Public Information Notice No. 00/39

Public Information Notice: IMF Concludes Article IV Consultation with Sudan

June 9, 2000

On May 22, 2000, the Executive Board concluded the Article IV consultation with Sudan.¹

Background

Cooperation between Sudan and the IMF continues within the framework of a medium-term staff-monitored program (MTSMP) for the period of 1999-2001. The MTSMP is based on the government's economic recovery strategy and builds on the progress achieved in the implementation of the 1997-98 annual staff-monitored programs (SMP), including in reducing financial imbalances, strengthening taxation, improving public expenditure management, financial deepening, exchange rate unification, foreign trade liberalization, and privatization. The objective of the MTSMP is to lay a solid foundation for sustained economic growth through a further improvement in the macroeconomic situation supported by implementation of structural reforms to enhance resource allocation and encourage private sector activity. The program establishes medium-term targets of annual real growth of 5-6 percent, a reduction in average inflation to 5 percent, a further narrowing of the current account deficit, and a substantial buildup of gross usable reserves.

In 1999, the Sudanese authorities broadly achieved the macroeconomic objectives of the first annual program under the MTSMP. Based on solid performance of rainfed and non-traditional crops, livestock, and the new oil sector, growth is estimated to have reached about 6 percent. Tight fiscal and monetary policies allowed the government to successfully reduce inflationary pressures and to bring the average inflation rate down, for the third consecutive year, to 16 percent. After averaging about 8 percent of GDP in recent years, the external current account deficit contracted to 3.5 percent of GDP (excluding interest due and public transfers) as higher than projected oil prices helped to offset the weaker performance of traditional exports. By end-1999 the Bank of Sudan (BOS) doubled its usable foreign exchange reserves, to US$53 million, exceeding the target by US$6 million.

Structural reforms moved forward in 1999 and early 2000. The tax authority has finalized preparations for the June 1, 2000 start date for the Value Added Tax (VAT). Implementing regulations for the revised Investment Encouragement Act have been passed. Exchange market reforms continue. The BOS has introduced instruments for indirect monetary management, although their monetary impact remains limited. The BOS has announced a new bank restructuring strategy and is addressing the issue of nonperforming loans.

Despite the progress achieved, the overall economic situation remains fragile and susceptible to exogenous shocks. Determined policy implementation by the government is needed if the objectives of the MTSMP are to be met. Public expectations and political pressures for immediate use of oil revenues are high. However, the oil revenue windfall by itself will not be enough to sustain even required increases in spending, such as in the social and development sectors. For the near future, Sudan will remain a predominantly agricultural economy, facing financing shortages, a deteriorated infrastructure, recurrent problems with flooding, an inappropriate institutional framework in the irrigated sector, and a secular decline in world commodity prices. The banking system is weak, with many banks undercapitalized, and is not capable of supporting private sector growth. Poverty, especially in the South, is extremely high. Finally, Sudan's external debt, estimated at US$24 billion at end-1999 and most of it in arrears, is unsustainable.

Against this background, the program for 2000 aims at cementing the macroeconomic gains of the previous years, while expanding the breadth and depth of the structural reforms. Real GDP growth is targeted to reach 6.5 percent. New oil revenue will allow the government to reduce its borrowing from the BOS and leave more room for credit to the private sector. The resulting lower monetary expansion will help to relieve inflationary pressures and to achieve the 9 percent end-of-year inflation target. In line with expected improvements in the balance of payments, Sudan's gross usable reserves will increase by US$45, doubling the level at end-1999. On the structural side, the program pursues the goal of strengthening the budget by introducing a VAT and improving expenditure management through establishing accounts classification compatible with international standards. The government intends to start automatic adjustments of domestic oil prices in line with international prices. Financial sector reforms include bank consolidation and restructuring, enforcing capital adequacy requirements, reduction of nonperforming loans, and further development of indirect monetary management instruments. The program also envisages a wide range of other structural reforms, such as further trade and exchange market liberalization and privatization. The government has committed to US$60 million in payments to the IMF in 2000. The authorities are also working with the World Bank to develop policies that would eventually enhance the social safety net, strengthening health and education systems and reducing poverty.

Executive Board Assessment

Executive Directors noted the progress achieved by Sudan over the past three years in stabilizing the macroeconomic situation, moving forward the structural reform agenda, and improving relations with creditors against a background of a difficult domestic and international environment. Directors generally considered that Sudan's performance under the staff-monitored program (SMP) in 1999 had been satisfactory both in terms of policy implementation and payments to the Fund. Nevertheless, they noted that the overall macroeconomic policy stance had not yet succeeded in reducing inflation adequately, and there had been delays in implementing some of the key reforms. Looking ahead, Directors urged the authorities to consolidate and sustain the improvement in the macroeconomic situation, to push forward their agenda of structural reforms in order to enhance confidence and the expansion of the private sector, and to ensure careful management of Sudan's new oil resources. Directors also emphasized the contribution that a peaceful resolution of the armed conflict would make to poverty alleviation and improvements in social indicators.

In considering the outlook for 2000, Directors urged the authorities to be vigilant against the possible reversal of the recent improvements in the inflation rate and to proceed with caution in implementing the program by minimizing central bank financing of the budget and restraining expenditure as needed to keep inflation on track. Directors strongly emphasized the importance of ensuring that higher oil revenues not undermine budgetary discipline, and, in this regard, they welcomed the commitment to use excess oil revenues to reduce net borrowing from the Bank of Sudan. Moreover, they cautioned against increasing entitlement programs, which would be difficult to unwind should oil prices weaken. Directors also noted the need to continue to broaden the tax base and improve collection of non-oil revenue. In this connection, they welcomed the indication that the VAT will be put in place as planned on June 1. Directors underscored that cuts in nonproductive, and especially military expenditures would greatly facilitate the achievement of social objectives consistent with overall strength in the fiscal position.

Directors observed that no major pressure on the exchange rate was evident, despite the virtual stability in the rate in recent months. However, in view of the many challenges and risks facing Sudan's economy and the still low level of international reserves, Directors encouraged the authorities to allow the exchange rate to move flexibly in response to market forces and not to allow any perception to develop in the market that the rate was effectively fixed. In this regard, Directors considered that efforts should be stepped up to further develop the interbank foreign exchange market. Directors encouraged the authorities to closely monitor developments in external competitiveness, and, in particular, to avert any threat of oil-induced strength in the exchange rate undermining the competitiveness of the non-oil sector.

Directors welcomed the recent measures taken by the Bank of Sudan to strengthen the financial and banking sector, including the recent unification of the reserve requirements on domestic and foreign currency deposits, and urged the authorities to continue their program on an accelerated basis. They drew attention to the recent decline in credit to the private sector, observing that its reversal—in line with the program—would be an essential prerequisite for future economic growth. To that end, Directors agreed with the package of measures prepared by the authorities to address this problem, including the updating of laws to remove impediments to the extension of credit, strengthening provisioning and compliance with prudential regulations, and improving performance with respect to loan recovery. Directors encouraged the provision of Fund technical assistance to assist the authorities in these areas.

In other structural reform areas, Directors were encouraged by the measures taken recently—in particular, the approval of the implementing regulations for the Investment Encouragement Act—but urged the authorities to avoid any further delays in implementation. Directors were concerned with the continuing delays in adjusting petroleum product prices and recouping the remaining losses of the Sudan Petroleum Company. They stressed that it would be important for the authorities to utilize the agreed automatic petroleum price mechanism. Directors advised the authorities to move to full market liberalization in the petroleum product sector as quickly as possible.

The commitment to transparency in the oil sector to date was welcomed, and Directors strongly urged the authorities to build on this by full public disclosure of oil revenue data and periodic internal audits.

Taking a longer-term perspective, Directors were in general agreement with the medium-term macroeconomic targets for the SMP, noting that these were based on continued structural reforms across many sectors, and in particular the financial and agricultural sectors. At the same time, they recognized the risks to the program from structural weaknesses in the economy, such as low investment in physical and human capital, deteriorating infrastructure in the agricultural sector, and an unsustainable debt burden.

Directors noted Sudan's adherence to the schedule of payments to the Fund through April 2000, and urged the authorities to continue this performance. Welcoming the continued improvement in relations with external creditors, they also urged that further progress be made toward an eventual resolution of Sudan's external debt problem.

Directors welcomed the authorities' intention to strengthen the statistical database, especially regarding monetary statistics where some problems had emerged.