The outlook for Sudan’s struggling economy has brightened since the government passed a tough austerity package but it still needs to improve tax collection to overcome the loss of oil revenues, the International Monetary Fund (IMF) said on Monday.
Sudan lost three-quarters of its oil production when South Sudan became independent in July 2011, worsening an economic crisis as oil was the government’s main source of revenue and of the dollars needed to pay for food imports.
In June, the government launched a package of tough austerity measures including scaling back fuel subsidies to close a fiscal gap, sparking short-lived protests.
The central bank has also devalued the Sudanese pound, which had been in freefall on the black market since the South's secession.
While some opposition figures have suggested the economy may be on the brink of collapse, the IMF said the austerity plan, if fully implemented, would largely offset the loss of oil which accounted for some 55 percent of state income before the split.
“The picture is much, much brighter than it was in June (before the austerity plan was launched),” Paul Jenkins, the IMF’s resident representative in Sudan, told Reuters.
“We are very encouraged by the direction of policies which go a significant way towards resolving the challenges resulting from the loss of oil from South Sudan.”
But to close the fiscal gap, put by finance minister Ali Mahmoud at 6.5 billion pounds ($1.4 billion), the government also needs to improve tax collection.
Sudan’s tax yield, the ratio of revenues to gross domestic product (GDP), was only 7 percent, Jenkins said.
“Sudan has a very low tax revenue yield compared to other countries in the region and other countries with the same development level,” he said.
“Kenya, another low income country, has a yield of 20 percent ... If they moved half where a country like Kenya is they would have fully recovered the loss of tax revenues from South Sudan's secession.”
Analysts blame corruption and cronyism for lax tax enforcement with authorities often granting tax exemptions for people with the right connections.
Jenkins said scaling back of fuel subsides and other expenditures could bring down inflation, which hit 41.6 percent in July, to levels seen at the start of the year. In January, annual inflation was 19.3 percent.
“Contingent on firm implementation what they announced the inflation rate by the end of the year could be where it was at the beginning of the year,” he said.
Jenkins said the IMF hoped for more steps, although a senior party official has ruled out fully removing fuel subsidies until the end of 2013 to ease social pressures.
“We encourage them continuing reforms. Fuel subsidies are very expensive and benefit mainly wealthy people,” Jenkins said. “Something (like) 60 percent of the subsidies goes to the richest 40 percent of people.”
Sudan’s rising gold exports would help replace oil exports, which stopped with southern secession as Sudan’s remaining output is only serving domestic consumption. The government hopes to sell gold exports worth $3 billion this year.
Jenkins said boosting cotton exports would also help but would need time to reform the agricultural sector, which analysts say has been mismanaged for years.
“Sudan has a lot of potential for cotton,” he said.
Sudan is unable to borrow from the IMF after failing to pay back loans. Efforts to reschedule its bilateral debt of some $40 billion have been complicated by the United States, which often criticizes Sudan for human right violations, diplomats say.
Washington has a trade embargo in place since 1997 over Sudan’s past role for hosting prominent Islamist militants.