Press Release No. 17/97

On March 15, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of South Sudan.

South Sudan faces enormous economic and humanitarian challenges in the aftermath of internal conflict and external shocks. The relapse into violence a few months after forming a transitional government of national unity in April 2016 compounded the humanitarian crisis and derailed the peace process. The conflict has contributed to the deaths of thousands and led to severe food insecurity for nearly half of the population, as well as a substantial flight of refugees to neighboring countries. Moreover, famine was recently declared in some areas of the country.

Economic conditions have deteriorated rapidly since the beginning of the civil conflict in late 2013. Real GDP growth declined by nearly 20 percent in the two years through 2015/16, and annual inflation rose to about 550 percent in September 2016 before declining to 370 percent in January 2017. The conflict and the collapse of oil prices led to a decline in oil production and export proceeds. Falling government revenue and rising security-related spending caused the fiscal deficit to rise rapidly, which exacerbated the economic instability. Monetization of the fiscal deficit led to strong money growth, high inflation and precipitous exchange rate depreciation. Since December 2015, the South Sudanese pound has lost more than 95 percent of its value against the U.S. dollar.

The authorities shifted economic policy course in late 2016 with the passing of a new budget for 2016/17, which incorporates bold fiscal measures that could go a long way to restore macroeconomic stability and strengthen public financial management. Preliminary information indicates a substantial reduction in the fiscal deficit for the first half of the fiscal year and significant moderation in money growth.

The medium-term outlook faces challenges and significant downside risks. Without significant progress toward peace and economic stabilization, the economic trajectory for South Sudan is highly unstable, and the country risks falling into a spiraling trap of deteriorating economic performance and worsening security conditions with continued high humanitarian costs. A sustainable medium-term outlook is predicated on achieving progress on normalization of the political and security situation, sustained economic adjustment and reforms, and renewed access to external financing. Assuming that peace is achieved, the fiscal deficit could fall to 2–3 percent of GDP in the coming years consistent with a return to single digit inflation and exchange rate stability. In the next five years, annual GDP growth could increase to 5-6 percent, reflecting a recovery in oil production and in non-oil GDP.

Executive Board Assessment [2]

Directors noted the daunting humanitarian, economic and political challenges facing South Sudan in the wake of renewed internal conflict and subdued oil prices. In this context, Directors emphasized the need for a credible path towards lasting peace and decisive economic stabilization without which the country risks falling into a spiral of deteriorating economic performance and worsening security conditions. To alleviate the continued devastating humanitarian costs of the conflict, Directors called on the authorities to ensure that aid organizations have access to all areas of the country to deliver assistance.

Directors agreed that restoring fiscal discipline is necessary to reduce money expansion, help reduce inflation and restore external stability. They welcomed the adoption of the 2016/17 budget and accompanying policy measures, including a decision to stop monetizing the deficit and improve public financial management. Directors urged the authorities to implement the adopted revenue measures and spending cuts, and to take additional measures to reduce domestic financing to a level consistent with macroeconomic stability. Directors emphasized the need to improve expenditure management and prevent domestic arrears, primarily through enforcement of monthly budget allocations, strict control of extra-budgetary expenditures, and setting up of a treasury single account. They also stressed the need to minimize revenue leakages by implementing domestic oil market reforms, including removal of fuel subsidies, transparent transfer of government crude oil receipts to the budget, and liberalization of the fuel market.

Directors underlined the need to tighten monetary policy to reduce inflation and gradually replenish international reserves, and to enforce the statutory minimum reserve requirements and minimum capital for all banks to reduce vulnerabilities in the banking system. They acknowledged the progress achieved in the liberalization of the exchange rate regime and elimination of several exchange restrictions and multiple currency practices.

For the medium term, Directors underscored that policies should be focused on reprioritizing budgetary spending and rebuilding international reserves. They stressed that budgetary spending should be shifted from security-related outlays towards public services and infrastructure investment. Given capacity constraints, Directors encouraged the authorities to seek assistance to develop a coherent and well prioritized public investment program. They also encouraged the authorities to seek donor support for a disarmament, demobilization and reintegration program.

Directors noted that South Sudan is in debt distress despite moderate levels of external debt due to the combined impact of a civil war, decline in oil prices and high levels of fiscal spending. They underscored that steadfast implementation of announced adjustment policies and a return to peace would improve the debt outlook and allow for a gradual resumption of external financing.