South Sudan Struggles As Foreign Currency Dries Up

Despite the wealth of South Sudan in oil, political problems with the Republic of Sudan has brought about the paralysis of the domestic economy., a photo by Pan-African News Wire File Photos on Flickr.

July 22, 2012, 10:36 p.m. ET

South Sudan Struggles as Foreign Currency Dries Up

By NICHOLAS BARIYO
Wall Street Journal

A severe foreign-exchange shortage has thrown South Sudan—the world's newest nation—into an economic crisis a year after it gained independence from Sudan.

The country is in danger of running out of U.S. dollars. Long lines have formed outside gas stations because of a shortage of imported gasoline. Consumer-price inflation, riding the rocketing costs of imported food, soared 80% in May from April, according to the latest government data. Road-building projects that would connect the landlocked economy with the rest of the world have stalled amid the government's emergency spending curbs.

Shortages of imported gasoline in South Sudan have sparked long waits, such as at a station in Juba in May.
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South Sudan's future has hinged on peace and steady income from oil exports. Since the start of the year, South Sudan hasn't had much of either. In January, a spat with Sudan over oil-transit fees prompted it to suspend crude exports through its neighbor—the only viable route. The move has cost South Sudan as much as $2 billion in lost oil revenues and revived a decadeslong conflict with Sudan, its former civil-war foe.

The oil shutdown has hammered the Sudanese pound, now trading at about six to the dollar, compared with 3.55 before South Sudan suspended crude-oil exports. The South Sudanese government declines to disclose its current level of foreign-exchange reserves, but the World Bank estimates they may vanish as early as August.

Without hard currency, South Sudanese businesses can't pay foreign suppliers; telecommunication companies can't import the equipment; and road builders can't buy critical materials such as asphalt.

Joseph Wani, director at South Sudan Lamba Ltd., which runs a chain of gas stations across the country, has put his company's expansion plans on hold because "it's next to impossible to get dollars."

He adds: "To get dollars at the official exchange rate may take a month, if you are lucky. And for a business, that does not make sense."

South Sudan's finance minister, Kosti Manibe, said the government has appealed to foreign donors such as China, the U.S. and the European Union for urgent support. China has since pledged around $8 billion, in aid and loans, but the money hasn't yet materialized.

Foreign donors are urging the government first to negotiate a settlement with neighboring Sudan over oil-transit fees. Those talks have started and stopped several times, with each country waiting for the mounting woes of the other to force concessions. Presidents Omar al Bashir of Sudan and Salva Kiir of South Sudan recently met in Ethiopia's capital, Addis Ababa—their first meeting since troops clashed along their common border this year—but they only agreed to keep talking.

Meanwhile, South Sudan's new government has struggled to attract foreign investment whose capital could offset the shortfall in hard currency from oil sales. Foreign businesses have shied away from a country where industry regulation remains inchoate, the political outlook unclear and corruption rife. Mr. Kiir recently appealed to his fellow government officials to give back $4 billion in stolen funds; to date about $60 million has been returned, according to his office.

Those companies with the biggest opportunities are among the hardest hit. South Sudan has one of the lowest cellphone-penetration rates in the world—18%—but five local operators have struggled to move beyond Juba and other regional towns. A lack of foreign exchange has prevented imports of vital machinery.

"We can't upgrade our network because our machinery and services are imported," said an executive with Sudatel Telecom Corp. "Without dollars, it's a nightmare."

South Sudan isn't the only African country that has run into foreign-exchange trouble relying on a single commodity or energy resource. Malawi is just beginning to step back from economic crisis, with help from foreign donors who have returned after the death of its strongman president in April.

Sudan, which used to rely on oil-export earnings for the bulk of its foreign revenue, is also feeling the pinch of shrinking foreign-exchange reserves, leading to steep prices of imported goods.

In response to the foreign-exchange crisis, South Sudan has slashed government spending and attempted to widen its tax base to compensate for the lost oil revenue. The government has suspended plans to pave more than 4,300 miles of roads until alternative revenues come on board, said Mr. Manibe, the finance minister.

The World Bank has warned that attempts to increase non-oil revenue through increased taxation will only deepen the damage to the South Sudanese economy, lifting poverty levels.

South Sudan's neighbor hasn't been immune to the economic pressures. Weeks of street protests in Sudan are threatening to escalate into Arab Spring-like uprisings against Mr. Bashir's government.

Sudan is facing a budget deficit of around $2.4 billion this year, resulting mainly from the loss of revenue it earned by shipping about 75% of South Sudan's oil output through its country.

Write to Nicholas Bariyo at nicholas.bariyo@dowjones.com