Public Information Notice No. 12/114

Public Information Notice: IMF Executive Board Concludes 2012 Article IV Consultation with Sudan

September 27, 2012

On September 21, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Sudan.¹

Background

The secession of South Sudan on July 9, 2011 has translated for Sudan into the loss of a sizeable portion of its economic potential and a daunting challenge of adjusting to a permanent fiscal and external shock.

Sudan’s economic conditions deteriorated in 2011, with nonoil real GDP growth decelerating to 3.4 percent and inflation picking up at about 18.5 percent. Delays in responding to the fiscal shock resulted in an overall fiscal deficit of 1.3 percent of GDP, despite a low execution rate of the investment budget. The deficit was mostly financed by the banking system, which resulted in reserve money growing at 28 percent. Credit to the economy was subdued, growing only about 8 percent.

External developments led to a contraction of the balance of payments in 2011. Exports declined by an estimated 13 percent reflecting the drop in the second half of 2011 of oil exports, which was only partially offset by the increase in gold exports. Imports also declined by an estimated 7.5 percent. This restructuring of the balance of payments resulted in a current account deficit of ½ percent of GDP. In order to stabilize the domestic currency and stop the draw-down on the country’s foreign exchange reserves, the authorities introduced various administrative restrictions. These measures were, however, unsuccessful in preventing the depreciation of the exchange rate in the curb market.

Economic conditions continued to deteriorate in the first half of 2012. The fiscal position weakened in the first half as revenue under-performed by some 30 percent, reflecting the lack of agreement with South Sudan on oil transit fees, compared with an execution rate of 95 percent for spending. Both reserve money and broad money grew by 24 percent, much higher than in the first half of 2011. By end-July, 12-month inflation exceeded 40 percent. Pressures on the Sudanese pound intensified, pushing the premium on the US dollar over 100 percent by end-June 2012.

After several months of hesitation, the authorities adopted in June 2012 a reform package that included a step devaluation of the official exchange rate (66 percent), an increase in taxes, a bold reduction in energy subsidies, cuts in non-priority spending and an expansion of the social safety nets. These measures are a positive step towards restoring macroeconomic stability and addressing Sudan’s macroeconomic imbalances. However, reaching fiscal sustainability and enhancing growth potential will require a determined continuation of the reform momentum. Stepping up structural reforms will also help address the underlying structural challenges facing the economy. Key reforms include: (i) a comprehensive civil service reform, (ii) banking sector restructuring, (iii) ambitious privatization program, and (iv) improving governance.

Executive Board Assessment

Executive Directors noted Sudan’s daunting policy challenges, particularly the need to restore macroeconomic stability and growth prospects after the secession of South Sudan. They commended the authorities’ commitment to prudent policies, and welcomed the adoption of a comprehensive reform program to tackle these challenges. Directors agreed that a determined implementation of the policy agenda, supported by adequate resource mobilization at home and abroad, will be essential to improve the economic outlook for the medium term and beyond.

Directors considered that fiscal adjustment grounded on a sound medium-term framework is central to macroeconomic stabilization, and welcomed the recently-announced measures to enhance revenue collection and rationalize expenditure. They recommended a phase-out of remaining fuel subsidies in parallel with a strengthening of the social safety net, greater public sector wage restraint, and better public expenditure management. Efforts should also focus on widening the tax base, improving tax administration, and streamlining the taxation of extractive industries. In addition, reforms of state finances remain necessary to put the overall fiscal position on a sounder footing.

Against a backdrop of high inflation and exchange rate pressures, Directors saw merit in further monetary tightening. They encouraged the central bank to refrain from deficit monetization and step up reforms to enhance the effectiveness of monetary policy. In this regard, Directors called for a switch to a reserve money anchor, improved coordination between the monetary and fiscal authorities, and greater independence for the Bank of Sudan. Development of the interbank market and auctions of central bank securities could also help promote intermediation and absorb excess bank liquidity. Directors invited the authorities to discontinue central bank gold-trading operations, unify the official foreign exchange rates, and pursue greater exchange rate flexibility.

Welcoming the adoption of the Interim Poverty Reduction and Growth Strategy, Directors stressed the importance of reforms to improve the business climate and boost private-sector-led growth. In this regard, priorities include further economic liberalization and diversification, restructuring or privatization of public enterprises, and civil service and governance reforms. They also agreed that a comprehensive assessment of the banking system should be undertaken with a view to enhancing its development, efficiency, and resilience.

Directors called on the authorities to further strengthen their cooperation with the Fund on policies and payments, and supported continued Fund engagement with Sudan. They encouraged the authorities to continue making payments to the Fund, to make them on a regular basis, and to increase them as their payment capacity improves. Noting that Sudan’s outstanding arrears constrain its access to external financing, Directors encouraged the authorities to step up their dialogue with creditors and donors to garner support for debt relief. A few Directors called for exceptional efforts by the international community, including the Fund, to support Sudan in this endeavor.