Monday, October 17, 2011

Sudan's Economy Reels From Loss of the South

October 17, 2011 8:24 pm

Sudan’s economy reels from loss of south

By William Wallis

Three months after the secession of its oil-rich south, Sudan’s economy is reeling from the loss of oil revenues, rising inflation and a faltering currency.

During the Arab spring earlier this year, activists failed to convert protests in Khartoum against inflation and political repression into a broader uprising against the regime. Protests have become more frequent and, in some cases, larger, said a youth leader who was arrested and tortured earlier this year.

But, he added that they are tied much more to worsening economic conditions and have not been organised by political activists. “Before the demonstrations were orchestrated, but these ones have been spontaneous. We have had two steady months of high inflation. Meat prices have gone up to $10 per kilo. Everything has gone up.”

Sudan’s has been one of the fastest growing economies in Africa over the past decade, with oil production feeding a boom in consumer spending and services concentrated around Khartoum. But the government proved ill-prepared for the 75 per cent drop in revenues from oil when the south voted for independence and took most of the country’s reserves with it in July as part of a peace deal that ended decades of civil war.

Since then, the Sudanese pound, the currency in the north, has fallen by up to 60 per cent on the black market alongside a decline in foreign currency inflows. Annual inflation reached 21 per cent in September but some basic foodstuffs, such as sorghum, a staple food, have more than doubled, ramping up social tension.

Officials in the ruling National Congress party recognise the economy’s weakness as the greatest short-term threat to the stability of the regime, which is fighting rebel groups on at least three fronts.

“Unless action is taken the economy will be the weakest link in our social and political chain,” Ibrahim Ghandour, the political secretary of the NCP told the Financial Times in an interview earlier this year. He added that it could take at least two years for the north’s economy to adjust to the loss of the south.

“The government is definitely worried,” the youth leader added. “They have been quelling these protests with violence like before and with large numbers of arrests.”

Other Arab states have in the past provided vital funds to Sudan. In an effort to shore up foreign reserves, Mohamed Kheir al-Zubeir, the central bank governor, appealed earlier this month to them to step into the breach. He said that the central bank and commercial banks needed as much as $4bn.

For a decade, the regime used easy oil money to fatten up patronage networks, co-opt opponents and raise security and defence spending to at least 34 per cent of the budget, according to diplomats’ estimates. In a sign of how much President Omar al-Bashir’s government was feeling the pinch, finance ministry officials this weekend announced they would cut the security budget.

The government has already planned 25 per cent savings this year, financed partly by cutting ministerial salaries, travel budgets and politically sensitive fuel and sugar subsidies.

It has drawn up a three-year emergency programme, which aims to diversify revenues by increasing gold and other mining production and boosting agriculture and industry. Mr Bashir’s government starts talks in Juba today with the newly independent southern government on the sharing of oil revenues.

There are conflicting estimates of the cost of the loss of the south to Khartoum. The International Monetary Fund estimates it at more than $5bn up to 2015.

Southern officials are willing to pay $3bn, half via a 10 per cent reduction on oil sales running for three years and half via waiving debts it says are owed by the north. This falls far short of what Khartoum wants. Mr Bashir’s government argues it will lose $15bn.

It wants the south to stump up $9bn, via a 30 per cent discount on oil sales over six years. It also wants hefty transit fees for use of the pipeline which carries the South’s oil through the north to a refinery in Port Sudan.

Southern officials say these fees would amount to about $15 a barrel compared with the 41 cents charged by Cameroon on a similar length pipeline that runs from Chad.

Business people and officials had hoped that a peaceful transfer of sovereignty to the south would have enabled Khartoum to normalise relations with the west, ended the US trade embargo, and led to foreign investment.

But allegations of war crimes committed by Khartoum in disputed border regions have stalled Sudan’s rehabilitation and potentially delayed prospects of it winning forgiveness on its $40bn external debt.

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