## _cr06182

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---

### Executive summary — key findings and recent performance
- Real GDP grew at an estimated rate of 8 percent in 2005.
- Oil sector output in 2005: 287 thousand barrels per day.
- Average inflation in 2005: 8.5 percent; 12-month rate at end-February 2006: 5.8 percent.
- External current account worsened in 2005; strong capital inflows supported the balance of payments.
- Net international reserves rose from 1.9 months of imports at end-2004 to 2.6 months at end-2005.
- Foreign direct investment: US$1.8 billion in 2003; US$3.8 billion in 2005.
- Dinar appreciation since late 2004: 12 percent nominal; 17 percent real effective in the last year cited.

### Medium-term outlook and projections (2005–10)
- Outlook conditional on continued reforms: growth of 8–10 percent per year, low inflation, rising international reserves.
- Fiscal and balance of payments gaps of about 1.5–2 percent of GDP per year assumed covered by official grants.
- Risks: anti-reform opposition, unresolved domestic political tensions, weak institutions (especially at the subnational level).
- Selected medium-term projections (2005 Est; 2006 Projections; 2007; 2008–10 (Average)):
  - Real GDP Growth (in percent): 8.0; 13.0; 10.3; 8.9
  - Oil: -0.27; 1.02; 8.2; 9.0
  - Non-oil: 8.9; 7.2; 7.5; 8.8
  - Inflation (period average): 8.5; 7.5; 5.0; 3.3
  - Gross investment: 23.3; 25.3; 26.9; 27.4
  - Fiscal balance: -1.8; -0.9; -0.4; -0.1
  - Current account balance: -8.5; -5.2; -4.0; -3.7
  - Crude oil export price (U.S. dollars per barrel): 49.7; 47.4; 47.2; 46.2
  - Crude oil production (in millions of barrels/day): 0.29; 0.49; 0.63; 0.77
- Projections assume external current account deficit declines gradually and remains financed by external capital inflows.

### Implementation of the CPA and political-economy constraints
- Interim national constitution and Government of National Unity and Government of Southern Sudan established in mid-2005.
- Central government transfers to the South have begun; exact amounts under discussion; several commissions (borders, oil sector, fiscal federalism) not yet fully functioning.
- Darfur peace talks: progress on revenue sharing, power‑sharing, and security arrangements; security situation remains precarious; relations with Chad have deteriorated.

### Exchange rate trends and competitiveness (Box 1 highlights)
- Improved market fundamentals and move toward market-driven exchange rate led to dinar appreciation.
- 35 percent increase in oil exports accompanied rapid growth and higher oil prices in 2005.
- Prices of nontraded goods (housing, water, electricity) grew at an average rate of 11 percent in 2004–05; prices of tradable goods grew by an average of 6 percent.
- Non-oil export volumes fell in 2005; factors included transportation bottlenecks, high domestic demand, conflict in livestock-rich areas, and possible real exchange rate appreciation.
- Upward pressure on equilibrium real exchange rate from oil sector boom and strong fundamentals; need to remove structural bottlenecks and improve business environment to preserve competitiveness.

---

### Fiscal developments, 2005 — main facts and selected indicators
- Fiscal balance: after three years of surpluses, turned into a deficit in 2005.
- Oil revenue continued to rise but did not keep pace with increased government spending.
- Transfers and subsidies:
  - Transfers to the South and northern states increased significantly because of the CPA and fiscal decentralization.
  - Domestic fuel subsidy emerged equivalent to 3.5 percent of GDP as domestic fuel prices were not increased in line with rising international prices.
- Financing of the 2005 fiscal deficit:
  - Financed by bond sales to the domestic nonbank sector and a lower-than-programmed accumulation of deposits in the oil savings account.

- Selected fiscal indicators (2004, 2005, 2006 Est./Prog.) (in percent of GDP):
  - Total revenue: 19.8, 21.8, 24.0
  - Of which: Oil: 10.4, 13.4, 14.3
  - Total expenditure: 18.3, 23.6, 24.9
  - Of which: Fuel subsidies: 0.0, 3.5, 1.8
  - Transfers to the South: 0.4, 2.8, 4.0
  - Transfers to other states: 1.1, 3.6, 4.2
  - Overall balance: 1.5, -1.8, -0.9
  - Memorandum items:
    - Consolidated capital spending: 5.0, 5.5, 6.9
    - Pro-poor spending: ..., 2.8, 5.1

### 2006 fiscal stance and fuel subsidy policy
- Overall fiscal deficit projected: -1.8 (2005) to -0.9 percent of GDP (2006).
- Domestic financing of the deficit expected to be 0.3 percent of GDP (compared to 1.6 percent in 2005).
- Program targets: 7.5 percent inflation and further accumulation of international reserves.
- Oil savings account is expected to accumulate the equivalent of 1.4 percentage points of GDP in 2006.
- Authorities estimate a price increase of 60 percent will be needed to eliminate the subsidy on gas oil; intend to begin addressing subsidy in 2006.

---

### Monetary developments, banking sector and exchange rate, 2005
- Money and credit:
  - Broad money grew by 45 percent.
  - Reserve money grew by 35 percent.
  - Credit to the private sector grew by 65 percent during the year; about 60 percent of new credit went to services and trade; almost 40 percent of the new credit originated in a single bank.
- Banking soundness indicators (2004–end-2005):
  - Nonperforming loans to total loans: 8.9 percent in 2004 → 6.9 percent at end-2005.
  - Capital adequacy ratio: 10.8 percent → 12 percent.
  - Note: regulatory capital measures are artificially high because fixed assets are improperly counted as capital; authorities reviewing accounting norms.
- Exchange rate and policy stance:
  - Dinar appreciated as money demand pressures were backed by strong foreign exchange inflows.
  - Authorities allowed appreciation within a managed floating exchange rate regime; FX intervention targeted reserve objectives rather than an implicit exchange rate path.
- Reforms and regulatory actions in 2005:
  - Medium taxpayer unit set up.
  - Adopted Automated System for Customs Data at customs ports.
  - Strengthened cash management; introduced competitive auctions of government securities and a collateral-based financing window.
  - Privatized a large bank (Khartoum Bank); granted four licenses for new banks.
  - Enacted laws to restructure the central bank and banking activities; established a central bank branch in the South.
  - Central bank stepped up supervision of the bank that originated almost 40 percent of new credit.

---

### Performance under the 2005 SMP and external financing
- SMP performance:
  - Three of five quantitative targets and all but one structural benchmark for end-December 2005 were met.
  - Target on domestic financing of the fiscal deficit missed by a small margin.
  - Ceiling on nonconcessional borrowing not observed: US$935 million in loans contracted during the year.
    - Project-related nonconcessional loan contracts with China: US$814 million.
    - Contracts with the Islamic Development Bank and the Arab Monetary Fund: US$102 million.
    - Iran provided a loan for U$S19 million with a grant element of 25 percent.
  - Structural benchmark on converting the 2006 budget in GFSM 2001 format delayed; expected implementation in May 2006.

- Authorities’ initial borrowing plans for 2006: US$1.1 billion; later indicated could limit to about US$700 million.
  - Planned use: almost two-thirds for reconstruction of a North-South railway and construction of roads to the South and to Darfur; remaining for water and irrigation projects.
- Staff urged minimizing nonconcessional borrowing and treating new borrowing under the Highly Indebted Poor Countries’ Initiative.

---

### Oil sector transparency, external debt and creditor relations
- Near-term oil sector reforms:
  - Monthly publication of detailed oil sector data.
  - Completion and publishing of the audit of Sudapet.
  - Regularization of ad hoc transfers of profits from state-owned oil companies to the treasury.
  - Clarification of operational role of the National Petroleum Commission.
  - Staff emphasis: increase fiscal and oil sector transparency and publish oil-related transfers to the South.
- External debt (end-2005):
  - Stock of public and publicly guaranteed external debt: US$27.7 billion.
  - Arrears: US$24.4 billion.
  - Present value terms: estimated stock of debt: US$26 billion.
  - Debt is about 690 percent of the three-year average of exports of goods and services.
  - Composition: about 70 percent owed to official bilateral creditors (almost equally divided between Paris Club and non-Paris Club); multilateral institutions 17 percent; commercial creditors 13 percent.
- Payments to the Fund:
  - Authorities committed to increase payments to the Fund to US$45 million in 2006.
  - Payments in 2005 to the Fund: US$30 million.
- Creditor flows in 2005:
  - Multilateral creditors excluding IMF, World Bank, and AfDB: net resource transfer of US$74 million.
  - Arab bilateral creditors: net transfer of US$68 million.
  - Other bilateral creditors (China, India, Malaysia): Sudan paid net US$84 million.

---

### The 2006 Staff‑Monitored Program (SMP) — objectives, targets and TMU highlights
- Program aims:
  - Maintain macroeconomic stability.
  - Ensure implementation of macro‑relevant CPA commitments.
  - Increase fiscal and oil sector transparency.
- Program targets and measures:
  - Keep inflation at no more than 7.5 percent.
  - Increase budget allocations on social and infrastructure projects.
  - Lower the fuel subsidy.
  - Establish rules and procedures for the FFAMC.
  - Begin fiscal reporting according to GFS.
  - Publish detailed oil sector data and oil-related transfers to the South.
  - Introduce the new national currency.
- Key quantitative targets and TMU definitions:
  - Ceilings on change in NDA of the CBOS; ceilings on domestic financing of the fiscal deficit; floors for buildup of NIR; ceilings on new nonconcessional external loans contracted or guaranteed; floors for payments to the Fund.
  - Concessionality rule: loan concessional if grant element ≥ 35 percent using OECD CIRRs with specified margins.
  - Programmed OSA accumulation for the year: US$509 million.
  - Oil revenue adjustor: excess accruals deposited in OSA reduce NDA/domestic financing targets and raise NIR target; shortfalls permit OSA withdrawals.

- Quarterly Nile blend crude (2006) — prices, volumes, revenues:
  - Price (f.o.b. Port Sudan) US$/barrel: Q1 53.9, Q2 55.2, Q3 55.1, Q4 54.7, Year 54.7
  - Volume exported Million barrels: Q1 12.9, Q2 13.5, Q3 13.5, Q4 12.4, Year 52.2
  - Export revenues US$ millions: Q1 698, Q2 745, Q3 741, Q4 676, Year 2,859
  - Of which: programmed OSA accumulation US$ millions: Q1 116, Q2 138, Q3 136, Q4 119, Year 509

- Quarterly Dar blend crude and block 5A crude (2006):
  - Price (f.o.b. Port Sudan) US$/barrel: Q1 40.0, Q2 39.5, Q3 39.4, Q4 38.9, Year 39.5
  - Volume exported Million barrels: Q1 0.0, Q2 6.4, Q3 10.0, Q4 11.5, Year 27.9
  - Export revenues US$ millions: Q1 0, Q2 254, Q3 393, Q4 344, Year 1,094
  - Programmed OSA accumulation US$ millions: Q1 0.0, Q2 0.0, Q3 0.0, Q4 0.0, Year 0.0

---

### Data issues, technical assistance priorities and reporting framework
- Data strengths:
  - Participation in the Fund’s General Data Dissemination System.
  - Monetary and financial sector statistics comprehensive and timely.
  - Detailed data on oil sector shipments, revenues, and payments available regularly.
- Data weaknesses:
  - Fiscal expenditure data not compatible with GFS methodology.
  - National accounts virtually nonexistent; lack of subannual data and gaps in sectoral coverage.
  - Details on oil production from new blocks not available.
  - Statistics on capital goods imports and foreign direct investment weak.
- Near-term TA priorities:
  - Adoption of GFSM 2001 methodology.
  - Tax administration.
  - Fiscal decentralization and public financial management.
  - Issuance of the new currency.
  - Banking supervision and liquidity management.
  - Fiscal and real sector statistics.
- Data reporting timetable (selected):
  - Flash report (CBOS weekly indicators): Weekly — Tuesday of each week.
  - CBOS balance sheet: Monthly — 1 month after end of each month.
  - Monetary survey (banking system): Monthly — 1 month after end of each month.
  - Central government GFSM 2001 presentation: Monthly — Data for January–May by end-June; remaining months 45 days after end of each month.
  - Crude oil exports (Central Bureau of Statistics): Monthly — 1 month after end of each month.
  - Net operating income transfers to the treasury: Quarterly — 1 month after end of each quarter.

---

### Structural reform priorities and implementation challenges
- Tax policy and administration:
  - Plans to stop renewal of expired business-profits tax and customs-duty exemptions.
  - Introduce self-assessment for large and medium-sized taxpayers.
  - Set up three federal tax offices in major cities in the South.
  - Prepare program to revamp investment incentives in line with best international practices.
  - Box 2: achievements include introduction of VAT; phasing out privileges for major oil distribution companies; removal of income tax exemptions; large and medium taxpayer units; ASYCUDA adoption.
  - Non-oil tax revenues as share of non-oil GDP rose from 7 percent in 2002 to 9.9 percent in 2005.
  - Recommended further reforms: remove tax holidays and customs duty exemptions while grandfathering existing beneficiaries; implement accelerated depreciation; adopt low (20 percent or less) uniform business profit tax; scale back VAT exemptions; improve audit and collection enforcement.

- Expenditure management and decentralization:
  - Success depends on regulations, implementation capacity, transparent reporting, effective monitoring.
  - Capacity in the South and other states weaker than central government; urgent investments in administration and training needed.
  - Ensure efficient operations of FFAMC and compile budget execution reports according to GFSM 2001 covering central government and Government of Southern Sudan.

- Financial system restructuring:
  - Restructure commercial banks: increase minimum capital requirements and capital adequacy ratios; ensure compliance with prudential norms.
  - Central bank restructuring and introduction of new currency identified as most critical reform.
  - Risks: inappropriate planning for distribution of new currency; lack of safeguards against fraud during currency exchange.
  - Staff recommendation: well-planned, expeditious, transparent process to introduce the new currency; CBOS to proceed with internal restructuring and provide basis for a dual banking system.

---

### Staff appraisal — key assessments and policy recommendations
- Overall assessment:
  - Despite security challenges and CPA implementation pressures, macroeconomic stability was maintained and non-oil growth was robust.
  - Performance under 2005 SMP broadly satisfactory though with slippages (fuel subsidy, higher-than-projected nonconcessional borrowing).
- Fiscal policy recommendations:
  - Adhere to fiscal spending and reserve money targets in environment of exchange rate flexibility to keep inflation in check.
  - Reorient expenditures, including reduction in fuel subsidies.
  - Introduce GFSM 2001 reporting and publish detailed oil-sector data to improve expenditure management and transparency.
  - Build capacity, transparency, and accountability at all government levels and make FFAMC operational to support fiscal decentralization.
- Monetary policy recommendations:
  - Continue focus on attaining inflation objectives in environment of exchange rate flexibility.
  - Fiscal prudence and proactive monetary policy with close management of reserve money.
  - Maintain current managed floating exchange rate regime; ensure flexibility in FX pricing to prevent excessive monetization of external inflows.
- Financial system recommendations:
  - Central bank to proceed with internal restructuring, provide basis for dual banking system, and introduce new currency via transparent process.
  - Restructure commercial banks and raise capital adequacy requirements.
- External debt and borrowing:
  - Minimize nonconcessional borrowing as it threatens debt sustainability and could delay creditor participation in debt-relief operations.
  - Treat new borrowing under the Highly Indebted Poor Countries’ Initiative to ensure eventual relief sufficient to restore debt sustainability.
- SMP conclusion:
  - Except for high level of nonconcessional borrowing, staff considers 2006 SMP continues to be equivalent in strength to a Rights Accumulation Program.
  - SMP viewed as valuable to support reform momentum and provide framework for donor support to peace process and afflicted areas.

---

*Source: Executive Summary and selected sections, _cr06182.*

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

### Executive Summary

### Key findings and recent performance
- Sudan’s economic performance in recent years has been good despite internal conflicts and difficulties with the Comprehensive Peace Agreement (CPA): growth has been robust, inflation kept at a single-digit level, and important reforms undertaken.
- Real GDP grew at an estimated rate of 8 percent in 2005, driven mainly by a recovery in agriculture and robust activity in construction and services.
- Oil sector output in 2005 remained virtually unchanged at 287 thousand barrels per day.
- Average inflation in 2005 was 8.5 percent. At end-February 2006, the 12-month rate of inflation was 5.8 percent.
- The external current account worsened in 2005, but strong capital inflows supported the balance of payments.
- Net international reserves rose from 1.9 months of imports at end-2004 to 2.6 months at end-2005.
- Foreign direct investment rose from US$1.8 billion in 2003 to US$3.8 billion in 2005.
- Since late 2004 the dinar appreciated: 12 percent in nominal terms and 17 percent in real effective terms during the last year cited.

### Medium-term outlook and projections (2005–10)
- The medium-term outlook, conditional on continued reforms, envisages growth of 8–10 percent per year, low inflation, and rising international reserves.
- Fiscal and balance of payments gaps of about 1.5–2 percent of GDP per year are assumed to be covered by official grants.
- Risks include anti-reform opposition, unresolved domestic political tensions, and weak institutions (especially at the subnational level).
- Selected medium-term projections (2005 Est; 2006 Projections; 2007; 2008–10 (Average)):
  - Real GDP Growth (in percent): 8.0; 13.0; 10.3; 8.9
  - Oil: -0.27; 1.02; 8.2; 9.0
  - Non-oil: 8.9; 7.2; 7.5; 8.8
  - Inflation (period average): 8.5; 7.5; 5.0; 3.3
  - Gross investment: 23.3; 25.3; 26.9; 27.4
  - Fiscal balance: -1.8; -0.9; -0.4; -0.1
  - Current account balance: -8.5; -5.2; -4.0; -3.7
  - Crude oil export price (U.S. dollars per barrel): 49.7; 47.4; 47.2; 46.2
  - Crude oil production (in millions of barrels/day): 0.29; 0.49; 0.63; 0.77
- The projections assume the external current account deficit will decline gradually and remain financed by external capital inflows.

### Implementation of the CPA and political-economy constraints
- The interim national constitution and the Government of National Unity and the government of Southern Sudan were established in mid-2005.
- Central government transfers to the South have begun, but exact amounts due remain under discussion; several commissions (borders, oil sector, fiscal federalism) are not yet fully functioning.
- Progress in Darfur peace talks has been made on revenue sharing, power-sharing, and security arrangements, but the security situation remains precarious and relations with Chad have deteriorated.

### Exchange rate trends and competitiveness (Box 1 highlights)
- Improved market fundamentals and a move toward a market-driven exchange rate have led to dinar appreciation.
- A 35 percent increase in oil exports accompanied rapid growth and higher oil prices in 2005.
- Prices of nontraded goods (housing, water, electricity) grew at an average rate of 11 percent in 2004–05, while prices of tradable goods grew by an average of 6 percent.
- Non-oil export volumes fell in 2005; factors included transportation bottlenecks, high domestic demand, conflict in livestock-rich areas, and possible real exchange rate appreciation.
- The oil sector boom and strong fundamentals are likely to exert further upward pressure on the equilibrium real exchange rate, underscoring the need to remove structural bottlenecks and improve the business environment to preserve competitiveness.

### Fiscal context and policy issues
- Despite increased oil revenues, central government fiscal space is constrained because transfers required by the CPA and decentralization will increase spending and capital expenditures, contributing to a substantial increase in pro-poor development spending.
- To safeguard macroeconomic stability, an additional reorientation of expenditures is required, including through a reduction in fuel subsidies.
- Sudan’s external debt problems limit access to external development financing.

### Staff recommendations and critical actions
- Adhere to fiscal spending and reserve money targets in an environment of exchange rate flexibility to keep inflation in check.
- Introduce a new national currency to foster financial development in the South and economic integration.
- Ensure close coordination between the government of Southern Sudan, the other states, and the central government to harmonize spending and preserve macroeconomic stability.
- Initiate fiscal reporting according to Government Finance Statistics Methodology and publish detailed oil-sector data to improve expenditure management and transparency.
- Build capacity, transparency, and accountability at all levels of government and make the Fiscal and Financial Allocation and Monitoring Commission operational to support fiscal decentralization.
- Proceed with reforms to remove structural rigidities and lower transactions costs to improve competitiveness.
- Minimize nonconcessional borrowing and maintain cooperation on economic policies and payments to the Fund to facilitate resolution of Sudan’s debt and arrears problems.

*Source: Executive Summary, _cr06182 - Executive Summary.*

### 12.      After three years of surpluses, the fiscal balance turned into a deficit in 2005.

### _cr06182 - 12.      After three years of surpluses, the fiscal balance turned into a deficit in 2005.

### Fiscal developments, 2005
- After three years of surpluses, the fiscal balance turned into a deficit in 2005.
- Oil revenue continued to rise but did not keep pace with the increase in government spending.
- Transfers and subsidies:
  - Transfers to the South and northern states increased significantly because of the CPA and fiscal decentralization in the North.
  - A domestic fuel subsidy equivalent to 3.5 percent of GDP emerged as domestic fuel prices were not increased in line with rising international prices.
- Financing of the 2005 fiscal deficit:
  - Financed by bond sales to the domestic nonbank sector and a lower-than-programmed accumulation of deposits in the oil savings account.

- Selected fiscal indicators (2004, 2005, 2006 Est./Prog.) (in percent of GDP):
  - Total revenue: 19.8, 21.8, 24.0
  - Of which: Oil: 10.4, 13.4, 14.3
  - Total expenditure: 18.3, 23.6, 24.9
  - Of which: Fuel subsidies: 0.0, 3.5, 1.8
  - Transfers to the South: 0.4, 2.8, 4.0
  - Transfers to other states: 1.1, 3.6, 4.2
  - Overall balance: 1.5, -1.8, -0.9
  - Memorandum items:
    - Consolidated capital spending: 5.0, 5.5, 6.9
    - Pro-poor spending: ..., 2.8, 5.1

### Monetary developments and exchange rate
- Money demand and monetary aggregates in 2005:
  - Broad money grew by 45 percent.
  - Reserve money grew by 35 percent.
  - Credit to the private sector grew by 65 percent during the year.
  - About 60 percent of the new credit was channeled to the services and trade sectors; almost 40 percent of the new credit originated in a single bank.
- Exchange rate and policy stance:
  - Dinar appreciated as money demand pressures were backed by strong foreign exchange inflows.
  - Authorities allowed the exchange rate to appreciate to address incipient inflationary pressures within a managed floating exchange rate regime.
  - Foreign exchange market intervention targeted attainment of the program’s foreign exchange accumulation reserves objectives rather than an implicit exchange rate path.

### Banking system and financial sector reforms
- Banking soundness indicators, 2004–end-2005:
  - Nonperforming loans to total loans fell from 8.9 percent in 2004 to 6.9 percent at end-2005.
  - Capital adequacy ratio for the banking system increased from 10.8 percent to 12 percent.
  - Note: measures of regulatory capital are artificially high because fixed assets are improperly counted as capital; authorities are reviewing accounting norms.
- Reforms and regulatory actions in 2005:
  - Set up a medium taxpayer unit.
  - Adopted the Automated System for Customs Data at customs ports.
  - Strengthened cash management through cash plans and better coordination between the ministry of finance and the central bank.
  - Introduced competitive auctions of government securities and a new financing window for banks using collateral-based certificates.
  - Privatized a large bank (Khartoum Bank) and granted four licenses for new banks.
  - Enacted laws to restructure the central bank and banking activities and established a central bank branch in the South.
  - Formulated a strategy for screening mergers and acquisitions and opened the banking sector to foreign banks.
  - Central bank stepped up supervision of the bank that originated almost 40 percent of new credit to monitor its lending portfolio.

### Performance under the 2005 SMP and external financing
- Performance:
  - Three of five quantitative targets and all but one structural benchmark for end-December 2005 were met.
  - Target on domestic financing of the fiscal deficit was missed by a small margin.
  - Ceiling on nonconcessional borrowing was not observed: US$935 million in loans were contracted during the year.
    - Project-related nonconcessional loan contracts with China: US$814 million.
    - Contracts with the Islamic Development Bank and the Arab Monetary Fund: US$102 million.
    - Iran provided a loan for U$S19 million with a grant element of 25 percent.
  - Structural benchmark on converting the 2006 budget in GFSM 2001 format was delayed; expected implementation in May 2006.

### Economic outlook and 2006 macroeconomic framework
- Macroeconomic projections for 2006:
  - GDP growth: 13 percent.
  - Average inflation: 7.5 percent.
  - Non-oil sector growth: 7 percent.
  - Oil production expected to increase by nearly 70 percent (to 492,000 barrels per day) as two new oil fields come on stream.
  - Forecast oil prices for 2006: US$55 per barrel of Nile blend and US$40 per barrel of Dar blend.
- Fiscal stance for 2006:
  - Overall fiscal deficit projected to fall from 1.8 percent in 2005 to 0.9 percent of GDP in 2006 because of higher oil revenues.
  - Domestic financing of the deficit expected to be 0.3 percent of GDP (compared to 1.6 percent in 2005).
  - Program targets 7.5 percent inflation and further accumulation of international reserves.
  - Oil savings account is expected to accumulate the equivalent of 1.4 percentage points of GDP in 2006.
- Expenditure reorientation and fuel subsidy policy:
  - Fiscal framework envisages moderate growth in wages and goods and services and a smaller fuel subsidy.
  - Authorities recognize the fuel subsidy does not benefit the poor and intend to begin addressing it in 2006; estimate that a price increase of 60 percent will be needed to eliminate the subsidy on gas oil.
  - Decline in fuel subsidy in 2006 reflects, in part, a decline in fuel imports with higher subsidy per unit, increased domestic production of such products, dinar appreciation, and lower oil prices in 2006.
- Public spending and decentralization:
  - Central government transfers to the South and northern states expected to grow significantly in 2006.
  - Bulk of transfers to northern states and some national capital expenditures are deemed pro-poor.
  - Authorities acknowledge capacity constraints in recipient regions but consider infrastructure spending essential for poverty reduction and national unity.

- Monetary targets and policy instruments for 2006:
  - Reserve money growth targeted at 25 percent.
  - Broad money growth targeted at 28 percent.
  - Monetary policy to use domestic open market operations and foreign exchange market operations flexibly to manage uncertainties (fiscal behavior of subnational governments, money demand in the South, foreign exchange inflows).

### Structural reform priorities and implementation challenges
- Tax policy and administration:
  - Plans to stop renewal of expired business-profits tax and customs-duty exemptions.
  - Introduce self-assessment for large and medium-sized taxpayers.
  - Set up three federal tax offices in major cities in the South.
  - Prepare a program to revamp investment incentives in line with best international practices.
  - Box 2 summary of past progress and future agenda:
    - Achievements: introduction of VAT; phasing out privileges for major oil distribution companies; removal of income tax exemptions; setting up large and medium taxpayer units; enforcing departmental fee collection; implementing the Automated System for Customs Data.
    - Non-oil tax revenues as a share of non-oil GDP rose from 7 percent in 2002 to 9.9 percent in 2005.
    - Further reforms recommended:
      - Modify Investment Encouragement Act by removing tax holidays and customs duty exemptions while grandfathering existing beneficiaries; implement accelerated depreciation.
      - Adopt a low (20 percent or less) uniform business profit tax.
      - Scale back VAT exemptions, especially on capital goods and selected consumer goods.
      - Improve audit and collection enforcement by the large taxpayers unit and implement self-assessments and risk-based methods in tax and customs administration.

- Expenditure management and decentralization:
  - Success of decentralization depends on appropriate regulations, implementation capacity, transparent reporting, and effective monitoring.
  - Capacity in the South and other states is weaker than at the central government; urgent investments in administration and training needed.
  - Ensure efficient operations of the Fiscal and Financial Allocation and Monitoring Commission (FFAMC).
  - Pursue ambitious timetable for compiling budget execution reports according to GFSM 2001 format covering central government and Government of Southern Sudan.
  - First public expenditure review underway in consultation with the World Bank; Fund staff to assist on revenue management.

- Macroeconomic challenges of implementing the CPA (Box 3 highlights):
  - Monetary policy: introduce conventional instruments in the South and strengthen regulatory and supervisory capacity.
  - Single currency: introducing a new currency is essential for payments and integration.
  - Tax collection: Government of Southern Sudan lacks capacity and infrastructure to collect taxes; customs posts and tax offices will gradually operate.
  - Coordination of spending and timing is crucial to harmonize national and Southern projects and ensure smooth conduct of monetary policy.
  - Transparency and monitoring: FFAMC critical to ensure transparency and monitor allocation of nationally collected funds.
  - Coordination on budget preparation and execution (including borrowing plans) necessary to safeguard fiscal sustainability and macroeconomic stability.

*Source: _cr06182 - 12.      After three years of surpluses, the fiscal balance turned into a deficit in 2005.*

### 30.      Oil sector transparency. The authorities’ near-term reforms in this area include the

### _cr06182 - 30.      Oil sector transparency. The authorities’ near-term reforms in this area include the

### Oil sector transparency and near-term reforms
- Monthly publication of detailed oil sector data.
- Completion and publishing of the audit of Sudapet (a state-owned oil company with equity stakes in a number of fields).
- Regularization of the hitherto ad hoc transfers of profits from the state-owned oil companies to the treasury (MEFP, ¶21).
- Clarification of the operational role of the National Petroleum Commission, a high-level body created under the CPA to manage oil sector policy.
- Staff appraisal emphasis:
  - Increase fiscal and oil sector transparency.
  - Publish detailed oil sector data and oil-related transfers to the South.

### Financial system restructuring
- Key near-term actions:
  - Restructuring of the central bank.
  - Introduction of the new currency (identified as the most critical reform).
- Technical assistance:
  - MFD providing intensive technical assistance.
  - Follow-up to the Financial System Stability Assessment (FSSA) prepared in March 2005.
- Banking sector strategy:
  - Restructure commercial banks by increasing minimum capital requirements and capital adequacy ratios.
  - Ensure banks’ compliance with prudential norms.
- Risks highlighted:
  - Inappropriate planning for distribution of new currency.
  - Lack of safeguards to prevent fraud during currency exchange.
- Staff recommendation:
  - Embark on a well-planned, expeditious, and transparent process to introduce the new currency.
  - Central bank to proceed with internal restructuring and provide basis for effective functioning of a dual banking system.

### External debt and relations with creditors — findings and figures
- At end-2005:
  - Stock of public and publicly guaranteed external debt: US$27.7 billion.
  - Arrears: US$24.4 billion.
- Present value terms:
  - Estimated stock of debt: US$26 billion.
  - Debt is about 690 percent of the three-year average of exports of goods and services.
- Composition note (footnote 16):
  - About 70 percent of the debt is owed to official bilateral creditors (almost equally divided between Paris Club and non-Paris Club creditors).
  - Remaining debt owed to multilateral institutions (17 percent) and commercial creditors (13 percent).
- Payments to the Fund:
  - Authorities committed to increase payments to the Fund to US$45 million in 2006.
  - In 2005, Sudan paid US$30 million to the Fund as envisaged under the SMP.
- Creditor flows in 2005:
  - Multilateral creditors excluding the IMF, World Bank, and African Development Bank: net resource transfer of US$74 million.
  - Arab bilateral creditors: net transfer of US$68 million.
  - Other bilateral creditors (China, India, and Malaysia): Sudan paid a net amount of US$84 million.

### Borrowing plans and staff concerns
- Authorities’ initial borrowing plans for 2006: US$1.1 billion.
- Authorities later indicated they could limit this type of borrowing to about US$700 million.
- Planned use of borrowing:
  - Almost two-thirds for reconstruction of a North-South railway and construction of roads to the South and to Darfur.
  - Remaining amount intended for water and irrigation projects (footnote 18).
- Staff urged:
  - Minimize nonconcessional borrowing due to complications for potential debt relief and higher cost of debt relief for existing creditors.
  - Prioritize projects and limit contracting of nonconcessional facilities, especially if concessional financing becomes available.
  - Treat all such new borrowing under the Highly Indebted Poor Countries’ Initiative to ensure eventual relief is sufficient to restore debt sustainability.

### Data issues and technical assistance priorities
- Data strengths:
  - Participation in the Fund’s General Data Dissemination System.
  - Monetary and financial sector statistics are comprehensive and timely.
  - Detailed data on oil sector shipments, revenues, and payments are available regularly.
- Data weaknesses:
  - Fiscal expenditure data not compatible with GFS methodology.
  - National accounts are virtually nonexistent.
  - Details on oil production from new blocks are not available.
  - Statistics on capital goods imports and foreign direct investment are weak.
- Near-term technical assistance priorities:
  - Adoption of GFSM 2001 methodology (budget classification, accounting, auditing, and reporting).
  - Tax administration.
  - Fiscal decentralization and public financial management.
  - Issuance of the new currency.
  - Banking supervision and liquidity management.
  - Fiscal and real sector statistics.
- Coordination:
  - Fund coordinating technical assistance on financial sector reforms.
  - World Bank to continue providing technical assistance to the Government of Southern Sudan on public financial management, with occasional Fund support.

### The 2006 Staff-Monitored Program (SMP) — objectives and commitments
- Program aims:
  - Maintain macroeconomic stability.
  - Ensure implementation of macro-relevant commitments under the CPA.
  - Increase fiscal and oil sector transparency.
- Program targets and measures:
  - Keep inflation at no more than 7.5 percent.
  - Increase budget allocations on social and infrastructure projects.
  - Lower the fuel subsidy.
  - Establish rules and procedures for the FFAMC.
  - Begin fiscal reporting according to GFS.
  - Publish detailed oil sector data and oil-related transfers to the South.
  - Introduce the new national currency.

### Risks to the outlook
- Main risks:
  - Weakening of political resolve to maintain macroeconomic stability and advance critical reforms.
  - Deterioration of security (noted earlier in Darfur) undermining creditor confidence and access to concessional financing.
  - Persistence of external arrears problems limiting reform implementation.
- Manifestations of lack of resolve:
  - Delayed action to lower fuel subsidies.
  - Delayed implementation of fiscal and oil-sector transparency reforms.
  - Inability to adhere to fiscal spending ceilings.
  - Difficulties in building modern administration in the South and other states.
  - Risk of wasteful spending of transfers to subnational governments.
  - Challenges to monetary policy amid unpredictable subnational government spending.

### Staff appraisal — key assessments and policy recommendations
- Overall assessment:
  - Despite security challenges and CPA implementation pressures, macroeconomic stability was maintained and non-oil growth was robust.
  - Performance under the 2005 SMP was broadly satisfactory though with some slippages (fuel subsidy, higher-than-projected nonconcessional borrowing).
- Fiscal policy recommendations:
  - Press ahead with fiscal reform priorities: rationalize investment incentives to protect non-oil tax revenues.
  - Build capacity, transparency, and accountability at all levels to support decentralization.
  - Improve fiscal transparency through adoption of GFS methodology.
  - Monitor effectiveness of additional pro-poor development spending.
  - Lower fuel subsidies: bring domestic fuel prices in line with export prices and develop an automatic mechanism for future price adjustments.
  - Ensure close coordination among Government of Southern Sudan, northern states, and central government.
- Monetary policy recommendations:
  - Continue focus on attaining inflation objectives in an environment of exchange rate flexibility.
  - Fiscal prudence and proactive monetary policy with close management of reserve money.
  - Ensure flexibility in foreign exchange pricing to prevent excessive monetization of external inflows and accommodate prospective real exchange rate appreciation without rekindling inflationary pressures.
  - Continue current managed floating exchange rate regime.
- Financial system recommendations:
  - Central bank to proceed with internal restructuring, provide basis for dual banking system, and introduce the new currency via a transparent process.
- External debt and borrowing:
  - Strive to minimize contracting nonconcessional debt as it threatens debt sustainability and could delay creditor participation in debt-relief operations.
  - Critical for creditors and Sudan to treat new borrowing under the Highly Indebted Poor Countries’ Initiative.
- Conclusion on the 2006 SMP:
  - Except for the high level of nonconcessional borrowing, the staff considers that the 2006 SMP continues to be equivalent in strength to a Rights Accumulation Program.
  - The SMP is a valuable tool to support reform momentum and provides a framework within which donors can support the peace process and afflicted areas.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06182.pdf*

### 50.      Sudan’s economic data remains generally adequate for surveillance and program

### Sudan’s economic data remains generally adequate for surveillance and program monitoring

### Surveillance recommendation
- It is proposed that the next Article IV consultation with Sudan be held according to the standard 12-month cycle.

### Medium-Term Macroeconomic Scenario, 2005–10 (key figures)
- Nominal GDP (in millions of U.S. dollars): 27,699; 36,030; 42,339; 47,923; 52,913; 58,558 (2005–2010, Est. / Projections)
- Real GDP (change in percent): 8.0; 13.0; 10.3; 9.3; 8.7; 8.6
- Oil (change in percent): -0.2; 71.0; 28.2; 13.5; 7.3; 6.2
- Non-oil (change in percent): 8.9; 7.2; 7.5; 8.5; 9.0; 9.1
- Inflation (period average): 8.5; 7.5; 5.0; 4.0; 3.0; 3.0
- Gross investment (percent of GDP): 23.3; 25.3; 26.9; 27.7; 27.6; 27.0
  - Government: 5.5; 6.9; 8.3; 8.7; 8.3; 8.0
  - Nongovernment: 17.8; 18.4; 18.6; 19.0; 19.3; 19.0
- Gross national saving (percent of GDP): 14.8; 20.1; 22.9; 24.4; 23.4; 23.5
  - Government: 3.7; 6.1; 8.0; 8.5; 8.1; 8.0
  - Nongovernment: 11.1; 14.1; 14.9; 15.9; 15.3; 15.4
- Central government (percent of GDP)
  - Total revenue: 21.8; 24.0; 25.8; 27.5; 27.1; 27.7
  - Of which: Oil revenue (Crude oil revenue): 13.4; 14.3; 16.4; 17.7; 17.2; 17.5
  - Total expenditure: 23.6; 24.9; 26.2; 27.7; 27.3; 27.6
  - Overall balance (cash basis): -1.8; -0.9; -0.4; -0.2; -0.2; 0.0
- External sector
  - External trade balance: -4.0; 1.9; 4.4; 5.3; 3.9; 3.2
  - Exports: 17.4; 22.0; 24.1; 24.8; 23.0; 21.8
  - Imports: 21.5; 20.1; 19.7; 19.5; 19.1; 18.6
  - Current account balance on cash basis: -8.5; -5.2; -4.0; -3.4; -4.2; -3.5
  - Net international reserves (in months of imports): 2.6; 3.1; 3.5; 4.3; 4.6; 5.1
- Non-oil export volume (change in percent): -12.4; 6.5; 9.8; 11.1; 11.4; 11.9
- Non-oil import volume (change in percent): 55.2; 21.0; 14.5; 11.5; 7.6; 6.6
- Terms of trade (change in percent): 24.4; -4.6; -0.8; -0.2; -3.0; -2.8
- Memorandum item: Crude oil export price (U.S. dollars per barrel): 49.7; 47.4; 47.2; 47.4; 46.1; 45.2

### Selected Economic and Financial Indicators, 2001–06 (highlights)
- Nominal GDP (in billions of Sudanese dinars, at market prices): 3,454; 3,978; 4,614; 5,573; 6,912; 6,748; 8,107 (2001–2006)
- Nominal GDP (in millions of U.S. dollars): 13,369; 15,109; 17,680; 21,610; 28,050; 27,699; 36,030
- Crude oil production (thousands of barrels per day): 209; 232; 262; 288; 312; 287; 492
- Population (millions): 31.9; 32.7; 33.6; 34.5; 35.4; 35.4; 36.3
- GNP per capita (U.S. dollars): 374; 425; 486; 579; 790; 790; 903
- Real GDP (change in percent): 6.1; 6.4; 5.6; 5.2; 8.2; 8.0; 13.0
  - Oil: 21.6; 24.7; 13.0; 9.9; 8.2; -0.2; 71.0
  - Non-oil: 5.0; 4.9; 4.8; 4.7; 8.2; 8.9; 7.2
- Consumer prices (average): 4.9; 8.3; 7.7; 8.4; 10.5; 8.5; 7.5
- Gross investment (percent of GDP): 17.6; 19.4; 20.0; 22.5; 21.9; 23.3; 25.3
- Gross national saving (percent of GDP): 8.2; 13.4; 15.3; 18.7; 16.9; 14.8; 20.1
- Current account balance (cash basis, percent of GDP): -9.4; -6.1; -4.7; -3.8; -5.0; -8.5; -5.2
- External debt (in billions of U.S. dollars): 20.9; 23.6; 25.7; 26.0; 27.0; 27.7; 28.8
- External debt (percent of GDP): 156.7; 156.3; 145.4; 120.3; 96.1; 100.0; 79.9
- Net international reserves (in millions of U.S. dollars): -109; 84; 290; 1,144; 2,005; 1,889; 2,589
  - In months of next year’s imports: -0.5; 0.3; 0.8; 1.9; 2.9; 2.6; 3.1
- Sudan’s crude-oil export price (U.S. dollars per barrel): 22.0; 23.0; 27.0; 36.4; 51.8; 49.7; 47.4

### Balance of Payments, 2002–06 (selected flows)
- Current account balance (in millions of U.S. dollars): -1,488; -1,369; -1,352; -1,989; -2,954; -2,486 (2002–2006, Rev./Prog./Prel./Prog.)
- Current account balance (on cash basis): -918; -827; -816; -1,404; -2,341; -1,874
- Trade balance: -204; 401; 924; 97; -1,121; 688
- Exports, f.o.b. (millions of U.S. dollars): 1,949; 2,577; 3,778; 5,619; 4,825; 7,936
  - Of which: Crude oil exports: 1,397; 1,968; 2,962; 4,704; 3,948; 6,867
- Imports, f.o.b. (millions of U.S. dollars): -2,153; -2,536; -3,586; -5,122; -5,946; -7,248
- Financial account (net): 499; 1,045; 1,194; 1,894; 2,688; 2,390
- Foreign direct investment and portfolio (net): 633; 1,092; 1,481; 2,090; 2,355; 2,332
- Overall Balance (on cash basis): 247; 308; 743; 849; 767; 597
- Change in net international reserves (increase -): -197; -204; -855; -849; -745; -700
- Memorandum: Sudanese crude oil price (U.S. dollars per barrel): 23.0; 27.0; 36.4; 51.8; 49.7; 47.4

### Central Government Operations (2002–06, highlights in SDD and percent of GDP)
- Total revenues (in billions of Sudanese dinars): 470.7; 741.9; 1,104.5; 1,545.9; 1,472.9; 1,947.6
- Tax revenue (in billions of SDD): 213.4; 270.0; 420.5; 490.0; 472.1; 571.0
  - Direct taxes: 41.2; 52.3; 74.7; 99.0; 92.2; 105.0
  - Indirect taxes: 172.2; 217.7; 345.8; 391.0; 379.9; 466.0
- Nontax revenues (in billions of SDD): 257.2; 471.9; 684.0; 1,055.9; 1,000.8; 1,297.7
  - National revenues: 244.2; 461.2; 669.9; 1,038.1; 985.5; 1,272.7
- Oil (in billions of SDD): 210.7; 422.6; 579.3; 948.2; 901.0; 1,157.7
  - Sales to refineries: 99.1; 93.1; 101.8; 288.1; 293.3; 268.6
  - Export: 83.8; 295.9; 475.0; 660.1; 607.7; 889.2
- Total expenditures (in billions of SDD): 346.9; 708.4; 1,019.5; 1,587.3; 1,593.9; 2,018.9
  - Current expenditures: 384.8; 563.8; 762.5; 1,374.2; 1,382.7; 1,714.4
  - Capital expenditures: 118.6; 135.2; 277.2; 217.7; 227.6; 304.5
- Overall balance (in billions of SDD): 123.8; 33.5; 85.0; -41.4; -121.1; -71.2
- Financing (in billions of SDD): -123.8; -33.5; -85.0; 41.4; 121.1; 71.2
  - Foreign financing (net): 9.6; -15.2; 5.2; 12.1; 11.5; 50.2
  - Domestic financing: -133.4; -18.3; -90.2; 29.4; 109.6; 21.1

### Central Government Operations (2002–06, percent of GDP)
- Total revenues (percent of GDP): 11.8; 16.1; 19.8; 22.4; 21.8; 24.0
  - Tax revenue: 5.4; 5.9; 7.5; 7.1; 7.0; 7.0
  - Nontax revenues: 6.5; 10.2; 12.3; 15.3; 14.8; 16.0
- Total expenditures (percent of GDP): 8.7; 15.4; 18.3; 23.0; 23.6; 24.9
- Overall balance (percent of GDP, cash): 3.1; 0.7; 1.5; -0.6; -1.8; -0.9
- Memorandum items:
  - Non-oil revenue (percent of non-oil GDP): 7.0; 7.6; 10.7; 10.4; 9.9; 10.7
  - Consolidated expenditures (percent of GDP): Current 5.7; 12.4; 13.3; 18.1; 18.2; 18.0; Capital 3.0; 2.9; 5.0; 4.9; 5.5; 6.9
  - Overall balance (excl. oil savings account): 2.9; -0.1; 0.0; -2.6; -2.7; -2.3

### Monetary Survey and Monetary Authorities’ Accounts (2002–06 highlights)
- Broad money (SDD billions): 563.3; 734.1; 969.8; 1,277.4; 1,403.1; 1,553.8; 1,796.0
- Currency outside banks (SDD billions): 193.6; 240.2; 303.6; 347.5; 374.0; 414.2; 502.9
- Deposits (SDD billions): 369.7; 493.9; 666.2; 929.9; 1,029.1; 1,139.6; 1,293.1
- Reserve money (annual percentage change): 22.0; 26.6; 27.8; 29.9; 34.9; 28.2; 25.0
- Broad money (annual percentage change): 30.3; 30.3; 32.1; 33.0; 44.7; 28.0
- Credit to nongovernment sector (annual percentage change): 28.5; 56.9; 56.2; 41.1; 61.7; 39.2; 34.1
- Net foreign assets (Central Bank of Sudan, in billions of SDD): -741.2; -685.4; -464.8; -246.5; -219.6; -136.7; -29.1
- Commercial banks net foreign assets (in millions of U.S. dollars): 435; 443; 493; 739; 685; 722; 729
- Vulnerability indicators (latest reported): Capital adequacy ratio: 9.0; 9.9; 10.8; ...; 12.0; ...... ; Ratio of non-performing loans to total loans: 12.7; 11.4; 8.9; ...; 6.9; ...... ; Ratio of loan provisions to bad loans: 24.0; 22.0; 26.0; ...; 31.9; ......

### Quantitative targets and program-related items (2005 Staff‑Monitored Program)
- Central Bank of Sudan net domestic assets (cumulative change during 2005): 129.5; 11.8; -32.1; -34.1; -34.2; 36.4; -53.4 (table shows program with adjustor and revisions)
- Domestic financing of the central government (cumulative change during 2005): -90.2; -6.3; -53.5; 15.8; 29.4; 100.0; 109.6
- Contracting or guaranteeing of external nonconcessional debt by the government or the central bank (in millions of U.S. dollars): 310; ...; 803; 803; ...; 935
- Gross official usable reserves (in millions of U.S. dollars): 1,338; 180; 358; 284; 667; 360; 530
- Payments to the Fund (in millions of U.S. dollars): 32.4; 15.0; ...; 16.5; 30.0; ...; 30.3
- Memorandum: Broad money and oil savings account shown in program context (e.g., Broad money: 969.8; 128.0; ...; 244.1; 316.9; ...; 433.4; Oil savings account: 129.0; 32.7; ...; 76.6; 135.0; ...; 64.4)

### Structural benchmarks under the 2005 Staff‑Monitored Program
- Table of structural benchmarks presented (status as of end-October 2005; timelines such as By end-June 2005 noted).

*Sources: Sudanese authorities; and Fund staff estimates and projections.*

### 2. Introduce an auction system with competitive selling price for the

### 2. Introduce an auction system with competitive selling price for the 

### Policy measures and implementation status
- Introduce an auction system with competitive selling price for the General Musharaka Certificates (GMC) and General Investment Certificates (GIC) securities in the primary market.
- Set up and operationalize a single treasury account for all Ministry of Finance’s operations. — Met
- Establish a medium taxpayers’ unit. — Met
- Develop a program (including timetable) for aligning the SPC and its subsidiaries’ accounting systems with commercial standards by end-2006. — Met (By end-December 2005)
- Convert the 2006 budget to GFSM 2001 classification. — Delayed, expected May 2006
- Prepare a 3-year import-tariff reform program and incorporate it in the 2006 budget. — Met
- Establish a new financing window that allows liquidity constrained banks to sell securities to the central bank at a penalty rate. — Met
- Prepare a financial sector reform program in light of FSAP recommendations. — Met

### Indicators of debt service capacity (2002–06; in millions of U.S. dollars; selected items preserved exactly)
- Total debt service paid: 137, 247, 304, 279, 394
- Payments to the Fund: 26, 283, 230, 45
- Charges and interest falling due: 17, 14, 18, 17, 21
- Charges settled: 3, 12, 32
- Reduction in overdue principal obligations: 23, 26, 30, 27, 43
- Overdue obligations to the Fund: 1,475; 1,576; 1,636; 1,583; 1,559
- Overdue obligations to the Fund (in millions of SDRs): 1,085; 1,074; 1,062; 1,054; 1,038

### Ratios (Total debt service paid, in percent of:)
- Exports of goods and nonfactor services: 6.8, 9.5, 7.9, 5.6, 4.9
- Net current receipts 1/: 14.4, 16.7, 12.9, 8.6, 8.5
- Gross official reserves: 55.0, 46.9, 22.7, 14.9, 15.3
- GDP: 0.9, 1.4, 1.4, 1.0, 1.1

### Selected memorandum items (preserved exactly)
- Exports of goods and services: 1,996; 2,613; 3,822; 4,938; 8,050
- Net current receipts 1/: 952; 1,478; 2,351; 3,262; 4,623
- Gross official reserves: 249; 527; 1,338; 1,868; 2,568
- In months of next year's imports: 1.0, 1.5, 2.2, 2.6, 3.1
- GDP (in millions of U.S. dollars): 15,109; 17,680; 21,610; 27,699; 36,030
- Quota (in millions of SDRs): 169.7; 169.7; 169.7; 169.7; 169.7
- External debt (including arrears): 23,609; 25,709; 26,001; 27,700; 28,803
- Available fiscal revenue (in millions of U.S. dollars) 3/: 1,662; 2,646; 3,956; 4,567; 5,032
- Exchange rate (U.S. dollar/ SDR, end of period): 1.36; 1.47; 1.54; 1.45; 1.43

### External financing requirements and sources (2002–06; cash basis, in millions of U.S. dollars; selected rows)
- Gross financing requirements: -1,259; -1,228; -1,919; -3,535; -3,663
- External current account deficit 1/: -921; -777; -760; -2,511; -2,568
- Debt service payments (interest and principal) -116; -219; -271; -249; -349
- International reserves accumulation: -197; -204; -855; -745; -700
- Payments to the Fund: -24; -28; -32; -30; -45

Financing:
- Financing totals: 1,259; 1,228; 1,919; 3,535; 3,663
- Official transfers and grants: 341; 0; 28; 23; 4; 767
- Debt financing: 458; 519; 130; 939; 395
  - Multilateral: 17; 2; 37; 74; 133; 190
  - Bilateral: 274; 8; 11; 71; 76; 205
- Foreign direct investment, and errors and omissions: 1,256; 1,125; 1,753; 2,670; 2,332
- Other flows 3/: -768; -543; 2; 11; 69
- Financing gap: 0; 0; 0; 0; 0

Sensitivity analysis: financing gap assuming:
- Shock 1: Price of oil decline by 10 percent .........335; 561
- Shock 2: Crude production is less by 5 percent.........168; 285
- Shock 3: FDI and net private transfers are 5 percent less than expected.........123; 193
- Combination of all three shocks.........626; 1,039

### Millennium Development Goals indicators (selected items, preserved exactly)
- Population below minimum level of dietary energy consumption: 27.0...
- Net primary enrollment ratio (percent of relevant age group): 43.3............
- Percentage of cohort reaching grade 5 (percent): 93.8...84.3......
- Share of women employed in the nonagricultural sector (percent): 22.2; 20.4; 19.3; 19.1; 18.9
- Under 5 mortality rate (per 1,000): 120.0; 106.0......93.0
- Infant mortality rate (per 1,000 live births): 74.0; 69.0......63.0
- Immunization, measles (percent of children under 12 months): 57.0; 51.0; 67.0; 49.0; 57.0
- Tuberculosis prevalence rate (per 100,000 people): 179.3; 193.9; 212.9; 216.2; 219.6
- Tuberculosis cases detected under DOTS: 31.4; 32.9; 33.7
- Forest area (percent of total land area): 30.0
- Access to an improved water source (percent of population): 64.0...69.0
- Access to improved sanitation (percent of population): 33.0......34.0...
- Fixed line and mobile telephones (per 1,000 people): 2.5; 2.8; 17.5; 26.5; 46.6
- Personal computers (per 1,000 people): ...0.4; 3.6; 6.1...
- Total fertility rate (births per woman): 5.4; 5.1; 5.1; 4.4; 4.4
- Life expectancy at birth (years): 52.2......58.4; 58.6
- Aid (percent of GNI): 6.6; 3.9; 1.5; 2.5; 3.8

### Relations with the Fund (as of February 28, 2006; selected items preserved exactly)
- Membership: Joined 09/05/57; Article VIII.
- Quota: 169.70 (100.00 percent)
- Fund holdings of currency: 469.59; 276.72
- Reserve position in Fund: 0.01; 0.01
- SDR Department: Net cumulative allocation: 52.19 (100.00 percent); Holdings: 0.00 (0.00 percent)
- Outstanding Purchases and Loans (SDR Million; percent of Quota): Stand-by Arrangements 179.62 (105.85); Extended Arrangements 100.70 (59.34); Contingency and Compensatory Financing Facility 19.55 (11.52); Trust fund 59.23 (34.90)

Financial arrangements (selected entries):
- Stand-by 06/25/1984–06/24/1985: Approved amount 90.00; Drawn 20.00
- Stand-by 02/23/1983–03/09/1984: Approved amount 170.00; Drawn 170.00
- Stand-by 02/22/1982–02/21/1983: Approved amount 198.00; Drawn 70.00

Projected obligations to the Fund (SDR million; based on existing use of resources and present holdings of SDRs):
- Overdue total: 1,054.00
- Forthcoming Charges/Interest: 12.06 (2006); 16.04 (2007); 16.06 (2008); 16.03 (2009); 16.04 (2010)
- Note: "The projection of charges and interest assumes that overdue principal at the report date (if any) will remain outstanding, but that forthcoming obligations will be settled on time."

Exchange rate arrangements (selected text preserved exactly):
- The legal tender is the Sudanese dinar, which replaced the Sudanese pound in proportion SDD 1=LSd 10 in 1999.
- Since October 1998, the exchange rate system has been unified—market participants trade freely within a unified regulatory framework.
- In 2001, the foreign exchange market came under pressure and the Central Bank of Sudan (CBOS) introduced a formal band of +1.5 percent (later broadened to 2 percent) around the official rate and began auctioning its foreign exchange within the band.
- In May 2003, the CBOS adopted a managed-floating exchange rate regime. The formal exchange rate band was abandoned and the auction system was replaced with direct transactions in the interbank market.
- The CBOS established an internal limit of +2 percent in intraday trading in the average daily market rate.
- In 2004, the CBOS changed the permissible intraday exchange rate fluctuation from +2 percentage points to +3 percentage points.
- Sudan maintains one inoperative bilateral payment agreement with Egypt and an inoperative payment clearing account with the former Soviet Union.
- Sudan maintains an exchange system that is free of restrictions on the making payments and transfers for current international transactions.
- Note: "In November 2005, the authorities removed two remaining exchange restrictions under Article VIII, Sections 2, 3 and 4 of the Fund’s Articles of Agreement. At that time, they lifted the prohibition that applies to importers in arrears with valid import licenses from executing payments and transfers for import transactions and eliminated the multiple currency practice arising from the use of a historic buying rate for the resale of export proceeds."

Article IV Consultation:
- Sudan is on a 12-month consultation cycle. The last Article IV consultation discussion was completed by the Executive Board on April 29, 2005 (IMF Country Report No.05/180).

FSAP Participation:
- The FSAP work took place during October 9-14, 2004 and was completed during December 1–14, 2004. The Financial System Stability Assessment report was discussed by the Executive Board on April 29, 2005.

Resident Representative:
- The Fund's resident representative office in Khartoum was reopened in October 2005, as a shared post with Djibouti.

Technical Assistance (selected entries, 2002–2006):
- Fiscal Affairs Department: Expenditure control and management — Short-term; January–September 2002; Counterpart: Ministry of Finance (MOF)
- Reform of direct taxation and revenue administration — Short-term; November 2002 and December 2003; MOF
- Fiscal cash management and budget classification (METAC) — Short-term; May and September 2004; June and October 2005; MOF
- Monetary and Financial Department: Monetary management and banking supervision — Short-term; Periodic visits, January–August 2002; Counterpart: Central Bank of Sudan (CBOS)
- Islamic compliant monetary instruments — Short-term; October 2002; CBOS
- Introduction of new national currency — Short-term; February 2005; CBOS
- Banking supervision (METAC) — Short-term; August 2005; CBOS

*Source: Fund staff estimates and report content.*

### Introduction of new national currency

### _cr06182 - Introduction of new national currency

### Short-term technical assistance and missions
- Short-term missions on monetary statistics, national accounts, CPI, balance of payments, GDDS, and government financial statistics occurred in:
  - August-September 2005; December 2005; January-February 2006 (CBOS, Statistics Department, Monetary statistics).
  - Periodic visits, January-November 2003 (CBOS).
  - Periodic visits, March 2002-February 2003 (CBOS).
  - July 2003 (CBOS) — Balance of payments statistics.
  - July 2003 (CBS, MFE and CBOS) — General Data Dissemination System (GDDS).
  - May–June 2005 (CBS, MOF and CBOS) — Assessing technical assistance needs in economic statistics (with METAC).
  - October 2005 (MOF) — Government Financial Statistics.
  - November-December 2005 (CBOS) — Monetary and Financial Statistics.

### World Bank relations and reengagement (as of March 17, 2006)
- Lending status and arrears:
  - World Bank has no active lending portfolio in Sudan because of Sudan’s default; disbursements suspended in April 1993.
  - “Good faith” payments to the Bank: US$1 million per month since July 1999 and US$500,000 per month since October 2002.
  - Arrears stood at about US$372 million as of March 16, 2006 (from US$145 million at the end of 1999).
  - Sudan’s outstanding Bank debt, including arrears, is approximately US$1.3 billion.
- Reengagement strategy and activities:
  - Sudan Country Reengagement Note (CRN) discussed July 10, 2003; emphasis on knowledge generation, capacity building, demonstration projects, and resolution of debt overhang.
  - Bank provided technical resource persons for wealth sharing discussions in peace talks and technical support to Darfur peace talks in Abuja.
  - Bank co-led Joint Assessment Mission (JAM) with the UN January 2004–March 2005 covering eight thematic sectors; JAM synthesis report “Framework for Transition, Reconstruction and Poverty Eradication” completed March 2005.
  - Oslo Donors’ Conference (April 2005) raised US$2.0 billion in pledges for 2005–2007.
  - Sudan Consortium twice-yearly meetings agreed; first Consortium meeting in Paris on March 9–10, 2006.
- Multi-Donor Trust Funds (MDTFs) and trust-fund grants:
  - CPA specified two MDTFs (National Government and Government of Southern Sudan) to remain operational through the six years of the Interim Period.
  - Approximately US$500 million pledged in Oslo toward the two Trust Funds, nearly all formally committed over 2005-2007.
  - World Bank is Administrator for both MDTFs; MDTFs now effective and first projects approved.
  - A US$4.5 million Low-Income Countries under Stress (LICUS) trust-fund grant for Sudan approved December 2004, focusing on capacity building and institutional development.
  - Two ongoing Post Conflict Fund grants from the World Bank totaling US$3.0 million.
- Poverty reduction and public expenditure work:
  - JAM workshop initiated work on a joint PRSP concept; interim PRSP expected to be finalized in 2006.
  - World Bank preparing a Public Expenditure Review (PER) with distinct activities for NG and GoSS through end-2007; IMF staff to participate.
  - World Bank working with IMF and multilateral creditors to explore options for clearance of arrears and debt relief.

### Statistical issues and priorities
- General assessment:
  - Available economic data generally adequate for surveillance and program monitoring, but many areas need improvement: national accounts, state budgetary data, external trade and financial statistics.
  - DFID-financed STA missions in June–July 2003 contributed to Sudan’s GDDS participation starting August 2003.
  - STA/METAC mission May 2005 assessed technical assistance needs; December 2005 follow-up mission on monetary and financial statistics.
- Real sector (national accounts and prices):
  - CPI:
    - Monthly CPI data for Khartoum area provided shortly after month-end; CPI for other states provided with a three-month lag.
    - Practices in production of monthly CPI are commendable; weekly CPI published in the flash report.
    - CPI for Sudan as a whole is not available.
    - Recommendation: Conduct new household income and expenditure survey; reduce timing discrepancies by states.
  - National accounts:
    - Compilation subject to delay; lack of basic information in sectors including oil, livestock, horticulture, and most services.
    - On expenditure side, data lacking on final consumption by households, investment, and changes in stocks.
    - No national accounts or industrial production data at sub annual frequencies; annual data reported with a lag of over three years.
    - Urgent need to increase funding to CBS and rebuild capacity; priorities include introducing the 1993 System of National Accounts, conducting a census of agricultural production, carrying out a household survey, producing poverty statistics, and improving coordination among CBS, MOFNE, Ministry of Energy and Mining, and Ministry of Agriculture and Livestock.
    - A peripatetic real sector expert provided technical assistance on national accounts through end-2003.
- Fiscal sector (Government Finance Statistics):
  - Monthly reporting of main revenue, expenditure, and financing items with a lag of about one month.
  - Reported statistics are for central government only; exclude states and publicly owned corporations.
  - Data use an outdated economic classification; actual expenditures by ministries not reported despite MOFNE allocations.
  - Urgent need to improve accounting and reporting procedures, introduce GFS classifications according to GFSM 2001, and implement TA recommendations on GFS.
  - October 2005 mission assisted in developing a budget classification and budget execution reports in line with GFSM 2001.
- Monetary sector:
  - Significant TA received; December 2005 STA mission assisted implementing the action plan.
  - Progress includes finalizing a new report form and guidelines scheduled for pilot testing during the first quarter of 2006.
  - Weekly flash report on CBOS activities consistent with depository corporations’ survey as recommended in the Monetary and Financial Statistics Manual.
  - Monetary statistics generally acceptable for monitoring; CBOS should complete harmonization of accounting codes and network connections to improve data collection.
  - Need to review and reconcile government accounts held with banking system with MOF to ensure appropriate classification in monetary survey.
  - Need to develop framework for incorporating South Sudan banking activities into monetary statistics.
  - A follow-up mission will be considered after priority actions recommended by December 2005 mission are completed.
- External sector:
  - Daily exchange rate data reported to the Fund with minimal lags.
  - Areas needing improvement: foreign direct investment, trade, and oil statistics; clarification on items that qualify as international reserves and earmarked reserves; begin compiling the data template on international reserves and foreign currency liquidity.
  - Import statistics: significant discrepancies between customs and central bank reports; July 2003 STA mission identified causes and attempted reconciliation with some progress.
  - Lack of survey data affects compilation of balance of payments items such as FDI.
  - Medium-term oil production projections and data on amortization of private sector debt need substantial improvement; authorities need to provide more detailed information on phasing-in and expected production levels of new blocks and on amortization of debt in the oil sector.

### Data quality assessment and recommended steps
- Real sector / National accounts:
  - Historical data reported on time by Central Statistics Office.
  - Broadly acceptable: Real and nominal GDP by sector available with a 2-year lag.
  - Areas of concern: 1968 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 used rather than surveys for most GDP components.
  - Steps to improve: Rebuild CBS capacity; introduce 1993 SNA; conduct census of agricultural production; implement STA peripatetic real sector expert project.
- Prices:
  - Monthly CPI reported on time with minimal lag; only CPI for Khartoum area available promptly.
  - Area of concern: CPI for Sudan as a whole unavailable.
  - Steps: New household income and expenditure survey; reduce timing discrepancies by states.
- Government finance:
  - Monthly reporting generally on time; 1.5-month lag.
  - Adequacy: Good for central government; financing consistent with monetary accounts.
  - Concerns: Partial data on state budgets; incomplete functional classification; MOFNE allocations reported but not actual expenditures; slow GFS classification progress.
  - Steps: Introduce GFS classification; improve accounting and reporting at MOFNE; implement GFS (1997) TA recommendations.
- Monetary accounts:
  - Monthly reporting of balance sheets generally on time; 1.5-month lag.
  - Adequacy: Acceptable following STA missions.
  - Concerns: Large and variable other items (net); frequent misclassification errors by commercial banks (consortium financing).
  - Steps: Establish working group to review CBOS foreign assets; revise guidelines related to consortium financing; implement 2001 TA mission recommendations.
- Weekly monetary flash reports:
  - 1-week lag; estimates of usable reserves added January 2003.
  - Concern: Divergence between reserve money in balance sheets and end-of-month flash reports.
  - Steps: Include data on returns on investment deposits; aim for full reporting of CBOS balance sheet.
- External sector reserves and BOP:
  - Monthly reporting of CBOS active balances generally on time; 0.5-month lag; acceptable but needs improvements in frequency and data quality.
  - Concern: Gross usable reserves part of CBOS active balances include unusable earmarked reserves; composition and potential usability unclear.
  - Steps: Clarify items qualifying as international reserves and earmarked reserves.
  - Balance of payments: Quarterly full BOP data provided on time; 3-month lag. Concerns include incompleteness of services, investment income, transfers, financial account, and large errors and omissions.
  - Steps: Introduce revised report forms for commercial banks; improve data collection; enforce residency criterion; enhance CBOS BOP compilation unit capacity; implement 1999 and 2003 TA recommendations.
- External debt:
  - Monthly payments to creditors on time; 1.5-month lag. Other debt data have a 10-month lag.
  - Adequacy: Good coverage but weaknesses persist.
  - Concerns: CBOS records not reconciled with some creditors; ODA data not available; charges on interest in arrears not calculated or separated.
  - Steps: Reconcile data with creditors; disaggregate according to standard definitions; Debt Management Unit to send monthly statements on external debt to CBOS Statistics Department.

### Table of common indicators required for surveillance (as of March 17, 2006)
- Exchange Rates: Date of latest observation 3/11/06; Date received 3/12/06; Frequency D; Frequency of reporting D; Frequency of publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 1/31/06; Date received 3/18/06; Frequency of data M; Frequency of reporting M; Frequency of publication M.
- Reserve/Base Money: 1/31/06; 3/18/06; Frequency of data M; Frequency of reporting W; Frequency of publication M/W.
- Broad Money: 1/31/06; 3/18/06; Frequency W; Frequency of reporting W; Frequency of publication M/W.
- Central Bank Balance Sheet: 1/31/06; 3/18/06; Frequency M; Frequency of reporting M; Frequency of publication M.
- Consolidated Balance Sheet of the Banking System: 1/31/06; 3/18/06; Frequency M; Frequency of reporting M; Frequency of publication M.
- Interest Rates: Feb. 2006; 3/18/06; Frequency W; Frequency of reporting M; Frequency of publication M/W.
- Consumer Price Index: Feb. 2006; 3/18/06; Frequency M/W; Frequency of reporting M; Frequency of publication M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Jan. 2006; 3/18/06; Frequency M; Frequency of reporting M; Frequency of publication M.
- Stocks of Central Government and Central Government-Guaranteed Debt: Dec. 2005; Feb. 2006; Frequency A; Frequency of reporting A; Frequency of publication A.
- External Current Account Balance: 2005: Q4; Feb. 2006; Frequency Q; Frequency of reporting Q; Frequency of publication Q.
- Exports and Imports of Goods and Services: 2005: Q4; Feb. 2006; Frequency M; Frequency of reporting M; Frequency of publication M.
- GDP/GNP: 2005; Feb. 2006; Frequency A; Frequency of reporting A; Frequency of publication A.
- Gross External Debt: 2005:Q4; Feb. 2006; Frequency A; Frequency of reporting A; Frequency of publication A.

### Government communication and program intentions
- Letter dated March 9, 2006 from Government of Sudan officials to IMF Managing Director sets out:
  - Progress since the Comprehensive Peace Agreement and formation of a national unity government.
  - Commitment to economic stability, growth, and poverty reduction; policy dialog with the Fund.
  - Discussions on 2006 Article IV consultation and a new Staff Monitored Program (SMP) conducted in Khartoum in February 2006.
  - Proposal to increase payments to the Fund from $30 million in 2005 to $45 million in 2006 to strengthen cooperation.
  - Intention to seek resolution of debt and arrears problems and to obtain financing assurances from creditors for arrears clearance and debt relief under the Heavily Indebted Poor Countries and the Multilateral Debt Relief Initiatives.
- Memorandum of Economic and Financial Policies (MEFP) dated March 9, 2006 accompanies the letter and sets forth policy intentions under the 2006 SMP.

*Source: _cr06182 - Introduction of new national currency (PDF).*

### 1.      This memorandum sets out the economic policies and objectives of the government

### This memorandum sets out the economic policies and objectives of the government of National Unity for 2006.

### Recent developments
- 2005 GDP growth is estimated at 8 percent; average inflation was contained at 8.5 percent.
- High oil prices supported the balance of payments and allowed for a further accumulation of international reserves.
- The Sudanese dinar appreciated by 8 percent against the U.S. dollar.
- Fiscal performance weaker than programmed, primarily due to the expanding fuel subsidy; oil revenues were higher than in 2004 but lower than programmed because of delayed production in Blocks 3 and 7.
- Non-oil revenues below projection because of increased volume of imports exempted from VAT (capital goods and NGO-related imports).
- Lower-than-programmed revenues and higher expenditures led to:
  - Withdrawal of deposits from the oil savings account.
  - Higher-than-programmed non-bank financing (mostly government securities).
  - Initiation of transfers to the government of South Sudan as stipulated by the CPA.
- Monetary and credit aggregates (2005):
  - Broad money grew by 45 percent.
  - Reserve money growth increased by 35 percent.
  - Private sector credit increased by 62 percent.
- Structural fiscal reforms undertaken:
  - Medium taxpayer unit established.
  - Three-year tariff reform program prepared; first phase initiated in the 2006 budget.
  - Adoption of ASYCUDA++ in customs administration and planned implementation of risk-based verification.
  - Regular cash plan preparation and improved coordination between ministry of finance and central bank; further improvements in cash management acknowledged as warranted.
- Banking system indicators (end-2005):
  - Nonperforming loans ratio fell from 8.9 percent (December 2004) to 6.9 percent (end-2005).
  - 18 banks (out of 24) complied with capital adequacy requirements as of December 2005.
  - Almost 40 percent of the increase in private credit was granted by a single bank; that bank placed under close supervision.
- Monetary operations and financial sector developments:
  - Auctioning of Government Musharaka Certificates (GMCs) and Government Investment Certificates (GIC) through competitive tenders without predetermined prices.
  - Phased out existing financing window for banks; introduced collateral-based financing window.
  - Launched Central Bank Ijara Certificates (CIC) in Q4 2005.
  - Privatized Khartoum Bank; granted four new commercial bank licenses: Al-Salam Bank, the Egyptian Sudanese Bank, Capital Bank, and the Emirate Sudanese Bank.
  - CBOS changed legal structure; new central bank and commercial bank laws approved; CBOS established branch in Juba.
- SMP performance (end-2005):
  - Met 3 of 5 quantitative targets for end-December and all but one structural benchmark.
  - Missed quantitative target on fiscal deficit financing by a small margin.
  - Missed target on nonconcessional borrowing after contracting new loans for US$122 million in H2 2005 to finance water and social projects.
  - Conversion of the 2006 budget into GFSM 2001 format delayed; commitment to implement by May 2006.

### Medium-term outlook and challenges
- Policy commitments and objectives:
  - Implement the CPA, tackle regional inequalities, and reduce poverty.
  - Launched a strategy to meet the Millennium Development Goals; intend to finalize an interim Poverty Eradication Strategy by end-2006.
  - Reorient public spending toward disadvantaged regions, social and infrastructure projects, capacity building, and revamping public financial management systems.
  - Committed to clear arrears and achieve debt sustainability; need for comprehensive and deep debt relief beyond traditional mechanisms.
- Medium-term macroeconomic targets:
  - Economic growth of 8–10 percent per year.
  - Continued decline in inflation to 5 percent or less by 2008.
  - Reductions in poverty levels.
- Policy priorities and reforms:
  - Prudent macroeconomic policies and a new wave of structural reforms to strengthen the business environment, foster agricultural development, and improve transparency in the oil sector and public resource use.
  - Improve policy coordination between and within national and subnational governments and capacity building.
  - Mobilize non-oil revenues despite higher oil revenues to lower dependence on oil and preserve prudent fiscal policy.

### Outlook and policies for 2006
- Macroeconomic targets:
  - National government assumes economic growth of 13 percent for 2006, driven by large increase in oil production and continued high non-oil growth.
  - Average inflation objective for 2006 is 7.5 percent (compared to 8.5 percent in 2005).
- Fiscal policy:
  - Fiscal deficit (including grants) to be contained at no more than 0.9 percent of GDP.
  - Oil benchmark prices for budget: US$45 per barrel for Nile blend crude and US$40 for the new DAR blend crude.
  - Contain intended large increases in civil servants’ salaries, goods and services, transfers to northern states, and domestically financed capital expenditures relative to budget figures; protect pro-poor development spending.
  - Any shortfall in non-oil revenues to be covered by restraint in lower priority expenditures from Chapter I and Chapter II.
  - No supplementary budget expected; parliament to be informed of changes.
- Fuel subsidies:
  - Review domestic fuel pricing policy in 2006 to reduce sizeable subsidy.
  - Finalize a strategy to eliminate these subsidies and adopt an automatic mechanism to pass through changes in world crude prices to product prices later in the year.
- Monetary policy and operations:
  - Target broad money growth of 28 percent in 2006, consistent with GDP growth and inflation objectives and increased money demand from reintegration of the South.
  - Reassess monetary targets mid-year given uncertainties (fiscal behavior, new currency introduction, private capital movements, large oil receipts).
  - Rely heavily on open market operations; continue competitive auctions for government and central bank securities.
  - Limit direct lending to banks; collateralized by short-term securities.
  - Lending to public enterprises to remain at end-2005 level.
- Exchange rate and competitiveness:
  - Ensure exchange rate flexibility to safeguard inflation objective amid continued appreciation pressures.
  - Intensify efforts to improve business environment and remove structural bottlenecks (especially transportation) and institutional reforms to foster rural development.
  - Conduct an investment climate assessment with World Bank assistance.
- Tax policy and administration:
  - Ministry of Investment will not refer proposals to renew expired business profit tax exemptions under the Investment Encouragement Act to the Council of Ministers.
  - By October 2006, finalize a program to revamp investment incentives in consultation with Fund staff and in line with best international practice; adopt a uniform system of profit tax rates.
  - Examine scope for expanding the VAT base by bringing exempted items into the tax net.
  - Tax administration measures: introduce self-assessment for large and medium taxpayers and set up three federal tax offices in major cities in the South.
- Fiscal decentralization, reporting, and accounting:
  - Pro-poor spending increased in 2005 and expected to increase in 2006; priority to strengthen public financial management at all government levels.
  - Make significant progress on the public expenditure review focusing on pro-poor spending, decentralization, and public financial management.
  - Establish and operationalize rules/procedures for the Fiscal and Financial Allocation and Monitoring Commission by end-June 2006.
  - Implement GFS methodology at all government levels:
    - Begin reporting the 2006 fiscal framework to parliament in GFS format by May.
    - Begin monthly budget execution reporting by June.
    - GOSS to follow the same schedule.
    - Modify chart of accounts later in 2006 to ensure 2007 budget prepared in accordance with GFSM 2001.
  - Upgrade recording of development spending from cash basis to accrual basis over time.
- Oil revenue management and transparency:
  - Publish monthly detailed oil sector data and clarify role/status of the National Petroleum Commission consistent with the CPA.
  - Publish 2004 and 2005 audited accounts of Sudapet.
  - Ensure regular transfers to the treasury of net operating income from the Sudan Petroleum Corporation and Sudapet including from exports of fuel products.
  - Extend open international tender marketing mechanism for Nile blend crude to the new Dar blend crude after an initial six-month test period.
  - Discuss with Fund staff the medium-term agenda for oil sector reforms, including process for joining the Extractive Industries Transparency Initiative.
- Financial sector reforms:
  - Implement restructuring plans for CBOS and commercial banks and financial reform program discussed during the FSAP.
  - Introduce the new national currency in the second half of 2006 as envisaged in the CPA.
  - Implement commercial bank development/restructuring program (2006–2008).
  - By end-2006:
    - Increase minimum capital requirements for commercial banks from SDD3 billion to SDD6 billion (US$25 million).
    - Increase capital adequacy ratio from 8 to 12 percent.
  - Require banks to implement action plans to meet provisioning and capitalization requirements.
  - CBOS to encourage bank mergers according to guidelines and carry out bank evaluations to identify net worth and share value.
- Trade and payments:
  - First phase of three-year tariff reform initiated in 2006: top tariff rate reduced from 45 percent to 40 percent; average tariff rate reduced to 20 percent.
  - By 2008, plan to reduce tariff dispersion and lower average tariff rate below 15 percent, especially through reductions in the top tariff rate.
- Technical assistance requests for 2006 (areas):
  - Implementation of Government Finance Statistics Methodology (GFSM 2001) (budget classification, accounting, execution, and auditing)
  - Budget reporting, including accounting of development expenditures
  - Fiscal decentralization and public financial management
  - Issuance of the new currency
  - Banking supervision
  - Liquidity management
  - Microfinance
  - Balance of payments, monetary, and real sector statistics

### Relations with the Fund and other creditors
- External debt situation and constraints:
  - 2006 debt service capacity constrained by peace agreement implementation costs and widespread poverty/regional inequalities.
  - Shortfalls or delays in donor assistance or significant negative oil price shocks would further limit debt service capacity.
  - Partial debt service payments being made to almost all multilateral creditors and selected bilateral creditors that provided new financing in recent years.
  - At end-2005, stock of public and publicly guaranteed external debt was about US$27.7 billion in nominal terms, of which US$24.4 billion was in arrears.
  - Continued hope for early resolution of debt problems, including HIPC initiative and Multilateral Debt Relief Initiative; substantial debt relief sought to finance Millennium Development Goals programs.

*Source: _cr06182 - This memorandum sets out the economic policies and objectives of the government of National Unity for 2006*

### 26.      External financing. Sudan has continued to suffer from limited access to

### 26. External financing.

### External financing constraints and needs
- Sudan has limited access to concessional loans because of difficulties in resolving its debt and arrears situation.
- Development needs are vast; authorities have relied on nonconcessional facilities to finance critical development and social projects.
- Authorities commit to limit contracting of nonconcessional facilities "as much as possible" and regard current borrowing levels as "exceptional and temporary" and integral to uniting the country after the signing of the peace agreement with the South.
- For the year, new financing requirements for critical infrastructure and transportation projects could be "as much as US$700 million."
- Two critical large projects cited: reconstruction of a railway linking the North and the South, and construction of roads to the South and to Darfur.
- Authorities will make every effort to avoid incurring nonconcessional loans, hope to obtain concessional resources, but acknowledge these projects may force contracting of nonconcessional loans "for up to that amount."
- In line with commitments to transparency, authorities will share plans and information on loans with Fund staff and publish detailed information on all government or government-guaranteed facilities.

### Payments to the Fund
- Payments to the Fund increased to demonstrate cooperation under the 2005 SMP:
  - Payments increased from US$30 million in 2005 to US$45 million in 2006.
  - Due to lower oil and non-oil revenues in the first half of 2006, payments to the Fund up until June will be US$15 million.
- Authorities state that the Fund’s preferred creditor status will be maintained by ensuring payments continue to exceed obligations falling due.
- Authorities hope their record of cooperation will be recognized through a rapid resolution of Sudan’s debt and arrears problems.

### Program coverage, targets, and monitoring
- Program period: January–December 2006.
- Program targets: semi-annual quantitative targets (end-June and end-December test dates) and structural benchmarks.
- Adjustors:
  - Targets on net domestic assets (NDA) and international reserves of the central bank include an adjustor for any lower-than-programmed withdrawals of deposits by the government of South Sudan (as specified in the Technical Memorandum of Understanding (TMU)).
  - There is also an adjustor on the value of oil export proceeds.
- Authorities and Fund staff agreed that relevant ministries, the CBOS, and the Central Bureau of Statistics will compile and share all core economic data on a timely basis as specified in the TMU.

### Key quantitative commitments and memorandum items (as presented in the text)
- Contracting or guaranteeing of external nonconcessional debt by the government or the central bank (in millions of U.S. dollars): ... .700 (indicative ceiling)
- Payments to the Fund (in millions of U.S. dollars): 30.3 ... 15.0 ... 45.0
- Programmed oil export revenues to the government (SDD billions): ...157382637889 (as listed in the memorandum items)
- Programmed OSA accumulation for the year: US$509 million

(Note: The text includes a detailed Table 1 and Table 2 with quantitative targets and structural benchmarks; the above extracts the key figures explicitly stated in the narrative and memorandum items.)

### Structural benchmarks and governance measures (selected)
- Prior action: Stop referral of requests for renewal of exemptions under the Investment Encouragement Act by the Minister of Investment to the Council of Ministers.
- Convert the 2006 fiscal framework of the National Government to GFSM 2001 classification and present it to parliament for information (including economic and functional classification of expenditures).
- Finalize and publish GOSS budget reporting for 2006 according to GFSM methodology (economic and functional classification).
- Initiate a public information campaign on the costs of fuel subsidies and pro-poor policies.
- Compile (monthly) and publish (quarterly) fiscal reporting data according to GFSM 2001 for the national government and the GOSS.
- Issue a decree establishing rules and procedures for the Fiscal and Financial Allocation and Monitoring Commission (FFAMC).
- Begin monthly publication on SPC and CBOS websites (one-month lag) of: (i) volume of oil production by blend of crude; export receipts and prices (in US$) by blend; sales to refineries; exports and imports of petroleum products; revenue accrued to the government; and transfers to the government of Southern Sudan; and (ii) details of any new external loan or financing contracted or guaranteed by the government or the CBOS, specifying the nature, amount, and terms.
- Complete and publish the 2004 and 2005 financial audits of Sudapet.
- Finalize a strategy for elimination of fuel subsidies and adoption of an automatic mechanism passing world crude price changes to domestic prices.
- Finalize a program to revamp the system of investment incentives under the Investment Encouragement Act.
- Remit net operating income of Sudapet (at year end) and SPC (quarterly) to the treasury, including those derived from exports of petroleum products.

### Technical Memorandum of Understanding (TMU) — definitions and operational rules
- Quantitative targets used by the SMP:
  - Ceilings on change in NDA of the Central Bank of Sudan (CBOS).
  - Ceilings on domestic financing of the fiscal deficit.
  - Floors for buildup of net international reserves (NIR) of the CBOS.
  - Ceilings on new nonconcessional external loans contracted or guaranteed by the government or the CBOS.
  - Floors for payments to the Fund.
- Memorandum items monitored: Broad money, reserve money, total government revenues from crude oil exports, and oil savings account (OSA).
- Key definitions:
  - NDA of the CBOS defined as Net Domestic Credit of the CBOS plus net issue of money market instruments and other items net; Net Domestic Credit includes net credit to the central government (GMCs, GICs, other central bank credit minus total central government deposits), net claims on state and local governments, claims on public enterprises and banks, minus CICs.
  - Domestic financing of the fiscal deficit: total net domestic borrowing by central government including net borrowing from the banking system (GMCs and GICs), net sales outside the banking system, and privatization revenues.
  - NIR: total gross non‑earmarked official foreign reserve assets on active accounts plus reserve assets of the government of Southern Sudan in the CBOS minus official short-term liabilities (no more than one-year maturity).
  - Limits on nonconcessional external debt apply to all forms of debt of more than one-year maturity contracted or guaranteed by the government or the CBOS, and to commitments contracted or guaranteed for which value has not been received.
- Concessionality rule for program purposes: a loan is considered concessional if the grant element is at least 35 percent calculated using a discount factor based on the Commercial Interest Reference Rates (CIRRs) published by the OECD plus margins by maturity (0.75 percent for <15 years; 1 percent for 15–19 years; 1.15 percent for 20–29 years; 1.25 percent for 30 years or more). The average of the CIRRs over the last ten years will be used for loans with maturity at least 15 years and the average of the CIRRs for the preceding six months for shorter maturities.

### Oil revenue adjustor and programmed oil export figures
- Oil saving account (OSA): accrued government oil revenue in excess of planned budgeted amounts is deposited in an OSA (a locked sub-account within net credit to the government at the CBOS).
- Programmed OSA accumulation for the year: US$509 million.
- Oil revenue adjustor rules:
  - If accrued government revenue from crude oil exports exceeds programmed amount, excess deposited in OSA; program targets for domestic financing and NDA reduced, and international reserves target increased by the difference.
  - If accrued government revenue falls short, program targets for domestic financing and NDA increased and international reserves target reduced by the difference.
  - If within a quarter accrued oil revenue to the budget falls below planned amount, withdrawals from the OSA will be used to ensure cumulative oil revenues for budget match planned amounts.

- Quarterly Nile blend crude (2006) — prices, volumes, and revenues (as reported):
  - Price (f.o.b. Port Sudan) US$/barrel: Q1 53.9, Q2 55.2, Q3 55.1, Q4 54.7, Year 54.7
  - Volume exported Million barrels: Q1 12.9, Q2 13.5, Q3 13.5, Q4 12.4, Year 52.2
  - Export revenues US$ millions: Q1 698, Q2 745, Q3 741, Q4 676, Year 2,859
  - Of which: programmed OSA accumulation US$ millions: Q1 116, Q2 138, Q3 136, Q4 119, Year 509

- Quarterly Dar blend crude and block 5A crude (2006) — prices, volumes, and revenues (as reported):
  - Price (f.o.b. Port Sudan) US$/barrel: Q1 40.0, Q2 39.5, Q3 39.4, Q4 38.9, Year 39.5
  - Volume exported Million barrels: Q1 0.0, Q2 6.4, Q3 10.0, Q4 11.5, Year 27.9
  - Export revenues US$ millions: Q1 0, Q2 254, Q3 393, Q4 344, Year 1,094
  - Of which: programmed OSA accumulation US$ millions: Q1 0.0, Q2 0.0, Q3 0.0, Q4 0.0, Year 0.0

- Memo items (programmed):
  - Programmed revenue from crude exports US$ millions: Q1 698, Q2 999, Q3 1,134, Q4 1,122, Year 3,953
  - Programmed revenue from crude exports SDD billions: Q1 157, Q2 225, Q3 255, Q4 253, Year 889
  - Of which: programmed OSA accumulation SDD billions: Q1 26, Q2 31, Q3 31, Q4 27, Year 114
  - Planned oil export revenue for the budget SDD billions: Q1 131, Q2 194, Q3 225, Q4 226, Year 775

### Data reporting framework (selected timing obligations)
- Flash report (CBOS weekly indicators): Weekly — Tuesday of each week.
- CBOS balance sheet: Monthly — 1 month after the end of each month.
- Monetary survey (banking system): Monthly — 1 month after the end of each month.
- Rates of return and securities: Monthly — 1 week after the end of each month.
- Banking indicators: Quarterly — 1 month after the end of each quarter.
- Balance of payments (CBOS): Quarterly — 2 months after the end of each quarter.
- Central government traditional presentation (revenues, expenditures, financing): Monthly — 30 days after the end of each month.
- Central government GFSM 2001 presentation: Monthly — Data for January–May by end-June; remaining months 45 days after the end of each month.
- GOSS GFSM 2001: Monthly — Data for January–May by end-June; remaining months 45 days after the end of each month.
- Crude oil exports (Central Bureau of Statistics): Monthly — 1 month after the end of each month.
- Net operating income transfers to the treasury (Ministry of Finance/Ministry of Energy): Quarterly — 1 month after the end of each quarter.

### IMF staff note on nonconcessional borrowing (Statement by the IMF Staff Representative, May 3, 2006)
- Staff and authorities discussed nonconcessional borrowing within the 2006 SMP during the Spring Meetings.
- Authorities are aware of Paris Club creditors’ concerns and indicated they would approach other creditors to seek concessional terms to minimize nonconcessional borrowing in 2006.
- If higher-than-projected oil prices persist, authorities will explore using additional oil revenues to substitute for intended borrowing.
- Authorities noted peace negotiations in Abuja are advanced and hope creditors will be ready to explore financing options to resolve Sudan’s debt and arrears problems after a peace agreement on Darfur is signed.

*Source: _cr06182 (provided content).*

### 3.      The staff urged the authorities to find some combination of additional oil revenue and

### _cr06182 - 3.      The staff urged the authorities to find some combination of additional oil revenue and

### Staff advice and program assessment
- Staff urged the authorities to find some combination of additional oil revenue and concessional financing to minimize nonconcessional borrowing and address concerns raised in the staff appraisal (paragraph 49).
- A final assessment of the program’s strength will need to take into account actual developments, including in nonconcessional borrowing.
- The authorities consented to publication of the staff report, including the letter of intent, the Memorandum of Economic Policies, and the technical Memorandum of Understanding.

### Macroeconomic developments (summary)
- Real GDP growth (estimated) in 2005: 8 percent.
- Oil sector output in 2005: remained virtually unchanged after rapid growth in 2003 and 2004.
- Average inflation in 2005: 8.5 percent.
- External current account: worsened in 2005, while balance of payments was supported by strong capital inflows.
- International reserves: increased from 1.9 months of imports at end-2004 to 2.6 months at end-2005.
- Monetary conditions in 2005: monetary growth remained high and the dinar appreciated.

### Fiscal developments and policy issues
- Central government fiscal balance: turned to a deficit after three years of surpluses in 2005.
- Drivers of fiscal deterioration: higher transfers to subnational governments (including transfers to the South) and a large subsidy on domestic fuels.
- Fuel subsidy: identified as a significant drain on public resources without any direct benefit to the poor in Sudan.
- Authorities’ actions: steps to improve tariff structure and increase flexibility in the foreign exchange market; removal of remaining exchange restrictions under Article VIII of the Fund’s Articles of Agreement; maintained a managed floating exchange rate regime.

### Structural reforms and institutional actions
- Fiscal measures: medium taxpayer unit established to boost non-oil revenue; adoption of Automated System of Customs Data expected to improve customs efficiency.
- Financial sector measures: central bank introduced competitive auctions of government securities, privatized a large bank, and began implementing financial reforms envisaged in the peace agreement with the South.
- Transparency: measures to increase transparency in oil sector operations, including monthly publication of detailed oil sector data; Directors encouraged joining the Extractive Industries Transparency Initiative.
- Remaining priorities: modernize tax and financial systems, strengthen expenditure management at all government levels, improve fiscal and oil sector transparency, implement FSAP recommendations including increase in minimum capital requirements, and plan a well-managed introduction of a new currency for the South.

### Executive Board assessment and recommendations
- Commendation: Directors commended Sudanese authorities for prudent macroeconomic policies and structural reforms in a difficult environment, noting higher foreign investment, robust growth, strengthened external position, and single-digit inflation.
- Challenges noted: mobilizing and transferring resources for CPA implementation, reconstruction, national unification, and addressing regional tensions and disparities (including Darfur).
- Program performance: performance under the 2005 Staff-Monitored Program (SMP) was broadly satisfactory; welcomed policy actions to contain inflation and most structural benchmarks implemented; regretted higher-than-programmed nonconcessional borrowing and delay in fiscal reporting framework.
- 2006 SMP endorsement: broadly endorsed but Directors urged minimizing nonconcessional borrowing.
- Nonconcessional borrowing: many Directors urged zero ceiling for 2006; others found zero ceiling unrealistic given Sudan’s circumstances. A ceiling of $700 million in such borrowing was not supported by some Directors. Final evaluation of SMP performance should consider actual developments in nonconcessional borrowing.
- Debt relief and creditor behavior: Directors stressed avoiding aggravation of Sudan’s unsustainable external debt, called for concessional terms where possible, equal treatment of creditors in any restructuring and HIPC Initiative, and tracking of nonconcessional borrowing (actual and planned) with information exchange among creditors.
- Fuel subsidy policy: Directors encouraged further reduction and eventual elimination of fuel subsidies, supported public information campaign and an automatic mechanism for future price adjustments in line with world oil prices; some Directors noted practical realities must be considered.
- Fiscal transparency and capacity: urged improvements in expenditure management systems, regulations, monitoring, transparent reporting, and compiling budget execution reports according to Government Finance Statistics methodology for both the Government of National Unity and the Government of Southern Sudan.
- Monetary policy stance: welcomed central bank focus on reserve money targets and broadening monetary instruments for a dual (Islamic and conventional) banking system; supported maintaining exchange rate flexibility within managed float while pursuing inflation objectives and business environment reforms.
- Reconstruction financing: Directors supported use of windfall oil revenues for infrastructure or seeking concessional loan terms; most Directors urged authorities to work with staff toward measures to substantially reduce nonconcessional borrowing.
- Road map for arrears clearance: many Directors felt Sudan’s performance under successive SMPs should be reflected in timetable for arrears clearance and emphasized the importance of a timely, clear road map.

### Authorities’ statements and requests (key points)
- CPA implementation: despite initial delays, CPA implementation on track; oil revenue transfers to Government of Southern Sudan effected in line with wealth sharing provision.
- Darfur: authorities seeking agreement along CPA lines and request the Fund to play a visible role and act as a full partner in the planned Joint Assessment Mission (JAM).
- Nonconcessional loans: in principle policy is not to contract nonconcessional loans; authorities request special consideration because of lack of access to concessional or development funding and large reconstruction/unification needs.
- Creditor engagement: authorities aware of Paris Club concerns; will seek concessional terms from other creditors and, if higher-than-projected oil prices persist, may use additional oil revenues to substitute for intended borrowing.
- Arrears clearance and debt relief: after seven years of SMPs (last four with policies equivalent in strength of Upper Credit Tranche conditionality), authorities request creditors and donors to present a clear road map for arrears clearance and debt relief under HIPC and MDRI.

### Selected economic indicators (2001–2005) — key figures preserved exactly
- Real GDP growth (percent change): 2001: 6.1  2002: 6.4  2003: 5.6  2004: 5.2  2005: 8.0
- GDP (in billions of dinars): 2001: 3,454  2002: 3,978  2003: 4,614  2004: 5,573  2005: 6,748
- GDP (in millions of U.S. dollars): 2001: 13,369  2002: 15,109  2003: 17,680  2004: 21,610  2005: 27,699
- GNP per capita: 2001: 374  2002: 425  2003: 486  2004: 579  2005: 790
- Inflation (period average): 2001: 4.9  2002: 8.3  2003: 7.7  2004: 8.4  2005: 8.5
- Inflation (end-of-period): 2001: 7.4  2002: 8.3  2003: 8.3  2004: 7.3  2005: 5.6
- Central government operations (in percent of GDP) — Revenue and grants: 2001: 10.7  2002: 11.8  2003: 16.1  2004: 19.8  2005: 21.8
- Central government operations (in percent of GDP) — Expenditure: 2001: 11.6  2002: 8.7  2003: 15.4  2004: 18.3  2005: 23.6
- Overall balance (commitment basis): 2001: -0.9  2002: 3.1  2003: 0.7  2004: 1.5  2005: -1.8
- Reserve money (end-of-period growth rate, in percent): 2001: 3.7  2002: 22.0  2003: 26.6  2004: 27.8  2005: 34.9
- Broad money (end-of-period growth rate, in percent): 2001: 24.7  2002: 30.3  2003: 30.3  2004: 32.1  2005: 44.7
- Broad money velocity: 2001: 8.1  2002: 7.1  2003: 6.6  2004: 5.7  2005: 4.8
- Current account balance (including transfers, in millions of U.S. dollars): 2001: -1,257  2002: -918  2003: -827  2004: -816  2005: -2,341
- Current account balance (in percent of GDP): 2001: -9.4  2002: -6.1  2003: -4.7  2004: -3.8  2005: -8.5
- External debt (in billions of U.S. dollars): 2001: 20.9  2002: 23.6  2003: 25.7  2004: 26.0  2005: 27.7
- External debt (in percent of GDP): 2001: 157  2002: 156  2003: 145  2004: 120  2005: 100
- Net international reserves (in millions of U.S. dollars): 2001: -109  2002: 84  2003: 290  2004: 1,144  2005: 1,889
- Net international reserves (in months of next year's imports of goods and services): 2001: -0.5  2002: 0.3  2003: 0.8  2004: 1.9  2005: 2.6

*Public Information Notice (PIN) No. 06/57 — May 24, 2006.*

### 4.      Notwithstanding internal conflicts and the difficulties of concluding and

### 4.      Notwithstanding internal conflicts and the difficulties of concluding and implementing the CPA, Sudan’s economic performance in recent years has been outstanding.

### Economic performance and outlook
- Recent performance: Growth robust; inflation kept under control; important reforms implemented.
- External support: Higher oil prices supported the balance of payments, allowed further accumulation of reserves and appreciation of the Sudanese dinar against the U.S. dollar.
- Competitiveness: So far, the appreciation of the currency has not led to loss of competitiveness; authorities are closely monitoring the situation.
- 2006 outlook:
  - Growth expected in the range of 8-10 percent in 2006, supported by a large increase in oil production and continued high growth in the non-oil sector.
  - Inflation expected to remain at a low single digit level.
  - Reduction in poverty levels will be enhanced.

### Challenges, risks, and development priorities
- Key challenges and risks:
  - Implementation of the CPA.
  - Tackling regional inequalities and reducing poverty.
  - Avoidance of the “Dutch disease”.
- Development strategy and commitments:
  - Launched a strategy to meet the Millennium Development Goals.
  - Interim Poverty Eradication Strategy to be finalized by the end of this year.
  - Reorient public spending towards less developed regions, social and infrastructure projects, capacity building, and revamping public financial management systems at all government levels.
  - Need for comprehensive and deep debt relief beyond traditional mechanisms to clear arrears and achieve debt sustainability.

### Fiscal policy
- Policy stance: Commitment to prudent fiscal policies aimed at achieving fiscal and debt sustainability and restoring borrowing relations with the international community, including international financial institutions.
- 2005: Oil revenue was lower than programmed because of delay in commencing oil production in some oil blocks. In line with CPA stipulations, transfers to the government of South Sudan were initiated.
- 2006 fiscal framework:
  - Fiscal deficit will be contained at below 1 percent of GDP.
  - Oil revenue to increase because of higher international oil prices and estimated higher production.
  - Non-oil revenue to benefit from improved administration (including collections in the South and other states) and from rationalization of tax exemptions.
  - Ministry of Investment will not refer proposals to renew expired business profit tax exemptions granted under the Investment Encouragement Act.
  - By October 2006, authorities will, in consultation with Fund staff, finalize a program to rationalize the system of investment incentives in line with international best practice.
  - Authorities will examine the scope for expanding the VAT base by bringing exempted items into the tax net.
- Expenditure policy:
  - Contain intended increases in civil servants’ salaries, expenditure on goods and services, transfers to the northern states, and domestically financed capital expenditures to ensure compatibility with economic stability goals.
  - Prioritize expenditure to ensure spending on programs that directly benefit the poor is protected.
  - Hope increased development assistance from the international community in 2006 will co-finance pro-poor programs.
  - Subsidization of domestic fuel prices deemed not sustainable; prefer phased reduction starting in June this year by sensitizing Parliament and the public and ultimately adopting an automatic pricing mechanism in line with world market prices for petroleum products.
- Structural reforms in fiscal management:
  - Strengthen public expenditure management systems in 2006.
  - Implement Government Finance Statistics Methodology (GFSM 2001).
  - Enhance transparency in oil revenue management.
  - Prioritize fiscal decentralization and improvement in fiscal reporting and accounting in the 2006 SMP.
  - These measures articulated in the authorities Memorandum of Economic and Financial Policies and will require substantial Fund and World Bank Technical Assistance.

### Monetary, exchange rate, and financial sector issues
- Monetary stance: Commitment to price stability through reserves management within a flexible exchange rate system.
- Exchange rate and competitiveness:
  - High external inflows recently led to appreciation of the real exchange rate, but no visible signs of tangible loss of competitiveness; overall non-oil economy remains competitive.
  - Long-term focus on improvements of total factor productivity to enhance external competitiveness.
  - Plans to improve the business climate for private sector participation by removing structural bottlenecks, institutional reforms, and fostering rural development.
- Financial sector reform:
  - Implement restructuring plans for the central bank and commercial banks and the financial reform program discussed during the recent FSAP.
  - As envisaged in the CPA:
    - A main central bank branch was established in South Sudan.
    - Rules and regulations were issued on conventional banking.
    - A new national currency will be introduced in the whole country by June this year.
  - Bank of Sudan reform program for 2006-2009:
    - Increase minimum capital requirement from SDD 3 billion to SDD 6 billion.
    - Increase capital adequacy ratio from 8 to 12 percent by end-2006.
    - Require commercial banks to implement action plans to meet provisions and capitalization requirements.
    - Encourage mergers of commercial banks according to specific guidelines.

### Non-concessional borrowings
- Policy: Authorities do not consider it prudent to borrow on non-concessional terms and would refrain if they had access to concessional resources.
- Access constraints: Sudan does not have access to any form of concessional or development funding from multilateral financial institutions, including the World Bank, the IMF and the African Development Bank; there is a big shortfall from major bilateral donors.
- Rationale for non-concessional loans: Enormous pressures to implement the CPA and provide key social services and infrastructure to sustain peace and enhance long-term non-oil growth potential.
- Use and transparency: All non-concessional loans directed to key projects, such as the North South Railway, the Darfur highway and provision of basic services such as hospitals, water and rural electrification; authorities have been very transparent on the use of all non-concessional loans.
- Measures to reduce non-concessional borrowing:
  - Explore innovative ways, including usage of any excess revenue from higher than projected oil prices and negotiation of concessional terms with key creditors.
  - Aim to maintain RAP quality equivalence on all policies to move quickly to a formal successor program, arrears clearance and debt relief.
  - Request international community to provide concessional resources to implement key social and physical infrastructure projects to make the peace dividend more tangible.

### Technical assistance (TA) needs
- Appreciation for ongoing Fund TA; additional TA required due to CPA implementation and forthcoming agreement on Darfur.
- Operationalization of new institutions at federal and state levels requires additional technical and financial assistance.
- Specific TA requests from the Fund:
  - Implementation of Government Finance Statistics Methodology (GFSM 2001).
  - Budget reporting, fiscal decentralization and public financial management.
  - Issuance of the new national currency.
  - Banking supervision.
  - Liquidity management.
  - Microfinance.
  - Balance of payments, monetary and real sector statistics.

### Roadmap / Way forward on debt and arrears
- Debt status: Sudan’s end-2004 debt stock remains unsustainable and significantly above the HIPC threshold.
- Financing needs: Substantial resources needed to finance post-conflict needs, including development and reconstruction of Darfur.
- Debt relief requirement: Sudan needs debt relief beyond traditional mechanisms and under the Enhanced HIPC Initiative and MDRI.
- Requests to creditors and donors:
  - After seven years of successful SMP implementation, with the last four implemented to the level of Upper Credit Tranche conditionality, authorities request creditors and donors to present a clear and timely road map for arrears clearance and debt relief under HIPC and MDRI.
  - Contributions from donors may need to constitute the bulk of resources needed to solve Sudan’s debt and arrears problems; request creditors and donors to begin considering how to mobilize necessary resources.
  - Authorities consider Sudan’s track record under successive SMPs since 1999 adequate to justify a waiver of the RAP for arrears clearance, qualification for a successor program and speedy reach of the decision and completion points under the HIPC Initiative.
  - Given the expiration of the sunset clause by the end of this year, urge creditors and donors to move quickly to mobilize necessary resources so protracted arrears cases will benefit from HIPC and MDRI debt relief as soon as possible to help achieve the MDGs.

### Conclusion and appeals to the international community
- Policy stance reaffirmed: Strong commitment to prudent and market oriented policies aimed at growth, employment creation and poverty reduction.
- Peace imperative: Without peace, no development is possible; implementation of the CPA and peace in Darfur remain central to the development strategy.
- Constraints: Task complicated by high debt burden and lack of access to concessional and development finance resources.
- Requests and expectations:
  - Trust the Fund will continue to be fully responsive in providing TA in the requested areas to build capacity, strengthen macroeconomic management and implement the reform agenda.
  - Looking forward to normalizing financial relations with the international community in the context of a formal arrangement with the Fund instead of continuing with SMPs for an undetermined period.
  - As proof of commitment to normalize relations with creditors, authorities have increased their payments to the Fund by 50 percent under the current SMP.
  - Urge the international community to release concessional resources, including grant financing and removing sanctions to assist implementation of the CPA and the forthcoming Darfur peace agreement.

*Source: Authorities’ statement as presented in the content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06182.pdf_