: complete review of all regulations and agreements granting tax exemptions; broaden definition of large taxpayers to include individuals; eliminate tax privileges of four major oil distribution companies; develop new three-year tariff reform program; formulate external debt policy and obtain cabinet approval.

### Staff appraisal, policy recommendations, and risks
- Staff appraisal: economic performance under the 2003 SMP was satisfactory; fiscal policy supportive; monetary policy improved though large capital inflows posed challenges; structural reforms progressed but fiscal cash management and SPC audits remain outstanding.
- Key staff policy recommendations:
  - Maintain a low domestically financed fiscal deficit and mobilize additional resources; strengthen tax revenue and reduce exemptions.
  - Contain military spending while increasing social development and agriculture support.
  - Moderate and phase future wage increases.
  - Monetary policy: be cautious; maintain flexible exchange rate; use open-market operations and MOD coordination to absorb liquidity.
  - Continue the OSA mechanism and review pace of reserve accumulation.
  - Curtail nonconcessional borrowing; strengthen external debt management and establish monitoring committee.
  - Maintain a relatively open trade regime and implement medium-term tariff reform with compensatory revenue measures.
  - Consolidate oil sector accounts to international standards.
- Key risks:
  - Delays in peace negotiations could undermine private capital inflows and balance-of-payments.
  - A peace agreement without timely donor support could create fiscal pressures amid FX inflows.
  - Sharp decline in oil price could undermine fiscal performance and balance-of-payments.

### Medium-term macroeconomic prospects and key projections (selected)
- Real GDP growth: 6.6 percent (2004); medium-term projections include 7.6 (2005), 9.3 (2006), 7.0 (2007), 7.1 (2008), 7.0 (2009).
  - Non-oil growth: 5.8 (2004); 6.2 (2005); 6.5 (2006); 7.2 (2007); 7.3 (2008); 7.3 (2009).
  - Oil growth series: 23.7; 24.7; 13.0; 14.4; 20.0; 38.9; 5.0; 5.0; 3.0 (2001–2009 sequence).
- Inflation (period average): 6.5 (2004); projections: 6.0 (2005); 5.5 (2006); 5.0 (2007); 5.0 (2008); 5.0 (2009).
- Investment and savings:
  - Gross domestic investment: 18.3 (2001); 19.1 (2002); 19.1 (2003); 21.6 (2004); projections: 23.8 (2005); 23.8 (2006); 23.7 (2007); 23.5 (2008); 22.0 (2009).
  - Gross domestic savings: 10.3 (2001); 12.8 (2002); 14.6 (2003); 16.3 (2004); projections: 18.5 (2005); 21.2 (2006); 19.9 (2007); 18.7 (2008); 16.9 (2009).
- External and reserves:
  - Usable international reserves: 244 (2002); 342 (2003); target $807 million (end-2004) equivalent to 2.5 months of next year’s imports at end-2003 baseline; gross official reserves projected to rise to 2.9 months (2005) and about 3–4 months by medium term.
- Debt service and external financing:
  - Total debt service paid: 158 (2000); 160 (2001); 137 (2002); 247 (2003); 297 (2004).
  - Payments to the Fund: 57 (2000); 55 (2001); 26 (2002); 28 (2003); 30 (2004).
  - Overdue obligations to the Fund (in millions of U.S. dollars): 1,451 (2000); 1,371 (2001); 1,475 (2002); 1,462 (2003); 1,445 (2004).
  - External financing requirements (gross financing requirements, in millions of U.S. dollars): 2,213 (2001); 1,877 (2002); 2,001 (2003); 2,286 (2004).

### Statistical issues, technical assistance, and data-strengthening actions
- Data strengths and gaps:
  - CPI compilation and dissemination commendable for Khartoum (monthly, shortly after month-end); national CPI available monthly with three-month lag.
  - National accounts: large deficiencies — use of 1968 SNA, oil sector value-added not completed, no real GDP by expenditure, annual data lag over three years, private consumption derived as residual, estimations rather than surveys for most components.
  - Government finance statistics: central government monthly reporting adequate but lacks consolidated state budgets and full functional classification.
  - Monetary statistics: broadly acceptable; weekly flash reports commendable; concerns about overestimation of international reserves, classification errors by banks, and large “other items (net)”.
  - External sector: BOP and trade reporting improved but problems with unusable/earmarked reserves, discrepancies between customs and BOS import data, incompleteness on FDI and services, and unreconciled creditor records.
- Technical assistance and recent actions:
  - STA mission recommendations (July 2003) led to GDDS metadata posted August 2003.
  - Early 2004: assistance for initial preparation of a statistics master plan; peripatetic real sector expert assisting national accounts.
  - TA history includes extensive missions on indirect taxation, monetary management, GFS, monetary statistics, BOP, VAT introduction, GDP/CPI, GDDS, and a December 2003 study (with Fund TA) on introduction of commodities futures/forward market in the agricultural sector.
- Key recommended statistical actions:
  - Rebuild Central Bureau of Statistics (CBS) capacity; introduce 1993 SNA; conduct agricultural census; implement household income and expenditure survey.
  - Improve accounting and reporting at MOFNE; introduce GFS classification; implement 1997 GFS TA recommendations.
  - Revise guidelines for consortium financing reporting; establish working group to review BOS foreign assets; reconcile BOS records with creditors; implement full recommendations of 1999 BOP TA.

### Program monitoring, structural benchmarks, and TMU definitions
- Program period: one year ending December 31, 2004; staff proposes semi-annual Board reviews (end-June and end-December), quarterly review missions, and reporting of significant developments.
- Main quantitative quarterly indicative targets (selected):
  - Ceilings on BOS net domestic assets.
  - Ceilings on domestic financing of the fiscal deficit.
  - Floors for buildup of gross usable reserves of the BOS.
  - Ceilings on new nonconcessional external loans contracted or guaranteed by the government.
  - Floors for payments to the Fund.
- Selected program memorandum items and targets (cumulative changes during 2004, SDD billions or as indicated):
  - BOS net domestic assets: 223.7; -16.1; 8.3; 16.5; 35.5
  - Domestic financing of the fiscal deficit: 98.7; -22.0; 39.1; 52.6; 44.0
  - Contracting or guaranteeing of external nonconcessional debt by government and BOS: 147.0; 0.0; 0.0; 0.0; 0.0
  - BOS gross usable reserves (in millions of U.S. dollars): 526.9; 170.9; 160.0; 225.0; 280.0
  - Payments to the Fund (in millions of U.S. dollars): 27.0 ......... 30.0
  - Broad money (memorandum): 734.1; 71.5; 56.5; 105.0; 161.5
  - Central government social expenditure (memorandum): 53.0 ......... 86.4
  - Oil saving account (OSA) (memorandum): 45.2; 9.1; 32.0; 44.0; 54.7
- Technical Memorandum of Understanding (key mechanics and definitions):
  - NDA of BOS defined as Net Domestic Credit of BOS + net issue of CMCs + other items net (OIN).
  - Net Domestic Credit includes total credit to central government (including GMCs and GFCs) minus central government deposits with BOS + BOS claims on public enterprises + BOS claims on banks.
  - Domestic financing of the fiscal deficit defined to include net domestic borrowing by central government including net borrowing from banking system (including GMCs and GFCs) but excluding OSA deposits, privatization revenues, and net sales of GMCs/GFCs outside banking system.
  - BOS gross usable reserves defined as foreign reserve assets immediately and unconditionally available to BOS and not earmarked.
  - Contracting/guaranteeing new nonconcessional external debt follows OECD CIRR grant element threshold of at least 35 percent to be concessional.
  - Oil revenue adjustor: oil revenue arising from export price over $24 per barrel for Nile oil exports, f.o.b. Port Sudan, will be deposited at BOS; program targets adjusted correspondingly.

*Source: Executive Summary and excerpts from IMF staff report and technical memorandum as presented in the supplied PDF content unit _cr05187.*

### Executive Summary ......................................................................................................

### Executive Summary

### Performance under the 2003 Staff-Monitored Program (SMP)
- Policy performance in 2003 was in line with the program; all quantitative targets were met except the target on contracting nonconcessional external debt.
- Sudan made the agreed payment of $27 million to the Fund.
- Real GDP growth: 6 percent (2003).
- Inflation (average CPI, 2003): 7.7 percent (compared with 8.3 percent in 2002 and 7 percent under the program).
- Fiscal outcome: overall fiscal balance in surplus at 1 percent of GDP (2003); balanced budget under the program was 0.0 percent of GDP.
- Non-oil domestic balance: -7.3 percent of GDP (2003), 2 percentage points of GDP higher than in 2002.
- Oil sector: oil GDP growth 13 percent (2003); government oil share rose (production rose from 232,000 bpd to 300,000 bpd between 2002 and 2004; government’s oil share rose from 120,000 bpd to 213,000 bpd).
- Structural benchmarks: most implemented; exceptions included expenditure management and fiscal reporting and incomplete audit/consolidation of SPC subsidiaries’ accounts.

### Recent macroeconomic and external developments
- External current account deficit (cash basis): 4.9 percent of GDP (2003) down from 6.2 percent (2002).
- Usable official reserves rose by $283 million to $527 million (end-2003), equivalent to 1.8 months of imports (2003) compared with 1.0 month in 2002; above the program target of $456 million.
- Exchange rates: nominal U.S. dollar rate appreciated by 1 percent (2003); nominal and real effective exchange rates depreciated by 9.7 percent and 4.5 percent, respectively (2003).
- Broad money growth: 30.3 percent (annual basis) at end-December 2003 versus a program target of 23 percent; without BOS mop-up measures projected broad money would have reached about 35 percent by end-2003.
- Reserve money: grew 27 percent (annual basis) at end-December 2003 versus 22 percent at end-2002.

Monetary table (December 2002 – December 2003, in billions of Sudanese dinars)
- Reserve money: Dec. 2002 = 280.3; Program Dec. 2003 = 335.4; Dec. 2003 = 354.8; Percent change (from end-2002) = 26.6
- NFA (excluding valuation adjustment): Dec. 2002 = 169.9; Dec. 2003 = 247.1; Percent change = 45.5
- NDA: 393.4 (Dec. 2002); Program 460.5; Dec. 2003 = 487.0; Percent change = 23.8
- Broad money: Dec. 2002 = 563.3; Program Dec. 2003 = 694.3; Dec. 2003 = 734.1; Percent change = 30.3
  - Credit to government: Dec. 2002 = 130.8; Program = 101.4; Dec. 2003 = 111.7; Percent change = -14.6
  - Credit to nongovernment: Dec. 2002 = 198.9; Dec. 2003 = 312.1; Percent change = 56.9

### Fiscal developments and public finances
- Total revenue (2003): 16.8 percent of GDP (oil 8.8 percent; non-oil 8.0 percent).
- Total expenditures (2003): 15.8 percent of GDP (current 12.7 percent; capital 3.1 percent).
- Balance (excluding OSA): 0.2 percent of GDP (2003).
- OSA balance: rose by SDD 36 billion (0.8 percent of GDP) to SDD 45.2 billion (1 percent of GDP) by end-December 2003.
- Total expenditures exceeded target by 2.3 percent of GDP, reflecting emergency spending (floods and humanitarian/security needs in eastern and western Sudan).
- Government measures: reforms launched for direct tax system; large taxpayer unit established; reforms to the tax incentive regime of the Investment Encouragement Act (IEA) implemented (tightening exemption criteria, centralizing authority to grant exemptions, setting limits on renewing exemptions); progress on medium-term fiscal framework for the 2004 budget.
- Areas needing attention: cash management and fiscal reporting (limited progress due in part to capacity constraints).

### Monetary and banking sector developments
- BOS liquidity measures in late-2003: reducing lending to government, open market sales of government securities, recalling BOS loans to banks.
- Monetary operations reforms completed: establishment of a Monetary Operations Unit (MOU) at the BOS; launch of Government Investment Certificates (GICs); amendment of central bank law to establish central bank independence and strengthen banking regulations; enactment of an anti-money laundering law.
- Banking soundness indicators (end-year, in percent):
  - Capital adequacy ratio: 2000 = 7.0; 2001 = 11.0; 2002 = 9.0; 2003 = 9.9
  - Ratio of nonperforming to total loans: 2000 = 17.0; 2001 = 16.0; 2002 = 12.7; 2003 = 11.4
  - Ratio of loan provisions to bad loans: 2000 = 29.0; 2001 = 23.0; 2002 = 24.0; 2003 = 22.0
- Banking system: 17 out of 24 banks complied with capital adequacy requirements; BOS measurements rated 14 banks as fair or better; BOS penalized noncompliant banks (including withholding dividend distributions).

### Peace, security, and humanitarian situation
- Peace negotiations with the SPLA: agreements on capital status and three border areas signed May 26, 2004; earlier agreements on security and resource-sharing signed September 2003 and January 2004; comprehensive peace agreement expected to be consolidated and signed in the near future.
- Darfur (western Sudan): hostilities since 2003 due to tribal clashes and local insurrection; ceasefire negotiated through Chad’s intermediation but situation remains grave; deterioration of security and humanitarian conditions in western Sudan.

### Policy discussions for the 2004 SMP
- Program objectives: reinforce macroeconomic stability and provide for post-conflict needs.
- Macroeconomic projections/targets under the 2004 program:
  - Real GDP growth projected at 6.6 percent.
  - Inflation targeted at 6.5 percent.
  - International reserves targeted to rise to 2.5 months of imports.
- Monetary and exchange rate policy:
  - Monetary policy to target a decline in broad money growth.
  - Exchange rate to remain flexible.
  - Monetary policy to be cautious and supported by a flexible exchange rate to mitigate the impact of foreign exchange inflows, consistent with broad money and reserve accumulation targets.
- Fiscal policy:
  - Prudent fiscal stance predicated on strong tax revenue efforts.
  - Additional fiscal measures to meet immediate post-conflict needs.
  - Authorities will raise the payments to the Fund to $30 million.
- Structural reforms priorities for 2004:
  - Tax reforms (including direct tax reform and IEA incentive reforms).
  - Improvements in cash management and fiscal reporting.
  - Oil sector transparency improvements.
  - Removal of institutional rigidities in broad money targeting.
  - Strengthening economic policy institutions.

### Staff appraisal
- Overall assessment: economic performance under the 2003 SMP was satisfactory.
- Fiscal policy: supportive of program objectives.
- Monetary policy: conduct improved, but managing large capital inflows proved challenging given limited exchange rate movements.
- Structural reforms: progressed, but extra efforts needed in fiscal cash management and reporting; audits and consolidation of SPC subsidiaries still outstanding.
- Program adequacy: the 2004 SMP is aimed at meeting the twin challenges of reinforcing macroeconomic stability and managing post-conflict demands; staff deem the program adequate for staff monitoring and assess the envisaged policies as equivalent in strength to a rights accumulation program (RAP).

*Source: Executive Summary, _cr05187 - Executive Summary_*

### 12.      The privatization program proceeded at a reasonable pace in 2003. Gross

### _cr05187 - 12.      The privatization program proceeded at a reasonable pace in 2003.

### Privatization progress (2003–early 2004)
- Gross privatization proceeds are estimated at SDD 9.9 billion in 2003 ($38 million) compared with a projected SDD 6 billion ($23 million).
- Major privatization receipts came mainly from Duty-Free Shops and Free Zone, the Sudanese Estate Bank, and Atbara Cement Factory.
- The Sudanese Estate Bank and Atbara Cement Factory are both now 100 percent foreign-owned.
- Khartoum Bank privatization advanced more slowly: 20 percent of its shares privatized thus far.

### Recent macroeconomic developments (Q1 2004)
- Exchange rate vis-à-vis the U.S. dollar appreciated by 0.3 percent during Q1 2004.
- Inflation rose to 9.2 percent (year-on-year) by end-March.
- Broad money growth reached 36 percent (year-on-year) by end-March, fueled largely by foreign exchange inflows.
- Fiscal revenues (oil and non-oil) performed better than expected and the budget was almost balanced.
- New financing contracted: credit line from the EXIM bank of India for $50 million and a supplier credit line from China for $95.8 million.
  - The Indian credit line has a grant element of 16 percent and will be used to finance infrastructure projects, including in rural areas.
  - The Chinese credit line has a grant element of 13 percent and will be used for water projects implemented over a number of years.
  - A memorandum of understanding envisages additional infrastructure financing (mostly energy and railway) in the amount of about $150 million; a decision has not yet been made on contracting these loans or on government guarantees.

### Macroeconomic program objectives for 2004
- Real GDP growth expected at 6.6 percent overall:
  - oil sector growth expected at 14.4 percent;
  - non-oil sector growth expected at 5.8 percent.
- CPI inflation targeted to fall to 6.5 percent in 2004.
- Monetary policy: target lower broad money growth in 2003 while keeping the exchange rate flexible; for 2004 monetary policy will target a broad money growth of 22 percent.
- External reserves targeted to rise by $280 million to $807 million, equivalent to 2.5 months of next year’s imports (from 1.8 months at end-2003).
- External current account deficit (cash basis) expected to slightly increase in 2004 due mainly to investment-related additional imports.
- Overall exports projected to increase by 16.5 percent on account of higher prices.
- Import volumes expected to grow faster largely owing to the Merowe hydropower project.
- Current account deficit to be financed by private capital inflows (mostly FDI) and, to a lesser extent, by project loan disbursements.

### Fiscal policy and composition (2004 projections and measures)
- Overall fiscal deficit expected at about 1.2 percent of GDP (2.3 percent of GDP excluding OSA), largely due to foreign-financed development expenditures on the Merowe dam.
- Non-oil domestic deficit projected to rise by 1.5 percentage points to 8.8 percent of GDP in 2004.
- Domestically financed fiscal deficit (excluding the OSA) to be contained at about 1.0 percent of GDP.
- Revenues:
  - Non-oil revenues estimated to rise by 1 percentage point of GDP to close to 9 percent in 2004.
  - Oil revenue expected to increase by 1 percentage point of GDP to 9.8 percent in 2004.
  - Program assumes an average annual price of Sudanese oil of $28.2 per barrel.
- OSA (Oil Stabilization Account) benchmark price raised by $2 per barrel to $24; OSA expected to accumulate an additional SDD 55.5 billion (1.1 percent of GDP) in 2004.
  - The OSA’s projected balance by end-2004 should be sufficient to finance 12-month spending levels similar to those in 2004 if Sudanese crude oil price drops to $20 per barrel from the program’s assumption of $28.2 per barrel.
- Expenditures:
  - Current expenditures expected to rise from 12.7 percent of GDP in 2003 to 14.3 percent in 2004.
  - Public sector wages and pensions initially budgeted to rise by 50 percent, later moderated to 38 percent after mission advice.
  - Transfers to the states budgeted to increase by 0.8 percent of GDP.
  - Military spending budgeted to remain at about 2.5 percent of GDP.
  - Spending on social programs to increase to 1.7 percent of GDP (from 1.2 percent in 2003).
  - Development spending projected to increase by 2.5 percentage points of GDP to 5.6 percent, largely because of the foreign-financed Merowe dam project (1.7 percent of GDP).
- Note: The 2004 budget will record a surplus of about 1 percent of GDP excluding foreign-financed development spending.
- To support post-conflict needs, authorities identified revenue measures that could generate about 0.2 percent of GDP in the second half of 2004; these were not included in program projections.

### Monetary and exchange rate policy details
- Monetary policy target: broad money growth of 22 percent in 2004 (Table 6), consistent with growth and inflation objectives and some decline in velocity; midyear reassessment planned.
- Authorities committed to tighten monetary policy if necessary.
- Liquidity absorption measures to be intensified in H1 2004: open market operations and reduced BOS lending to banks to bring monetary aggregates in line with targets.
- Exchange rate policy:
  - Authorities committed to a managed-float regime and measures to increase exchange rate flexibility.
  - BOS intra-day exchange rate fluctuation margin agreed to widen gradually in 2004 from ±2 percent over the previous day average market rate to ±3 percent.
  - Authorities will maintain a foreign exchange system free from restrictions on current account transactions in line with acceptance of obligations under Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement.
- Staff noted the foreign exchange market in Sudan is relatively thin and lacks appropriate hedging instruments (e.g., forward exchange rate market).

### Trade regime
- Authorities recognize need for further trade liberalization but are concerned about revenue losses and resource requirements for peace and poverty reduction programs.
- A medium-term tariff reform program in the context of the 2005 budget will aim to further reduce tariff protection, coordinated with efforts to strengthen taxation to compensate revenue losses.
- Sudan’s simple average tariff is 22.6 percent; four nonzero tariff rates: 3, 10, 25, and 45 percent. Sugar imports are subject to a stabilization tax in addition to the regular import duty of 45 percent.
- Sudan has progressed in WTO accession; plans to submit two final documents necessary for accession by mid-2004.

### External debt management
- Authorities will formulate and implement a new external borrowing policy consistent with Sudan’s repayment capacity and long-term debt sustainability.
- A high-level Debt Policy and Monitoring Committee (senior MOFNE and BOS officials) to be established in Q2 2004 to formulate and implement external debt and new borrowing policies by September 2004.
- A three-year rolling ceiling on external borrowing to be incorporated in the 2005 budget.
- Mission urged improved capacity for post-peace negotiation and implementation of HIPC-related debt rescheduling and relief agreements.
- Authorities stated they will not contract or guarantee new external debt on nonconcessional terms, hoping post-peace access to concessional financing; mission cautioned that continued borrowing on nonconcessional terms could worsen external debt overhang.
- Newly contracted external debt justified by authorities as necessary to finance vital development projects (e.g., water supply), given limited access to concessional financing.

### Preparing for peace (budgetary and financing implications)
- Authorities prepared an amended budget to be presented to parliament upon completion of the peace agreement.
- Amended budget to consider measures to mobilize additional resources of about 1 percent of GDP in the second half of the year to cover immediate post-conflict needs via revenue measures and spending reallocations.
- If envisaged revenue measures are not approved, expenditures would be reduced across most budget sectors while protecting social and key development programs of the original budget.
- Authorities expect a substantial financing gap and hope the international community will provide adequate assistance in a timely manner.

### Structural reforms for 2004 — revenue, transparency, and public expenditure management
- Revenue reforms to emphasize removal of exemptions and strengthening tax and customs administration in line with Fiscal Affairs Department recommendations.
  - Following approval of the 2004 budget, authorities began implementing revenue measures expected to amount to about 0.9 percent of GDP.
  - Authorities agreed to a complete ban, through a Cabinet decision, on granting ad hoc exemptions outside the IEA and to reform exemption-granting regulations and laws outside the IEA.
  - Tax and customs administration reforms include making the Large Taxpayer Unit fully operational and broadening the definition of large taxpayers to include individuals.
- Box 1 — Tax Reforms (measures being implemented in 2004)
  - Revenues and tax exemptions:
    - eliminating the 10 percent privilege tax rate on the income of professionals;
    - imposing an excise tax on petroleum products;
    - raising the excise tax rate on sugar;
    - raising the selling price of crude oil to refineries;
    - introducing steps to enforce departmental fee collection;
    - abolishing corporate tax exemptions for rehabilitation purposes;
    - eliminating the non-oil related tax privileges of the four major oil distribution companies; and
    - banning, through a cabinet decision, all exemptions granted outside the IEA.
  - Tax administration measures:
    - making the recently established Large Taxpayer Unit fully operational by mid-2004; the unit is expected to cover about 200 of the largest tax-paying entities, accounting for about 60 percent of business and profit taxes and 70 percent of value-added tax (VAT) collections;
    - broadening the definition of large taxpayers beyond corporations to include individuals;
    - introducing a taxpayer identification number that would apply to all taxes, including for excise duties;
    - beginning to transfer VAT collected by customs to the tax directorate on a daily basis;
    - launching a pilot project in audit enforcement to increase field audits; and
    - applying, nationwide, the Automated System for Customs Data (ASYCUDA)++, a selective risk-based verification system.
- Oil sector transparency:
  - Staff underscored the need for wider-ranging transparency efforts despite progress, including an SPC audit.
  - Authorities prepared a timetable of 2004 actions: audits of SPC subsidiaries and launching a program to align their accounts with international standards.
- Public expenditure management (PEM) and fiscal reporting (Box 2)
  - Wealth-Sharing Agreement provisions to underpin PEM reform: National Revenue Fund (NRF) to pool nationally collected revenues; NRF to embrace all accounts and subfunds; all government revenues and expenditures to be on-budget and public.
  - Immediate measures committed:
    - establish a cash management unit; appoint a cash release committee; issue regulations in line with Fund recommendations; make the unit fully operational by mid-2004;
    - develop an action plan to strengthen fiscal reporting and begin preparing monthly fiscal reports within two weeks after the end of each month by improving coordination, further computerization, and training of budget accountants;
    - adopt a two-year program to align budget classification with the Government Finance Statistics Manual, 2001, with staged implementation culminating in full adoption with the 2006 budget.
  - Authorities requested further technical assistance; FAD plans technical assistance missions during 2004.

*IMF staff report content (excerpts provided).*

### 29.      Operations at the BOS would be streamlined to overcome institutional rigidities

### 29.      Operations at the BOS would be streamlined to overcome institutional rigidities

### Monetary operations and BOS reform
- The authorities intend to transform the existing MOU at the BOS into a monetary operations division (MEFP, ¶23) to:
  - Efficiently coordinate open market operations in securities and foreign exchange.
  - Coordinate banks’ access to standing credit facilities.
- The staff urges the authorities to activate the envisaged monetary operations division at the BOS to coordinate monetary policy actions and help reduce broad money growth to program targets.

### Banking system, privatization, and PRSP progress
- Banking system reforms:
  - A medium-term reform plan is needed based on a comprehensive assessment of the banking system.
  - The authorities requested a financial sector assessment program (FSAP), with a note that an FSAP mission is scheduled to take place in mid-2004.
- Privatization:
  - Authorities plan to continue ongoing privatization started in 2002; a number of state-owned entities are planned for privatization in 2004.
  - Expected gross receipts from privatization: more than 50 percent increase to about $60 million in 2004.
  - Companies to be privatized in 2004 include the Bank of Khartoum, Sudanese Telecommunication Company, and Rabak Cement Factory.
- Poverty Reduction Strategy Paper (PRSP):
  - Progress has been made on the Interim Poverty Reduction Strategy Paper (I-PRSP) with World Bank help.
  - Development and consultation for a full PRSP will require countrywide participation after peace is reached.

### Medium-term macroeconomic prospects and projections
- Outlook summary:
  - Real GDP is expected to grow at 7 percent, reflecting higher expected oil production and continued non-oil growth in construction, power, and services.
  - Inflation is expected to remain low, ranging at about 5 to 6 percent, owing to restrained monetary policy supporting a low domestically-financed fiscal deficit.
  - Manufacturing is expected to grow steadily at about 5 percent.
  - The share of agriculture in GDP is expected to continue to fall.
- Caveat:
  - The medium-term outlook reflects a cautious view on the impact of peace given uncertainties about the final outcome of the peace negotiations and the extent of external assistance. The medium-term outlook should be viewed as work in progress.

### External position, debt service capacity, and creditor relations
- Debt service capacity and projections:
  - An improved external position is expected to increase external debt service capacity by $50 million in 2004 (to about $297 million).
  - Debt service/net current receipts ratio projected to decline slightly from 15.6 percent in 2003 to 14.8 percent in 2004.
  - A sizable external financing gap could open if international oil prices or private inflows drop; reserve buildup may be inadequate against a large oil price shock.
- Relations with non-Fund creditors and payments:
  - In 2003 Sudan resumed debt service payments to the World Bank ($5.5 million) and the African Development Bank (AfDB) ($3 million).
  - In 2004 authorities will continue payments to these institutions and to the Islamic Development Bank, International Fund for Agricultural Development, Arab Fund for Economic and Social Development, Organization of the Petroleum Exporting Countries (OPEC) Fund for International Development, Arab Monetary Fund, and a number of bilateral Arab funds.
  - Resumption of payments to these institutions will result in net financing reflows.
  - Total debt service payments to these creditors (excluding the World Bank and AfDB) are projected to be $82 million, while new disbursements from them will be over $300 million.
  - The largest payment in 2004 would be made to China: $102 million, mainly to service Khartoum oil refinery construction loans.
  - Note on Khartoum refinery debt: If debt service is not met, CNPC has the right to lift the equivalent of crude oil in kind; thus, nonpayment is not a realistic option.
- Payments to the Fund:
  - Authorities proposed increasing the payment to the Fund to $30 million compared with about $12 million required to stabilize Sudan’s arrears to the Fund.
  - The proposed increase would keep the ratio of payment to the Fund to the payment capacity indicator (measured in terms of net current receipts) at about 2003 levels.
  - Authorities hope the payment to the Fund will be reviewed after a peace agreement to account for post-conflict financing needs.

### Program duration, monitoring, and structural actions
- Program period:
  - The program period will be one year, ending on December 31, 2004.
  - Staff proposes semi-annual Board reviews for end-June and end-December performance, with continued quarterly review missions and reporting of significant developments.
- Structural benchmarks and institutional steps (selected):
  - By end-June 2003: Prepare comprehensive direct tax reform program (Done); strengthen fiscal reporting system (Under way); establish debt management units (Done); establish the monetary operations unit in the BOS (Done); submit anti-money laundering law to parliament (Done).
  - By end-December 2003: Establish Cash Management Unit at the ministry of finance; prepare rolling medium-term budget with 2004 budget; enhance oil sector transparency by auditing subsidiaries of Sudan Petroleum Company and initiating accounting reform; prepare comprehensive external debt policy statement and guidelines; submit amendments to the BOS Law and the Law Regulating Banking Activity to parliament; complete preparations to point of sale for Bank of Khartoum.

### Staff appraisal, policy recommendations, and risks
- Staff appraisal highlights:
  - Sudan has made substantial progress under successive SMPs since 1997, with strengthened SMPs in 2002 and 2003 yielding strong growth and a surge in foreign investment.
  - Twin policy challenge in 2004: reinforce macroeconomic stability and manage post-conflict demands.
- Fiscal and monetary policy recommendations:
  - Maintain a low domestically financed fiscal deficit, mobilize additional resources, and direct expenditures to meet obligations of peace.
  - Strengthen tax revenue, including further reduction in tax exemptions, to mobilize revenue and promote fiscal transparency and equity.
  - Contain military spending while increasing spending on social development and agriculture support programs.
  - Moderate future wage increases and phase them over a longer period due to a sizable wage-bill increase that has reduced fiscal flexibility.
  - Monetary policy: be cautious; maintain a flexible exchange rate to mitigate FX inflows associated with peace; coordinate monetary measures with the BOS monetary operations division and use open-market operations to absorb liquidity.
  - Continue the OSA mechanism; use frequent reviews to determine the speed of OSA reserve accumulation to balance development needs and fiscal security.
  - Curtail nonconcessional borrowing to avoid aggravating the external debt overhang and complicating eventual HIPC debt relief; strengthen external debt management (establish external debt monitoring committee and formulate an external debt policy).
  - Maintain a relatively open trade regime and develop a new medium-term tariff reform plan in the context of the 2005 budget, phasing liberalization with compensatory revenue measures.
  - Ensure consolidation of accounts of all oil sector operations according to best international standards to reinforce oil sector transparency.
- Key risks identified:
  - Delays in peace negotiations could increase uncertainty and undermine private capital inflows, creating balance-of-payments difficulties.
  - A peace agreement without timely donor support could create fiscal pressures if foreign exchange inflows surge, risking macroeconomic stability.
  - An unexpected sharp decline in the oil price could undermine fiscal performance and the balance-of-payments position.

*Source: IMF staff report excerpt titled "29.      Operations at the BOS would be streamlined to overcome institutional rigidities" (PDF content unit)._

### 12. Conduct a study, with Fund technical assistance, examining the introduction

### _cr05187 - 12. Conduct a study, with Fund technical assistance, examining the introduction

### Study task and status
- Conduct a study, with Fund technical assistance, examining the introduction of a market-based mechanism for hedging agricultural finance risks, including possibly through the establishment of commodity future markets for agricultural products.
- Reported status markers in the source: "Not done", "Done" (multiple entries shown), and final listed states include "Not done" and "Done" in the excerpt. (No further procedural details or timelines provided in the supplied content.)

### National income, production, and prices (selected actuals and projections)
- Nominal GDP (in billions of Sudanese dinars): 3,376 (2001); 3,876 (2002); 4,426 (2003); 5,024 (2004).
- Real GDP growth: 6.1 (2001); 6.0 (2002); 6.0 (2003); 6.6 (2004).
- Real non-oil GDP growth: 4.8 (2001); 5.0 (2002); 5.5 (2003); 5.8 (2004).
- Average CPI inflation: 4.9 (2001); 8.3 (2002); 7.7 (2003); 6.5 (2004).
- 12-month CPI inflation (end of period): 7.4 (2001); 8.3 (2002); 8.3 (2003); 6.5 (2004).

### Investment and savings (percent of GDP)
- Gross domestic investment: 18.3 (2001); 19.1 (2002); 19.1 (2003); 21.6 (2004).
  - Government sector: 2.3 (2001); 3.1 (2002); 3.1 (2003); 5.6 (2004).
  - Nongovernment sector: 16.0 (2001–2004 each shown).
- Gross domestic savings: 10.3 (2001); 12.8 (2002); 14.6 (2003); 16.3 (2004).
  - Government sector savings: 2.2 (2001); 3.5 (2002); 5.7 (2003); 5.7 (2004).
  - Nongovernment sector savings: 8.1 (2001); 9.2 (2002); 8.9 (2003); 10.7 (2004).
- Net exports of goods and nonfactor services: -8.0 (2001); -6.3 (2002); -4.4 (2003); -5.3 (2004).

### Central government operations (selected levels and ratios)
- Total revenue (percent of GDP): 11.0 (2001); 12.1 (2002); 16.8 (2003); 18.7 (2004).
  - Oil revenue (percent of GDP): 4.4 (2001); 5.4 (2002); 9.5 (2003); 9.8 (2004).
  - Non-oil revenue (percent of GDP): 6.5 (2001); 6.7 (2002); 7.2 (2003); 8.9 (2004).
- Total expenditure (percent of GDP): 11.9 (2001); 13.0 (2002); 15.8 (2003); 19.9 (2004).
  - Current expenditure: 9.6 (2001); 9.9 (2002); 12.7 (2003); 14.3 (2004).
  - Capital expenditure: 2.3 (2001); 3.1 (2002); 3.1 (2003); 5.6 (2004).
- Overall balance (cash basis, percent of GDP): -0.9 (2001); -0.8 (2002); 1.0 (2003); -1.2 (2004).
- Central government operations in levels (in billions of Sudanese dinars, selected): Total revenues 205.5 (1999); 326.3 (2000); 370.0 (2001); 470.7 (2002); 598.5 (2003); 741.9 (2003 actual listed again); 937.1 (2004 program/actual mixing in table).

### External sector and balance of payments (selected)
- Exports, f.o.b. (in millions of U.S. dollars): 1,699 (2001); 1,949 (2002); 2,577 (2003); 3,001 (2004).
- Imports, f.o.b. (in millions of U.S. dollars): -2,031 (2001); -2,153 (2002); -2,536 (2003); -3,032 (2004).
- External current account balance (in millions of U.S. dollars): -1,289 (2001); -918 (2002); -827 (2003); -1,000 (2004).
  - In percent of GDP: -9.9 (2001); -6.2 (2002); -4.9 (2003); -5.2 (2004).
- Crude oil export price (US$ per barrel): 22.0 (2001); 23.0 (2002); 27.0 (2003); 28.2 (2004).
- Exports composition, Table 4 (2000–05 extract): Exports, f.o.b.: 1,864 (2000); 1,699 (2001); 1,949 (2002); 2,577 (2003); 2,324 (2003 est/other column); 3,001 (2004); 3,197 (2005 proj).

### Monetary sector and banking (selected levels and indicators)
- Broad money (in billions of Sudanese dinars): 346.7 (Dec 2000); 432.2 (Dec 2001); 563.3 (Dec 2002); 592.3 (Dec 2003); 611.5 (Mar 2003); 667.2 (2003 quarterly series); 734.1; 788.4; 805.6; 790.6; 839.1; 895.6 (Dec 2004 reported in table).
- Reserve money (in billions of Sudanese dinars): 221.5 (Dec 2000); 229.8 (Dec 2001); 280.3 (Dec 2002); 289.9 (Dec 2003); 286.8 (Mar 2003); 332.1; 354.8; 386.5; 380.2; 380.1; 399.6; 426.5.
- Reserve money (annual percentage change): 35.3 (2000); 3.7 (2001); 22.0 (2002); 16.5 (2003); 10.5; 28.1; 26.6; 36.4; 31.1; 32.5; 20.3; 20.2 (series shown quarterly/annually).
- Broad money (annual percentage change): 34.6 (2000); 24.7 (2001); 30.3 (2002); 24.8 (2003); 22.1; 25.3; 30.3; 35.5; 36.0; 29.3; 25.8; 22.0.
- Credit to nongovernment (annual percentage change): 72.4 (2000); 60.7 (2001); 28.5 (2002); 30.9 (2003); 37.6; 50.9; 56.9; 57.4; 67.3; 35.6; 30.4; 26.8.
- Usable international reserves (in millions of U.S. dollars): 135 (2000); 45 (2001); 244 (2002); 342 (2003); 416; 413; 527; 619; 698; 687; 752; 807.
  - In months of next year's imports: 0.7 (2000); 0.2 (2001); 1.0 (2002); 1.8 (2003); 1.7; 2.5; 2.9 (2004); subsequent months rising in projections.

### Monetary authorities' balance sheet (selected items)
- Net foreign assets (BOS and commercial banks combined, Dec series): BOS net foreign assets series show large negative positions: -747.3 (Dec 2000); -777.1 (Dec 2001); -741.2 (Dec 2002); -722.8 (Dec 2003).
- Counterpart to valuation changes (Dec series): 777.0 (Dec 2000); 766.1 (Dec 2001); 796.8 (Dec 2002); 796.6 (Dec 2003); series continues to 834.0 (Dec 2004).
- Net domestic credit and net claims on central government series shown in tables, with net claims on central government (Dec): 106.1 (2000); 137.3 (2001); 130.8 (2002); 117.7 (2003); and detailed quarterly movements in 2003–2004.

### Medium-term macroeconomic scenario (2001–09 projections)
- Nominal GDP (SD billions): 3,376 (2001); 3,876 (2002); 4,426 (2003); 5,024 (2004); 5,730 (2005); 6,607 (2006); 7,423 (2007); 8,347 (2008); 9,378 (2009).
- Real GDP growth (aggregate): 6.1 (2001); 6.0 (2002); 6.0 (2003); 6.6 (2004); projections: 7.6 (2005); 9.3 (2006); 7.0 (2007); 7.1 (2008); 7.0 (2009).
  - Non-oil growth projections: 4.8 (2001); 5.0 (2002); 5.5 (2003); 5.8 (2004); 6.2 (2005); 6.5 (2006); 7.2 (2007); 7.3 (2008); 7.3 (2009).
  - Oil growth projections listed as: 23.7; 24.7; 13.0; 14.4; 20.0; 38.9; 5.0; 5.0; 3.0 (periods correspond to 2001–2009 row).
- Inflation (period average): 4.9 (2001); 8.3 (2002); 7.7 (2003); 6.5 (2004); projections: 6.0 (2005); 5.5 (2006); 5.0 (2007); 5.0 (2008); 5.0 (2009).
- Investment and savings (percent of GDP projections): Gross domestic investment 23.8 (2005); 23.8 (2006); 23.7 (2007); 23.5 (2008); 22.0 (2009). Gross domestic savings 18.5 (2005); 21.2 (2006); 19.9 (2007); 18.7 (2008); 16.9 (2009).
- External and reserve projections: Gross official reserves (months of imports): 2.9 (2005); 3.1 (2006); 3.2 (2007); 3.3 (2008); 3.5 (2009).
- Memorandum: Crude oil export price (US$ per barrel) projections: 25.2 (2005); 24.2 (2006); 23.7 (2007); 23.0 (2008); 23.0 (2009).

### Debt service capacity and external financing (selected indicators)
- Total debt service paid (in millions of U.S. dollars): 158 (2000); 160 (2001); 137 (2002); 247 (2003); 297 (2004).
- Payments to the Fund (in millions of U.S. dollars): 57 (2000); 55 (2001); 26 (2002); 28 (2003); 30 (2004).
- Total debt service paid, in percent of exports of goods and nonfactor services: 8.4 (2000); 9.3 (2001); 6.8 (2002); 9.5 (2003); 9.8 (2004).
- Overdue obligations to the Fund (in millions of U.S. dollars): 1,451 (2000); 1,371 (2001); 1,475 (2002); 1,462 (2003); 1,445 (2004).
- External financing requirements and sources (gross financing requirements, in millions of U.S. dollars): 2,213 (2001); 1,877 (2002); 2,001 (2003); 2,286 (2004).
  - External current account deficit excluding interest and official transfers: 2,122 (2001); 1,504 (2002); 1,467 (2003); 1,709 (2004).
  - Debt service payments (interest and principal): 157 (2001); 166 (2002); 239 (2003); 280 (2004).
  - Expected financing items shown: Official transfers and grants 834 (2001); 1,060 (2002); Debt financing and other items reported across years; Foreign direct investment, and errors and omissions: 1,286 (2001); 1,155 (2002); 1,203 (2003); 1,136 (2004).
- Memorandum items: Exports of goods and services series 1,891 (2000); 1,713 (2001); 1,996 (2002); 2,613 (2003); 3,039 (2004). Net current receipts series 1,187 (2000); 1,235 (2001); 1,167 (2002); 1,590 (2003); 1,999 (2004).

### Key chart-based observations and narrative points (figures)
- The current account deficit declined in 2003 owing to higher exports and private transfers.
- Tight monetary policy in the first three quarters of 2003 led to a slowdown, on average, in inflation in 2003.
- Economic growth, at 6 percent, was stronger than projected in 2003.
- The overall domestic deficit, excluding OSA, was better than programmed in 2003.
- The nominal exchange rate against the U.S. dollar remained stable in 2003, appreciating slightly at the end of the year, while the effective exchange rates depreciated.
- The overall improvement in the balance of payment allowed a strong buildup in international reserves in 2003.
- Monetary growth accelerated in 2003 owing to large private capital inflows, higher government spending, and BOS lending.
- The cost of finance fell in the fourth quarter of 2003.
- External inflows and private sector credit contributed to the sharp increase in broad money in the second half of 2003.
- Accumulation of reserves by commercial banks slowed down in the fourth quarter of 2003.

### IMF relations and institutional notes (selected)
- Membership: Status: Joined 09/05/57; Article VIII.
- Quota (SDR million): 169.70 (100.00 percent).
- Fund holdings of currency (SDR million): 508.90 (299.88 percent of quota).
- SDR Department net cumulative allocation (SDR million): 52.19 (100.00 percent); holdings 0.22 (0.42).
- Outstanding purchases and loans (SDR million, percent of quota): Stand-by Arrangements 201.72 (118.87); Extended Arrangements 113.02 (66.60); Contingency and Compensatory Financing Facility 24.44 (14.40); Trust fund 59.23 (34.90).
- Projected obligations to the Fund (SDR million, based on existing use and holdings): Principal overdue 398.41 (overdue column); Charges/interest forthcoming 6.49 (2004); 8.51 (2005); 8.51 (2006); 8.51 (2007); 8.54 (2008). Total forthcoming/overdue series: 1,071.72 (overdue plus forthcoming breakdown shown).
- Exchange rate arrangements: Legal tender is the Sudanese dinar (replaced the Sudanese pound in proportion SDD 1=LSd 10 in 1999). Since October 1998, the exchange rate system has been unified. In 2001, the foreign exchange market came under pressure and the Bank of Sudan (BOS), in an effort to increase the flexibility of the system, introduced a formal band of + (text truncated in supplied content).

*Sources: Fund staff estimates and projections based on information provided by the Sudanese authorities.*

### 1.5 percent (later broadened to 2 percent) around the official rate and began auctioning its

### _cr05187 - 1.5 percent (later broadened to 2 percent) around the official rate and began auctioning its

### Exchange rate regime and Bank of Sudan (BOS) operations
- Initially maintained a formal exchange rate band of 1.5 percent (later broadened to 2 percent) around the official rate and began auctioning foreign exchange within the band.
- In May 2003, BOS adopted formally a managed-float exchange rate regime.
- The formal exchange rate band was abandoned, and the auction system was replaced with direct transactions in the interbank market.
- BOS established an internal limit of +2 percent intraday fluctuations around the average daily market rate that will trigger its intervention.
- Sudan maintains one inoperative bilateral payments agreement with Egypt and an inoperative payment clearing account with the former Soviet Union.

### Article IV Consultation
- Sudan is on a 12-month consultation cycle.
- Last Article IV consultation discussions were held from August 16 to 28, 2003.
- The Staff Report (IMF Country Report No.03/390) was discussed by the Executive Board on October 31, 2003.

### Technical assistance (TA) provided since January 1995
- Executive Board decided to resume Fund selective technical assistance to Sudan in January 1995.
- TA missions and activities (with dates as provided):
  - Reform of indirect taxation: August 1995; March, May, and October 1997; May, October, and November 1998; October 1999; and November 2000.
  - Multisector technical assistance in statistics: September/October 1995.
  - Exchange system reform: April and November 1997; May and September 1998.
  - Monetary management and banking supervision: June and November 1997; May, September, and December 1998; May and October 1999; November 2000; and November 2002.
  - Government finance statistics: June 1997 and May 1998.
  - Monetary statistics: July 1997; February 2000; May 2000; February 2001; April 2001; and July 2003.
  - Balance-of-payments and monetary statistics: April 1999; and July 2003.
  - Expenditure control and management: September 1997; May 1998; May 2000; and November 2002.
  - Oil sector taxation: October 1999.
  - Introduction of the VAT since October 1999.
  - Reform of direct taxation and revenue administration: November 2002; and December 2003.
  - Training course on financial programming and policies: April 2000.
  - GDP and CPI statistics: March and September 2002; and February 2003.
  - General Data Dissemination System (GDDS) technical assistance: July 2003.
  - Reform of direct taxes and investment incentives: March 2003.
  - Medium-Term Budgetary Framework: April 2003.
  - Monetary policy operations and introduction of a commodities futures/forward market in the agricultural sector: December 2003.
  - Islamic Compliant Monetary Instruments: October 2002.
- An MFD long-term banking supervision resident advisor was assigned to the BOS from May 2001 to May 2003.

### Resident Representative
- The Fund's resident representative in Khartoum was withdrawn in June 1990.

### Sudan: Relations with the World Bank (As of April 2004)
- The World Bank has no active lending portfolio in Sudan because of Sudan’s default on its financial obligations to the Bank, which led to the suspension of disbursements in April 1993.
- Authorities started making “good faith” payments of $1 million per month to the Bank starting in July 1999.
- Monthly payments of an equivalent of $500,000 have been made since October 2002.
- Arrears stood at about $280 million at the end of 2003 (from $145 million at the end of 1999).
- Sudan’s outstanding Bank debt, including arrears, is approximately $1.3 billion.
- The Bank formulated a Country Reengagement Note (CRN) discussed by the Executive Board on July 10, 2003, emphasizing:
  - Knowledge generation and sharing;
  - Capacity-building to support policy reform;
  - Demonstration projects to improve delivery of social services;
  - Resolution of the debt overhang.
- The Bank completed the Country Economic Memorandum—the first economic report on Sudan in a decade—focusing on social and economic developments from the early 1990s to present and status of macroeconomic, governance, and institutional reforms.
- The Bank and the UN have been asked to co-lead a Joint Assessment Mission (JAM) to assess reconstruction and rehabilitation needs in the next six years in all of Sudan; the JAM will be undertaken once a comprehensive peace agreement is signed.
- Bank and Fund staff have begun collaboration on resolving the debt issue facing Sudan; this collaboration is expected to increase significantly once a peace agreement is signed.

### Statistical issues
- Available economic data are sufficient for program monitoring purposes in Sudan.
- Further improvements are needed, particularly in compiling national accounts, state budgetary data, and external trade and financial statistics.

*Prepared by World Bank staff; extracted content as presented in the source PDF.*

### appendix discusses outstanding statistical issues by sector.

### _cr05187 - appendix discusses outstanding statistical issues by sector.

### Background and technical assistance
- Based on the recommendations of the July 2003 Statistics Department (STA) mission, the authorities prepared the metadata for participation in the General Data Dissemination System (GDDS). These metadata were posted on the Dissemination Standards Bulletin Board in August 2003.
- Sudan participated in the Department for International Development (DFID) project for anglophone African countries and received technical assistance on statistical issues.
- A technical assistance mission visited Khartoum in July 2003 and:
  - Encouraged the Bank of Sudan (BOS), the ministry of finance and national economy (MOFNE), and the ministry of energy and mining (MEM) to improve interagency coordination in data collection and data-sharing for key areas such as oil-related transactions.
  - Encouraged dissemination of up-to-date and comprehensive information through the BOS web site.
- In early 2004, assistance was provided for the initial stages of preparation of a statistics master plan.
- A peripatetic real sector expert is assisting the authorities in compiling and updating the national accounts.

### I. Real sector — findings and steps to improve
- Findings / data status:
  - Monthly consumer price index (CPI) compilation and dissemination have been commendable in recent years.
  - CPI data for the Khartoum area are available on a monthly basis and shortly after the end of each month.
  - CPI data including other states in Sudan are available monthly with a three-month lag.
  - National accounts compilation lags behind; national accounts statistics lack basic information for many sectors, including oil, livestock, horticulture, and most services.
  - On the expenditure side, data are lacking on final consumption by households, investment, and changes in stocks.
  - No national accounts or industrial production data at subannual frequencies.
  - Annual data are being reported with a lag of over three years.
  - 1968 System of National Accounts (SNA) still in use; oil sector value-added calculation not completed; no real GDP by expenditure; 4-year delay in nominal GDP by expenditure; private consumption derived as a residual; estimations rather than surveys are used for most GDP components.
- Urgent needs and recommended actions:
  - Rebuild the institutional capacity of the Central Bureau of Statistics (CBS).
  - Introduce the 1993 System of National Accounts.
  - Conduct a census of agricultural production.
  - Improve coordination among MOFNE, MEM, the ministry of agriculture and livestock, and the CBS.
  - Implement the project prepared by the peripatetic real sector expert.
  - Conduct new household income and expenditure survey; reduce timing discrepancies and other reporting inefficiencies by individual states.

### II. Fiscal sector — findings and steps to improve
- Findings / data status:
  - Government finance statistics (GFS) reported to MCD are adequate: main revenue, expenditure, and financing items reported on a monthly basis with a lag of about one to two months.
  - Financing items are consistent with the monetary accounts.
  - Reported statistics are for the central government only and do not include consolidated data on state budgets, which are often not available.
  - Data are submitted using economic classification; MOFNE allocations to ministries are reported, but their actual expenditures are not.
  - Data reported for Government Finance Statistics Yearbook are weak and cover only budgetary central government up to 1999.
- Areas of concern:
  - Only partial data on state budgets available.
  - Incomplete functional classification.
  - Slow progress on the introduction of the government finance statistics (GFS) classification.
- Steps to improve:
  - Improve accounting and reporting procedures at MOFNE.
  - Introduce the GFS classification.
  - Implement in full the 1997 GFS technical assistance mission recommendations.

### III. Monetary sector — findings and steps to improve
- Findings / data status:
  - Sudan has received significant technical assistance to improve monetary and financial statistics; following an October 1992 joint MCD and STA mission, six STA missions were undertaken between 1993 and 2003.
  - Monetary accounts are broadly acceptable for monitoring purposes.
  - Balance sheet data of the central bank and commercial banks are reported on a monthly basis and are generally on time.
  - Weekly flash reports of key monetary indicators are particularly commendable, usually with a one-week lag. Starting January 2003, estimates of the BOS’ usable reserves were added.
- Areas of concern:
  - STA expressed concern that, without prompt remedial action suggested by the July 2003 monetary and financial statistics mission, problems could reemerge: overestimation of international reserves and errors and omissions in determination of net credit to government.
  - Only partial implementation of some important recommendations; some measures earlier fully implemented are now discontinued.
  - Large and variable "other items (net)" owing to grouping of transactions into unclassified assets and liabilities.
  - Frequent classification errors by commercial banks, particularly for consortium financing, preventing meaningful analysis of net domestic assets.
  - Divergence between reserve money in balance sheets and end-of-month flash reports.
- Steps to improve:
  - STA to provide a program of peripatetic assistance.
  - Revise guidelines related to consortium financing and ensure compliance.
  - Establish a working group to review the BOS’s foreign assets.
  - Implement the 2001 TA mission on monetary statistics recommendations, including improvement of commercial banks’ other items net.
  - Include data on returns on investment deposits and aim at full reporting of the BOS balance sheet.

### IV. External sector — findings and steps to improve
- Findings / data status:
  - Daily exchange rate data are reported to the Fund with minimal lags.
  - Monthly reporting of BOS active balances; generally on time with a 0.5-month lag.
  - Quarterly full balance of payments (BOP) data provided on time and during missions; 3-month lag.
  - Monthly trade data provided upon request with a 2–3 month lag.
  - Monthly payments to creditors are on time; 1.5-month lag.
  - Other debt data reported with a 10-month lag.
  - Balance-of-payments compilation affected by lack of survey data, especially for foreign direct investment (FDI).
- Areas of concern:
  - BOS’s active balances include unusable reserves earmarked for particular purposes such as medicine, oil, and spare part imports; the composition and potential usability of earmarked reserves in a balance-of-payments need are not clear.
  - Significant discrepancies between customs authorities’ import reports and BOS import statistics.
  - Incompleteness of data on some services (oil transportation costs), investment income (oil-related expenses and interest payments due on external public debt), transfers (workers' remittances), financial account (amortization due on external public debt), and FDI; large positive errors and omissions.
  - BOS cash flow table does not reflect exactly actual payments made by the MOFNE.
  - BOS records are not reconciled with those of some creditors; data on Official Development Assistance not available; charges on interest in arrears not calculated; for some creditors, interest on arrears not separated from delayed interest.
- Steps to improve:
  - Clarify items that qualify as international reserves in general, and those included in earmarked reserves in particular; begin to implement the reserves template.
  - Reconcile customs and BOS import data; mission identified possible causes and attempted reconciliation.
  - Introduce the revised reports form for commercial banks; improve data collection procedures; enforce the use of residency criterion; enhance institutional capacity of the BOS BOP compilation unit.
  - Implement in full the recommendations of the 1999 TA in BOP statistics.
  - Eliminate timing and recording discrepancies between the BOS and the MOFNE.
  - Reconcile external debt data with creditors; further disaggregate data according to standard definitions; Debt Management Unit to send monthly statements on external debt to the BOS’s Statistics Department.

### Key statistics and dated observations (as presented)
- CPI:
  - Khartoum area: monthly and shortly after month-end.
  - Sudan as a whole: monthly with a three-month lag.
- National accounts:
  - Annual national accounts data reported with a lag of over three years.
- Monetary reporting lags and frequencies:
  - Weekly flash reports: 1-week lag.
  - Monthly balance sheets: generally on time; 1.5-month lag.
- External sector reporting lags:
  - BOS active balances: 0.5-month lag.
  - Quarterly full BOP data: 3-month lag.
  - Monthly trade data: 2–3 month lag.
  - Monthly payments to creditors: 1.5-month lag.
  - Other debt data: 10-month lag.
- Oil sector projections and reserves:
  - Total oil reserves available are estimated between 10 to 15 billion barrels.
  - At a production rate of 350 thousand barrels a day, reserves would last about 100 years.
- Payments and commitments:
  - The government stated it will increase its yearly payment to the IMF to $30 million, noting the need to review the situation after a peace agreement is signed.
- Dates and milestones:
  - July 2003: STA mission recommendations prompting metadata preparation and other actions.
  - August 2003: metadata posted on the Dissemination Standards Bulletin Board.
  - January 2003: estimates of BOS’ usable reserves added to weekly flash reports.
  - Early 2004: assistance for initial preparation of a statistics master plan.
  - Core statistical indicators as of March 31, 2004 (various data frequencies and receipt dates recorded in the report).

### Sudan: Strengthening external debt management — key actions and recommendations
- Overarching objective:
  - Ensure long-term debt sustainability by keeping debt levels and new borrowing prudent and using external financing for poverty-reducing and growth-enhancing investment.
- Key challenges:
  - Improve external debt management capacity.
  - Follow appropriate borrowing policies.
- Recommended key actions:
  - Preparation of a legal and institutional framework for debt management and borrowing policies.
  - Strengthen coordination with macroeconomic policies.
  - Develop a strategy on new borrowing.
  - Improve basic debt management functions and associated technical capacity.
- Institutional context:
  - MOFNE, BOS, and the Ministry of International Cooperation share external debt management responsibilities, but no explicit law governs the relationship.
  - The External Debt Unit (EDU), established in 2000, collects and reconciles sovereign debt information; prepares quarterly reports for BOS and MOFNE; publishes a comprehensive annual report; participates in debt rescheduling negotiations; and assists formulation of a borrowing strategy and assessment of repayment terms of new loans.
  - MOFNE’s International Cooperation Department: responsible for contracting new borrowing, monitoring disbursements, initiating debt service payments (executed by BOS), and preparing debt service estimates for the budget in cooperation with the EDU.
- Specific priority actions:
  - Establish a high-level debt policy and monitoring committee (comprising MOFNE and BOS representatives and chaired by a state minister) to:
    - Propose annual external borrowing ceilings within a multiyear rolling budget.
    - Establish guidelines for appropriate loan terms.
    - Review loan proposals for the minister of finance.
    - Coordinate debt rescheduling and relief negotiations with creditors.
  - Strengthen technical capacity for loan evaluation and debt sustainability assessment:
    - Committee to draw on MOFNE departments and the EDU.
    - Possible division of tasks: MOFNE to provide technical support for loan evaluation; EDU to assess debt service implications.
  - Prepare to negotiate and implement Heavily Indebted Poor Countries (HIPC)-related debt rescheduling and relief agreements:
    - Develop expertise in MOFNE’s Department of International Cooperation and the EDU.
    - Seek technical assistance as needed.
    - The Fund and the Bank could assist in preparation of debt sustainability analyses for the HIPC Initiative; other agencies such as UNCTAD and Debt Relief International could provide specialized assistance.

*Source: Appendix discussing outstanding statistical issues by sector (as presented in the supplied PDF content).*

### 1.      This memorandum reviews the outcome of the 2003 Staff-Monitored Program

### This memorandum reviews the outcome of the 2003 Staff-Monitored Program

### I. Recent macroeconomic and policy developments
- 2003 economic outcome broadly in line with program projections; all quantitative targets for end-December were met except the target on nonconcessional external borrowing.
- Real GDP growth: 6 percent (slightly higher than projected).
  - Agriculture growth: 6 percent.
  - Utilities (electricity and water): 4.9 percent.
  - Services: 6.2 percent.
  - Oil sector growth: 13 percent (previously projected 13.3 percent).
- Consumer price inflation: fell from 8.3 percent in 2002 to 7.7 percent in 2003; program target was 7 percent.
- Balance of payments:
  - Current account deficit (cash basis): 4.9 percent of GDP in 2003 versus 6.2 percent in 2002.
  - Bank of Sudan (BOS) usable reserves: $527 million (equal to 1.8 months of imports); program target was $456 million.
  - Nominal exchange rate: appreciated by 1 percent in 2003.
- Fiscal outcome:
  - Overall fiscal balance excluding the Oil Savings Account (OSA): +0.2 percent of GDP.
  - Oil revenues exceeded projections by 3.3 percent of GDP due to higher production and prices.
  - OSA accumulation: rose by $135 million in 2003 to $175 million.
  - Total expenditures exceeded program target due to emergency flood relief, humanitarian aid, and security-related outlays.
- Monetary developments:
  - Broad money growth: 30 percent by end-2003 (program target 23 percent).
  - Reserve money: rose 27 percent.
  - Rapid monetary growth attributed to large capital inflows, higher-than-expected government spending, and increased BOS lending in support of agriculture finance.
- Structural reforms and institutional changes in 2003:
  - Fiscal: launched direct tax reform program; established a large taxpayer unit; reformed Investment Encouragement Act (IEA) incentives by tightening exemption criteria, centralizing authority to grant exemptions, and setting limits on renewing exemptions; developed medium-term budget framework and consolidated three-year rolling budget; limited progress on expenditure management and fiscal reporting; technical difficulties delayed audit and consolidation of Sudan Petroleum Corporation (SPC) subsidiaries.
  - Monetary and financial sector: implemented all monetary structural reform measures; established a monetary operation unit (MOU) at BOS; launched Government Investment Certificates (GICs); amended central bank and banking laws to establish central bank independence and strengthen banking regulations; enacted an anti-money laundering law; completed, with Fund technical assistance, a study on market-based agricultural finance hedging instruments.

### II. Outlook and policies for 2004
- Macroeconomic framework and objectives:
  - Real GDP growth envisaged: 6.6 percent in 2004, supported by oil, construction, and utilities.
  - Inflation expected to fall to 6.5 percent.
  - International reserves target: $807 million (2.5 months of imports), including $210 million of additional OSA accumulation.
  - External current account deficit (cash basis) expected: 5.2 percent of GDP in 2004.
- Fiscal policy and budgetary measures:
  - Overall deficit expected to reach 1.2 percent of GDP, reflecting increased foreign-financed development projects including the Merowe dam project.
  - Domestic financing of the deficit (excluding OSA deposit accumulation): limited to SDD 44 billion (0.9 percent of GDP).
  - Social outlays to increase by 54 percent to SDD 86 billion (1.7 percent of GDP) in 2004, focusing on health, education, water, and agriculture.
  - Military spending budgeted broadly unchanged at about 2.5 percent of GDP.
  - Wage increase of 50 percent planned, including raising minimum wage from SDD 7,500 per month to SDD 12,500 per month.
  - Revenue-raising measures expected to yield SDD 44.7 (0.9 percent of GDP), including:
    - Applying an excise tax on petroleum products.
    - Raising the excise tax on sugar from 14 percent to 17 percent.
    - Enforcing collection of departmental fees.
    - Raising the selling price of crude oil to refineries.
    - Abolishing corporate tax exemptions for rehabilitation purposes.
  - Post-peace-agreement amended budget intentions:
    - Immediate wage bill reduction by SDD 22 billion (0.4 percent of GDP).
    - Additional revenue measures expected to generate more than SDD 10 billion (0.2 percent of GDP) on a half-year basis:
      a. raising the petroleum excise tax;
      b. imposing a turnover development tax of 1 percent on all tax-exempt entities with no exemptions provided;
      c. considering applying an excise tax on mobile communication services and eliminating all other fees and charges;
      d. applying the value-added tax (VAT) on capital goods imports and domestic sales;
      e. eliminating the 10 percent privilege tax rate on the income of professionals.
  - Contingency: if revenue measures are not approved, further expenditure reductions will be applied across most budget sectors while protecting social and key development programs.
  - Tax exemptions reform:
    - Enforce a ban on all discretionary tax exemptions by end-April (via ministerial decree).
    - Complete review of regulations and agreements resulting in tax exemptions and develop action plan to streamline them in context of the 2005 budget by end-December 2004.
    - Tax privileges of the four major oil distribution companies will not be renewed after they lapse at end-2004; no new exemptions to be granted.
- Expenditure management and fiscal reporting actions:
  - Establish effective cash management system at ministry of finance; improve fiscal reporting; initiate adoption of functional and economic budget classification system.
  - By end-April 2004: fully constitute cash management unit (CMU), issue ministerial decree, appoint cash release committee, and draft action plan based on Fund TA recommendations.
  - By end-June 2004: CMU to prepare monthly fiscal budget cash plan for second half of year, approve via cash release committee, and present approved plan to BOS.
  - Abolish all tax netting operations related to direct taxes and VAT certificates by end-June.
  - VAT collected by customs: administrative changes so payments made to taxation chamber and transferred weekly by end-April and daily by end-June.
  - Action plan to strengthen fiscal reporting by end-April 2004; begin preparing monthly fiscal reports within 2-3 weeks after month end; include measures for coordination, computerization, and training.
  - Two-year program to align budget classification with government finance statistics (GFS) to be adopted by end-April 2004 with key benchmarks:
    - Classify 2004 budget sectors into GFS functions by end-June 2004.
    - Prepare 2005 budget presentation according to functional classification.
    - Implement 2005 budget in pilot ministries using old and new classification.
    - Fully adopt GFS classification with 2006 budget.
- Tax administration and customs reforms:
  - Large taxpayer unit to be fully operational by end-June 2004; broaden definition to include individuals by end-2004.
  - Adopt universal taxpayer identification number, including on excise duties, by end-June 2004.
  - Launch pilot audit enforcement project to increase field audits.
  - Implement more selective risk-based verification through nationwide coverage of ASYCUDA++.
- Oil Savings Account and oil price benchmark:
  - 2004 budget prepared on OSA benchmark of $22 per barrel.
  - Given projected Sudan oil export prices averaging over $28 per barrel, benchmark raised to $24 per barrel; save oil revenues above benchmark.
  - Commit to allocating SDD 11 billion from extra revenue from raising OSA benchmark price to additional social spending programs.
- Monetary and exchange system:
  - Broad money growth target for 2004: 22 percent.
  - BOS to ensure lending consistent with monetary target; assist in managing, but not extending, government support to agriculture.
  - Use of indirect monetary instruments to continue; no restrictions on market financing rates or banks’ credit allocations.
  - Reassess broad money growth target during program reviews.
  - Transform MOU into monetary operations division (MOD) by end-September 2004 with Fund TA to execute MPC guidelines.
  - Establish daily-maintained database to support MOD and flash reporting including daily bank deposits; required and excess reserves; banks’ foreign exchange positions; estimates of vault cash, currency in circulation and bank float; government accounts with central bank; bank holdings of government and BOS securities; bank lending; and various market rates.
  - Exchange system: maintain free of restrictions on current account transactions in accordance with acceptance of Article VIII, Sections 2, 3, and 4 obligations; implement managed-float regime.
  - Intraday market exchange rate fluctuation band to be allowed to +- 3 percent from previous day average market rate by end-December 2004 instead of present +- 2 percent.
  - BOS foreign exchange interventions to be guided primarily by monetary policy considerations when exchange rate movements remain within permitted daily fluctuations.
- Trade, WTO accession, and external debt management:
  - Maintain current open nontariff trade system.
  - Develop a new three-year tariff reform program by end-December 2004 to be implemented in context of 2005 budget; aim to reduce average tariff rate and number of tariff bands.
  - WTO accession progress: all necessary documents submitted except initial offer documents on goods and services, expected by May 2004; Sudan has requested special and differential treatment as a least developed country; requested WTO Secretariat to prepare factual summary for draft WP report.
  - External debt management actions by end-December 2004:
    - Formulate and approve public sector external debt policy by cabinet.
    - Prepare three-year rolling ceiling on contracting new external debt in context of 2005 budget, aligned with repayment capacity and debt sustainability under HIPC Initiative.
    - Establish Debt Policy and Monitoring Committee by end-April 2004 to guide debt policy formulation, implementation, and to evaluate all new loans before ministry approval.
    - Strengthen BOS External Debt Unit technical and human resources for negotiating and implementing debt rescheduling and relief under HIPC.
- Other reforms:
  - Oil sector transparency: plan to audit and consolidate accounts of all SPC subsidiaries and align accounting systems with international standards; prepare action timetable by end-April 2004.
  - Privatization program: gross privatization proceeds expected to reach SDD 15.7 billion in 2004 versus SDD 9 billion in 2003, reflecting government sale of part of shares in the Bank of Khartoum and Sudan Airways Company, and sale of Rabak Cement Factory.

### III. Medium-term outlook
- (Text of medium-term outlook follows in source.)

* _cr05187 - 1.      This memorandum reviews the outcome of the 2003 Staff-Monitored Program_*

### 31.      With the overall objective of achieving robust post-conflict growth and poverty

### _cr05187 - 31.      With the overall objective of achieving robust post-conflict growth and poverty

### Medium-term macroeconomic framework and objectives
- Overall objective: achieving robust post-conflict growth and poverty reduction over the medium term.
- Growth target: 6–7 percent of GDP.
- Inflation target: 5-6 percent.
- Current account deficit: expected to average about 6 percent of GDP.
- International reserves target: rise to about 3–4 months of imports.
- Domestically-financed budget deficit: will be kept at or below 1 percent of GDP.
- Exchange rate and monetary policy:
  - Monetary policy will aim to support the inflation target.
  - A flexible managed-float exchange rate will be maintained.
- Emphasis on private sector-led non-oil growth through prudent macroeconomic policies and structural reforms.

### Expected effects of peace and fiscal implications
- Anticipated improvements:
  - Resolution of Sudan’s external debt problems.
  - Improvement in relations with the international community.
  - Relaxation of external financing constraints.
  - Expected increase in oil production and higher FDI.
  - New revenue measures enabling a higher level of investments.
- Fiscal constraints and costs arising from the peace agreement:
  - Transfers to the South increased in line with its share of oil revenues, leading to a net increase in transfers from the federal budget to states of about 12 percent of total revenues.
  - Demobilization of armed forces will require net budgetary expenditures in the first three years before savings accrue from military downsizing.
- Policy challenge: ensure sufficient private sector-led growth and employment generation while allowing adequate budgetary allocations for poverty reduction.

### Relations with the Fund and other creditors
- Commitment to regularize relations with all creditors and strengthen relations with the Fund.
- Payments to the Fund:
  - Sudan made regular payments under the 2003 SMP: $27 million.
  - Planned increase in payments to the Fund to $30 million in 2004.
- Progress with external creditors:
  - Agreements reached with a number of bilateral Arab funds and most multilateral creditors, including the World Bank, African Development Bank, Islamic Development Bank, International Fund for Agricultural Development, Arab Fund for Economic and Social Development, OPEC Fund for International Development, and Arab Monetary Fund.
  - These agreements have resulted, in most cases, in net financing inflows.
  - Efforts will be intensified to reach agreement with remaining multilateral creditors.
  - Work with a support group of creditors led by the United Kingdom to secure donor support for resolving external debt under the HIPC Initiative.

### Program monitoring: quantitative indicative targets (Table 1) — key figures and memorandum items
- Quarterly indicative targets for end-June and end-December 2004 are set forth in Table 1.
- Selected quantitative figures (Cumulative Change During 2004 1/; in billions of Sudanese dinars unless otherwise indicated):
  - BOS net domestic assets: 223.7; -16.1; 8.3; 16.5; 35.5
  - Domestic financing of the fiscal deficit: 98.7; -22.0; 39.1; 52.6; 44.0
  - Contracting or guaranteeing of external nonconcessional debt by government and BOS: 147.0; 0.0; 0.0; 0.0; 0.0
  - BOS gross usable reserves (in millions of U.S. dollars): 526.9; 170.9; 160.0; 225.0; 280.0
  - Payments to the Fund (in millions of U.S. dollars): 27.0 ......... 30.0
- Memorandum items:
  - Broad money: 734.1; 71.5; 56.5; 105.0; 161.5
  - Central government social expenditure: 53.0 ......... 86.4
  - Oil saving account (OSA): 45.2; 9.1; 32.0; 44.0; 54.7
- Monitoring commitment: financial and economic developments will be closely monitored and, in consultation with Fund staff, measures implemented as needed to safeguard macroeconomic stability.

### Structural benchmarks for 2004 (Table 2)
- Prior Actions
  1. Enforce a ban, through a ministerial decree distributed to all line ministers, on all discretionary tax exemptions.
  2. Constitute the cash management unit (CMU), appoint a cash release committee, and draft an action plan to operationalize the CMU.
  3. Adopt a two-year program to align the budget classifications with the GFS.
  4. Develop an action plan to reform the fiscal reporting system.
  5. Establish a Debt Policy and Monitoring Committee to guide the formulation and implementation of a debt strategy and to evaluate all new loans.
  6. Prepare a time-bound action plan to audit and consolidate the accounts of all subsidiaries of Sudan Petroleum Corporation, and launch a program to align their accounting system with international standards.
- By end-June 2004
  1. Prepare a fiscal budget cash plan on a monthly basis for the second half of 2004. The cash plan must be approved by the cash release committee and presented to the Bank of Sudan (BOS).
  2. Begin to transfer VAT collected by customs to the taxation department on a daily basis.
  3. Activate the large tax payer unit.
  4. Classify, as a technical exercise, the 2004 budget sectors into the GFS.
  5. Adopt a universal taxpayer identification number.
- By end-December 2004
  1. Complete a review of all regulations and agreements that grant tax exemptions and develop an action plan to streamline the regulations in the context of the 2005 budget.
  2. Broaden the definition of large taxpayers to include individuals.
  3. Eliminate all tax privileges of the four major oil distribution companies.
  4. Develop a new three-year tariff reform program that will be implemented in the context of the 2005 budget.
  5. Formulate an external debt policy of the public sector and have it approved by the cabinet of ministers.

### Technical Memorandum of Understanding — definitions and program mechanics
- The 2004 SMP relies on five quantitative quarterly indicative targets and an oil revenue adjustor. The quantitative indicative targets are:
  1. Ceilings on net domestic assets of the Bank of Sudan (BOS).
  2. Ceilings on the domestic financing of the fiscal deficit.
  3. Floors for the buildup of gross usable reserves of the BOS.
  4. Ceilings on new nonconcessional external loans contracted or guaranteed by the government.
  5. Floors for payments to the Fund.
- Monitored memorandum items: Broad money, floor for the central government social expenditures, and oil savings account (OSA).
- Key definitional points and mechanics (selected):
  - NDA of the BOS defined as the sum of the Net Domestic Credit of the BOS, the net issue of money market instruments central bank musharaka certificates (CMCs), and other items net (OIN) of the BOS.
  - Net Domestic Credit of the BOS defined to include total credit to the central government (including government musharaka certificates (GMCs) and government finance certificates (GFCs)) minus total central government deposits with the BOS plus BOS claims on public enterprises plus BOS claims on banks.
  - Net issues of CMCs by the BOS are classified as part of the NDA.
  - Domestic financing of the fiscal deficit defined as total net domestic borrowing by the central government, including net borrowing from the banking system (including GMCs and GFCs), but excluding deposits accumulated in the OSA; net sales of GMCs and GFCs outside the banking system; revenues from privatization; and repayments by the central government of internal domestic debts to public agencies, banks, and private companies.
  - BOS gross usable reserves defined as foreign reserve assets controlled by the BOS, immediately and unconditionally available to the BOS for meeting balance-of-payment needs, and not earmarked for specific payments; they consist of balances on accounts maintained with overseas correspondent banks and foreign exchange banknotes in the vaults of the BOS.
  - Contracting or guaranteeing of new nonconcessional external debt by the government applies to debt as defined in point no. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision no. 12274-(00/85), August 24, 2000), and to commitments contracted or guaranteed for which value has not been received. Debt deemed concessional when the currency-specific discount rate (determined by the market-related “commercial interest reference rates (CIRR)” as published by the OECD) applied to the contractual schedule indicates a grant element of at least 35 percent.
  - Broad money defined as the sum of local currency circulating outside of the banks, banks’ demand, and time and savings deposits; includes transferable deposits and margin deposits against letters of credit placed by the local government, nonfinancial public enterprises, and the nonbank private sector with the BOS.
  - Oil revenue adjustor:
    - Oil revenue arising from an export price of over $24 per barrel for Nile oil exports, f.o.b. Port Sudan, will be deposited in a government account at the BOS.
    - Amounts will be transferred, if necessary, to the government, at least on a quarterly basis, to ensure that government oil export receipts are not less than the amounts targeted under the program.
    - Program targets for domestic financing of the budget deficit and BOS NDA will be reduced, and the international reserve target will be raised by amounts corresponding to the accumulated deposits during the program period.
    - In the event of oil revenue shortfalls below the quarterly program targets, the accumulated balance at the BOS can be drawn down to make up the shortfall; correspondingly, program targets for domestic financing of the budget deficit and BOS NDA will be raised, and the international reserve target reduced.
    - The adjustor will be reviewed at the regular program reviews.
  - Central government social expenditure corresponds to central government expenses on medical care; health services; poor students' support; supplement to poor consumers of electricity; social and health insurance; and water, health, and education development.

*Source: Sudan authorities; and Fund staff estimates and projections as presented in the technical memorandum and program tables.*

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