IMF Executive Board Concludes Article IV Consultation
June 4, 2019
On May 29, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of South Sudan.
Since December 2013, South Sudan has been hit hard by a civil war and falling oil prices. The conflict along ethnic lines left hundreds of thousands dead, with severe social and economic consequences. A relapse into war in mid-2016 spread insecurity across the country and severely affected economic activities and exacerbated the humanitarian crisis and food insecurity. About 40 percent of the population are either internally displaced or live as refugees in neighboring countries and more than half of the population currently requires humanitarian assistance.
South Sudan is in a deep economic crisis. Economic conditions have deteriorated rapidly since the beginning of the civil conflict in late 2013. Real GDP is estimated to have declined by 2.4 percent in 2017/18 adding to a cumulated decline of about 24 percent in the last three years. Overall, real disposable income (adjusted for terms of trade) is estimated to have declined by about 70 percent since independence in 2011, contributing to an increase in poverty headcount ratio from 50 percent in 2012 to about 82 percent in 2016.
The peace agreement signed in September 2018 has improved the prospects for lasting peace and economic recovery. The cessation of hostilities last year has already enabled the reopening of some damaged oil wells, which pushed up daily oil production (export) by about 20 percent in February 2019. Inflation has gradually declined to about 40 percent in December 2018 from a peak of 550 percent in September 2016, while the exchange rate depreciated substantially in the last 18 months.
Fiscal policy has been weakened by the loss of fiscal discipline,
deteriorating public financial management, and contracting of
non-transparent oil advances, which have increased corruption
vulnerabilities. Shortfalls in revenue translated into deep cuts in
expenditure for other budget items, including wages and operating
expenses, which contained the cash deficit to an estimated
2.8 percent of GDP in 2017/18. With cash rationing, arrears grew, and
civil servants’ salaries lagged by at least 3 months. In the first half
of 2018/19, the fiscal path was similar, running essentially a balanced
cash deficit and maintaining 3–4 months of salary arrears.
The banking sector is yet to recover from the adverse effects of the civil conflict, high inflation and strong currency depreciation. Consequently, many domestic banks are heavily undercapitalized and face rising non-performing loans.
The medium-term outlook faces challenges and significant downside risks. Without peace and security, the outlook remains extremely difficult, with continuing threats to macroeconomic and financial stability, declining income, and deteriorating humanitarian conditions. A sustainable medium-term outlook requires sustained improvements in the political and security situation, robust economic adjustment and reforms, budgetary discipline, and enhanced oil revenue management. Under these assumptions, the fiscal deficit is projected to average 1–2 percent of GDP in the coming years assuming a robust recovery in oil production and higher capital spending, while annual GDP growth could increase to about 6 percent a year, reflecting a recovery in oil production and in non-oil GDP.
Executive Board Assessment [2]
Executive Directors commended the authorities for signing the revitalized peace agreement and stressed that achieving lasting peace will be critical to restoring macroeconomic stability and improving the population’s living conditions. Directors observed, however, that the country is facing a deep economic and humanitarian crisis, and underscored the importance of decisively implementing key reforms to restore macroeconomic stability, strengthen economic buffers, improve governance, and rebuild credibility with the international community.
Directors welcomed the removal of domestic fuel subsidies, liberalization of the fuel market, and the authorities’ efforts to reverse fiscal dominance by reducing central bank budgetary financing, which contributed to lowering inflation. These efforts notwithstanding, Directors concurred on the need to restore fiscal discipline and strengthen oil revenue and public financial management. They urged the authorities to implement the planned measures to discontinue contracting oil advances and to arrest off‑budget transactions. Directors also encouraged non‑oil revenue mobilization to underpin the needed fiscal consolidation over the medium‑term while creating space for increased spending in education, health, infrastructure, and rural development. In this regard, they recommended to fast‑track the operationalization of the newly‑created National Revenue Authority.
Directors welcomed the authorities' intention to pursue a tight monetary policy, including by abstaining from providing credit to government, with the objectives to continue to lower inflation, gradually replenish international reserves, and remove distortions in the foreign exchange market. In this regard, Directors called for actions to liberalize the foreign exchange market and abolish the surrender requirements. They also concurred that the exchange rate should be market‑determined, which would help address external imbalances and improve resilience to shocks.
Directors welcomed the Bank of South Sudan’s commitment to strengthen financial stability, including by adopting a sound banking resolution framework and taking actions to address undercapitalization of banks that do not meet minimum capital requirements. Efforts to strengthen the AML/CFT framework were also encouraged.
Directors noted that additional reforms, including to improve governance, will be needed to foster more diverse, inclusive growth. They expressed concern about the lack of transparency of Nilepet’s financial operations and called for a transparent audit to ensure that its planned investments in oil production and related activities are cost‑effective and growth‑enhancing. Directors stressed the importance of auditing the current stock of domestic arrears and developing a credible clearance strategy.
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing up can be found here: http://0-www-imf-org.library.svsu.edu/external/np/sec/misc/qualifiers.htm .
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