Press Release No. 17/480

On November 29, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Sudan.

Economic conditions in Sudan have been challenging since the secession of South Sudan in 2011 and the loss of the bulk of oil production and exports, which have compounded the difficult external environment—including arrears and limited access to external financing, U.S. sanctions, and the withdrawal of correspondent bank relations. The authorities have implemented partial policy adjustments to help stabilize the economy and reestablish growth, most recently by allowing for greater exchange rate flexibility and reducing fuel subsidies. However, while these measures were helpful, they were insufficient to turn the tide toward sustained macroeconomic stability and broad-based growth.

External imbalances are moderating from previous high levels, but economic activity remains modest. The current account deficit (cash basis) is expected to decline by 3.25 percentage points to 2.75 percent of GDP in 2017, reflecting (i) the strong depreciation of the parallel exchange rate and the introduction in late 2016 of a commercial bank incentive rate close to the parallel rate for many formal transactions; (ii) fuel and electricity price hikes in November 2016, which helped curb domestic demand; (iii) quantitative import restrictions adopted in 2016; and (iv) improved the terms of trade. GDP grew at an estimated 3.5 percent in 2016, led by private and public consumption and a positive contribution from net exports. Data for the first half of 2017 indicate weaker real domestic demand, partly offset by a strengthening contribution from net exports (notably due to lower imports), and 3.25 percent growth is projected for 2017.

Loose policy settings are fueling inflationary pressures. The on-budget fiscal deficit is expected to widen from 1.6 percent of GDP in 2016 to 1.8 percent of GDP in 2017. This is slightly better than the budget target (2 percent of GDP), as revenue shortfalls (largely oil related) have been more than offset by expenditure restraint, notably in goods and services, capital expenditure, and transfers to state governments. Access to foreign currency at the overvalued official exchange rate for socially sensitive imports leads to quasi-fiscal activities that—result in continued monetization, causing monetary aggregates to expand rapidly and increasing inflationary pressures.

The recent revocation of U.S. sanctions would amplify the benefits that would arise from decisive implementation of ambitious reforms to support inclusive growth and macro stability. Associated upside risks are broadly balanced by downside risks stemming from the continuation of fiscal and monetary policy settings that are incompatible with macro stability, alongside risks to external financing that has declined from earlier peaks.

Sudan remains in debt distress and is eligible for debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. Public and external debt remain high and unsustainable, and most external debt are in arrears. Sudan’s arrears to the Fund declined to SDR 966.3 million at end-September 2017. The authorities plan to continue to engage with external creditors to secure comprehensive support for debt relief, and continue to strengthen their cooperation with the Fund on policies and payments.

Executive Board Assessment [2]

Executive Directors noted the challenging economic conditions in Sudan since the secession of South Sudan in 2011 and the associated loss of the bulk of oil exports. Directors welcomed the authorities’ policy adjustments, but noted that the measures have been insufficient to secure sustained macroeconomic stability and broad‑based growth, particularly given the difficult external environment with limited external financing and the withdrawal of correspondent bank relations. Going forward, they underscored the need for reforms to achieve fiscal sustainability, reduce inflation, and foster inclusive growth. Directors emphasized that the permanent revocation of U.S. sanctions on trade and financial flows presents a unique opportunity for decisive action to strengthen the outlook and boost the payoff from reforms.

Directors agreed that exchange rate unification is critical for eliminating the distortions that hamper investment and growth. Many Directors saw merit in an upfront unification of exchange rates to eliminate multiple currency practices and to bolster the credibility of the authorities' reform agenda. At the same time, some Directors recognized that a gradual approach could mitigate the risks of potential exchange rate overshooting given minimal international reserves, and the adverse social impact of adjustment. Directors encouraged the authorities to continue a close dialogue with the staff on the appropriate timing and pace of adjustment, while emphasizing that successful exchange rate unification will also require appropriate supportive macroeconomic and structural policies.

Directors stressed that fiscal consolidation is needed to entrench macroeconomic stability and create space for priority public spending. While assessing import duty and oil revenues at a market‑determined exchange rate could generate a revenue windfall, additional measures are needed to reduce the fiscal deficit. Strengthened revenue mobilization should be accompanied by streamlined tax exemptions, the phasing out of costly fuel and wheat subsidies, and greater use of targeted cash transfers.

Directors called for tighter monetary policy to keep inflation in check. They noted that limits on central bank monetization of fiscal deficits should be reinforced to contain inflationary pressures. Until the building blocks to directly target inflation are in place, a reserve money targeting framework would be helpful to anchor monetary policy under a flexible exchange rate regime. Directors encouraged the central bank to continue upgrading its capacity to supervise and mitigate financial stability risks. They also welcomed Sudan’s progress in addressing AML/CFT deficiencies, and called for continued efforts to strengthen the framework.

Directors encouraged the authorities to modernize the business climate and legal framework, and to press ahead with anti‑corruption measures to support investment and growth.

Directors recognized that Sudan remains in debt distress and is eligible for debt relief under the HIPC Initiative. They encouraged the authorities to continue to engage with international partners to secure comprehensive support for debt relief, and to strengthen their cooperation with the Fund on policies and payments, including by making regular payments to the Fund at least sufficient to cover obligations falling due, and increasing them as Sudan's payment capacity improves. Directors noted the authorities’ interest in a new Staff Monitored Program, which is a pre‑condition to reach the HIPC decision point.