## SUDAN: STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION ## Source details **Canonical URL:** [SUDAN: STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16324.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16324.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16324.pdf.json) --- ### Key issues and context - Sudan is described as a low-income fragile country facing significant domestic and international constraints and large macroeconomic imbalances. - Decades of internal conflicts and U.S. sanctions have undermined economic stability and growth. - The secession of South Sudan in 2011 caused the loss of the bulk of oil exports and related budget revenues; gradual policy adjustment and external support restored some stability. - Reforms since 2012 included exchange rate adjustments, subsidy reductions, fuel price hikes, and tax increases; an SMP in 2014 supported stabilization efforts. - Persistent constraints: low tax revenues, monetization of the budget deficit, large quasi-fiscal activities (QFAs), virtually fixed official exchange rate, withdrawal of correspondent bank relations (CBRs), absence of debt relief. ### Developments, outlook, and risks - Growth and inflation developments: - Despite good harvests and growth close to 5 percent in the prior year, external imbalances widened in 2015–16 due to a negative terms-of-trade shock, increased monetization of government operations, and limited exchange rate flexibility. - Foreign exchange reserves dropped to one-and-a-half month of imports despite external financial support; the parallel exchange rate depreciated and the premium soared as the official rate remained virtually fixed. - Outlook: - Growth is expected to remain modest at 3–3½ percent in 2016 and beyond. - The outlook is subject to significant downside risks: low commodity export prices, absence of policy buffers, economic sanctions, withdrawal of foreign correspondent banking relationships, and a weak business environment. - Large external financing gaps are likely to persist, heightening risks of disorderly adjustment if external financing shortfalls materialize. - Fiscal risks: - Fiscal framework faces risks due to low tax revenues and uncertain oil revenues. - The fiscal deficit widened; large external financing gaps and arrears constrain access to external financing. - Debt status: - Sudan remains in debt distress and is eligible for debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. - Sudan’s arrears to the Fund declined to about SDR 969 million at end-June 2016 following payments of $10 million each in 2014 and 2015, and $5 million in the first half of 2016. ### Executive Board assessment and main policy recommendations - Executive Directors welcomed progress toward macroeconomic stabilization and growth since 2011 but noted large macroeconomic imbalances remain. - Key policy directions encouraged by Directors: - Accelerate and sustain broad-based reforms to achieve macroeconomic stability, address vulnerabilities, and promote inclusive growth. - Fiscal policy: - Continue fiscal consolidation. - Contain spending on goods and services while protecting social spending, prioritizing capital spending. - Accelerate revenue administration reforms and strengthen domestic revenue mobilization given low tax revenues. - Minimize non-concessional borrowing and avoid selective servicing of bilateral debt. - Monetary and financial policy: - Tighten monetary policy to keep inflation in check by adhering to limits on central bank advances to the government, limiting quasi-fiscal activities to levels consistent with monetary targets, and developing liquidity management instruments. - Strengthen central bank capacity to mitigate financial stability risks. - Continue strengthening the AML/CFT framework; the removal from the FATF “gray list” was welcomed. - Exchange rate and external stability: - Adjust the exchange rate and move toward greater flexibility to improve competitiveness and significantly reduce the parallel market premium. - Prepare a timetable for the removal of foreign exchange restrictions and multiple currency practices as soon as possible. - Structural and social policies: - Advance structural policies to improve the business environment, financial inclusion, and quality of spending to support human capital. - Expand social safety nets and improve their targeting; initial preparations of a Poverty Reduction Strategy were welcomed. - Debt relief and external engagement: - Garner international support for debt relief; continued engagement with international partners to secure comprehensive support for debt relief and the lifting of sanctions. - Continue strengthening cooperation with the IMF on policies and payments, making regular payments to the Fund at least sufficient to cover obligations falling due and increasing them as payment capacity improves. - Encourage extension of the “zero option” agreement with South Sudan before it expires in October 2016 and strengthen joint outreach for debt relief by the two countries. ### Debt relief and Fund relations - Sudan remains eligible for debt relief under the HIPC Initiative. - Arrears to the Fund: about SDR 969 million at end-June 2016, after payments of $10 million each in 2014 and 2015, and $5 million in H1 2016. - Authorities intend to engage with international partners to secure support for debt relief and the lifting of sanctions, and to continue strengthening cooperation with the IMF on policies and payments. ### Selected economic indicators and key statistics (2012–17; figures preserved exactly as presented) - Real GDP (factor cost, annual change): 2012: -2.2; 2013: 5.3; 2014: 1.6; 2015: 4.9; 2016: 3.0; 2017 (Proj.): 3.5 - Oil (annual change): 2012: -59.0; 2013: 57.8; 2014: -13.2; 2015: -10.0; 2016: -7.6; 2017: 0.4 - Non-oil (annual change): 2012: 4.6; 2013: 2.8; 2014: 2.7; 2015: 5.8; 2016: 3.6; 2017: 3.6 - Consumer prices (end of period): 2012: 44.4; 2013: 41.9; 2014: 25.7; 2015: 12.6; 2016: 16.5; 2017: 13.7 - Consumer prices (period average): 2012: 35.4; 2013: 36.5; 2014: 36.9; 2015: 16.9; 2016: 13.5; 2017: 16.1 - Central government finances (in percent of GDP): - Revenue and grants: 2012: 9.9; 2013: 11.0; 2014: 12.0; 2015: 11.0; 2016: 9.8; 2017: 9.6 - Of which: Nonoil revenues: 2012: 6.9; 2013: 8.3; 2014: 9.0; 2015: 9.0; 2016: 8.6; 2017: 8.2 - Of which: Oil revenues: 2012: 2.6; 2013: 2.0; 2014: 2.4; 2015: 1.7; 2016: 0.8; 2017: 1.1 - Expenditure: 2012: 13.3; 2013: 13.3; 2014: 13.4; 2015: 12.9; 2016: 11.9; 2017: 11.7 - Overall balance: 2012: -3.3; 2013: -2.3; 2014: -1.4; 2015: -1.9; 2016: -2.1; 2017: -2.2 - Primary balance: 2012: -2.2; 2013: -1.8; 2014: -0.5; 2015: -1.1; 2016: -1.3; 2017: -1.5 - Monetary sector (annual change): - Broad money: 2012: 40.3; 2013: 13.0; 2014: 17.0; 2015: 19.8; 2016: 25.5; 2017: 22.8 - Credit to the economy: 2012: 34.1; 2013: 23.2; 2014: 17.6; 2015: 20.8; 2016: 23.2; 2017: 18.7 - Balance of payments: - Exports of goods (in US$, annual percent change): 2012: -53.7; 2013: -4.4; 2014: -9.0; 2015: -28.8; 2016: 13.5; 2017: 9.8 - Imports of goods (in US$, annual percent change): 2012: 2.6; 2013: 2.3; 2014: -7.0; 2015: 3.2; 2016: -2.8; 2017: 7.5 - Current account balance (cash basis, percent of GDP): 2012: -6.7; 2013: -6.2; 2014: -4.8; 2015: -5.9; 2016: -4.2; 2017: -3.6 - External debt (percent of GDP): 2012: 68.9; 2013: 68.7; 2014: 65.8; 2015: 61.4; 2016: 55.9; 2017: 49.5 - External debt (in billions of US$): 2012: 43.2; 2013: 45.0; 2014: 46.8; 2015: 50.0; 2016: 52.6; 2017: 55.6 - Gross international reserves (in billions of US$): 2012: 1.7; 2013: 1.6; 2014: 1.5; 2015: 1.0; 2016: 0.8; 2017: 0.9 - Reserves in months of next year's imports of G&S: 2012: 1.9; 2013: 1.9; 2014: 1.7; 2015: 1.2; 2016: 1.0; 2017: 1.0 - Exchange rate (official SDG/US$, period average): 2012: 3.6; 2013: 4.8; 2014: 5.7; 2015: 6.0 ### Tax revenue mobilization (Box 1) - Tax revenues position and potential: - Sudan’s tax revenues are among the lowest in low- and lower-middle income countries (LLMICs). - Tax revenues represented only 6.3 percent of GDP compared to 12 percent of GDP on average in fragile LLMICs in 1995–2015. - Oil revenues averaged 8 percent of GDP in 1995–2011 and dropped to 2.2 percent of GDP in 2012–15; expected to drop to less than 1 percent of GDP in 2016 on account of low global oil prices. - VAT efficiency: 0.19 per percentage point, below the 25th percentile and below the median of 0.37; VAT rate is 17 percent. - Comparison: a non-oil producing country with median income per capita of $1,520 (PPP) should raise tax revenues equivalent to 12.2 percent of GDP on average; Sudan with income of $3,920 collected only 6.2 percent of GDP in 2015. - Tax revenue position and mobilization potential (continued): - Direct tax revenues: "only 0.6 percent of GDP." - Sudan ranked 34th out of 36 African LLMICs in tax effort, with a tax revenue gap of "6.1 percent of GDP" (Torres, 2016). - Estimated scope to increase tax ratio by "6 percent of GDP". - Potential increases by tax base: - Income: "2.3 percent of GDP" - Goods & services: "2.8 percent of GDP" - Drivers of low direct tax revenues: low personal and corporate income tax rates, high exemptions and tax holidays, and low compliance due to weak administration. ### Humanitarian situation and internal conflicts - Internally-displaced persons: "3.1 million". - Refugees (many from South Sudan): "about 360,000". - Humanitarian support provided to "some 5.4 million people (15 percent of the population)". - Endemic armed conflicts in Darfur, South Kordofan, and Blue Nile states. - UN-AU peacekeeping force in Darfur: "21,000-strong" since 2007. - National dialogue launched in 2015 but boycotted by key opposition parties and armed rebel groups. - Roadmap for peace launched in early 2016 under AU auspices but not agreed by all parties. - May 2016: government held a referendum on permanent administrative status of Darfur. - June 2016: government declared a unilateral cessation of hostilities in South Kordofan and Blue Nile. ### Implementation of 2014 Article IV recommendations (summary) - Exchange rate: greater exchange rate flexibility - Outcome: "No progress." CBOS adjusted the official exchange rate by only "2 percent" in July 2015; gap with parallel market rate widened to "122 percent" in mid-June 2016. International reserves declined. - Fiscal policy: fiscal consolidation through revenue mobilization and restrain of current spending, including gradual phase-out of fuel subsidies - Outcome: "Limited progress." Current spending contained, but drop in oil revenues and slow progress in increasing non-oil revenues led to a widening deficit. - Monetary policy: tighter monetary policy - Outcome: "Limited progress." Inflation declined from "25.7 percent at end-2014" to "14.3 percent in June 2016". Reserve money growth was higher than expected due to central bank financing of government and agriculture. - Structural policy: improve business climate and invest in human and physical capital - Outcome: "Limited progress." Sudan’s ranking in the 2016 World Bank Doing Business Survey dropped one position to "159th among 189 countries." Low domestic revenues constrained social spending and public investment. ### Recent economic developments (2015–Q1 2016) - Growth and sector performance: - Non-oil real GDP growth: "5.8 percent in 2015" (up from "2.7 percent in 2014"), driven by agriculture and services. - Oil-GDP contracted by "10 percent." - Inflation: - Slowed to "12.6 percent in December 2015" (from "26 percent at end-2014") due largely to lower food prices. - Picked up to "14.3 percent in June 2016" as nonfood inflation remained high at "about 20 percent." - Fiscal deficit: - Widened by "0.5 percent of GDP in 2015" to "1.9 percent" (fuel subsidies remained high; oil revenues declined). - First quarter 2016 deficit contained to "0.5 percent of GDP" through tightened expenditure, especially capital. - Central Bank of Sudan (CBOS) balance sheet and QFAs: - Net domestic assets expanded by "38 percent in 2015", largely owing to lending to the government and QFAs. - Total lending to government and QFAs: "3.8 percent of GDP in 2015", up from "1.8 percent in 2014". - Growth of net domestic assets slowed to "27 percent annually in May 2016". - Current account and external position: - Current account deficit (cash basis): widened to "5.9 percent of GDP" in 2015 (from "4.8 percent of GDP in 2014"). - Trade deficit in Q1 2016 widened to "1.1 percent of GDP" (from "0.7 percent" in same period of last year). - International reserves dropped by about "$460 million in 2015" and remained low at "$1.2 billion (1.4 months of imports) as of May 2016." - Financial inflows from Gulf countries estimated at "$2.1 billion between May 2015 and January 2016". - Exchange rate and parallel market: - Parallel exchange rate depreciated by "36 percent between end-2014 and end-June 2016". - Parallel market premium increased to "125 percent (from 46 percent)". - Staff estimates exchange rate overvalued by "about 50 percent in real terms." - Banking system: - Financial stability indicators improved: increasing capital adequacy ratios, declining nonperforming loans, steady profits. - Net open foreign-exchange position of banking system: "-3 percent of capital"; five largest banks had positive net open position of "7 percent in March 2016". - CBOS and government fully or partially owning "15 of the 37 banks"; restructuring lagging. - October 2015: Sudan removed from FATF “gray list” after strengthening AML/CFT framework. ### Correspondent banking relations and trade/transactions impact (Box 3 highlights) - Enforcement actions in mid-2014 against international banks for violating U.S. sanctions contributed to substantial withdrawal of foreign CBRs of Sudanese banks. - BNP Paribas pleaded guilty in June 2014 and was ordered to pay "$8.9 billion" in forfeitures and fines. - Loss of CBRs: - One large bank reported having "only 15 correspondent banks in 2016 compared to 55 a year ago." - Sudan lost almost half of its CBRs between 2012 and 2015, representing "a 15 percent drop in volume" (Committee on Payments and Market Infrastructure). - Economic effects: - Import financing slowed in 2015. - Difficulties in repatriating export proceeds weakened exports. - Transfer payments and remittances were adversely affected. - Payments to the IMF received with long delays. - A persistent breakdown of CBRs would cause shortages of imported goods, increase inflation, depress consumption, and worsen poverty. ### Exchange rate adjustment scenario and macroeconomic effects (staff illustrative scenario) - Short-term effects: - Growth would likely be slower and inflation higher due to the impact of devaluation on imports, prices, and customs receipts. - Inflationary effects of official exchange rate devaluation would be manageable because most prices already reflect the parallel rate. - Revenue gains from the devaluation may be significant as imports would be valued at a higher exchange rate, increasing the import tax base. - Medium-term effects: - Macroeconomic performance would improve as elimination of foreign exchange distortions would improve competitiveness and encourage FDI. - Measures to mitigate social impact: - Maintain temporarily the subsidy regime for fuel and wheat to allay concerns over the social impact of greater exchange rate flexibility. - Cover higher subsidy costs by revenue gains from the devaluation. - The CBOS should use all available instruments to forestall second-round effects of exchange rate adjustment on inflation. - Authorities’ views: - Prefer a more incremental approach than staff’s illustrative scenario; view large adjustments as destabilizing and premature without sufficient reserves. - Five-Year Program: gradually allow private sector to use parallel market for key imports, gradually adjust the official rate, diversify exports, and anticipate continued foreign aid from Gulf countries. ### Fiscal consolidation and revenue mobilization (policy recommendations) - Short-term fiscal strategy: - Fiscal consolidation needed to curb monetization of the deficit and contribute to external adjustment. - Limiting the 2016 deficit to 1.9 percent of GDP would be consistent with manageable domestic financing. - Require containing spending on current goods and services, and prioritizing capital spending. - In response to exchange rate adjustment, maintain current subsidies in the short term to mitigate impact on vulnerable groups, offset by corresponding revenue gains. - Mobilize additional non-oil revenues—especially by expanding tax bases; tax administration reforms need to be accompanied by tax policy measures. - Medium-term revenue mobilization measures: - Further rationalize exemptions, cease granting new tax holidays and phase out existing ones. - Introduce a presumptive tax for small businesses. - Reform gold taxation. - Increase personal and business income tax rates and their progressivity. - Continue to strengthen customs and tax administration. - Adjust the customs exchange rate in tandem with adjustments in the official rate to boost tax collections. - Gradually phase out fuel subsidies to create space for targeted pro-growth and pro-poor social spending. - Target a gradual reduction in the nonoil primary balance over time to lower dependence on uncertain oil revenues. - Public financial management (PFM) strengthening: - Sustain introduction of a treasury single account (TSA) by: - (i) strengthening budget formulation and planning, with emphasis on revenue projections and the macro-fiscal unit; - (ii) improving preparation of the medium-term fiscal framework and incorporating it into budget planning; - (iii) expanding the coverage of the TSA; - (iv) deploying an integrated financial management system. ### Monetary policy and financial stability (recommendations and authorities’ stance) - Monetary policy recommendations: - Tighten monetary policy and further develop instruments to manage liquidity. - Address burdens from government large financing needs and QFAs that lead to sizable liquidity injections. - Continue to adhere to existing limits on advances to government. - Curtail QFAs by limiting gold purchases to levels consistent with reserve money and international reserve targets. - Discontinue financing of agriculture. - Develop Sharia-compliant securities. - Enhance transparency by reporting all lending to government (including payments of letters of guarantees and wheat subsidies) and QFAs as credit to government. - Financial stability and supervisory priorities for CBOS: - (i) Modernize the framework to deal with weak banks, including limiting access to “lender of last resort” support to solvent banks, expanding the range of resolution regimes, and empowering CBOS to initiate resolution processes. - (ii) Divest CBOS’ equity in commercial banks. - (iii) Strengthen CBOS’ capacity for financial stability analysis. - (iv) Continue to enforce limits on net foreign exchange positions to mitigate foreign currency mismatch risks. - Continue strengthening risk-based AML/CFT supervision. - Authorities’ monetary views and banking sector assessment: - Authorities remain committed to monetary targets; reserve money growth slowed in the first quarter of 2016 on account of lower QFAs. - Liquidity Management Fund launched in 2014 reduced CBOS liquidity support for commercial banks. - CBOS will continue to buy gold as an important source of foreign exchange and to reduce smuggling. - Banking sector: banks are liquid, return on assets is high, and NPL ratios have declined. ### Inclusive growth, poverty, and labor market - Business environment and structural bottlenecks: - Sudan is at the bottom twentieth percentile of the 2016 Doing Business rankings; ranking: "159th out of 189 countries in 2016." - Weaknesses include access to credit, international trade, and investor protection. - Better public infrastructure and improved human capital would support private sector development and help address high unemployment. - Key labor and social statistics: - Unemployment rate at 22 percent in 2015. - Youth unemployment (World Bank, 2013): 24.5 percent. - Female unemployment (2013): 19.8 percent; Male unemployment (2013): 12.7 percent. - Labor participation rate (World Bank, 2013): 54.5 percent; Male: 76.4 percent; Female: 32.6 percent. - Adult literacy rates: exceeding 70 percent. - Social safety nets and PRS: - Staff welcomed plans to prepare the 2016–20 Poverty Reduction Strategy (PRS). - Cash transfer program currently supports about 500,000 households (20 percent of the poor); plan to expand coverage to 600,000 households in 2017. ### External debt and debt relief (DSA findings and recommendations) - DSA conclusions: - DSA confirms Sudan continues to be in debt distress. - PV of PPG external debt "about 93 percent of GDP at end-2015" (benchmark for weak performers is 30 percent). - PV of debt-to-exports in 2015 "above 1400 percent." - PV of debt-to-revenue ratio in 2015 "about 872 percent." - Ratios projected to improve but remain above thresholds throughout the projection period. - Policy implications: - Critical to follow sound economic policies, adopt prudent borrowing strategy minimizing non-concessional borrowing, rely on grants and concessional financing, and continue garnering support for debt relief. - HIPC eligibility and steps: - Sudan is eligible for debt relief under the HIPC Initiative but has yet to meet all requirements. - Remaining steps to reach Decision Point include obtaining assurances of support from creditors representing at least 70 percent of HIPC-eligible debt; establish an adequate track record under an SMP; clear arrears with the IMF; and have a fully financed plan to clear arrears with the World Bank and AfDB. - Resources required for IMF participation in HIPC have not yet been identified. - Authorities’ debt stance: - Authorities committed to outreach to creditors and to continue making quarterly payments to the Fund totaling $10 million per year; they expressed disappointment at lack of progress toward debt relief. ### Outlook and risks (short and medium term projections) - Short-term outlook: - Growth expected to slow to "about 3 percent in 2016". - Inflation could increase due to lagged effects of parallel exchange rate depreciation and waning harvest effects. - Current account deficit expected to remain high and international reserves low absent policy adjustment. - Medium-term outlook: - Growth expected to remain at "3.5 percent" in 2017 and beyond, largely reliant on agriculture. - External financing gap of "$1.3–1.9 billion per year" that will need to be covered by foreign aid. - International reserves projected to hover around "$1 billion (1 month of imports)." - Downside risks: - Large and persistent external financing gaps could lead to disorderly adjustment, depressed activity, and rapid inflation. - Other risks: lower oil receipts from South Sudan; reduced FDI and remittances from the Gulf; continued withdrawal of CBRs. - Upside risk: - Progress with national dialogue and the roadmap for peace. ### Risk Assessment Matrix — selected risks and policy responses - Global risks: - Sharper-than-expected global growth slowdown (likelihood: Low to High; impact: Medium) — policy responses: greater exchange rate flexibility; pro-cyclical spending cuts if revenue declines. - Persistently lower energy prices (likelihood: High; impact: Medium to High) — policy responses: remove fuel subsidies; greater exchange rate flexibility; increase domestic revenue mobilization. - Regional risks: - Oil production in South Sudan declines owing to civil conflicts (likelihood: High; impact: High) — policy responses: greater exchange rate flexibility; tight monetary policy; rationalize spending and increase domestic revenue mobilization. - Country-specific risks: - Sustained breakdown in correspondent bank relations (likelihood: High; impact: High) — policy responses: outreach efforts to restore CBRs; tighten monetary policy as needed; enhance exchange rate flexibility; effective implementation of the AML/CFT framework. ### Reserve adequacy and external stability (Annex I highlights) - Gross international reserves remained low: - May 2016 reserves: $1.2 billion (1.4 months of imports). - Estimated foreign deposits at the central bank over the previous 12 months: $2.1 billion. - EBA-lite estimate: the real effective exchange rate is overvalued by about 50 percent relative to economic fundamentals. - Policy direction recommended: greater exchange rate flexibility and structural reforms, supported by tighter fiscal and monetary policies, to improve competitiveness and foster private sector investment in the tradable sector. - Critical enabling factors: removal of sanctions, clearance of external arrears, and debt relief. ### Public finances and budget context (selected fiscal details) - 2016 budget context (in billions of Sudanese pounds): - Revenue and grants (2016 Budget): 67.5; Q1 2016: 12.2. - Revenue (2016 Budget): 65.0; Q1 2016: 11.7. - Nonoil revenue (2016 Budget): 52.7; Q1 2016: 10.9. - Oil revenue (2016 Budget): 12.3; Q1 2016: 0.8. - Total expenditure (2016 Budget): 77.0; Q1 2016: 14.8. - Overall balance (2016 Budget): -9.6 (in percent of GDP: -1.7 for 2016 estimate; -2.1 proj for 2017). - Net acquisition of nonfinancial assets (capital exp.): 2016 Budget: 10.1 (in percent of GDP: 1.8). - Financing composition (selected): - Financing (2016 Q1): 1.0 (percent of GDP). - Foreign financing (2016 Q1): 0.5 (percent of GDP). - Domestic financing (2016 Q1): 0.5 (percent of GDP). - Change in net domestic arrears (2016 Q1): 0.0 (percent of GDP). ### Financial sector soundness (selected indicators, 2016Q1) - Regulatory capital to risk-weighted assets: 21.0 - Gross nonperforming loans (NPLs) to gross loans: 5.1 - Loans provisions to NPLs: 85.5 - Return on assets (before tax): 1.0 (figures for 2016Q1 are not annualized) - Liquid assets to total assets: 35.8 ### DSA key projections and vulnerabilities (selected) - DSA baseline unsustainable: - PV of PPG external debt "about 93 percent of GDP at end-2015." - PV of PPG external debt (selected years, percent of GDP): 2016: 95.2; 2017: 83.6; 2018: 72.2; 2019: 64.4; 2020: 57.7; 2021: 51.5; 2026: 46.3; 2036: 40.6; later entry: 31.1. - PV of PPG external debt (in percent of exports): 2016: 1414.5; 2017: 1321.8; 2018: 1204.0; 2019: 1162.8; 2020: 1141.0; 2021: 1137.2; 2026: 1158.8; 2036: 995.3; later entry: 683.6. - Stress scenarios: - A one-time 30 percent depreciation shock in 2017 would raise the PV-of-debt to "96 percent of GDP in that year," with it falling below the 2017 baseline only in 2020. - Alternative scenarios and bound tests show marked deterioration under shocks (examples: B6 one-time 30 percent nominal depreciation: PV debt‑to‑GDP 2017: 96; B2 export value growth shock can push PV debt‑to‑exports to very high levels). ### Data, statistics, and Article VIII issues - Data shortcomings: - Data provision broadly adequate for surveillance but major shortcomings due to capacity constraints, especially in national accounts and balance of payments statistics. - Last published national accounts date from 2010. - Absence of FDI survey data impairs balance of payments compilation. - Recommendation: devote more resources to statistics and data collection. - Article VIII and exchange restrictions: - Sudan continues to maintain exchange restrictions and multiple currency practices (MCPs) subject to Fund jurisdiction under Article VIII, including an exchange rate regime with multiple effective exchange rates and rationing/allocating foreign exchange to certain sectors. - Staff urged authorities to eliminate restrictions and MCPs; authorities committed to gradual removal as conditions improve but did not commit to a timetable. ### Staff appraisal (summary judgments) - Progress and achievements: - Notable progress toward macroeconomic stability and growth since South Sudan’s secession. - Policy measures—including exchange rate adjustments, subsidy reform, and improved social safety nets—helped contain the fiscal deficit, slow money growth, reduce inflation, and support economic recovery. - Institutional reforms strengthened tax collections and public financial management, and social spending increased. - Implementation of a five-year reform plan for growth and poverty reduction and good harvests boosted growth to close to 5 percent. - Remaining challenge: - Despite these efforts, large macroeconomic imbalances continue to constrain growth prospects, and decisive policy adjustment and mobilization of external aid are required. ### Mission and institutional engagement - Discussions were held in Khartoum during May 21–June 2, 2016. - Mission team: Eric Mottu (head), Abdikarim Farah, Gabriel Presciuttini, Saad Quayyum (all MCD), Mariusz Sumlinski (FIN), Lodewyk Erasmus (Resident Representative), Amin Yasin (local economist); Ms. Daniela Gressani joined conclusion of the mission. Ms. Chileshe Kapwepwe and Ms. Felicia Dlamini-Kunene (both OED) participated in policy discussions. Chawoong Lee (FAD) supported from headquarters. - Authorities met included First Vice-President Bakri Hassan Salih, Finance Minister Badreldin Mahmoud Abbas, Central Bank Governor Abdelrahman Hassan Abdelrahman, other senior officials, business and diplomatic communities. *International Monetary Fund. Staff Report for the 2016 Article IV Consultation (July 25, 2016).* ### 25.7 percent a year before), rose to 16.5 percent in July 2016. ### SUDAN: STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION ### Key issues and context - Sudan is described as a low-income fragile country facing significant domestic and international constraints and large macroeconomic imbalances. - Decades of internal conflicts and U.S. sanctions have undermined economic stability and growth. - The secession of South Sudan in 2011 caused the loss of the bulk of oil exports and related budget revenues; gradual policy adjustment and external support restored some stability. - Reforms since 2012 included exchange rate adjustments, subsidy reductions, fuel price hikes, and tax increases; an SMP in 2014 supported stabilization efforts. - Persistent constraints: low tax revenues, monetization of the budget deficit, large quasi-fiscal activities (QFAs), virtually fixed official exchange rate, withdrawal of correspondent bank relations (CBRs), absence of debt relief. ### Developments, outlook, and risks - Growth and inflation developments: - Despite good harvests and growth close to 5 percent in the prior year, external imbalances widened in 2015–16 due to a negative terms-of-trade shock, increased monetization of government operations, and limited exchange rate flexibility. - Foreign exchange reserves dropped to one-and-a-half month of imports despite external financial support; the parallel exchange rate depreciated and the premium soared as the official rate remained virtually fixed. - Outlook: - Growth is expected to remain modest at 3–3½ percent in 2016 and beyond. - The outlook is subject to significant downside risks: low commodity export prices, absence of policy buffers, economic sanctions, withdrawal of foreign correspondent banking relationships, and a weak business environment. - Large external financing gaps are likely to persist, heightening risks of disorderly adjustment if external financing shortfalls materialize. - Fiscal risks: - Fiscal framework faces risks due to low tax revenues and uncertain oil revenues. - The fiscal deficit widened; large external financing gaps and arrears constrain access to external financing. - Debt status: - Sudan remains in debt distress and is eligible for debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. - Sudan’s arrears to the Fund declined to about SDR 969 million at end-June 2016 following payments of $10 million each in 2014 and 2015, and $5 million in the first half of 2016. ### Executive Board assessment and main policy recommendations - Executive Directors welcomed progress toward macroeconomic stabilization and growth since 2011 but noted large macroeconomic imbalances remain. - Key policy directions encouraged by Directors: - Accelerate and sustain broad-based reforms to achieve macroeconomic stability, address vulnerabilities, and promote inclusive growth. - Fiscal policy: - Continue fiscal consolidation. - Contain spending on goods and services while protecting social spending, prioritizing capital spending. - Accelerate revenue administration reforms and strengthen domestic revenue mobilization given low tax revenues. - Minimize non-concessional borrowing and avoid selective servicing of bilateral debt. - Monetary and financial policy: - Tighten monetary policy to keep inflation in check by adhering to limits on central bank advances to the government, limiting quasi-fiscal activities to levels consistent with monetary targets, and developing liquidity management instruments. - Strengthen central bank capacity to mitigate financial stability risks. - Continue strengthening the AML/CFT framework; the removal from the FATF “gray list” was welcomed. - Exchange rate and external stability: - Adjust the exchange rate and move toward greater flexibility to improve competitiveness and significantly reduce the parallel market premium. - Prepare a timetable for the removal of foreign exchange restrictions and multiple currency practices as soon as possible. - Structural and social policies: - Advance structural policies to improve the business environment, financial inclusion, and quality of spending to support human capital. - Expand social safety nets and improve their targeting; initial preparations of a Poverty Reduction Strategy were welcomed. - Debt relief and external engagement: - Garner international support for debt relief; continued engagement with international partners to secure comprehensive support for debt relief and the lifting of sanctions. - Continue strengthening cooperation with the IMF on policies and payments, making regular payments to the Fund at least sufficient to cover obligations falling due and increasing them as payment capacity improves. - Encourage extension of the “zero option” agreement with South Sudan before it expires in October 2016 and strengthen joint outreach for debt relief by the two countries. ### Debt relief and Fund relations - Sudan remains eligible for debt relief under the HIPC Initiative. - Arrears to the Fund: about SDR 969 million at end-June 2016, after payments of $10 million each in 2014 and 2015, and $5 million in H1 2016. - Authorities intend to engage with international partners to secure support for debt relief and the lifting of sanctions, and to continue strengthening cooperation with the IMF on policies and payments. ### Selected economic indicators and key statistics (2012–17; figures preserved exactly as presented) - Real GDP (factor cost, annual change): 2012: -2.2; 2013: 5.3; 2014: 1.6; 2015: 4.9; 2016: 3.0; 2017 (Proj.): 3.5 - Oil (annual change): 2012: -59.0; 2013: 57.8; 2014: -13.2; 2015: -10.0; 2016: -7.6; 2017: 0.4 - Non-oil (annual change): 2012: 4.6; 2013: 2.8; 2014: 2.7; 2015: 5.8; 2016: 3.6; 2017: 3.6 - Consumer prices (end of period): 2012: 44.4; 2013: 41.9; 2014: 25.7; 2015: 12.6; 2016: 16.5; 2017: 13.7 - Consumer prices (period average): 2012: 35.4; 2013: 36.5; 2014: 36.9; 2015: 16.9; 2016: 13.5; 2017: 16.1 - Central government finances (in percent of GDP): - Revenue and grants: 2012: 9.9; 2013: 11.0; 2014: 12.0; 2015: 11.0; 2016: 9.8; 2017: 9.6 - Of which: Nonoil revenues: 2012: 6.9; 2013: 8.3; 2014: 9.0; 2015: 9.0; 2016: 8.6; 2017: 8.2 - Of which: Oil revenues: 2012: 2.6; 2013: 2.0; 2014: 2.4; 2015: 1.7; 2016: 0.8; 2017: 1.1 - Expenditure: 2012: 13.3; 2013: 13.3; 2014: 13.4; 2015: 12.9; 2016: 11.9; 2017: 11.7 - Overall balance: 2012: -3.3; 2013: -2.3; 2014: -1.4; 2015: -1.9; 2016: -2.1; 2017: -2.2 - Primary balance: 2012: -2.2; 2013: -1.8; 2014: -0.5; 2015: -1.1; 2016: -1.3; 2017: -1.5 - Monetary sector (annual change): - Broad money: 2012: 40.3; 2013: 13.0; 2014: 17.0; 2015: 19.8; 2016: 25.5; 2017: 22.8 - Credit to the economy: 2012: 34.1; 2013: 23.2; 2014: 17.6; 2015: 20.8; 2016: 23.2; 2017: 18.7 - Balance of payments: - Exports of goods (in US$, annual percent change): 2012: -53.7; 2013: -4.4; 2014: -9.0; 2015: -28.8; 2016: 13.5; 2017: 9.8 - Imports of goods (in US$, annual percent change): 2012: 2.6; 2013: 2.3; 2014: -7.0; 2015: 3.2; 2016: -2.8; 2017: 7.5 - Current account balance (cash basis, percent of GDP): 2012: -6.7; 2013: -6.2; 2014: -4.8; 2015: -5.9; 2016: -4.2; 2017: -3.6 - External debt (percent of GDP): 2012: 68.9; 2013: 68.7; 2014: 65.8; 2015: 61.4; 2016: 55.9; 2017: 49.5 - External debt (in billions of US$): 2012: 43.2; 2013: 45.0; 2014: 46.8; 2015: 50.0; 2016: 52.6; 2017: 55.6 - Gross international reserves (in billions of US$): 2012: 1.7; 2013: 1.6; 2014: 1.5; 2015: 1.0; 2016: 0.8; 2017: 0.9 - Reserves in months of next year's imports of G&S: 2012: 1.9; 2013: 1.9; 2014: 1.7; 2015: 1.2; 2016: 1.0; 2017: 1.0 - Exchange rate (official SDG/US$, period average): 2012: 3.6; 2013: 4.8; 2014: 5.7; 2015: 6.0 ### Tax revenue mobilization (Box 1) - Sudan’s tax revenues are among the lowest in low- and lower-middle income countries (LLMICs). - Tax revenues represented only 6.3 percent of GDP compared to 12 percent of GDP on average in fragile LLMICs in 1995–2015. - Oil revenues averaged 8 percent of GDP in 1995–2011 and dropped to 2.2 percent of GDP in 2012–15; expected to drop to less than 1 percent of GDP in 2016 on account of low global oil prices. - VAT efficiency: 0.19 per percentage point (revenue collected in percent of GDP divided by the standard tax rate), below the 25th percentile and below the median of 0.37; VAT rate is 17 percent. - Comparison: a non-oil producing country with median income per capita of $1,520 (PPP) should raise tax revenues equivalent to 12.2 percent of GDP on average; Sudan with income of $3,920 collected only 6.2 percent of GDP in 2015. ### Institutional engagement and mission - Discussions were held in Khartoum during May 21–June 2, 2016. - Mission team: Eric Mottu (head), Abdikarim Farah, Gabriel Presciuttini, Saad Quayyum (all MCD), Mariusz Sumlinski (FIN), Lodewyk Erasmus (Resident Representative), Amin Yasin (local economist); Ms. Daniela Gressani joined conclusion of the mission. Ms. Chileshe Kapwepwe and Ms. Felicia Dlamini-Kunene (both OED) participated in policy discussions. Chawoong Lee (FAD) supported from headquarters. - Authorities met included First Vice-President Bakri Hassan Salih, Finance Minister Badreldin Mahmoud Abbas, Central Bank Governor Abdelrahman Hassan Abdelrahman, other senior officials, business and diplomatic communities. *International Monetary Fund. Staff Report for the 2016 Article IV Consultation (July 25, 2016).* ### Box 1. Tax Revenue Mobilization (concluded) ### Box 1. Tax Revenue Mobilization (concluded) ### Tax revenue position and mobilization potential - Direct tax revenues: "only 0.6 percent of GDP." - Sudan ranked 34th out of 36 African LLMICs in tax effort, with a tax revenue gap of "6.1 percent of GDP" (Torres, 2016). - Estimated scope to increase tax ratio by "6 percent of GDP". - Potential increases by tax base: - Income: "2.3 percent of GDP" - Goods & services: "2.8 percent of GDP" - Drivers of low direct tax revenues: low personal and corporate income tax rates, high exemptions and tax holidays, and low compliance due to weak administration. ### Humanitarian situation and internal conflicts - Internally-displaced persons: "3.1 million". - Refugees (many from South Sudan): "about 360,000". - Humanitarian support provided to "some 5.4 million people (15 percent of the population)". - Endemic armed conflicts in Darfur, South Kordofan, and Blue Nile states. - UN-AU peacekeeping force in Darfur: "21,000-strong" since 2007. - National dialogue launched in 2015 but boycotted by key opposition parties and armed rebel groups. - Roadmap for peace launched in early 2016 under AU auspices but not agreed by all parties. - May 2016: government held a referendum on permanent administrative status of Darfur. - June 2016: government declared a unilateral cessation of hostilities in South Kordofan and Blue Nile. ### Implementation of 2014 Article IV recommendations (Box 2 summary) - Exchange rate: greater exchange rate flexibility - Outcome: "No progress." CBOS adjusted the official exchange rate by only "2 percent" in July 2015; gap with parallel market rate widened to "122 percent" in mid-June 2016. International reserves declined. - Fiscal policy: fiscal consolidation through revenue mobilization and restrain of current spending, including gradual phase-out of fuel subsidies - Outcome: "Limited progress." Current spending contained, but drop in oil revenues and slow progress in increasing non-oil revenues led to a widening deficit. - Monetary policy: tighter monetary policy - Outcome: "Limited progress." Inflation declined from "25.7 percent at end-2014" to "14.3 percent in June 2016". Reserve money growth was higher than expected due to central bank financing of government and agriculture. - Structural policy: improve business climate and invest in human and physical capital - Outcome: "Limited progress." Sudan’s ranking in the 2016 World Bank Doing Business Survey dropped one position to "159th among 189 countries." Low domestic revenues constrained social spending and public investment. ### Recent economic developments (2015–Q1 2016) - Growth and sector performance: - Non-oil real GDP growth: "5.8 percent in 2015" (up from "2.7 percent in 2014"), driven by agriculture and services. - Oil-GDP contracted by "10 percent." - Inflation: - Slowed to "12.6 percent in December 2015" (from "26 percent at end-2014") due largely to lower food prices. - Picked up to "14.3 percent in June 2016" as nonfood inflation remained high at "about 20 percent." - Fiscal deficit: - Widened by "0.5 percent of GDP in 2015" to "1.9 percent" (fuel subsidies remained high; oil revenues declined). - First quarter 2016 deficit contained to "0.5 percent of GDP" through tightened expenditure, especially capital. - Central Bank of Sudan (CBOS) balance sheet and quasi-fiscal activities: - Net domestic assets expanded by "38 percent in 2015", largely owing to lending to the government and QFAs. - Total lending to government and QFAs: "3.8 percent of GDP in 2015", up from "1.8 percent in 2014". - Growth of net domestic assets slowed to "27 percent annually in May 2016". - Current account and external position: - Current account deficit (cash basis): widened to "5.9 percent of GDP" in 2015 (from "4.8 percent of GDP in 2014"). - Trade deficit in Q1 2016 widened to "1.1 percent of GDP" (from "0.7 percent" in same period of last year). - International reserves dropped by about "$460 million in 2015" and remained low at "$1.2 billion (1.4 months of imports) as of May 2016." - Financial inflows from Gulf countries estimated at "$2.1 billion between May 2015 and January 2016". - Exchange rate and parallel market: - Parallel exchange rate depreciated by "36 percent between end-2014 and end-June 2016". - Parallel market premium increased to "125 percent (from 46 percent)". - Staff estimates exchange rate overvalued by "about 50 percent in real terms." - Banking system: - Financial stability indicators improved: increasing capital adequacy ratios, declining nonperforming loans, steady profits. - Net open foreign-exchange position of banking system: "-3 percent of capital"; five largest banks had positive net open position of "7 percent in March 2016". - CBOS and government fully or partially owning "15 of the 37 banks"; restructuring lagging. - October 2015: Sudan removed from FATF “gray list” after strengthening AML/CFT framework. ### Correspondent banking relations and trade/transactions impact (Box 3 highlights) - Enforcement actions in mid-2014 against international banks for violating U.S. sanctions contributed to substantial withdrawal of foreign CBRs of Sudanese banks. - BNP Paribas pleaded guilty in June 2014 and was ordered to pay "$8.9 billion" in forfeitures and fines. - Loss of CBRs: - One large bank reported having "only 15 correspondent banks in 2016 compared to 55 a year ago." - Sudan lost almost half of its CBRs between 2012 and 2015, representing "a 15 percent drop in volume" (Committee on Payments and Market Infrastructure). - Economic effects: - Import financing slowed in 2015. - Difficulties in repatriating export proceeds weakened exports. - Transfer payments and remittances were adversely affected. - Payments to the IMF received with long delays. - A persistent breakdown of CBRs would cause shortages of imported goods, increase inflation, depress consumption, and worsen poverty. ### Outlook and risks - Short-term outlook (staff projections): - Growth expected to slow to "about 3 percent in 2016". - Inflation could increase due to lagged effects of parallel exchange rate depreciation and waning harvest effects. - Current account deficit expected to remain high and international reserves low absent policy adjustment; external financial support by authorities may materialize but is insufficient alone. - Medium-term outlook: - Growth expected to remain at "3.5 percent" in 2017 and beyond, largely reliant on agriculture. - External financing gap of "$1.3–1.9 billion per year" that will need to be covered by foreign aid. - International reserves projected to hover around "$1 billion (1 month of imports)." - Downside risks: - Large and persistent external financing gaps could lead to disorderly adjustment, depressed activity, and rapid inflation. - Other risks: lower oil receipts from South Sudan; reduced FDI and remittances from the Gulf; continued withdrawal of CBRs. - Upside risk: - Progress with national dialogue and the roadmap for peace. ### Policy discussions and recommendations - Core message: current policies—maintaining the fixed exchange regime without significant fiscal and monetary policy adjustment—are unsustainable and increase the likelihood of disorderly adjustment. - Recommended decisive policy actions and reforms: - Greater flexibility of the official exchange rate, with a view to liberalizing the foreign exchange market and reducing external imbalances. - Continued fiscal consolidation focused on mobilizing domestic revenues, to generate fiscal space for infrastructure, education, and health, while reducing the budget deficit and its monetization. - Tighter monetary policy, including by limiting quasi-fiscal activities of the central bank. - Strengthened social safety nets to mitigate the cost of adjustment on vulnerable groups. - Improved business environment to support private sector growth. - Continued engagement with international partners to progress toward debt relief and the lifting of sanctions. - External stability and exchange rate specifics: - Exchange rate flexibility would support fiscal and monetary policies to reduce external imbalances. - Widening (or eliminating) the band for the commercial bank rate would help liberalize the foreign exchange market for banks. - Efficient operation of a more flexible foreign exchange regime requires developing an interbank market and strengthening reserve management, including by establishing rule- and market-based interventions. *Source: Box 1. Tax Revenue Mobilization (concluded), _cr16324 - Box 1. Tax Revenue Mobilization (concluded)._ ### 13. Staff presented an illustrative scenario with adjustment of the official exchange rate ### 13. Staff presented an illustrative scenario with adjustment of the official exchange rate ### Exchange rate adjustment scenario and macroeconomic effects - Short-term effects (staff's illustrative scenario): - Growth would likely be slower and inflation higher due to the impact of devaluation on imports, prices, and customs receipts. - Inflationary effects of official exchange rate devaluation would be manageable because most prices already reflect the parallel rate. - Revenue gains from the devaluation may be significant as imports would be valued at a higher exchange rate, increasing the import tax base. - Medium-term effects: - Macroeconomic performance would improve as elimination of foreign exchange distortions would improve competitiveness and encourage FDI. ### Measures to mitigate social impact - Critical measures: - Maintain temporarily the subsidy regime for fuel and wheat to allay concerns over the social impact of greater exchange rate flexibility. - Cover higher subsidy costs by revenue gains from the devaluation. - The CBOS should use all available instruments to forestall second-round effects of exchange rate adjustment on inflation. ### Authorities’ views on exchange rate policy - Preferred approach and concerns: - Authorities favor a more incremental approach than staff’s illustrative scenario. - Consider large exchange rate adjustments destabilizing—both economically and socially—and premature without sufficient foreign exchange reserves to prevent overshooting. - View flexible exchange regime as a long-term objective. - Concerned about inflationary impact, limited effectiveness given price-inelastic commodity-based exports, and risk of social unrest similar to September 2013 devaluation. - Reform strategy (Five-Year Program): - Gradually allow the private sector to use the parallel foreign exchange market to import key commodities. - Gradually adjust the official rate and diversify exports in the medium term. - Anticipate continued foreign aid from Gulf countries to cover financing gaps. ### Fiscal consolidation and revenue mobilization - Risks for the 2016 budget: - Targeted deficit of 1.7 percent of GDP will be difficult to achieve given lower oil revenues and transfers from South Sudan. - Full spending of budget appropriations would bring the deficit close to 3 percent of GDP, implying sizable recourse to CBOS financing. - Short-term fiscal strategy: - Fiscal consolidation needed to curb monetization of the deficit and contribute to external adjustment. - Limiting the 2016 deficit to 1.9 percent of GDP would be consistent with manageable domestic financing. - Require containing spending on current goods and services, and prioritizing capital spending. - In response to exchange rate adjustment, maintain current subsidies in the short term to mitigate impact on vulnerable groups, offset by corresponding revenue gains. - Mobilize additional non-oil revenues—especially by expanding tax bases; tax administration reforms need to be accompanied by tax policy measures. - Medium-term revenue mobilization measures: - Further rationalize exemptions, cease granting new tax holidays and phase out existing ones. - Introduce a presumptive tax for small businesses. - Reform gold taxation. - Increase personal and business income tax rates and their progressivity. - Continue to strengthen customs and tax administration. - Adjust the customs exchange rate in tandem with adjustments in the official rate to boost tax collections. - Gradually phase out fuel subsidies to create space for targeted pro-growth and pro-poor social spending. - Target a gradual reduction in the nonoil primary balance over time to lower dependence on uncertain oil revenues. - Public financial management (PFM) strengthening: - Sustain introduction of a treasury single account (TSA) by: - (i) strengthening budget formulation and planning, with emphasis on revenue projections and the macro-fiscal unit; - (ii) improving preparation of the medium-term fiscal framework and incorporating it into budget planning; - (iii) expanding the coverage of the TSA; - (iv) deploying an integrated financial management system. ### Authorities’ fiscal views and actions - Short-term approach: - Plan to achieve policy targets by cutting spending to offset revenue shortfalls. - Rely on domestic financing to cover deficits amid sizable development needs and insufficient external financing. - Revenue measures taken: - Increased last year the income tax rate (from 15 percent to 30 percent) on cigarette producers. - Recently introduced royalties on gold production. - Policy stance: - In line with the Five-Year Program, plan to expand tax bases—including by reducing exemptions and introducing electronic collection of VAT and other taxes—rather than increase tax rates. - Believe increasing the effective tariff and VAT rates on imports by adjusting the official exchange rate would not increase customs revenues significantly because of high import-price elasticity. - PFM improvements planned: - Continue to liberalize fuel prices to reduce subsidies while providing more resources to social programs and productive sectors (including agriculture and infrastructure). - Strengthen the TSA and expand it to include all government ministries and departments. - Introduced electronic payment systems for salaries and are strengthening internal and external audit. ### Monetary policy and financial stability - Monetary policy recommendations: - Tighten monetary policy and further develop instruments to manage liquidity. - Address burdens from government large financing needs and QFAs that lead to sizable liquidity injections. - Continue to adhere to existing limits on advances to government. - Curtail QFAs by limiting gold purchases to levels consistent with reserve money and international reserve targets. - Discontinue financing of agriculture. - Develop Sharia-compliant securities. - Enhance transparency by reporting all lending to government (including payments of letters of guarantees and wheat subsidies) and QFAs as credit to government. - Financial stability and supervisory priorities for CBOS: - (i) Modernize the framework to deal with weak banks, including limiting access to “lender of last resort” support to solvent banks, expanding the range of resolution regimes, and empowering CBOS to initiate resolution processes. - (ii) Divest CBOS’ equity in commercial banks. - (iii) Strengthen CBOS’ capacity for financial stability analysis. - (iv) Continue to enforce limits on net foreign exchange positions to mitigate foreign currency mismatch risks. - Continue to strengthen risk-based AML/CFT supervision. ### Authorities’ monetary views and banking sector assessment - Commitment and recent actions: - Authorities remain committed to monetary targets. - Reserve money growth slowed in the first quarter of 2016 on account of lower QFAs. - Liquidity Management Fund launched in 2014 reduced CBOS liquidity support for commercial banks. - CBOS will continue to buy gold as an important source of foreign exchange and to reduce smuggling. - Banking sector condition: - Despite strains from sanctions and withdrawal of CBRs, banking sector health improved—banks are liquid, return on assets is high, and NPL ratios have declined. - Banking sector’s net open foreign exchange position is at manageable levels, in line with regulatory limits. - Authorities committed to strengthening AML/CFT framework but noted sanctions encourage shift to cash-based and informal transactions, undermining effectiveness. ### Inclusive growth and poverty reduction - Business environment and structural bottlenecks: - Sudan is at the bottom twentieth percentile of the 2016 Doing Business rankings. - Weaknesses include access to credit, international trade, and investor protection. - Addressing these issues—streamlining regulations and liberalizing trade and foreign exchange markets—would, together with macroeconomic stability, encourage private sector investment and job creation. - Better public infrastructure (including water and electricity) and improved human capital would support private sector development and help address high unemployment. - Key labor and social statistics: - Unemployment rate at 22 percent in 2015, with higher rates for youth and women. - Social safety nets and PRS: - Staff welcomed plans to prepare the 2016–20 Poverty Reduction Strategy (PRS). - Social safety nets should be expanded and their targeting improved, especially the cash transfer program which currently supports about 500,000 households (20 percent of the poor). - Strengthening education and health services is essential. - Authorities’ inclusive growth actions: - Automation of tax collection to reduce transaction costs. - Information campaigns to solicit investor inputs on reforms. - Established high-level committee to review land laws and regulations to facilitate investment. - Encouraging expansion of bank branches and microfinance; strengthening CBOS credit registry to improve access to credit. - Preparing a full PRS through consultative process; household survey to be completed this year to document poverty profile. - Expanded education and health services to the poor; plan to expand cash transfer program coverage to 600,000 households in 2017, while strengthening management and targeting, with World Bank support. ### External debt and debt relief - Debt sustainability findings: - DSA confirms Sudan continues to be in debt distress. - Both public and external debt ratios remain high, and most external debt is in arrears. - Debt ratios would be higher with GDP valued at the parallel exchange rate. - Sudan’s external debt is assessed to be unsustainable; all external debt indicators breach indicative thresholds under the baseline scenario and many remain above thresholds throughout the analysis time horizon. - Policy implications: - Critical to follow sound economic policies, adopt prudent borrowing strategy minimizing non-concessional borrowing, rely on grants and concessional financing, and continue garnering support for debt relief. - HIPC eligibility and requirements: - Sudan is eligible for debt relief under the HIPC Initiative but has yet to meet all requirements. - Debt relief hinges on normalizing relations with international creditors, including the Fund. - Staff advised authorities to extend, together with South Sudan, the “zero option” to avoid complex and protracted apportionment of external debt. - IMF arrears and payments: - Sudan’s arrears to the Fund declined to about SDR 969 million at end-June 2016 following payments of $10 million each in 2014 and 2015, and $5 million in the first half of 2016. - Staff encouraged authorities to continue making payments at least sufficient to cover Sudan’s obligations falling due, make payments regularly, and increase them in line with improvement in Sudan’s payment capacity. - Authorities’ debt stance: - Reiterated commitment to reach out to international creditors and make quarterly payments to the Fund totaling $10 million per year. - Disappointed by lack of progress toward debt relief and noted absence of resolution complicated extension of the “zero option,” which they consider a sovereign decision. ### Box: Path to Debt Relief (key points) - Sudan meets certain HIPC conditions: - Faces an unsustainable debt burden that cannot be addressed through traditional debt relief mechanisms. - Developed an Interim Poverty Reduction Strategy (I-PRSP) document; I-PRSP assessed by IMF and World Bank staffs and discussed by both Boards in September 2013. - Remaining steps to reach Decision Point: - Obtain assurances of support for HIPC debt relief from a large majority of creditors representing at least 70 percent of HIPC-eligible debt. - Establish with the IMF an adequate track record of strong policy performance in the period leading up to the Decision Point, under an SMP judged by the Executive Board to meet policy standards associated with upper-credit tranche arrangements. - Clear arrears with the IMF, and have a fully financed plan and timetable to clear arrears with the World Bank and the African Development Bank. - Financing note: - Resources required for IMF participation in the HIPC Initiative have not yet been identified; additional financing will need to be secured when Sudan is ready to clear its arrears and embark on HIPC. ### Statistical issues - Data shortcomings: - Data provision broadly adequate for surveillance but major shortcomings due to capacity constraints, especially in national accounts and balance of payments statistics. - Last published national accounts date from 2010. - Absence of FDI survey data impairs balance of payments compilation. - Recommendation: devote more resources to statistics and data collection. - Authorities’ action: - Agreed with need to strengthen economic statistics and are working to upgrade national account statistics and seeking support to conduct FDI surveys. ### Article VIII and exchange restrictions - Staff assessment: - Sudan continues to maintain exchange restrictions and multiple currency practices (MCPs) subject to Fund jurisdiction under Article VIII, including an exchange rate regime with multiple effective exchange rates and rationing/allocating foreign exchange to certain sectors. - Staff urged authorities to eliminate restrictions and MCPs as they delay external adjustment and hamper foreign investment. - Authorities’ view: - Unable to remove all restrictions and MCPs because of continued balance of payments pressures following secession of South Sudan, external sanctions, and need to finance strategic imports of food, fuel, and medicine. - Committed to gradually removing exchange restrictions and MCPs as conditions improve, without committing to a timetable. - Box: Exchange Rate System (practices subject to Article VIII): - Government limitations on availability of foreign exchange and allocation to priority items. - Establishment of an official exchange rate (the CBOS rate) for government transactions which in practice differs by more than 2 percent from the rate used by commercial banks. - Large spreads between the CBOS rate and the parallel market exchange rate due to CBOS’ limitation on availability of foreign exchange channeling transactions to the parallel market. - Imposition by the government of a cash margin requirement for most imports. ### Staff appraisal (summary judgments) - Progress and achievements: - Notable progress toward macroeconomic stability and growth since South Sudan’s secession. - Policy measures—including exchange rate adjustments, subsidy reform, and improved social safety nets—helped contain the fiscal deficit, slow money growth, reduce inflation, and support economic recovery. - Institutional reforms strengthened tax collections and public financial management, and social spending increased. - Implementation of a five-year reform plan for growth and poverty reduction and good harvests boosted growth to close to 5 percent. *Source: IMF staff report excerpt.* ### 38. Despite these efforts, however, large macroeconomic imbalances continue to constrain ### _cr16324 - 38. Despite these efforts, however, large macroeconomic imbalances continue to constrain ### Macroeconomic context and key vulnerabilities - Large macroeconomic imbalances continue to constrain growth prospects, along with internal conflicts and U.S. sanctions. - External imbalances were triggered by the loss of three-quarters of Sudan’s oil exports and have yet to be resolved. - Domestic and international efforts to end internal conflicts have yet to bear fruit; the humanitarian situation remains difficult. - Sanctions and the withdrawal of correspondent banking relationships (CBRs) weigh on trade, investment, and growth. - Absence of progress toward debt relief limits access to official external financing. ### Recent developments and key statistics - Current account deficit widened to 6 percent of GDP in 2015. - Foreign exchange reserves dropped to 1½ month of imports despite external financial support. - Parallel exchange rate premium soared to 125 percent as the official rate remained virtually fixed. - Budget deficit widened to 1.9 percent of GDP owing to shortfalls in oil revenue. - Inflation rose to 14.3 percent in June 2016. - Sudan’s arrears to the Fund declined to about SDR 969 million at end-June 2016 following payments of $10 million each in 2014 and 2015, and $5 million in the first half of 2016. - The “zero option” agreement with South Sudan is noted to expire in October 2016. ### Outlook and downside risks - Growth is expected to remain modest in 2016 and beyond given: - Low commodity export prices. - Absence of policy buffers. - Economic sanctions and the withdrawal of CBRs. - Weak business environment. - Fiscal framework risks stem from low tax revenues and uncertain oil revenues. - Large external financing gaps are likely to persist, heightening risks of disorderly adjustment in case of shortfalls in external financing. - Macroeconomic stability and growth rest on determined and early policy adjustment and mobilization of external aid. ### Policy recommendations and reforms (summary) - Accelerate policy consolidation and reforms to achieve macroeconomic stability, address vulnerabilities, and promote inclusive growth. Specific measures discussed include: - Exchange rate policy - Greater exchange rate flexibility to help reduce the external trade deficit. - Large upfront exchange rate adjustment followed by greater flexibility to reduce the parallel market premium. - Restore exchange rate competitiveness and remove foreign exchange distortions to diversify the export base and foster FDI. - Fiscal policy - Short-term fiscal consolidation to contribute to external adjustment and help reduce inflation. - Contain spending on goods and services and prioritize capital spending while protecting social spending. - Accelerate revenue administration reforms. - Medium-term domestic revenue mobilization: reduce tax exemptions and increase the relatively low personal and corporate tax rates to raise low tax revenues, create fiscal space, and reduce the deficit. - Maintain fuel subsidies in the short term to mitigate the impact of greater exchange rate flexibility, but phase them out in the medium term to make space for targeted pro-poor spending. - Continue strengthening PFM, in particular budget planning and the newly introduced treasury single account. - Monetary policy and central bank operations - Tighten monetary policy to keep inflation in check. - Continue to adhere to limits on central bank advances to government, limit QFAs and gold purchases to levels consistent with monetary targets, and develop Sharia-compliant liquidity management instruments. - Greater transparency in reporting government financing and QFAs. - Strengthen central bank capacity to mitigate financial stability risks: modernize the framework to deal with weak banks, divest CBOS’ remaining interests in commercial banks, strengthen CBOS’ capacity for financial stability analysis, and implement corrective measures to mitigate foreign currency mismatch risks. - Continue strengthening the AML/CFT framework and its implementation following Sudan’s removal from the FATF “gray list”. - Structural and social policies - Accelerate structural reforms to improve the business environment, encourage private investment and job creation, promote financial inclusion, and improve the quality of spending to support human capital. - Strengthen and better target social safety nets; the full Poverty Reduction Strategy under preparation should provide a coherent framework. - Devote more resources to statistics. - Exchange restrictions and multiple currency practices (MCPs) - Remove exchange restrictions and MCPs over time; staff urges authorities to articulate a firm timetable for their removal. - Staff notes the authorities are not requesting approval for the exchange restrictions and MCPs, and no approval is recommended. - External relations and debt - Continue to strengthen cooperation with the Fund on policies and payments; authorities are strongly encouraged to make payments at least sufficient to cover Sudan’s obligations falling due, make payments regularly, and increase them in line with improvement in payment capacity. - Garner international support for debt relief; Sudan remains in debt distress and is eligible for debt relief under the HIPC Initiative. - Minimize non-concessional borrowing and avoid selective servicing of bilateral debt; rely instead on grants and concessional financing. - Extend the “zero option” agreement with South Sudan before it expires in October 2016 to avoid a complex and protracted apportionment of external debt between the two countries. ### Risk Assessment Matrix — selected risks, likelihoods, impacts, and policy responses - Global risks - 1. Sharper-than-expected global growth slowdown (likelihood: Low to High; impact: Medium) - Policy responses: Greater exchange rate flexibility; pro-cyclical spending cuts if revenue declines and fiscal space is limited. - 2. Heightened risk of fragmentation/state failure in the Middle East (likelihood: High; impact: Medium to High) - Policy responses: Strengthen domestic revenue mobilization to increase social safety nets; mobilize international financing to support refugees. - 3. Persistently lower energy prices (likelihood: High; impact: Medium to High) - Policy responses: Remove fuel subsidies; greater exchange rate flexibility; increase domestic revenue mobilization. - Regional risks - 4. Oil production in South Sudan declines owing to civil conflicts (likelihood: High; impact: High) - Policy responses: Greater exchange rate flexibility; tight monetary policy; rationalize spending and increase domestic revenue mobilization. - 5. Heightened tensions between Sudan and South Sudan (likelihood: Low to Medium; impact: Low to Medium) - Policy responses: Advance economic and political cooperation; provide assistance to refugees; rationalize spending and tighten monetary policy. - Country-specific risks - 6. Failure of the ongoing national dialogue and efforts to address internal conflicts (likelihood: Medium; impact: Medium to High) - Policy responses: Protect social safety nets by prioritizing spending while enhancing domestic revenue; advance policies for inclusive growth. - 7. Sustained breakdown in correspondent bank relations and reduced financial services by global/regional banks (likelihood: High; impact: High) - Policy responses: Outreach efforts to restore correspondent banking relationships; tighten monetary policy as needed; enhance exchange rate flexibility; effective implementation of the AML/CFT framework. ### Institutional and procedural note - Staff proposes that the next Article IV consultation take place on the standard 12-month cycle. *Source: Sudanese authorities; and IMF staff calculations.* ### 8. Sudden stop of financial support ### 8. Sudden stop of financial support from Gulf countries ### Risk and immediate effects - Risk classification: Medium / High - Direct macroeconomic effects listed: - Foreign exchange shortage. - Exchange rate depreciation. - Drop in imports. ### Policy responses recommended - Greater exchange rate flexibility. - Tighten monetary and fiscal policies. - Implement structural reforms. - Improve social safety nets. ### Key macroeconomic indicators and projections (selected) - Output and prices - Real GDP (factor cost): 2016: 3.0; 2017: 3.5. - Oil sector growth: 2016: -7.6; 2017: 0.4. - Non-oil sector growth: 2016: 3.6; 2017: 3.6. - Real GDP (market prices): 2016: 3.1; 2017: 3.5. - Consumer prices (end of period): 2016: 16.5; 2017: 13.7. - Consumer prices (period average): 2016: 13.5; 2017: 16.1. - Public finances (central government, in percent of GDP) - Revenue and grants: 2016: 9.8; 2017: 9.6. - Nonoil revenues: 2016: 8.6; 2017: 8.2. - Oil revenues: 2016: 0.8; 2017: 1.1. - Expenditure: 2016: 11.9; 2017: 11.7. - Overall balance: 2016: -2.1; 2017: -2.2. - Primary balance: 2016: -1.3; 2017: -1.5. - Non-oil primary balance: 2016: -2.1; 2017: -2.7. - Public debt (percent of GDP): 2016: 63.3; 2017: 57.1. - Monetary and financial sector - Broad money (annual change, percent): 2016: 25.5; 2017: 22.8. - Reserve money (annual change, percent): 2016: 26.0; 2017: 22.0. - Credit to the economy (annual change, percent): 2016: 23.2; 2017: 18.7. - External sector and reserves - Exports of goods (US$, annual percent change): 2016: 13.5; 2017: 9.8. - Imports of goods (US$, annual percent change): 2016: -2.8; 2017: 7.5. - Merchandise trade balance (percent of GDP): 2016: -4.8; 2017: -4.3. - Current account balance (percent of GDP): 2016: -5.9; 2017: -5.0. - Current account balance (cash basis, percent of GDP): 2016: -4.2; 2017: -3.6. - Overall balance (cash basis, percent of GDP): 2016: -0.7; 2017: -1.0. - Financing gap (in billions of US$): 2016: 0.5; 2017: 1.3. - External debt (percent of GDP): 2016: 55.9; 2017: 49.5. - External debt (in billions of US$): 2016: 52.6; 2017: 55.6. - Gross international reserves (in billions of US$): 2016: 0.8; 2017: 0.9. - Reserves in months of next year's imports of G&S: 2016: 1.0; 2017: 1.0. - Exchange rate (official SDG/US$, period average): 2016: ...; 2017: ... - Medium-term outlook highlights (selected) - Real GDP (at factor cost) stable at 3.5 for 2017–2021 projections. - Consumer prices (end of period) projected: 2017: 13.7; 2018: 11.7; 2019: 12.2; 2020: 13.2; 2021: 14.2. - Current account balance (cash basis, percent of GDP): 2017: -3.6; 2018: -3.4; 2019: -3.0; 2020: -2.9; 2021: -2.8. - Financing gap (percent of GDP): 2016: 0.5; 2017: 1.1; 2018: 1.1; 2019: 0.9; 2020: 0.9; 2021: 1.0. - Gross international reserves (in billions of US$) projected: 2017: 0.9; 2018: 1.0; 2019: 1.1; 2020: 1.1; 2021: 1.1. - In months of next year's imports of G&S: 2017: 1.0; 2018: 1.0; 2019: 1.0; 2020: 1.0; 2021: 0.9. ### Fiscal adjustment and financing pressures (selected fiscal details) - Central government operations (2016 budget context, in billions of Sudanese pounds) - Revenue and grants (2016 Budget): 67.5; Q1 2016: 12.2. - Revenue (2016 Budget): 65.0; Q1 2016: 11.7. - Nonoil revenue (2016 Budget): 52.7; Q1 2016: 10.9. - Oil revenue (2016 Budget): 12.3; Q1 2016: 0.8. - Total expenditure (2016 Budget): 77.0; Q1 2016: 14.8. - Overall balance (2016 Budget): -9.6 (in percent of GDP: -1.7 for 2016 estimate; -2.1 proj for 2017). - Net acquisition of nonfinancial assets (capital exp.): 2016 Budget: 10.1 (in percent of GDP: 1.8). - Financing composition (selected) - Financing (2016 Q1): 1.0 (percent of GDP). - Foreign financing (2016 Q1): 0.5 (percent of GDP). - Domestic financing (2016 Q1): 0.5 (percent of GDP). - Change in net domestic arrears (2016 Q1): 0.0 (percent of GDP). ### Financial sector soundness (selected indicators) - Regulatory capital to risk-weighted assets: 2016Q1: 21.0. - Gross nonperforming loans (NPLs) to gross loans: 2016Q1: 5.1. - Loans provisions to NPLs: 2016Q1: 85.5. - Return on assets (before tax): 2016Q1: 1.0 (figures for 2016Q1 are not annualized). - Liquid assets to total assets: 2016Q1: 35.8. *Source: Central Bank of Sudan and Ministry of Finance and Economic Planning; and IMF staff estimates and projections.* ### Annex I. External Stability Assessment ### Annex I. External Stability Assessment ### Overall Assessment - Sudan’s external position is weak and vulnerable to shocks. - Constraints: exchange rate misalignment, U.S. sanctions, withdrawal of CBRs, and high costs of doing business. - Consequences: inability to adjust to the sharp decline in export proceeds following the secession of South Sudan in 2011; five years on the external current account deficit remains large and international reserves precariously low. - External vulnerability amplified by narrow, commodity-based exports. - EBA-lite estimate: the real effective exchange rate is overvalued by about 50 percent relative to economic fundamentals. - Policy direction recommended: greater exchange rate flexibility and structural reforms, supported by tighter fiscal and monetary policies, to improve competitiveness and foster private sector investment in the tradable sector. - Critical enabling factors: removal of sanctions, clearance of external arrears, and debt relief. ### Recent Developments - External current account deficit (cash basis) widened to 5.9 percent of GDP in 2015. - Exports dropped by 29 percent in 2015. - Imports increased by 3.2 percent in 2015. - Decline in exports mainly due to sharp drops in prices of main exports—oil, livestock, sesame seeds, and gold—which declined by 8–47 percent from a year ago. - Official exchange rate remained virtually fixed in 2015–16: - Official rate adjustment: 2 percent. - Parallel market exchange rate depreciation: 36 percent since end-2014. - Parallel market premium widened to 125 percent at end-June 2016 (from 46 percent at end-2014). ### Price Competitiveness - Based on the official rate, the REER appreciated by 17 percent between December 2014 and April 2016, reflecting high inflation relative to trading partners and the quasi-fixed official exchange rate in 2015–16. - On the parallel market, the REER depreciated by 18 percent between December 2014 and April 2016 but still recorded a cumulative appreciation of 15 percent since end-2012. - Factors indicating REER overvaluation: - large current account deficit; - low international reserves; - widening gap between official and parallel market rates; - appreciation of the REER in 2013–15; - weak external payment capacity evidenced by accumulation of external arrears. - EBA-lite details: - Current account norm: -2 percent of GDP. - Actual current account balance in 2015: -5.9 percent of GDP. - Current account gap: about 3.9 percent of GDP. - Long-term elasticity of the current account to the REER: -0.077. - Implied REER overvaluation: about 50 percent. - Note: model estimates should be interpreted with caution because specific external constraints (e.g., U.S. sanctions on trade and financial transactions) are not captured by the model. ### Non-Price Competitiveness - Institutional and business environment weaknesses undermine competitiveness. - World Bank Doing Business ranking: 159th out of 189 countries in 2016. - Lowest-ranked areas: Trading across borders, access to credit, investor protection. - World Bank CPIA 2015 classification: Sudan as a weak performer with overall score 2.4 (Sub-Saharan Africa average 3.2). - Sudan scores poorly in public sector management and institutions. - Additional constraints: U.S. sanctions and withdrawal of CBRs impose high costs on international trade and finance. ### Reserve Adequacy - Gross international reserves remained low over several years: - May 2016 reserves: $1.2 billion (1.4 months of imports). - Estimated foreign deposits at the central bank over the previous 12 months: $2.1 billion. - Under current policies, little prospect of reserves increasing over the medium term. - Projected reserves: remain at about 1 month of imports. - Benchmarks: traditionally recommended minimum of 3 months of imports; IMF reserve adequacy metric suggests 6–8 months. ### Conclusions and Policy Recommendations - Reduce external imbalances and enhance resilience by: - Reducing overvaluation and closing the gap between the official and parallel market exchange rates through: - exchange rate adjustment; - gradual removal of restrictions on access to foreign exchange; - fiscal and monetary policies supportive of external adjustment. - Improving the business environment and implementing wide-ranging structural reforms and infrastructure investments to improve competitiveness and increase human and physical capital. - Continued outreach to garner international support for debt relief under the Heavily Indebted Poor Country Initiative. *Source: Annex I. External Stability Assessment.* ### 9. Sudan’s unemployment rate is ### 9. Sudan’s unemployment rate is ### Unemployment levels and trends - In 2013 the unemployment rate was estimated by the World Bank at 15.2 percent of the labor force—virtually unchanged from 1991. - In 2015, the government reported an unemployment rate of 22 percent, suggesting a significant worsening following the secession of South Sudan. - The persistence of high levels of unemployment may be the legacy of an oil-based economy where growth and employment depended on government spending. - Footnote note: Alternatively, previous calculations may have underestimated unemployment. ### Youth and gender differentials - Youth unemployment (2013, World Bank estimate) was 24.5 percent—unchanged since 1991. - Unemployment among young women (2013) was 26.5 percent; among young men it was 22.1 percent. - Unemployment among women (2013) was 19.8 percent, higher than for men at 12.7 percent. ### Labor force participation - In 2013, the World Bank estimated the labor participation rate at only 54.5 percent. - Gender breakdown (2013): 76.4 percent for men and 32.6 percent for women. ### Education and human capital - Literacy rates in Sudan exceed 70 percent for adults and are above the average for countries with medium HDI. - Enrollment rates are only on par with low HDI countries. - Resources allocated to education are lower than average for low HDI countries, constraining education outcomes. ### Core reform priorities to support inclusive growth - Macroeconomic and political stability - Macroeconomic and political stability are critical to generate confidence and facilitate long-term planning for private sector saving and investment. - Enabling a business-friendly environment - Address weaknesses identified in the Doing Business surveys: trading across borders, protecting investors, getting credit, and resolving insolvency. - Tackle excessive regulations and corruption that favor informality and weigh on inclusive growth. - Continued outreach to progress towards debt relief and arrears clearance would help the business environment. - Increasing female participation in the labor force - Policies should support equal access to education, support working parents, reduce the gender wage gap, and increase mobility and equal opportunity. - Developing infrastructure - Expand electricity production and networks, roads, railways, and strengthen regional connectivity to lower production and transportation costs and improve productivity and market access. - Expand and improve agricultural irrigation to improve efficiency and productivity and insulate agriculture from weather vagaries. - Improving access to finance - Reforms to improve access to finance are urgently needed; getting credit remains one of the lowest rated Doing Business indicators in Sudan. - Authorities are implementing measures including expanding microfinance, increasing banking coverage in the countryside, developing agent banking, and strengthening the credit registry to lower costs of credit. - Regional integration - Implement plans to improve connectivity of rail and road networks with neighboring countries to leverage Sudan as a gateway to international markets for landlocked neighbors. - Reach out to the diaspora - Encourage investment by the diaspora by reforming the foreign exchange market (to facilitate transfers via official channels) and improving the business environment. - Invest in human capital through education to improve growth prospects and labor competitiveness. ### Key statistics (as reported) - Unemployment rate (World Bank, 2013): 15.2 percent of the labor force. - Government-reported unemployment rate (2015): 22 percent. - Female unemployment (2013): 19.8 percent. - Male unemployment (2013): 12.7 percent. - Youth unemployment (World Bank, 2013): 24.5 percent. - Youth female unemployment (2013): 26.5 percent. - Youth male unemployment (2013): 22.1 percent. - Labor participation rate (World Bank, 2013): 54.5 percent. - Male labor participation rate (2013): 76.4 percent. - Female labor participation rate (2013): 32.6 percent. - Adult literacy rates: exceeding 70 percent. *Source: SUDAN — STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION — INFORMATIONAL ANNEX (prepared by Middle East and Central Asia Department, July 25, 2016).* ### 1. The economy of Sudan has yet to adjust fully to the secession of South Sudan in 2011, ### _cr16324 - 1. The economy of Sudan has yet to adjust fully to the secession of South Sudan in 2011, ### Overview and recent context - South Sudan’s secession in 2011 “took away the bulk of its oil exports and fiscal revenues.” - Continued constraints: heavy debt burden, U.S. sanctions, volatile domestic and regional political environments. - Stabilization and reform measures helped adjustment, but “large imbalances persist.” ### 2015 economic performance and near-term outlook - Growth and inflation: - Economic growth “close to 5 percent” in 2015 (boosted by good harvests). - Inflation dropped from 26 percent in December 2014 to 13 percent in December 2015. - Public finances and external sector: - “Limited progress with raising domestic revenue to replace shortfalls in oil-related revenues weakened public finances.” - External current account deficit widened and international reserves remained low. - Exchange rates: - Official exchange rate “kept virtually unchanged.” - Parallel exchange rate premium: “soared above 80 percent in December 2015 and to 125 percent at end-June 2016.” - Outlook: “mixed with risks to the downside.” ### Prospects for debt relief and creditor engagement - Debt relief prospects depend on: - Obtaining assurances of support from creditors. - Normalizing relations with international financial institutions. - Establishing a track record of cooperation with the IMF on policies and payments. - “In 2014, the Sudanese authorities agreed with South Sudan to extend the deadline for the ‘zero-option’ until October 2016.” - Note: the “zero-option” is the 2012 agreement where Sudan retains all external liabilities after secession provided international community commits to debt relief within two years. ### Structure and stock of debt (end-2015) - Total external debt (nominal): “about $50 billion (61 percent of GDP)” including an estimated “$1.6 billion deposited in the Central Bank of Sudan by official creditors in 2015.” - Arrears: “About 84 percent of the external debt was in arrears in 2015.” - Composition of external debt: - Bulk is public and publicly guaranteed (PPG) debt: “$48.2 billion, of which 86 percent in arrears.” - Main creditors: bilateral creditors, “roughly equally divided between Paris Club and non-Paris Club creditors.” - Small fraction private (suppliers): “$1.7 billion.” - Public debt (total): “72.9 percent of GDP by end-2015.” - Domestic debt: “13 percent of GDP by end-2015.” ### New external borrowing 2012–16 and recent flows - External public borrowing has been limited; Sudan largely cut off due to arrears. - New debt contracted remained below 1 percent of GDP per year in 2012–15. - 2015 new debt contracted: “$262 million (0.3 percent of GDP)” comprising: - “$166 million from a multilateral creditor and $96 million from bilateral creditors.” - 2016 Q1: official creditors deposited an estimated “$0.5 billion” in the Central Bank of Sudan (in addition to the $1.6 billion deposit in 2015); these amounts “were added to outstanding debt.” - So far in 2016, “only one bilateral loan was contracted to finance projects in water harvesting.” ### DSA assumptions (2016–36) - Natural resources and oil: - Oil production projected at “101 thousand barrels/day in 2016” and to “108 thousand barrels/day in 2021.” - Price of Sudan’s crude oil projected to average “US$47/barrel in the medium term.” - Real sector: - Real GDP growth rate expected to “stabilize at 3.5 percent through 2021 and remain unchanged over 2022–36.” - Non-oil GDP projected to grow “about 3.6 percent per year by 2021 and remain stable afterwards.” - Prices: - Inflation (GDP deflator) projected averaging “12.6 percent in 2016–36.” - Fiscal: - Fiscal deficit projected to stabilize with gradual improvements in tax revenue, stable oil revenues, containment of current spending, and gradual phasing out of fuel subsidies. - Domestic debt-to-GDP ratio projected to be sustainable under these assumptions. - External sector: - Current account deficit expected to improve to “below 4 percent of GDP by end-2021” and decline to “about 2 percent of GDP” in the long run. - Deficit financed by FDI and continued accumulation of external debt arrears; “Sizable financing gap are assumed to be covered by external debt throughout the projection period.” - External debt policy: - New disbursements expected to be limited at “about 0.3 percent of GDP during 2016-36.” - Share of new concessional loans assumed at “around one-third.” - Assumption: Sudan will continue not to service obligations arising from the stock of arrears, but will service in full in 2022 obligations associated with the central bank deposits referred to in paragraph 5. - Note: The update “does not include arrears clearance, possible external debt relief, or debt apportionment between Sudan and South Sudan in its baseline or alternative scenarios.” ### External debt sustainability findings - Baseline unsustainable: - PV of PPG external debt “about 93 percent of GDP at end-2015” (benchmark for weak performers is 30 percent). - PV of debt-to-exports in 2015 “above 1400 percent.” - PV of debt-to-revenue ratio in 2015 “about 872 percent.” - Ratios projected to improve but remain above thresholds throughout the projection period. - Shock vulnerability: - A one-time 30 percent depreciation shock in 2017 would raise the PV-of-debt to “96 percent of GDP in that year,” with it falling below the 2017 baseline only in 2020. - PV-of-debt-to-GDP, debt-to-revenue and debt service-to-revenue ratios most vulnerable to a one-time depreciation shock. - PV-of-debt-to-exports and debt service-to-exports ratios most vulnerable to an export shock. - Projection note: “The peaks in debt service in 2022 in Figure 1 are due to estimated bullet repayments of central bank deposits.” ### Public debt sustainability findings - Public DSA mirrors external DSA: debt ratios decline but “remain at relatively high levels in the long term.” - PV of public debt-to-GDP ratio “projected to stay above the indicative benchmark throughout the projection period.” - Public debt path most vulnerable to a one-time 30 percent real depreciation. ### Conclusions and policy recommendations - Diagnosis: - “Sudan remains in debt distress.” - External debt “remains unsustainable.” - “Debt burden increases over time as the amounts needed to close projected financing gaps are added to the outstanding debt stocks.” - In nominal terms, “in 2026 the debt stock is 2.5 times the amount in 2015.” - Long-term: “all public and public-guaranteed external debt burden ratios remain well above their respective indicative thresholds.” - Necessary actions: - Debt relief—along with sound policies—is necessary to bring debt back to a sustainable path and regain access to external financing. - Sudan needs to: - “(i) step up outreach efforts to its creditors to garner broad support for debt relief;” - “(ii) continue to cooperate with the IMF on economic policies and payments with a view to establishing a track record of sound macro policies;” and - “(iii) minimize new borrowing on non-concessional terms, since it further increases the future debt burden, and instead secure foreign support on highly concessional terms to finance necessary development and infrastructure expenditures.” - Authorities’ stance: - Authorities “generally agree with the results and assessments of the DSA.” - They agree external debt is unsustainable, debt service burdens exceed Sudan’s capacity, and Sudan continues to accumulate external debt arrears. - They agree non-concessional borrowing is costly and should be minimized and “reiterate that debt relief is urgently needed for economic development.” - Authorities “are committed to continue reaching out to creditors.” *INTERNATIONAL MONETARY FUND* ### 14. The authorities are developing a national debt strategy. In February 2016, they held a donor- ### The authorities are developing a national debt strategy. In February 2016, they held a donor‑sponsored workshop to formulate a national debt policy. ### National debt strategy and related actions - A donor‑sponsored workshop was held in February 2016 to formulate a national debt policy. - The workshop included a high‑level seminar exploring the experience of Ethiopia in receiving HIPC and MDRI debt relief and was followed by a trip to Addis Ababa. - The resulting national debt strategy is awaiting approval by the government. - Given uncertain prospects for debt relief, the strategy focuses on domestic debt markets to finance development projects. - The authorities consider that technical assistance on external debt management, external debt statistics, macroeconomic policies, and financial programming would be helpful to advance their debt strategy. ### Debt sustainability indicators and baseline projections (selected figures, 2013–36) - External debt (nominal) series (in percent of GDP): 2013: 81.8; 2014: 68.4; 2015: 61.9; 2016: 55.4; 2017: 49.1; 2018: 44.8; 2019: 41.1; 2020: 37.5; 2021: 34.5; 2026: 33.3; 2036: 28.7. - Of which: public and publicly guaranteed (PPG) (in percent of GDP): 2013: 79.3; 2014: 66.1; 2015: 59.9; 2016: 53.5; 2017: 47.5; 2018: 43.4; 2019: 39.8; 2020: 36.4; 2021: 33.5; 2026: 32.5; 2036: 28.0. - Change in external debt (in percent of GDP): 2013: -2.9; 2014: -13.4; 2015: -6.5; 2016: -6.6; 2017: -6.3; 2018: -4.3; 2019: -3.8; 2020: -3.6; 2021: -3.0; 2026: -0.1; 2036: -0.7. - Identified net debt‑creating flows (in percent of GDP): 2013: 2.6; 2014: -1.1; 2015: -3.0; 2016: 2.1; 2017: 1.4; 2018: 1.4; 2019: 1.2; 2020: 1.1; 2021: 1.2; 2026: 0.4; 2036: -1.3. - Non‑interest current account deficit (in percent of GDP): 2013: 6.1; 2014: 4.7; 2015: 5.8; 2016: 3.3; 2017: 3.4; 2018: 4.1; 2019: 3.5; 2020: 3.3; 2021: 2.9; 2026: 2.7; 2036: 2.7. - Endogenous debt dynamics (contribution, in percent of GDP): 2013: -0.5; 2014: -3.6; 2015: -6.5; 2016: 0.2; 2017: -0.1; 2018: -0.1; 2019: -0.2; 2020: -0.2; 2021: -0.2; 2026: -0.3; 2036: -0.4. - Contribution from nominal interest rate (in percent of GDP): 2013: 3.2; 2014: 2.8; 2015: 2.2; 2016: 1.8; 2017: 1.5; 2018: 1.3; 2019: 1.2; 2020: 1.1; 2021: 0.9; 2026: 0.8; 2036: 0.6. - Contribution from real GDP growth (in percent of GDP): 2013: -4.3; 2014: -1.2; 2015: -2.9; 2016: -1.6; 2017: -1.6; 2018: -1.5; 2019: -1.4; 2020: -1.2; 2021: -1.1; 2026: -1.1; 2036: -1.0. - Contribution from price and exchange rate changes (in percent of GDP): 2013: 0.6; 2014: -5.2; 2015: -5.8; 2016: ... (table continues). - Residual (3–4) (in percent of GDP): 2013: -5.5; 2014: -12.3; 2015: -3.4; 2016: -8.6; 2017: -7.7; 2018: -5.6; 2019: -4.9; 2020: -4.7; 2021: -4.2; 2026: -0.5; 2036: 0.6. - Of which: exceptional financing (in percent of GDP): 2013: -2.9; 2014: -2.7; 2015: -2.1; 2016: -1.9; 2017: -1.6; 2018: -1.4; 2019: -1.2; 2020: -1.1; 2021: -0.9; 2026: -0.7; 2036: -0.4. - PV of external debt (selected years, percent of GDP): 2016: 95.2; 2017: 83.6; 2018: 72.2; 2019: 64.4; 2020: 57.7; 2021: 51.5; 2026: 46.3; 2036: 40.6; later entry: 31.1. - PV of PPG external debt (percent of GDP): 2016: 93.2; 2017: 81.7; 2018: 70.7; 2019: 63.0; 2020: 56.5; 2021: 50.5; 2026: 45.4; 2036: 39.7; later entry: 30.4. - PV of PPG external debt (in percent of exports): 2016: 1414.5; 2017: 1321.8; 2018: 1204.0; 2019: 1162.8; 2020: 1141.0; 2021: 1137.2; 2026: 1158.8; 2036: 995.3; later entry: 683.6. - PV of PPG external debt (in percent of government revenues): 2016: 871.9; 2017: 868.2; 2018: 757.9; 2019: 686.7; 2020: 640.2; 2021: 597.1; 2026: 562.8; 2036: 511.6; later entry: 389.9. - Debt service‑to‑exports ratio (in percent): 2013: 32.1; 2014: 32.5; 2015: 38.2; 2016: 34.5; 2017: 31.1; 2018: 29.7; 2019: 28.7; 2020: 28.0; 2021: 28.3; 2026: 22.9; 2036: 24.9. - PPG debt service‑to‑revenue ratio (in percent): 2013: 30.3; 2014: 25.6; 2015: 23.2; 2016: 22.3; 2017: 19.2; 2018: 17.3; 2019: 15.8; 2020: 14.4; 2021: 13.5; 2026: 11.5; 2036: 13.9. - Total gross financing need (Billions of U.S. dollars): 2013: 4.1; 2014: 3.8; 2015: 4.9; 2016: 3.8; 2017: 3.8; 2018: 4.0; 2019: 4.1; 2020: 4.4; 2021: 5.0; 2026: 4.2; 2036: 1.0. - Non‑interest current account deficit that stabilizes debt ratio (in percent of GDP): 2013: 8.9; 2014: 18.0; 2015: 12.3; 2016: 10.7; 2017: 9.8; 2018: 7.5; 2019: 6.7; 2020: 6.3; 2021: 5.7; 2026: 2.1; 2036: 1.3. ### Key macroeconomic assumptions and projections (selected) - Real GDP growth (in percent): historical 2013: 5.3; 2014: 1.6; 2015: 4.9. Projections: 2016: 3.5; 2017: 3.2; 2018: 3.0; 2019–2021: 3.5; 2016–21 average: 3.5; 2026: 3.5; 2036: 3.4; 2022–36 average: 3.4; further projected averages: 3.5, 3.5 in table. - GDP deflator in US dollar terms (change in percent): 2013: -0.7; 2014: 6.8; 2015: 9.3; projections include 2016: 8.6; 2017: 10.9; 2018: 12.2; 2019: 15.2; 2020: 11.7; 2021: 11.1; 2026: 11.6; 2036: 11.1; averages and further entries: 12.1; 2.0; 1.8; 1.9. - Effective interest rate (percent) 5/: 2013: 3.9; 2014: 3.8; 2015: 3.6; 2016: 4.6; selected projections: 2017: 0.7; 2018: 3.4; 2019: 3.3; 2020: 3.2; 2021: 3.1; 2026: 3.0; 2036: 2.9; further annual entries: 3.1; 2.5; 2.1; 2.5. - Growth of exports of goods & services (US dollar terms, in percent): 2013: 3.0; 2014: -0.2; 2015: -16.9; projections include 2016: 6.0; 2017: 34.3; 2018: 8.6; 2019: 13.2; 2020: 6.8; 2021: 5.0; 2026: 3.5; 2036: 1.5; other averages: 6.4; 6.1; 7.0; 6.3. - Growth of imports of goods & services (US dollar terms, in percent): 2013: 1.8; 2014: -5.3; 2015: -0.4; projections include 2016: 3.4; 2017: 9.5; 2018: -2.8; 2019: 7.5; 2020: 7.5; 2021: 5.0; 2026: 5.6; 2036: 6.3; other averages: 4.8; 3.4; 3.5; 3.5. - Government revenues (excluding grants, in percent of GDP): 2013: 10.4; 2014: 11.4; 2015: 10.7; 2016: 9.4; 2017: 9.3; 2018: 9.2; 2019: 8.8; 2020: 8.5; 2021: 8.1; 2016–21 average: 7.8; 2026: 7.8; 2036: 7.8. - Grant element of new public sector borrowing (in percent): selected projected values: 2019: 33.4; 2020: 32.8; 2021: 32.8; 2022: 32.9; 2023: 32.8; 2024: 32.7; 2025: 32.9; 2026: 32.6; 2036: 32.4; memorandum: 32.5. ### Sensitivity analysis and stress tests (selected results) - Table 2 baseline PV of debt‑to‑GDP ratio (percent): 2016: 82; 2017: 71; 2018: 63; 2019: 56; 2020: 50; 2021: 45; 2026: 40; 2036: 30. - Alternative scenarios and bound tests show marked deterioration under shocks: - A1 (historical averages 2016–2036) PV debt‑to‑GDP: 2016: 82; 2026: 22; 2036: 6. - A2 (new public sector loans on less favorable terms): 2016: 82; 2026: 42; 2036: 35. - B6 (one‑time 30 percent nominal depreciation in 2017): PV debt‑to‑GDP 2017: 96; 2026: 54; 2036: 41. - PV of debt‑to‑exports ratio baseline (selected): 2016: 1322; 2017: 1204; 2018: 1163; 2026: 995; 2036: 684. - B2 (export value growth shock) can push PV of debt‑to‑exports to very high levels (e.g., 2017: 1940; 2018: 2883). - PV of debt‑to‑revenue ratio baseline (selected): 2016: 868; 2017: 758; 2018: 687; 2026: 512; 2036: 390. - Under shocks, values can rise significantly (e.g., B3 US dollar GDP deflator shock: 2017: 894; 2018: 927). - Debt service‑to‑revenue and debt service‑to‑exports ratios show vulnerability to shocks; baseline debt service‑to‑revenue (percent): 2016: 34; selected projection patterns indicate large increases under stress scenarios. ### Public sector debt framework and indicators (selected) - Public sector debt (percent of GDP): 2013: 89.9; 2014: 76.8; 2015: 72.9; 2016: 62.8; 2017: 56.7; 2018: 52.8; 2019: 49.5; 2020: 46.6; 2021: 44.4; 2016–21 average: 46.3; 2026: 46.8. - Of which: foreign‑currency denominated (percent of GDP): 2013: 79.3; 2014: 66.1; 2015: 59.9; 2016: 53.5; 2017: 47.5; 2018: 43.4; 2019: 39.8; 2020: 36.4; 2021: 33.5; 2026: 32.5; 2036: 28.0. - Change in public sector debt (percent of GDP): 2013: -4.4; 2014: -13.0; 2015: -3.9; 2016: -10.1; 2017: -6.1; 2018: -3.9; 2019: -3.2; 2020: -2.9; 2021: -2.2; 2016–21 average: 0.4; 2026: -0.2. - Identified debt‑creating flows (percent of GDP): 2013: -6.7; 2014: -16.7; 2015: -10.1; 2016: -8.4; 2017: -8.0; 2018: -5.7; 2019: -4.2; 2020: -3.6; 2021: -2.7; 2016–21 average: -0.1; 2026: -1.0. - Primary deficit (percent of GDP) and components (selected): primary deficit series and revenue and grants: - Revenue and grants (percent of GDP): 2013: 11.0; 2014: 12.0; 2015: 11.0; 2016: 9.8; 2017: 9.6; 2018: 9.4; 2019: 9.0; 2020: 8.6; 2021: 8.2; 2016–21 average: 7.8. - Primary (noninterest) expenditure (percent of GDP): 2013: 10.4; 2014: 10.4; 2015: 10.3; 2016: 9.6; 2017: 9.8; 2018: 9.7; 2019: 10.1; 2020: 10.2; 2021: 10.2; 2016–21 average: 10.1. - Automatic debt dynamics and contributions: - Automatic debt dynamics (percent of GDP): 2013: -6.1; 2014: -15.1; 2015: -9.3; 2016: -8.2; 2017: -8.2; 2018: -5.9; 2019: -5.3; 2020: -5.2; 2021: -4.7; 2016–21 average: -2.3. - Contribution from interest rate/growth differential (percent of GDP): 2013: -23.9; 2014: -18.2; 2015: -10.5; 2016: -8.2; 2017: -8.2; 2018: -5.9; 2019: -5.3; 2020: -5.2; 2021: -4.7; 2016–21 average: -5.4; 2026: -5.2. - Contribution from average real interest rate (percent of GDP): 2013: -19.1; 2014: -16.8; 2015: -6.9; 2016: -6.0; 2017: -6.1; 2018: -4.0; 2019: -3.5; 2020: -3.5; 2021: -3.1; 2016–21 average: -3.9; 2026: -3.7. - Contribution from real GDP growth (percent of GDP): 2013: -4.7; 2014: -1.4; 2015: -3.6; 2016: -2.2; 2017: -2.1; 2018: -1.9; 2019: -1.8; 2020: -1.7; 2021: -1.6; 2016–21 average: -1.5; 2026: -1.6. - PV of public sector debt (percent of GDP, selected): 2016: 106.2; 2017: 91.0; 2018: 79.8; 2019: 72.3; 2020: 66.1; 2021: 60.6; 2026: 56.2; 2036: 53.6; later entry: 49.2. - Gross financing need (percent of GDP): 2013: 5.3; 2014: 4.8; 2015: 4.1; 2016: 3.8; 2017: 3.5; 2018: 3.3; 2019: 4.0; 2020: 4.3; 2021: 4.7; 2016–21 average: 5.2; 2026: 5.6. - Debt service‑to‑revenue and grants ratio (in percent): 2013: 46.0; 2014: 47.0; 2015: 36.2; 2016: 29.2; 2017: 25.6; 2018: 23.8; 2019: 23.6; 2020: 22.6; 2021: 22.1; 2016–21 average: 23.4; 2026: 30.3. ### Stress scenarios for public debt (selected entries from Table 4) - PV of debt‑to‑GDP ratio (baseline and scenarios, selected years): - Baseline (percent): 2016: 91; 2017: 80; 2018: 72; 2019: 66; 2020: 61; 2021: 56; 2026: 54; 2036: 49. - A1 (real GDP growth and primary balance at historical averages): 2016: 91; 2026: 48; 2036: 37. - B4 (one‑time 30 percent real depreciation in 2017): 2016: 91; 2017: 110; 2018: 109; 2019: 98; 2026: 74; 2036: 63. - Debt service‑to‑revenue ratio (baseline and scenarios, selected years): - Baseline (percent): 2016: 29; 2017: 26; 2018: 24; 2019: 23; 2020: 22; 2021: 23; 2026: 30; 2036: 30. - B4 (one‑time 30 percent real depreciation in 2017) shows higher peaks (e.g., 2017: 41). ### Authorities' statement (September 7, 2016) - The Sudanese authorities: - Appreciate continued engagement with the Fund and thank Staff for constructive discussions during the Article IV mission in Khartoum. - Broadly concur with the analysis of the challenges facing Sudan and agree with the assessment and conclusions of the Staff report. - Background and policy context (authorities' points, selected): - Sudan is well‑endowed with natural resources and has maintained reasonable GDP growth rates, exceeding 3 percent post secession of South Sudan. - Structural weaknesses, limited market penetration, US imposed economic sanctions, internal conflicts, and debt overhang have limited economic growth. - Separation from the South created huge financing needs and led to internal and external imbalances. - Authorities adopted a successor five‑year (2015–2019) Program for Economic Reform and prepared the 2016–2020 Poverty Reduction Strategy (PRS). - Sanctions and loss of correspondent banking relationships have reduced capacity to attract FDI, affected remittances, export receipts, and import financing, and increased transaction costs. - Positive political developments include administrative referendum in Darfur (April 2016) and a comprehensive road map for peace signed on August 8, 2016 in Addis Ababa, which the authorities view as laying a foundation for reprioritizing resources from war to development. - Recent economic developments (start of paragraph): Economic growth slowed to 3.5 percent in 2014 before rebounding to 4.9 percent in (text continues). *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 2015. The recovery was supported by better than expected performance in agriculture. ### _cr16324 - 2015. The recovery was supported by better than expected performance in agriculture. ### Macroeconomic performance and outlook - Inflation reduced from 36.9 percent in 2014 to 17. 3 percent in 2015 due to authorities’ stabilization policies. - Central bank efforts to contain growth in reserve money dampened inflationary pressures; inflation is expected to average 13 percent in 2016, remaining within the authorities’ target. - External sector: - Slump in oil and commodity prices led to deterioration of the current account as commodity other export earnings declined significantly. - Higher import transactions costs contributed to widening of the current account. - External support from Gulf States helped cushion erosion of international reserves which contracted to 1.4 months of import cover. - Fiscal outturn and projection: - Budget targeted a primary deficit of 1.6 percent of GDP. - Deficit is expected to reach 1.9 percent of GDP for 2016 due to implementation of the Darfur referendum. - Downside risks to growth in 2016: low commodity prices, sanctions, and recent floods. ### Fiscal policy - Authorities aim to maintain fiscal restraint while preserving social spending amid large financing needs driven by: - Significant fall in oil prices. - Considerable revenue gaps created by the secession of South Sudan. - Limited access to external budgetary and balance of payments support. - Fiscal consolidation goal: reduce the deficit to 0.4 percent by 2019. - Consolidation strategy: combine expenditure restraint, revenue mobilization, and enhanced public finance management. - Revenue measures: - Increase domestic revenues; enforce compliance; reduce tax exemptions. - Review taxation and royalties on extractive industries. - Review direct taxes including income and corporate taxes. - Review and harmonize tax codes under the economic reform program. - Expenditure measures: - Rationalize subsidies and strengthen the social safety net. - Implement gradual liberalization of wheat, hydrocarbons and electricity. - Public finance management: - Strengthening PFM; introduced an integrated financial management system and the Treasury Single Account (TSA) with Fund technical assistance. ### External debt and the Zero Option - Sudan remains in debt distress despite significant progress on technical prerequisites under the Fund SMPs. - No positive response from the international community on debt relief; prospects have not improved significantly. - Two-year ‘Zero Option Agreement’—seen as a means to strengthen joint outreach between Sudan and South Sudan towards debt relief—expired in 2014; the extension is due to expire in October 2016 without favorable prospects. - Authorities face a dilemma: - Lack of progress has dampened political appetite for further extension. - Without the Zero Option the debt has to be apportioned, which will be politically challenging. - Authorities recognize developments in South Sudan (rising conflicts and instability) and may be open to considering further extension of the ‘Zero Option’ which expires in October 2016 with the anticipation of a positive outcome on debt relief. ### Monetary policy - Authorities agree on the need for tighter fiscal and monetary policy to anchor macroeconomic stability and reduce financing gaps given uncertain and short-term financing. - Monetary policy will continue to focus on containing reserve money growth; instruments for effective liquidity management are being developed. - Consolidation efforts will focus on reducing the government deficit and minimizing the central bank’s quasi fiscal activities. - Efforts to strengthen the AML/CFT framework have been made; successful implementation of key recommendations of the MENAFAFT led to Sudan’s removed from the ‘gray list’ of countries requiring regular follow-up to biennial updates. ### Exchange rate policy - Large external imbalances and loss of correspondent banking relations created instability in the exchange rate and led to foreign exchange shortages, exerting significant pressures on the exchange rate. - Differential between the official and parallel rates has widened significantly. - Authorities recognize that distortions in the foreign exchange market are weakening the credibility of the exchange rate policy and underline the need to reform the foreign exchange regime. - Authorities acknowledge rationale for harmonizing the exchange rate and introducing greater exchange rate flexibility but prefer a gradual approach to minimize destabilizing the financial sector and the impact on the vulnerable population. ### Structural reforms - Authorities focus on addressing key structural impediments to encourage private sector activity and attract FDI. - Investment law under review and should be issued end 2016; new law focuses on removing legal and administrative obstacles to private sector investment and growth. - Continued investment in infrastructure, particularly roads, ports and electricity. - Strengthening efforts to improve human capital development by designing programs to remove disparities and strengthen provision of education and health services. - Removal of sanctions would benefit the economy significantly; authorities are taking measures aimed at improving the business environment. ### Conclusion - Authorities will continue efforts to attain peace and stability by enhancing progress toward resolving internal conflicts. - Remain committed to cooperating with the Fund on policies and have made progress in strengthening economic policies and institutions benefiting from Fund support. - Will continue efforts to normalize relations with the US and with creditors to garner support for removal of sanctions and possibly debt relief. *Source: _cr16324 - 2015. The recovery was supported by better than expected performance in agriculture.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16324.pdf_