Public Information Notice No. 98/29

Press Information Notice: IMF Concludes Article IV Consultation with Sudan

April 13, 1998

The IMF Executive Board on February 27, 1998, concluded the Article IV consultation¹ with Sudan.

Background

In February 1997, Sudan reached agreement with IMF staff on an adjustment program for the period March–December 1997 to be monitored by the staff, which aimed at: reducing the inflation rate; reducing the external current account and fiscal deficits; making significant progress toward exchange rate unification; and initiating reforms in the areas of taxation, monetary operations and exchange and trade systems.

The tightening and rebalancing of fiscal, monetary, and external policies during 1997 led to marked progress in macroeconomic stabilization. Real GDP growth is estimated to have reached 5.5 percent in 1997, while the inflation rate declined at end-1997 to 32 percent and further to 23 percent at end-February 1998 down sharply from 114 percent at end-1996. The free market exchange rate remained broadly stable during 1997, and adjustments to the official rate reduced the spread with the market rate from 23 percent at end-1996 to 6.7 percent at end-1997. While the balance of payments was somewhat weaker than in 1996 owing to a deterioration in the terms of trade, net foreign assets of the Bank of Sudan improved due to payments to the IMF and accumulation of arrears to other external creditors. Sudan paid SDR 43.8 million to the IMF, which reduced its arrears to the IMF by SDR 16 million.

The overall fiscal deficit was reduced sharply from 3.4 percent of GDP in 1996 to 0.8 percent of GDP in 1997, through revenue efforts (0.6 percent of GDP) and substantial expenditure restraint (2 percent of GDP). The improved revenue performance over the previous year reflected measures adopted in early 1997, including the application of the official dealer exchange rate for customs valuation (rather than the more appreciated customs exchange rate), realistic pricing policies for petroleum products after elimination of subsidies, curtailment of tax exemptions, and improved tax administration. The strong fiscal adjustment allowed for a substantial reduction of government borrowing from the Bank of Sudan, which declined to 0.5 percent of GDP from 3.2 percent of GDP in 1996, contributing to a rapid deceleration in monetary expansion to 37 percent (compared with 65 percent in the preceding year). Furthermore, increases in the Bank of Sudan cost of borrowing reference rates led to a substantial rise in real lending rates and real rates of return on deposits for investment purposes reached positive levels in 1997, following several years of substantially negative rates.

In addition, substantial progress has been achieved in the design and initial implementation of structural reforms in the fiscal, monetary, and exchange system areas. Preparations for the reform of the indirect tax system were completed and preparatory steps for the introduction of the value-added tax (VAT) were initiated. Progress was also made in improving budget management and monitoring. Important reforms were implemented to improve the quality of banking supervision, including through strengthening internal controls in banks, and initiating accounting reforms with a view to standardizing banks’ financial statements. Non-debt instruments of market-based monetary management, consistent with Islamic banking principles, were developed and are expected to be used in the conduct of monetary policy during 1998. Also, measures were taken in 1997 to improve the efficiency of the foreign exchange market and to prepare for a phasing-in of a transparent, unified, and market-based exchange regime including the reduction of export surrender requirements to the Bank of Sudan and an increased role for the private sector in imports of petroleum products.

The government has formulated a medium-term reform program covering 1998–2003 which aims at achieving an average real GDP growth of 6 percent a year, reducing inflation to 5 percent by 2000, and improving Sudan’s external accounts, by addressing long-standing structural rigidities, mobilizing private savings, and encouraging foreign direct investment. Consistent with these goals, the authorities have adopted for 1998 a strengthened adjustment program, that is being monitored by the staff and the Executive Board will review the implementation of the program on a quarterly basis. The 1998 staff-monitored program targets a real GDP growth rate of 6.5 percent, end-year inflation of 15 percent, and an improvement in the overall balance of payments. The program calls for containing central bank financing to the government to 0.3 percent of GDP and a significant tightening of credit expansion, consistent with the inflation target. Macroeconomic policies will be complemented by structural reforms in the areas of taxation (reform of the indirect and direct tax systems, including preparations for the introduction of the VAT), budget management (expenditure controls and monitoring), themonetary and banking sector (introduction of new monetary instruments), the exchange and trade system (unification of exchange markets and tariff reform), privatization, the investment regime, and the agriculture sector.

Executive Board Assessment

Executive Directors noted that performance in 1997 was satisfactory, with real economic growth, inflation, fiscal and external sector performance in line with, or exceeding, initial expectations. Important structural reforms were initiated—particularly in the monetary, exchange, and fiscal areas—laying the institutional ground for strengthening reform efforts over the medium term. Directors noted that these accomplishments had been achieved under difficult internal and external environments, including a sharp worsening of the terms of trade.

Directors welcomed the authorities' commitment to deepen economic reforms in 1998 under a program that would continue to be monitored by the staff. They were of the view that firm implementation of the program would be important to lay the foundation for sustained economic growth and moving toward normalizing financial relations with external creditors. Directors observed that the performance in 1997 and the ambitious 1998 program marked a clear departure from past reform attempts, which should help build confidence on the part of market participants and the international community. Directors encouraged the authorities to persevere with the design and implementation of urgently needed structural reforms to ensure the attainment of the ambitious medium-term goals and to improve Sudan's capacity to meet its existing financial obligations. Directors stressed that sustained implementation, a broadening and expansion of the 1998 program, efforts to increase repayments to the IMF, and progress toward regularizing relations with other creditors were elements that could provide the basis for closer cooperation with the IMF in the medium term.

Directors were encouraged by the authorities' fiscal strategy, which emphasized revenue mobilization to reduce the fiscal deficit while allowing for substantially higher development outlays. They noted that Sudan’s revenue-GDP ratio remained very low, and they welcomed the authorities’ plan under the 1998 staff-monitored program to broaden the tax base and improve the elasticity of the tax system. Moreover, they indicated that sustaining the pace of revenue mobilization over the medium term would depend critically on expeditious introduction of the value-added tax (VAT). On this basis, Directors urged the authorities to adhere strictly to a timetable of measures that would ensure early and effective implementation of the VAT; rationalize the indirect tax system; undertake reform of the direct tax system; and continue to curb tax exemptions. On the expenditure side, they encouraged the authorities to put more emphasis on increasing spending on social and development programs and away from unproductive expenditures, given Sudan's social and infrastructural needs and the fact that the former expenditures had reached record low levels in recent years. Directors also encouraged the authorities in their efforts to improve budgetary management.

Directors supported the authorities' intention to maintain a tight credit policy through strict limits on central bank financing of the budget deficit. The tight credit policy stance and improved monetary management instruments would permit the authorities to address the significant challenges facing them in 1998. Directors welcomed the authorities' efforts to improve the health of the banking system, including through enforcement of prudential regulations, introduction of a new accounting system, and strengthening of the banking supervisory capability of the Bank of Sudan.

Directors welcomed the authorities' plan to unify the exchange markets under a market-determined exchange rate regime by mid-1998, and underscored the importance of accelerating the monetary and exchange system reforms in support of the exchange rate unification. They urged the authorities to continue to accelerate the pace of convergence of the official exchange rate toward the free market rate, reduce the surrender requirements in the first half of 1998, and eliminate the remaining requirements in the second half of 1998. Directors emphasized the importance of removing any barriers to exports. Directors noted that, notwithstanding the planned tariff reforms in 1998, Sudan's tariff barriers remained high, and urged the authorities to undertake further tariff reforms and to remove barriers to exports.

Directors also strongly encouraged the authorities to broaden the implementation of structural reforms in other areas, including the investment regime, agricultural policies, privatization, public investment policy, and the financial sector in order to sustain economic stabilization and strengthen growth prospects.

Directors noted that Sudan had made scheduled payments to the IMF in 1997, and took note of the authorities' commitment to further reduce arrears to the IMF in 1998 by SDR 15.6 million. They urged the authorities to accelerate payments to the IMF as balance of payments developments permitted, so as to enhance Sudan's credibility and reduce the burden of its overdue obligations on IMF members.