IMF Survey: South Sudan Faces Hurdles as World's Newest Country

IMF News, July 18, 2011

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Since the Comprehensive Peace Agreement in 2005, South Sudan has set out to build an economy almost from scratch, creating economic institutions and working toward establishing an environment conducive to growth and stability.
IMF Survey online — July 18, 2011.

Population of about 8 million.
Land area nearly as large as France.
Only 100 kilometers of paved roads.
One of least developed nations in the world; half the population living below the poverty line.
Youth literacy rate: 37 percent (half the sub-Saharan Africa average).
Primary school enrollment: about half of children enroll; primary school completion: only 10 percent.
One-third of the population is under the age of 10.
Electricity generation capacity increasing, but blackouts are frequent; heavy business use of generators.
No airport meeting international civil aviation standards; river channels not made navigable.

Large livestock, fishery, and forestry resources; adequate rainfall, fertile land, and available water suggest potential for labor-intensive agricultural exports.
Oil currently accounts for 98 percent of the government’s revenue.
Developing agriculture could reduce dependence on oil and enable investment in social and infrastructure development and savings for the future.

Most contentious negotiation topic: division of oil resources (majority of oil fields in the south; pipelines flow north to Port Sudan on the Red Sea).
Three key issues under African Union negotiations:
- Oil sharing:
- The 50-50 split of oil revenues was scheduled to end at independence; future revenue division remains open.
- South Sudan is expected to pay Sudan a transit fee for pipeline use; the fee amount has not been established.
- Debt:
- Tentative agreement: Sudan would take over all debt on the condition that creditors commit to debt relief within two years in the context of the IMF and World Bank’s Heavily Indebted Poor Country (HIPC) Initiative and that South Sudan help lobby in support of Sudan.
- If this fails, debt would be apportioned based on a formula yet to be determined.
- Currency:
- Parties have not agreed on the disposition of Sudanese pounds circulating in the South.
- South Sudan introduced a new currency on July 12; Sudan is also expected to introduce its own new currency.

Sudan may lose some 75 percent of its oil revenues.
Oil revenue constitutes more than half of government revenue and 90 percent of exports in Sudan.
Potential consequences include domestic and external imbalances and the need for a permanent adjustment at a time of limited external financing access.
Possible required policy responses for Sudan:
- Exercise fiscal restraint by streamlining nonpriority spending.
- Reduce fuel subsidies.
- Reduce tax exemptions.
- Enhance revenue administration.
- Allow greater exchange rate flexibility.
- Tighten monetary policy.
- Implement structural reforms in a timely manner.
Oil production in South Sudan’s fields is peaking now, implying export revenue decline over time unless extraction efficiency improves or new sources are found—both long-term propositions.
Need for transparent and effective budget processes, a robust legal framework, and a strengthened financial sector to enable private-sector–led growth.

South Sudan has approached the IMF for technical assistance to build capacity and institutions to manage its nascent economy, including assistance to the Bank of South Sudan to become a full-fledged central bank.
Areas of IMF technical assistance include:
- Designing, implementing, and monitoring sound macroeconomic policies.
- Developing a fiscal framework.
- Establishing the central bank and its core activities.
- Building statistical capacity.
- Putting in place the legislative framework for effective economic and financial management.
IMF intends to seek donor contributions to a special trust fund for IMF capacity building in South Sudan.
- Trust fund amount: $10.6 million for a period of just under four years.

South Sudan applied for IMF membership on April 15.
Membership application process:
- Application examined by the IMF’s Executive Board.
- Executive Board submits a report to the Board of Governors with recommendations in the form of a membership resolution covering quota amount, form of payment of the subscription, and other customary terms and conditions.
- After the Board of Governors adopts the membership resolution, the applicant country may become a member once it has taken the legal steps required under its law to sign the IMF's Articles of Agreement and fulfill IMF membership obligations.
The IMF currently has 187 member countries.

Source: IMF Survey: South Sudan Faces Hurdles as World's Newest Country (IMF Survey online, July 18, 2011).