Press Release No. 16/444

IMF Executive Board Concludes 2016 Article IV Consultation with Sudan

October 4, 2016

On September 7, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Sudan.

Sudan is a low-income fragile country facing significant domestic and international constraints and large macroeconomic imbalances despite efforts made toward macroeconomic stability and growth. Following the shock of the secession of South Sudan five years ago, policy adjustments helped to 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. Despite these efforts, however, large macroeconomic imbalances—triggered by the loss of three-quarters of oil exports—continue to constrain growth prospects, along with weak policies, internal conflicts, and U.S. sanctions. Domestic and international efforts to end internal conflicts have yet to bear fruit, and the humanitarian situation remains difficult. Sanctions and the withdrawal of correspondent bank relations weigh on trade, investment, and growth. Absence of progress toward debt relief limits access to official external financing.

While good harvests boosted growth to close to 5 percent in 2015, external imbalances widened due to low commodity export prices, expansionary policies, and insufficient exchange rate adjustment. The terms-of-trade shock widened the current account deficit to 6 percent of GDP in 2015, while the already low foreign exchange reserves dropped to 1½ month of imports despite external financial support. The parallel exchange rate continued to depreciate and the premium soared to 165 percent as the official rate remained virtually fixed. The budget deficit widened to 1.9 percent of GDP owing to shortfalls in oil revenue. Inflation, which had been contained to 12.6 percent at end-2015 (from 25.7 percent a year before), rose to 16.5 percent in July 2016.

The outlook is subject to significant downside risks. Low commodity export prices, absence of policy buffers, economic sanctions, the withdrawal of foreign correspondent banking relationships, and a weak business environment will continue to constrain economic activity. Consequently, growth is expected to remain modest at 3–3½ percent in 2016 and beyond. The fiscal framework faces risks due to low tax revenues and uncertain oil revenues. Large external financing gaps are likely to persist.

Sudan remains in debt distress and is eligible for debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. Large external debt and arrears hinder access to external financing and weigh heavily on development prospects. 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 authorities intend to continue to engage with international partners to secure support for debt relief and the lifting of sanctions, which would pave the way for foreign investment and financing for growth and poverty reduction. They are committed to strengthening cooperation with the IMF on policies and payments.

Executive Board Assessment [2]

Executive Directors welcomed the progress made toward macroeconomic stabilization and growth following South Sudan’s secession in 2011 and against the backdrop of a challenging external environment. Directors regretted, however, that large macroeconomic imbalances, exacerbated by low commodity export prices, continue to constrain growth and development prospects. They encouraged the authorities to accelerate and sustain broad‑based reforms to achieve macroeconomic stability, address vulnerabilities, and promote inclusive growth.

Directors stressed the importance of continued fiscal consolidation. They encouraged the authorities to contain spending on goods and services while protecting social spending, prioritizing capital spending, and accelerating ongoing revenue administration reforms. Directors considered that, given Sudan’s low tax revenues, stronger domestic revenue mobilization is essential to generate fiscal space for investment and social spending in the medium term, and to achieve pro‑growth fiscal consolidation.

Directors called for tightening monetary policy to keep inflation in check. They noted that this would require continued adherence to limits on central bank advances to the government, limiting quasi‑fiscal activities to levels consistent with monetary targets, and developing liquidity management instruments. Directors also called on the central bank to strengthen its capacity to mitigate financial stability risks. They welcomed Sudan’s removal from the Financial Action Task Force’s “gray list,” and called for continued strengthening of the AML/CFT framework.

Directors emphasized the need to adjust the exchange rate and move toward greater flexibility, with a view to improving competitiveness and significantly reducing the parallel market premium. They encouraged the authorities to prepare a timetable for the removal of foreign exchange restrictions and multiple currency practices as soon as possible.

Directors encouraged the authorities to advance structural policies to foster sustained and inclusive growth. They supported reforms to improve the business environment for the private sector, financial inclusion, and the quality of spending to support human capital. Directors called for expanding social safety nets and improving their targeting to reduce poverty, and welcomed initial preparations of a Poverty Reduction Strategy.

Directors recognized that garnering international support for debt relief is critical for Sudan’s economic development. Continued engagement with international partners to secure comprehensive support for debt relief would pave the way for foreign investment and financing for growth and poverty reduction. Directors called for minimizing non‑concessional borrowing and avoiding selective servicing of bilateral debt. They encouraged the extension of the “zero option” agreement with South Sudan before it expires in October 2016 and strengthening the joint outreach for debt relief by the two countries. Directors encouraged the authorities to continue to strengthen cooperation with the Fund on policies and payments. They advised the authorities to make regular payments to the Fund that are at least sufficient to cover Sudan’s obligations falling due and increase them in line with improvement in Sudan’s payment capacity.