SOUDAN piel) Yousif M.A. Bashir Eltahir /y.eltahir@afdb.org Suwareh Darbo / s.darbo@afdb.org Kabbashi M. Suliman / kmsulimani@yahoo.co.uk www.africaneconomicoutlook.org‘Sudan SUDAN + In 2013 real gross domestic product (GDP) grew by 3.6%, up from 1.4% in 2012, driven by agriculture, oil, gold and transit fees. It is predicted to recede slightly in 2014 to 2.7%, because of fiscal consolidation, and is projected to reach 3.8% in 2015. Inflation remained high at 36.2% and is forecast to drop to 26.8% in 2014 and projected at 23.2% for 2015. + Private small and medium-sized enterprises (SMEs) continue to face challenges. High costs of inputs including labour and infrastructure services appear as major obstacles to the development and economic diversification of SMEs. Also Sudan’s ratings on contract enforcement, protecting investors and registering property deteriorated. * Integration into global value chains (GVCs) provides opportunities. But the high costs of production, together with the numerous taxes along the supply chains and the weak linkages, would undermine these prospects; nevertheless the government continues efforts with the United Nations Industrial Development Organization (UNIDO) to boost agro-industrial value addition. Overview Sudan's real GDP grew by 3.6% in 2013, up from 1.4% in 2012, driven by agriculture and mining as well as the inflows from oil transit fees and the Transitional Financial Arrangement (TFA) with South Sudan. However, inflation remained high (36.2%), reflecting the combined effect of inflationary financing, the devaluation of the currency and high energy prices, Itis estimated that real growth will recede slightly in 2014 to 2.7% and is projected at 3.8% in 2015. Inflation is estimated to drop by 9.4 percentage points in 2014, and projected at 23.2% for 2015. However, the credibility of the government's disinflation programme relies on addressing the contractionary effects of fiscal consolidation and boosting value addition in agriculture, manufacturing and mining. The repercussions of the July 2011 secession continue to aggravate the challenges of economic ‘management. The resulting high extemal and internal deficits, coupled with the sustained United States sanctions and the security concerns in Darfur as well as in other areas of the country’s 26 states, continue to threaten macroeconomic stability, the outlook for 2014 and medium-term growth. In September austerity measures were introduced to supplement the 2013 budget, including the devaluation of the currency by 29% and removal of fuel subsidies worth SDG 3.6 billion (Sudanese pounds) about 1.2% of GDP, resulting in riots. The 2014 budget is a continuation of fiscal consolidation to maintain macroeconomic stability, with the implementation of well-designed social safety nets. The 2013 finalised Interim Poverty Reduction Strategy Paper (I-PRSP) could be a vehicle for short-term policies aiming at enhancing employment and poverty reduction as well as deepening macroeconomic reform, However, high inflation and the political and economic uncertainty in the interim period leading to the presidential elections in 2015 could pose grave challenges. Economic linkages and value addition were weakened during the period of oil-driven growth (1999-2011), particularly in agriculture (which provided 47.5% of total jobs in 2011). Also, the high taxes along the supply chains and the recent increase in tariffs on imported inputs in addition to the high costs of energy and infrastructure services raised domestic resource costs and reduced domestic value addition and integration with partners in the GVCs. During 2001-07, 41% of all factories closed because of intense competition, The government continues efforts with the UNIDO to boost agro-industrial value addition, However, further policies are required to upgrade the supply chain into value chains. Lifting the burden of high taxes on supply chain actors would promote the participation of small producers and clustering with larger firms. Additionally, increasing the quality and safety measurements of production up to international standards would enhance value addition and participation in GVCs. 2 ‘ean Economie Outlook ‘© ADB, OECD, UNDP 2014 |Figure 1. Real GDP growth TE Foal GOP growth vs) —@— Easter Arca) — <> — Africa) % 10 ‘2004 20052006 2007-2008 +2008 «010 /« 01 -—«2012 +—«2013\e) 20T4(e) 20T5(p) ‘Source: MDB, Statistics Departiment AEO. Estimates (e; projection (ph Table 1, Macroeconomic indicators ao. 0) 201) 201805) ea 0° grat 1 36 2 a8 ea 6 per cant growth ar 15 os 16 Ptintaten 385 362 m8 a2 Bucget balance % BOP a8 a3 as as Caren acauntblace 6D? 98 86 10 as Source: Data from domestic authorities estimates (@) and projections (p) based on authors calculations. Recent developments and prospects Real GDP growth rebounded to 3.6% in 2013, up from 1.4% in 2012, driven by fiscal consolidation efforts and the inflows from oil transit fees and the TFA. Real growth is estimated slightly to decrease in 2074 by 0.9 percentage points to 2.7%, reflecting the effects of fiscal consolidation and the disinflationary monetary stance and is forecast to be 3.8% for 2015, However, consumer price inflation remained high at 36.2% in spite of the reduction of the fiscal deficit to 1.7% in 2013, down from 3.5% in 2012, as a result of the high monetisation of the fiscal deficit, the continued devaluation of the Sudanese pound and the high fuel costs following the September 2013 austerity measures. Also, inflation is estimated to drop by 94 percentage points in 2014 and is forecast to be 23.2% for 2015. Though the 2014 budget is the last year under the three-year Economic Programme for Stabilisation and Sustained Growth (EPSSG) 2012-14; itis the fourth budget following the secession of South Sudan, reflecting the grave post- secession challenges. In this regard, containing the monetisation of the fiscal deficit and the inflationary pressures of the reduction of subsidies as well as a deepening of the financial intermediation and reviving agriculture would enhance the credibility of the government's disinflation efforts. Growth was driven by the primary sector in 2013, with agriculture contributing 34.5% to the value added. It grew by 6%, up from 5.1% in 2012. The rise in gold production partially compensated for the modest oil production of 130 000 barrels per day (bpd) about 28% less than envisaged). Growth in agriculture was driven by high production of groundnuts and sesame (which more than doubled in the crop year 2011/12), benefiting from good weather. Also, the production of millet grew by 16% in 2012/13 compared with 2011/12. Despite the fact that cotton and wheat were + Sudan ‘© ADB, OECD, UNDP 2014 ‘Arican Ezonomie Outlook 3‘Sudan targeted in the EPSSG export promotion and import substitution, they contributed, respectively, 54% and 43% less than the target because of government monopoly of cotton and the disincentives caused by the weakening of the Sudanese pound. Livestock contributed about USD 530 million to exports (29% more than in 2012) as a result of the good weather, ‘The contribution of agriculture to GDP for 2014 is projected to decrease by three percentage points, reflecting the rise of the share of mining, mainly oil. Gold productions expected to increase by 25 percentage points, up from about 60 tonnes in 2013, Gold production is dominated by small informal miners providing about 90% while the rest is contributed by 12 companies. In 2013, the government licensed nine Russian companies to mine gold, chrome, ore, tar sands, and other ore deposits, Since 2012, the British Geological Survey Institute has been helping Sudan prepare a geological map. The Ariab Mining Company is expected to climb the value chain by mining one million tonnes of copper in two open pit gold mines, (Hassai, the company’s oldest gold mine, and Hadal Awatib) with proven reserves of up to 80 million tonnes of volcanogenic massive sulphide- type gold-copper lead deposits. The development capital is estimated at USD 191.2 million. The strongest downside risks relate to the growing environmental concerns, due to extensive use of mercury in the informal sub-sector and the continuing threat of the “Dutch disease” manifested in the attraction of labour from agriculture and manufacturing, in addition to the depletion of surface reserves and shifting the conflicts to the small-scale gold mining (SSCM) sector. il production is estimated at 130 000 average barrels per day (bpd), the same as in 2012 and is projected to increase by about 8% in 2014 on the back of enhanced oil recovery from operating fields. The government is negotiating the remaining 25% transfer of the ownership of the AlFula pipeline (721 km). Estimated proven reserves remain at 762 million barrels; however, expansion of production could be boosted by reducing the security tensions in Darfur and South Kordofan including resolving the technical problems that lessen oil recovery as well as the incentivisation of oil firms by paying debt arrears, ‘The contribution of the tertiary sector to real growth dropped by 1.4% compared with 2012; reflecting the effects of the continuation of the austerity measures; with transport, storage and communication as well as finance, insurance, real estate and business services most affected Although Sudan finalised the Interim Poverty Reduction Strategy Paper (I-PRSP) the outlook for expanding health and education, which are essential for accelerating poverty alleviation efforts, is poor because of the negative impact of the phasing out of fuel subsidies. Itis projected that the growth of the tertiary sector will drop by about 0.2% in 2014 because of slower private investment in tourism, health and education, weak credit growth and budget cuts. Manufacturing continues to be adversely affected by high energy prices, a deteriorating exchange rate and high production costs, The construction subsector is most affected and contracted by 0.8% in 2013, Nevertheless, boosting oil production and the implementation of the envisaged public-private sector partnership targeting eight commodity groups, including sugar, medicine, leather and edible oils, are expected to increase the growth of manufacturing by 6% in 2013, up from 5.2% in 2012. ‘The risein oil exports to USD 2.58 billion (up from USD 2.01 billion in 2012) boosted export value and reduced the trade deficit. Notwithstanding the current account deficit (9.5%) is estimated to widen by 0.1 percentage points in 2013 due to payments to oil companies and foreign investors but should improve by 1.6 percentage points to reach -8% in 2014. ‘Aggregate demand continued to contract in 2013, largely reflecting containment of public spending, higher taxation and import contraction dictated by the adjustment to South Sudan's secession. The current exchange rate arrangements including the cash margin requirement for imports are expected further to reduce aggregate demand in 2014 with imports projected to contract by 0.7 percentage points. However, the outlook for 2014 and medium term economic growth will depend on efficient use of natural resources, addressing the contractionary effects of fiscal consolidation, including the unsettled civil conflicts, the instability in South Sudan and the smooth transition in the interim period leading to the presidential elections in 2015, 4 ‘ean Economie Outlook ‘© ADB, OECD, UNDP 2014 |= Table 2. GDP by sector (percentage) ° 208 28 Aart, unig frst. seg 362 mS et wtie ting Ming ww s va cS Manutecog a 20 teey ga ad vate oa as contain as a Whol and trades and estas 18 a lite ntact apr. orgs an ceaietan 1s 18 Fane lek ara buseservies “5 70 orion socslandpenenaeries 61 oe tess 1 13 000 100 Macroeconomic policy The second Five-Year Plan (2012-16) and the EPSSG 2012-14 together with the finalised I-PRSP 2012-14, Sudan Constitution 2005, Doha and East Sudan Peace Agreements will continue to guide ‘economic policy through 2012-16. Fiscal policy ‘The fiscal stance in Sudan has weakened since the secession of South Sudan. In 2013, the government introduced austerity measures focusing on reduction of fuel subsidies by about 9.1% (SDG 36 billion), maxi-devaluation (29%). Wages were raised by 20% to compensate for the ensuing higher cost of living. The improvements in revenue collections from tariffs and expenditure control through reducing subsidies, as well as the inflow of oil transit fees, helped reduce the deficit in 2013 by an estimated 1.8 percentage points to 1.7% compared with 35% in 2012, and it is projected to remain low at 0.9% in 2014 on the back of sustained inflows from oil transit fees and fiscal consolidation. Sudan's tax-to-GDP ratio is very low (6% in 2013) compared with an average of about 17% in the low-income countries (LICs) and is projected to average about 6.3% during 2014-15, as a result of the ‘extensive tax exemptions and incentives. Expanding the taxable capacity requires streamlining tax ‘exemptions, including improving revenue administration and business registration, Over the last year, up to mid-2013, the fiscal deficit was largely monetised. The resultant high inflation averaging, respectively, 35.5% and 36.2% in 2012 and 2013, coupled with continued devaluation of the Sudanese pound has translated into lower growth than potential averaging 2.5% over the two years ‘Streamlining public spending should continue in 2014, Subsidies are projected at 14.2% of the budget in 2014 (about 6.3% less than in 2013). The wage bill is projected to drop by 0.8 percentage points from 4.4% of GDP in in 2013 owing to the separation of the police and security pension fund from the wage bill. However, allocations to state governments as well as goods and services are projected to grow, respectively, by 5.2 and 2.4 percentage points in 2014, up from 22% and 8.3% of ‘the overall budget for 2013. The cost of public borrowing is expected to grow by 8.9% compared with 7.6% in 2013, reflecting the weak financial market. The drop in revenues and spending cuts over 2012-13 limit the fiscal space for counter-cyclical policy. In this respect, the government continues to improve public financial management in ‘order to enhance the process of the budget preparation, execution and monitoring within a three-year medium-term rolling fiscal plan. Also, efforts are under way to finalise the Treasury ‘© ADB, OECD, UNDP 2014 ‘Aircan Economic Outlook Hl‘Sudan Single Account and to establish quarterly cash-flow tables. The challenges ahead relate to the rationalisation of non-priority spending including the financial guarantees under the government ‘Musharaka Certificates, the continued implementation and rollout of the global overall financial requirements (GOFR) as well as the mobilisation of donors’ efforts to finance the deficit. Also, ‘additional measures are needed to expand the social safety nets. Table 3. Public finances (percentage of GDP) 2005 2 2tt zo 20tsie) 2014p) 201509), Total rovnue and arants ma, waa ma, 82 a 03 303 Toxrovmue €1 «2 “1 a7 60 @2 3 revenue 7 ne 108 a0 sa sa 2 Teta expenure ad net ending 197 m8 m 2 na m2 107 Cone expendiure 780) 167 758) 1 104 36 92 cluing int 80 us ur 0s 85 a 1 Wages nd staries ry ar 52 a 36 2 a Inet 10 10 12 1“ oa uw 1a capa expena 28 16 2 23 23 2a a Primary bance as a 1 22 oa ee as verttbatance a9 oa oz as aa as as ‘Note: a. Only major ems are reported. Source: Dat from domestic authorities estimates (ean projections based on authors’ calculations Monetary policy Monetary policy in 2013 was accommodatory thanks to the monetisation of the fiscal deficit. In addition the gold purchases by the BoS to replenish foreign reserves contributed to money supply growth particularly in 2012 (40.3%); however, it is estimated at 18.2% in 2013 as a result of slowing gold purchases on the back of the inflow of oil transit fees. Although inflation fell to 22.9% in August from 47.9% in March 2013, because of a sharp drop in food prices (-25.8%) overall, it remained high, at 36.2% in 2013, reflecting the combined effect of deficit financing and gold policy as well as the devaluation and high energy prices following the September austerity measures, Inflation is expected to decline to 26.8% in 2014 as the BoS has introduced measures to limit credit to the government within the legal ceiling. Because of the commitment to interest-free banking, the BoS uses Government Investment Certificates (GICs), the reserve requirement and the exchange rate (in the context of managed floating) to conduct its monetary policy. Recently the BoS introduced exchange restrictions and multiple exchange rates, as short-term interventions, applicable to priority imports (wheat, medicine and energy) and other commercial transactions. ‘The level of equity trading on the Khartoum Stock Exchange is low. In mid-2013, trading in government securities accounted for 94% of the volume of trade, with Sudatel (a public-private firm) accounting for 50% of the rest, and the share of the agriculture-based firms is about 0.01%. Banks’ credit to the private sector was estimated at 12.8% of GDP at the end of 2012, about one third of the low income countries (LICs). The concentration of banks in major cities and the growing government domestic borrowing accounted for this low share. The access of SMEs to credit remains difficult because of the aversion of banks to high risks, as in most LICs. At the end of 2012 about 5% of the banks’ portfolio was allocated to microfinance (MF) compared with the 112% target. In 2013 only about 4% of the poor aged over 18 years accessed MF. It is expected that the strategic plan of the BoS MF Unit (2012-16) will reform the insurance and guarantee to cover MF lenders and improve their access to low-cost wholesale finance. According to the World Bank report Doing Business 2014 Sudan's rank in getting credit is low (167* out of 189 countries). To bring down inflation, the BoS would continue tightening credit to the government, including streamlining gold purchases, while enhancing the interbank market for efficient liquidity management. ‘ean Economie Outlook ‘© ADB, OECD, UNDP 2014 |Economic co-operation, regional integration and trade Sudan's trade balance is estimated to have improved by 0.5% of GDP in 2013 compared with 2012 and is projected to be -5.2% for 2014. In 2013 exports (USD 6.9 billion) were dominated by crude oil and gold which contributed, respectively, 50.4% and 35.8%. The continuing policy of slowing gold purchases is expected to reduce the contribution of gold to 30% in 2014, while the share of oil is projected to increase to 57.7%. In 2012 63.2% of exports were directed towards the United Arab Emirates (UAE) followed by Saudi Arabia (9.2%), while imports remained diversified ‘with 26.9% sourced from China and India. The overvaluation of the pound, despite the September ‘measures, coupled with high tariffs (20.2% on average) and the surrender of 10% from non-gold exports proceeds to the BoS, significantly reduced the competitiveness of agricultural exports, which dropped by 5.6%, down from a 19.4% share in 2012 At the World Trade Organization (WTO) December 2013 ministerial conference Sudan reaffirmed its readiness to engage constructively with the WTO to reactivate the accession process in 2014 and, to that end, requested the support of the working party members. Also negotiation continues for a full economic partnership agreement with the European Union (EU) as part of the Eastern and Southern Africa countries group. Sudan's cross-border trade with the ‘Common Market for Eastern and Southern Africa (COMESA) is limited to Ethiopia and Egypt with 9.3% of exports targeting these countries; however, efforts continue to benefit from COMESA programmes in the fields of transport, telecoramunication and the development of the leather sector. ‘The inflows of cil transit fees resulted in modest improvement in the current account, which wasnevertheless estimated negative in 2013 (-9.6% of GDP). Also net foreign directinvestment (FDI) and portfolio investments (estimated at about USD 2.87 billion in 2013, up from USD 2.47 billion in 2012) originating from Saudi Arabia, Kuwait, Qatar and UAE targeting agriculture as well as the remittances (USD 800 million in 2013) contributed to foreign reserves, which increased to ‘two months of imports, up from 1.9 months in 2012. The unification of the exchange rate would increase remittances through the official channel and improve price competitiveness. Table 4. Current account (percentage of GDP) 2008 2010 aH wn 20% 2014) 2015 Tate balance 42 a7 22, 69 60) 52 a Exports of gods (tb) 137 ves oy a8 52 52 as Inport a goog tan) 169 met ne na a 104 88 Serves 42 a3 22 a5 05 as a4 Faetorincome 4a a a8 aa 45 46 4a current antes 40 a 16 13 4 as a {Current ezount baa aa 25 a9 as 4. a0 1a Source; Data from the Gentral Bank and domestic authorities, calculations imates[e) and projection [p bared on authors External borrowing including overseas development assistance (ODA) remains low for Sudan, because of high and unsustainable debts. Contracted debt stood at USD 431 million in 2012 of which 69% was non- concessional, with 23% sourced from China and India. In 2014, loans and grants are projected at USD 3.3 billion, about 74% more than in 2013, consisting mainly of loans (82%) to be sourced mainly from China, India, the Islamic Bank for Development and the Arab Fund for Economic and Social Development. Debt policy According to the update based on the joint International Monetary Fund (IMF)-World Bank 2012 debt sustainability framework, Sudan continues to be “in debt distress”, with the stock of external debt estimated at USD 43.2 billion at the end of 2012 (71% of GDP and 8 347% of = Sudan ‘© ADB, OECD, UNDP 2014 ‘Arican Ezonomie Outlook 7‘Sudan exports) most of which is public and publically guaranteed (USD 41.6 billion with 88% in arrears) ‘Also the denominator effect arising from the 66% devaluation in 2012 raised the stock of debt. Recently Sudan limited non-concessional borrowing to below the UDS 700 million ceiling of the Staff Monitored Programme (SMP). Disbursements from ODA including concessional loans are estimated at USD 400 million in 2013 and projected at the same level through 2014-15. The conservative level of disbursements is attributable to the low debt-servicing capacity. Domestic debt is estimated at about 11.9% of GDP (down from 13.4% in 2022) and projected to drop further by 1.6 percentage points in 2014 reflecting the effect of the inflows of oil transit fees and the fiscal consolidation including streamlining of the fuel subsidies. Additionally, the continued implementation of the GOFR including restrictions on Bos lending to public enterprises (SDG 786 million in 2013 compared to SDG 397 million in 2011) would contribute to a prudent domestic borrowing strategy. Sudan has made progress in the technical work required to reach the decision point of the Highly Indebted Poor Countries (HIPC) Initiative including reconciliation of about 90% of debt at the end of 2010 with creditors, the finalised I-PRSP in 2013 and strong co-operation with the IMF on economic policy and arrears clearance. However, addressing macroeconomic imbalances and improving public debt management in the context of the successor IMF SMP together with effective engagement with key creditors would expedite the accession to the HIPC. In this regard, co-operation with South Sudan is important to elicit creditors’ support for debt relief, particularly in view of the approaching deadline of the “zero option” for debt apportionment. With technical assistance from the African Development Bank (AfDB), the governments of Sudan and South Sudan are adopting a joint approach for outreach to the international community for debt relief. Figure 2. Stock of total external debt (percentage of GDP) and debt service (percentage of exports of goods and services) outstanding dobt (public and private) 6DP-_ —— Debt servico/Expars 0 0 6 80 0 20 20 2005 2008 2007-=«2008--«=« 008» 20m 2011 0rz==2m13S ata 2015 Source IME (WEO & Article LV}. ‘ean Economie Outlook ‘© ADB, OECD, UNDP 2014 |Economic and political governance Private sector ‘Sudan's private sectoris diversified and contributed about 80% and 50% of the agricultural and industrial value added. The private SMEs, the main driver of diversification (accounting for about {90% of all enterprises), continue to face difficulties in accessing finance. Lack of transparency and poor accounting and business planning in many of these firms led the banks to rely on burdening collateral. According to the World Bank report Doing Business 2014, Sudan's ranking on contract enforcement is 154 out of 188, Scoring on protecting investors and registering property deteriorated, respectively, by one and four points down from 37" and 156" in 2013. Following the recent austerity measures the Sudanese Business and Employers Federation (SBEF) identified the high costs of foreign inputs owing to escalated customs duties (40%) and the high exchange rate pass-through into imported inputs as well as the doubling of the minimum wage and high cost infrastructure services as major challenges to the development of the SMEs. The government continues to encourage the development of the MF sector: but with loans at 5.3% of the total loans at the end of 2012, it remains small. MF could promote partnerships with lead firms as guarantors (in the context of the Islamic Musharaka mode) to enhance the financial inclusion of small firms in agriculture and organise community-based marketing access. At present, the MF sector, as is, the case of banks, prefers the Murabaha mode with returns estimated at 18% as in GICs and the short-term government Musharaka Certificates (GMCs) ‘The government continues efforts with the UNIDO to boost agro-industrial value-addition in the context of the EPSSG 2012-14, Eight commodity groups including sugar, medicine, leather and ‘edible oil are selected for promotion through preferential tax and allocation of foreign exchange. Additionally, Sudan's new Investment Act 2013 provides greater exemptions and onsite facilities compared with the 1999 Act, and as a result USD 160 million greenfield FDI has been attracted from Saudi Arabia and USD 70 million from Qatar targeting agriculture through concessionary land leases. Also the SBEF considers co-operation with South Sudan to be strategic with an estimated USD 700 million volume of potential trade per year, However, a unified registration system of tax and VAT in addition to addressing infrastructure barriers and enhancing business incorporation would reduce operating costs and boost private activities. Financial sector The commercial banks dominate Sudan's financial sector (97% in terms of total assets) with a small microfinance sub-sector. Non-bank financial institutions are dominated by insurance. Although the number of commercial bank branches grew by 6% in 2012, up from 593 in 2011, the bank per square kilometre ratio remains very low (0.26 in 2011) compared with 0.90 for sub- Saharan African countries, Financial intermediation (proxied by the ratio of M2 to GDP) is small (28.3% of GDP in 2012 compared with 48% average for the LICs), and is estimated at 22% for 2013. ‘The ratio of currency outside banks is high (28% in 2012) and expected to increase to 32% in 2013 Following the results of the IMF pilot case study for enhancing bilateral financial sector surveillance in 2012, the government acknowledged the need to enhance financial intermediation to broaden access to banking services and reform the sector to support private sector investment, Between the end of 2012 and June 2013 the capital adequacy ratio increased to 14.9%, up from 12%, while bank liquidity dropped to 38.8% from 41.7%. Despite the decline in the ratio of gross non- performing loans to total gross loans (10.4% in June 2013 compared with 11.8% at the end of 2012), ‘the pre-tax return on assets decreased by 3.1 percentage points, down from 4.4% in 2012. The lack of short-term liquidity products under the interest-free banking in Sudan limits the inter-bank market, In order to boost lending to the private sector, the BoS limited banks’ investments in the GMCs to 20% of their loanable funds, down from 25% in 2012. However, trading in government securities continues to dominate the Khartoum stock exchange market and the small amount of = Sudan ‘© ADB, OECD, UNDP 2014 ‘Arican Ezonomie Outlook a‘Sudan equity trading is dominated by a few firms. The penetration of the insurance market is low with a ratio of 0.4% of total premium revenues to GDP in 2012 (compared with 3.7% for Africa) and is, dominated by car insurance (40%). The 2011 World Bank Financial Sector Review indicated that Sudan's Insurance Supervision Act needs to incorporate an updated supervision system, ‘The government continues efforts, with IMF technical support, to improve bank supervision, inspection and enforcement as well as updating and finalising the legislative and regulatory framework for the securities markets. Public sector management, institutions and reform The fact that the 2014 budget is the fourth during the EPSSG 2012-14 highlights the need to anchor the fiscal and monetary policy within a sound medium-term framework consistent with a sustainable macroeconomic path. The government continues efforts to reduce budget volatility by improving tax administration, enhancing the purview of the Ministry of Finance and National Economy over public funds and combating corruption and fraud, The government has also started adopting an electronic inventory tracking system that supports the treasury system ‘management including strengthening the control mechanisms in public spending with technical assistance from the IMF. Transfers to the states are projected to grow by 5.2% in 2014, up from. 22% of the budget in 2013; however, much of this growth is expected to go to paying the wage bill. ‘The dominance of recurrent spending (mainly wages) over development spending at the state level raises concerns, since service delivery to the poor in the longer term requires investment in social infrastructures Contract enforcement is lengthy in Sudan (810 days compared with 652 on average for Africa). In 2013 a new Investment Act was introduced offering further incentives to investors, especially by simplifying land contracting. To encourage entrepreneurship 137 public enterprises, employing 39 000 workers, were privatised between 2008 and 2012 with an estimated 28 000 net new jobs added. Also, 145 enterprises are under review to be transferred to the private sector. ‘The 2011 Auditor General's (AG) report indicated that the returns from government investments were low (12% of the targeted $DG 2 billion); moreover, SDG 700 million from the proceeds of privatisation were not included in the accounts at the end of 2011. According to Transparency International's Corruption Perceptions Index, Sudan's score dropped from 13 in 2012 to 11 in 2013, and the country ranked 174" out of 177. The government continues efforts to improve the public institutions and financial management. In December 2013, the AfDB approved a Public Finance Management project for Sudan (USD 35 million) aimed at building and enhancing transparency and accountability in the use of public resources through institutional strengthening and capacity building. Natural resource management and environment Sudan is dependent on natural resources and as a result faces critical environmental challenges relating to the depletion of those resources, including soil, water, forests, grazing and, wildlife, fish stocks and biodiversity. In 2013 public revenues from oil, including TFA and oil transit fees, were estimated at 27.0% of the budget compared with an average of 43.4% over the oil boom years 1999-2011, and are projected to be 28% in 2014. The share of revenues from gold mining is low (0.03% in 2013), however gold exports were managed by the BoS and were about 40.4% of total exports during 2012-13. Though the large-scale gold purchases by the BoS boosted informal small-scale mining, the risks of pollution due to uncontrolled use of mercury tend to increase. In 2012 alone 66 tonnes were estimated to have been discharged. In addition there were reported conflicts between indigenous peoples, large-scale mining companies and informal miners. A comprehensive approach is needed to deal with the legal, social, economic and environmental aspects of mining ina context of a national diversification plan for sustained growth. 10 ‘ean Economie Outlook ‘© ADB, OECD, UNDP 2014 |Moreover, the expanding urbanisation and the growing demand for solid biomass (about 75% of household energy supply) continue to threaten the sustainability of the environment. In 2012, the FAO-Africover programme revealed that Sudan's forest cover shrank by 1.6 percentage points in 2011, falling from 11.6% in 2000. Sudan has also emerged as a net emitter of greenhouse gases since 2000, Institutions and policies to address the environmental issues do exist, including a dedicated ministry for environment and physical development and an environmental framework act (2001), However, these institutions and the implementation of policies remain weak because of a shortage of funds and staff. In September 2012 Sudan (in collaboration with the United Nations Environment Programme (UNEP) submitted its strategy for reducing emissions from deforestation and forest degradation, which will allow the country to benefit from the UN Clean Development ‘Mechanism in boosting afforestation and reforestation, Political context The National Congress Party (NCP) headed by the incumbent president continues to lead the government. The political scene is largely affected by the daunting fiscal shock in the aftermath of South Sudan's secession. Following the second wave of austerity measures of September 2013, wide-scale anti-government demonstrations erupted for days which were crushed by the riot police. Nationwide, more than S0 demonstrators were killed, 250 were wounded, and more than 600 were temporarily arrested for questioning. In December 2012, the president reshuffled the cabinet and the vice-president resigned Despite the official stance on promoting freedom of the press, four daily newspapers were temporarily suspended, including Al-Meghar Al-Siyasi, Al-Sahafah, AlEntibaha and Al-Miedan, because they published material that might be seen as promoting anti-government sentiment. In 2013, Sudan was rated 170® out of 179 countries by Reporters Without Borders, the same rank as in 2012, The continued civil conflicts in Darfur, South Kordofan and the Blue Nile states present major challenges. However, the recent oil deal and agreement on border trade between Sudan and South Sudan as well as the continued negotiations between the government and the Sudan People’s Liberation Movement-North (SPLM-N) on a peace deal could lessen the vulnerability associated with civil conflicts. Social context and human development Building human resources Sudan has made progress in social and human development, Between 1975 and 2008, the country’s Human Development Index (HDI) rose from 0.345 to 0.583. The government maintained the provision of free and compulsory education for all in line with the 25-year national strategy, 2007-31. According to the labour survey (2011), the gross enrolment ratio (GER) in basic education was 71.4% compared with 68% in 2009. The respective female to male ratios slightly deteriorated at B1 (in 2008) from 88, Also in 2011, the GER revealed high geographical disparities ranging from 88% in the Norther State and 52.6% for Western Darfur. Further effort is needed to fulfil the second Millennium Development Goal (MDG). The under-five mortality rate declined from 112 per 1 000 live births in 2006 to 102 per 1 000 in 2008 (the 2015 MDG is 41 per 1 000. The Sudan Household Health Surveys 2006 and 2010 showed that the percentages of women attended at least once during pregnancy were, respectively, 69.6% and 74%; and the cases referred to care centres were 19.4% and 21%. The maternal mortality rate declined from 1 107 per 100 000 live births in 2006 to $34 per 100 000 for 2010, (the 2015 MDG is 134/100 000) ‘The prevalence rate of HIV/AIDS among the population aged between 15 and 49 is estimated at 0.67%; with the average among pregnant women attending antenatal care at 0.19%. The government continues its collaboration with the United Nations Development Programme + Sudan ‘© ADB, OECD, UNDP 2014 ‘Arican Ezonomie Outlook 1"‘Sudan (UNDP) thematic group on HIV/AIDS and UNAIDS on advocacy and sensitisation campaigns. In addition, 229 HIV/AIDS services centres exist. However, malaria continues to be the leading cause of mortality and morbidity in Sudan, with only 41% of households accessing insect-treated nets ((TNs). The prevalence of al forms of tuberculosis (TB) in Sudan is 207 per 100 000 with 19831 cases in 2012 compared with actually detected cases amounting to respectively 209 per 100 000 and 20385 cases in 2011. However, the country accounts for 15% of the T burden in the World Health Organization (WHO) Eastern Mediterranean Region, In 2013, Sudan implemented a national TB prevalence survey with funding from contributions from the National Federal Ministry of Health, the WHO, and the Global Fund to Fight AIDS, T and Malaria, The national TB programme covers, all the states and there is a TB diagnostic unit per one hundred thousand persons. Poverty reduction, social protection and labour According to the Central Bureau of Statistics (CBS, 2008) the poverty rate is 45.5% in Sudan (the 2015 MDG is 23.2%) Poverty is higher in rural areas than in urban ones, (57.6% versus 26.5%) and among farmers, compared with wage earners (59% versus 47%). Also, poverty remained high in the Darfur region (62.1%), which is home to an estimated ? million internally displaced persons {(DPs) and 4 million receivers of humanitarian aid. The soaring inflation could increase the rate of poverty and deepen inequality. Zakat (an Islamic pillar for wealth redistribution) is the main social protection mechanism in Sudan. In 2011, SDG 5977 million Zakat funds were distributed to about 2.47 million poor people. Additionally, the Community Development Fund (CDF) since its inception in 2006 has assisted in the construction of $00 schools, 100 health units, and 150 water projects. The UN humanitarian interventions have been instrumental in providing basic services to an estimated 25 million IDPs. To alleviate the socially negative effects of the September ‘measures, the 2014 budget seeks to support 500 000 families through monthly payments (SDG 150 per family) According to the Labour Survey (2011), 8.9 million people aged 15 years and above participated in the labour market, with paid employment accounting for 42.0%, own-account work 39.2% and 18.5% were unemployed. Despite the relatively high share of the wage economy, the growing rate of unemployment among the young aged between 15 and 24 is a concern, (33%), in view of the lack of unemployment insurance schemes and the weak formal social protection institutions. In 2012, the MF allocated 18.2% of credit (SDG 173.1 million) to university graduates and by 2013 an estimated 150 thousand of them were attracted into the SSGM sector. Since 2006, the DF has supported a large number of capacity-building and training activities; 40 040 men and 29 060 women have participated. In 2013, the government, with donor support, reintegrated 400 ex-combatants in Darfur and 1 973 in the states of North Kordofan, Blue Nile and Sennay. ‘The 2014 budget plans to continue this effort, However, the implementation of some of the International Labour Organization (ILO) conventions, including child labour, continues to be a challenge. The 2013 finalized !-PRSP could be a vehicle for interventions aiming to reduce poverty and enhance job-creating growth. Gender equality According to the UNDP Sudan Human Development Report, 2012, the human development index (HDI) in 2008 was higher for males compared with females (0.620 versus 0.525). Also the Gini coefficient revealed that gender differences against females exist in all human development components except for longevity with the gender gaps in educational attainment and income estimated respectively at 0.045 and 0.046, Policies focusing on reducing gender inequality for female targeting education could expand human development opportunities for women and ‘men. Female participation in the labour market in 2011 was low (23.1%) with 11.1% self-employed, mainly because family and societal norms constrict female labour market participation. Overall, Sudan ranks 171* out 187 countries in the Gender Inequality Index. 2 ‘ean Economie Outlook ‘© ADB, OECD, UNDP 2014 |In 2012, Sudan's ranking on the Social Institutions and Gender index (SIGI) was 85" out of 86 countries. Sudan is also one of the few countries that have not ratified the treaty on Convention on Elimination of All Forms of Discrimination Against Women (CEDAW). Information about violence against women is limited; but studies have shown indications of a high prevalence of violence against women reflecting the effects of ongoing regional conflicts. In 2013, the government continued efforts, in collaboration with the United Nations International Children's Emergency Fund (UNICEF) and other donors, to combat female genital mutilation. Since 2012, 24.1% of the parliamentary seats have been held by women; but, women's civil liberties have remained limited. Cases have been reported where women were punished for not dressing according to the 1991 Public Decency Law. Thematic analysis: Global value chains and industrialisation in Africa Sudan's recent experience revealed that the value chains processes of precious minerals and agricultural production were competitiverather thancomplementary. Although oil has contributed to exports and generated positive forward linkages in terms of downstream industries (refining, plastic production and oil-related infrastructures) including the provision of energy input into the economy, the negative backlash effects are substantial. The resultant export concentration and the sharp drop in the share of cotton exports from 38.8% average over 1970-98 to 2% average during the oil boom (1999-2011) have considerably weakened the access of agriculture to GVCs. At its prime, cotton supported a broad-based supply chain with high domestic value addition, involving cultivation, harvesting, grading, ginning, packaging and exporting as well as cotton lint, spinning, textile and apparel for the local market, After secession Sudan continues to be a provider of upstream inputs to the GVCs; during 2012-13, exports were dominated by oil (44.8%) and gold (40.4%) with agricultural crop exports accounting for about 10%. Over 2012-13, export of crude oil accounted for 85.4% of total exported oil, benefiting from the existing interconnected network of pipelines and export terminal. In the gold-subsector, informal and small-scale miners are the main producers, contributing about 90% of production (60 tonnes in 2013). The major value chain activities comprise mining, ore crushing, beneficiation, small-scale refining and marketing and the main actors are the miners, stamp mills operators, chemical and equipment suppliers, financers and middlemen. The intermediate inputs include locally fabricated tools, gold pans, metal detectors, petrol-powered jackhammers, jaw crushers, chemicals as well as hand and machine operated trommel classifiers. Deep gold mining up to ten metres is regulated by the 2010 Ministerial Act; and a licence costing SDG 3 225 is required. Small miners often sell their produce on-site to traders, jewellers’ agents orin the nearby towns, depending on the quantity and purity, with the profit of the onsite traders (who also supply inputs to the miners) estimated at 11% per gramme. In 2012 the government established a gold refinery (with a design capacity of 270 tonnes per annum) for the refining and fabrication of gold bars with high purity up to the international standards for export; since then, the Bos has been the sole exporter with most of gold export targeting the UAE (90.1% in 2012). Because of the low purity of gold extracted by the small miners (50% on average), a number of artisans operate in-house refining. However all were closed by a ministerial decree in 2012, to standardise the quality of traded gold and combat smuggling. Despite the government's attempt to internalise part of the gold value chain, the supply chain in the SSGM sector is largely informal and prone to illicit activities, Furthermore the variation in purity and informal financing of production (with 25% capital share in output) including the relatively low price in the onsite gold market prevent many miners from benefiting from downstream value capture. With a share in exports of 18.6% in 2012, agriculture is less integrated in the upstream GVCs as an input provider, in addition the agricultural trade balance is negative (the ratio of agricultural exports to food and agriculture-related imports is 25%). However, the reliance of agriculture on + Sudan ‘© ADB, OECD, UNDP 2014 ‘Arican Ezonomie Outlook a‘Sudan foreign inputs has increased (the ratio of imported agriculture-related inputs such as chemicals, fertilisers, tractors, pesticides and sacks in total imports was about 6% in 2012, up from 4.8% in 2011). The traditional rain-fed production, (crops and livestock), accounted for 62.1% of agricultural GDP between 2000 and 2008 and contributed most to GVCs as an input provider, with about 80% of livestock exports in 2012 sourced from this sub-sector, The main value chain actors involve producers, collectors, fatteners, middlemen, traders, live animals and meat exporters. Sudan has diversified agriculture, (rain-fed and irrigated, with @ mix of small and large- scale farming) as well as oil and gold products that are supportable by buyer-driven GVCs, with potentials for recovering the cotton linkages and up-scaling minerals and traditional exports. In this regard, the revitalisation of cotton production benefiting from existing significant irrigation infrastructures would revive cotton supply and value chains, especially since the Sudanese barakat cotton ranks among the world's highest quality cottons. Also the domestic market is sizeable; in 2012 imports of textile and related products accounted for about 3% of imports (USD 300 million). At present only three out of 16 textile factories are operating, Moreover, Sudan is one of the countries with the largest livestock inventories in Africa; the population of sheep and goats alone was estimated at about 69 million in 2013. Live sheep are the largest livestock export earner, contributing USD 286 million (8.5% of exports) in 2012. Sudan is neighbour to some wealthy Middle Eastern countries with sizeable markets and considerable preference for Sudanese breeds of sheep; also the country could explore the EU market for imported sheep meat. The livestock farm-gate value addition could be upgraded by undertaking the fattening and reconditioning of animals including linking herders to regional terminal markets. Sudan's oil industry is virtually vertically integrated and the rent accrues to the public sector; there are good prospects for boosting oil yield from depleting fields using enhanced oil recovery techniques to increase the recovery factor up to 30% and reserves by one billion barrels by 2020. Also, there is great potential for value addition in the SSGM sector through upgrading the locally fabricated tools and establishing machine leasing schemes together with enhancing the small miners’ and the larger mining firms’ synergies, including strengthening the community-based mining organisations. ‘The I-PRSP 2013, acknowledges that to create jobs and reduce unemployment and poverty, agriculture, livestock, manufacturing and services should be the main sources of growth. To that end, Sudan needs to address trade and non-trade barriers, including production, to upscale value addition and participation in the GVCs. Studies revealed that lifting the burden of high taxes and other levies along the supply chains would upgrade the value chain. Charges on crops are estimated at 30% of the total assembly and logistic costs and average tariffs on imported agricultural inputs at 30.6%, Marketing costs represent, on average, 33% of the cost of the sheep. Also, reducing the high cost of energy and infrastructure services, which raises the domestic resource cost (a measure of the opportunity cost of producing or saving foreign exchange), would enhance participation in GVCs. During 2001-07 about 41% of all factories closed due to high competition from imports and in export markets, The supply chain could be upgraded into value chains by clustering SMEs to increase participation of small producers (as in the case of the Sudan and Ethiopia organic banana project). Increasing the quality and safety measurements of production in compliance with international standards would raise the domestic value added. During 2000-01 Sudan's sheep were banned, and the EU also banned groundnuts, Attracting foreign mining companies with advanced technology would ensure healthy development of the mining industry. Improving the governance of extractive industries would enhance traceability; transparency, and confidence, and hence, reduce property disputes and upstream costs, More important, the supply and value chains need to be incorporated into the national development planning framework ort ‘ean Economie Outlook ‘© ADB, OECD, UNDP 2014 |