Sudan's macroeconomic adjustment hit by structural weaknesses: IMF

The Executive Board of the International Monetary Fund (IMF) today concluded the Article IV consultation with Sudan. IMF said Sudan's economy has yet to recover from the shock of South Sudan's secession three years ago, which took away three-quarters of oil production, half of its fiscal revenues, and two-thirds of its international payments capacity. In March 2014, Sudan reached understandings with IMF staff on a staff-monitored program (SMP) for 2014. South Sudan secession and aims to restore macroeconomic stability, strengthen social safety nets, and create condition for sustainable and inclusive growth. Macroeconomic adjustment has been complicated by structural weaknesses, a heavy debt burden, external sanctions, and volatile domestic and regional political environments, which affect confidence and investment.

Economic performance in 2014 has been mixed. Growth remains relatively low, and inflation high. The budget deficit has narrowed compared with 2013 on account of improved revenue collection and tight expenditure control. Growth in monetary aggregates has slowed significantly from the end of 2013. Following a large appreciation of the parallel market exchange rate and a small devaluation of the official exchange rate, the gap between those rates has declined considerably. The current account deficit is estimated to have narrowed to 6.5 percent of GDP on account of continued fiscal consolidation.

Implementation of the authorities' adjustment program should help restore macroeconomic stability and improve growth prospects over the medium term. Driven by agriculture, minerals, and oil, growth is expected to accelerate gradually to about 4.7 percent in 2019. With prudent macroeconomic policies, inflation is expected to fall to single digits by 2017. The external current account deficit is expected to gradually narrow toward sustainable levels. However, the external debt overhang and the large arrears, along with protracted political transition and unsettled regional civil conflicts will continue to hinder access to external financing and weigh on growth prospects.

Resolving Sudan's unsustainable external debt is of paramount importance for the successful adjustment to the impact of South Sudan's secession, implementation of the government's poverty reduction policies, and for supporting inclusive growth. The key pillar of the requirements for debt relief is normalization of relations with external creditors, including the Fund, other multilateral institutions, and bilateral creditors. In this regard, it is critical for the authorities to reach out to their external creditors, including under the framework of the Joint Approach with South Sudan and the African Union High-level Implementation Panel. The recent agreement between the governments of Sudan and South Sudan to extend the "zero option" for another two years till October 2016 is a welcome step2.

IMF Executive Directors noted a gradual improvement in Sudan's macroeconomic performance despite difficult economic and social conditions related to South Sudan's secession and political insecurity. Directors welcomed Sudan's continued engagement with the Fund under the staff- monitored program ( SMP). They encouraged the authorities to sustain the reform momentum in order to reduce macroeconomic imbalances, fos- ter resilience, and promote broadbased, inclusive growth.

Directors welcomed the improved fiscal performance in the first half of 2014, which helped create fiscal space for much-needed social and investment outlays. They called for a consolidation of recent gains, through a further streamlining of low-priority expenditures and enhanced revenue mobilization, and recommended cuts in tax exemptions and reform of gold-related taxation, as well as a reduction in fuel subsidies. Directors cautioned that the decline in subsidies should also be accompanied by reinforced social safety nets, to help safeguard the poor and vulnerable and enhance the success of the economic reforms. They noted that an integrated public financial management system would be critical to modernize the budgetary framework and improve fiscal governance.

IMF Directors called for a tightening of the monetary stance and strengthening of the monetary policy framework, to contain high inflation. They encouraged continued use of reserve money as the nominal anchor, and advised that monetization of the budget deficit and unsterilized gold purchases be curtailed.