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Sudan, SL, Similarities

South Sudan’s secession on July 9, 2011 has translated for Sudan into the loss of a sizeable portion of its economic potential and a daunting challenge of adjusting to a permanent fiscal and external shock, the IMF in a press release said.
Sudan’s economic conditions deteriorated in 2011, with non oil real GDP growth decelerating to 3.4% and inflation picking up at about 18.5%.
Delays in responding to the fiscal shock resulted in an overall 1.3% of GDP fiscal deficit, despite a low execution rate of the investment budget.
The deficit was mostly financed by the banking system, which resulted in reserve money growing at 28%. Credit to the economy was subdued, growing only about 8%.
External developments led to a contraction of the balance of payments (BoP) in 2011. Exports declined by 13%, reflecting the drop in 2011 second half of oil exports, which was only partially offset by the increase in gold exports. Imports also declined by 7.5%.
This restructuring of the BoP resulted in a ½% of GDP current account deficit.
In order to stabilize the domestic currency and stop the draw-down on the country’s foreign exchange (forex) reserves, the authorities introduced various administrative restrictions. These measures were however unsuccessful in preventing the exchange rate (ER) depreciation in the curb market.
Economic conditions continued to deteriorate in 2012 first half(1H).
The fiscal position weakened in the 1H as revenue underperformed by some 30%, reflecting the lack of agreement with South Sudan on oil transit fees, compared with a 95% execution rate for spending. Both reserve money and broad money grew by 24%, much higher than in 20111H.
By end July, 12 month inflation exceeded 40%. Pressures on the Sudanese pound intensified, pushing the premium on the US dollar over 100 percent by end-June 2012.
After several months of hesitation, the authorities adopted in June 2012 a reform package that included a step devaluation of the official ER (66%), an increase in taxes, a bold reduction in energy subsidies, cuts in non-priority spending and an expansion of the social safety nets.
These measures are a positive step towards restoring macroeconomic stability and addressing Sudan’s macroeconomic imbalances. However, reaching fiscal sustainability and enhancing growth potential will require a determined continuation of the reform momentum.
Stepping up structural reforms will also help address the underlying structural challenges facing the economy. Key reforms include: (i) a comprehensive civil service reform, (ii) banking sector restructuring, (iii) ambitious privatization programme, and (iv)improving governance.
IMF’s executive directors noted Sudan’s daunting policy challenges, particularly the need to restore macroeconomic stability and growth prospects after South Sudan’s secession.
They commended the authorities’ commitment to prudent policies and welcomed the adoption of a comprehensive reform programme to tackle these challenges. Directors agreed that a determined policy agenda implementation supported by adequate resource mobilization at home and abroad will be essential to improve the economic outlook for the medium term and beyond.
Directors considered that fiscal adjustment grounded on a sound medium-term Framework is central to macroeconomic stabilization and welcomed the recently announced measures to enhance revenue collection and rationalize expenditure. They recommended a phase-out of remaining fuel subsidies in parallelwith a strengthening of the social safety net, greater public sector wage restraint and better public expenditure management. Efforts should also focus on widening the tax base, improving tax administration and streamlining extractive industries’ taxation. In addition, state finances reforms remain necessary to put the overall fiscal position on a sounder footing.
Against a backdrop of high inflation and ER pressures, directors saw merit in further monetary tightening. They encouraged the central bank to refrain from deficit monetization and step up reforms to enhance the monetary policy’s effectiveness. In this regard, directors called for a switch to a reserve money anchor, improved coordination between monetary and fiscal authorities and greater independence to the Bank of Sudan.  Development of the interbank market and auctions of central bank securities could also help promote intermediation and absorb excess bank liquidity.
Directors invited the authorities to discontinue central bank gold-trading operations, unify the official forex rates and pursue greater ER flexibility.
Welcoming the adoption of the Interim Poverty Reduction and Growth Strategy, directors stressed the importance of reforms to improve the business climate and boost private-sector-led growth.
In this regard, priorities include further economic liberalization and diversification, restructuring or privatization of public enterprises and civil service and governance reforms.
They also agreed that a comprehensive assessment of the banking system should be undertaken with a view to enhancing its development, efficiency and resilience.
Directors called on the authorities to further strengthen their cooperation with the Fund on policies and payments and supported continued Fund engagement with Sudan.
They encouraged the authorities to continue making payments to the Fund, to make them on a regular basis and to increase them as their payment capacity improves.
Noting that Sudan’s outstanding arrears constrain its access to external financing, directors encouraged the authorities to step up their dialogue with creditors and donors to garner support for debt relief. A few directors called for exceptional efforts by the international community, including the Fund, to support Sudan in this endeavour.

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