Last Updated: Sun Feb 26, 2012 09:28 am (KSA) 06:28 am (GMT)

Lost oil billions leave Sudan’s economy reeling

Sudan’s oil exports, which began in the late 1990s, fuelling growth and investment, effectively stopped in July when the south became independent. (Reuters)
Sudan’s oil exports, which began in the late 1990s, fuelling growth and investment, effectively stopped in July when the south became independent. (Reuters)

Sudan has lost billions of dollars in oil receipts since the south gained independence last year, and is plagued by soaring prices and a weakening currency, with no economic solution in sight for the bankrupt nation, analysts say.

“The situation is deteriorating further and further,” and the economy is in crisis, says University of Khartoum economist Mohamed Eljack Ahmed.

“Life has become very difficult.”

Sudan’s oil exports, which began in the late 1990s, fuelling growth and investment, effectively stopped in July when the south became independent after an overwhelming vote that followed decades of civil war.

Prior to partition, about three-quarters of crude production came from the south and accounted for more than 85 percent of Khartoum’s export earnings, which reached $7.5 billion in the first half of 2011, according to the World Bank.

“They’ve lost that (oil) income. It’s gone for good,” an international economist said, declining to be identified.

South Sudan has to use the north’s pipelines and export terminal to sell its crude on the international market but the two sides have failed to agree on compensation owed to Khartoum for the use of its infrastructure.

Southern oil represented more than one third of the Sudanese government’s revenues and its biggest source of hard currency, and Ahmed says the regime now has very few alternatives.

Without the petro-dollars, there is a severe shortage of foreign currency, pushing prices higher for imported goods used in domestic production, as well as for essentials like medicine, Ahmed explained.

“The prices of drugs are now increasing dramatically,” he said.

According to official media, inflation hit 19 percent in January, and analysts say it could go higher.

Lacking other immediate ways to finance its deficit, economists say the government may resort to printing money, causing more inflation and further weakening the Sudanese pound.

Even before the loss of southern oil, Sudan’s foreign exchange reserves were less than half the recommended standard to pay for three months’ worth of imports, the international economist said.

The government maintains a fixed exchange rate at about 2.7 pounds for one U.S. dollar but the black market rate has been well above 4.0 since late last year. More recently it has hovered around 5.0.

“Nowadays we are all buying dollars,” in expectation of later profits on the further weakening of the pound, said one money trader working illegally on a downtown street.

“There is a shortage of dollars in the market,” said another dealer, whose clients include importers in need of the cash.

With the government tightly rationing foreign currency, even well-connected businessmen can’t get it through official channels, said the international economist.

Finance Minister Ali Mahmud al-Rasul said last week that Sudan would ramp up exports to acquire hard currency and bring down the exchange rate.

Khartoum aims to roughly double its truncated oil production this year while earning $2.5 billion from gold and targeting higher exports of cotton, sugar and other commodities.

But economists say the plan seems unworkable in the short term.

Ahmed says agricultural infrastructure, once the country’s economic mainstay, has collapsed and neither farmers nor industrialists have an incentive to operate.

Meanwhile, the budget deficit is estimated at about $8 billion between 2011 and 2015, said the international economist, who sees the economy contracting by 4.5 percent this year.

Roughly $38 billion in foreign debt, along with U.S. economic sanctions, limits Sudan’s access to external financing.

Under an emergency three-year program announced in June, Khartoum plans to cut spending and widen the tax base.

Economists say spending reductions are difficult given the extremely large outlay on the security forces, which are battling rebellions in several states bordering South Sudan.

For political reasons the government cannot broaden the tax base because of exemptions given to “certain persons, certain families and organizations,” Ahmed said.

“Most of the taxes are actually indirect taxes which have an impact on the poor,” he said.

The poverty rate in northern Sudan was estimated at 46.5 percent in 2010, the United Nations said.

With a monthly minimum wage of 200-300 pounds, people cannot meet their basic needs, poverty will increase, and social unrest is expected, Ahmed said.

Economic conditions are the main reason why Sudan faces a potential “revolution”, a taxi driver said.

“It is coming soon!” he said, wagging his finger.

But current difficulties are nothing compared to the 1970s and 80s when Sudan experienced acute shortages.

Khartoum -- where most of the country’s growth was concentrated -- still does not reflect an economy in crisis, as construction projects continue, businesses are open and people are not destitute, the international economist said.

At some point, he suggested, “things will hit the wall.”

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