December 2009 54718 Sudan The Road Toward Sustainable and Broad-Based Growth THE WORLD BANK Poverty Reduction and Economic Management Unit | Africa Region Poverty Reduction and Economic Management SUDAN THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH December 2009 Poverty Reduction and Economic Management Unit Africa Region Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without written authorization from the World Bank. TABLE OF CONTENTS ABBREVIATION AND ACRONYMS ............................................................................................................ ix ACKNOWLEDGMENTS ................................................................................................................................ xi SUMMARY: SUSTAINING RAPID GROWTH IS IMPORTANT, BUT BROADBASED GROWTH IS AN IMPERATIVE...................................................................................................................... 1 A. Oil-led Growth Has Changed the Sudanese Economy, But Will It Last?.................................................................1 Economic Threats from Oil Dependency and External Volatility............................................................................3 Political Threats from Conflicts and Unbalanced Development ..............................................................................5 B. Toward a New Growth Vision ................................................................................................................................6 Ensuring Macroeconomic Stability and Effective Fiscal Management .....................................................................7 Broadening Private Sector-led Growth ...................................................................................................................8 Recovery and Growth in the Agriculture Sector....................................................................................................10 Developing a Comprehensive Growth Strategy for the South ...............................................................................11 Complementing Technocratic Reforms with Good Governance ...........................................................................12 : .................................................. 15 CHAPTER 1. MACRO AND FISCAL MANAGEMENT IN A VOLATILE WORLD ECONOMY .......... 25 A. Sudan's Oil Driven Boom and Bust Cycle .............................................................................................................25 B. Managing External Imbalance Pressures................................................................................................................26 C. Symptoms of Resource Curse? ..............................................................................................................................29 D. Effective Fiscal Management.................................................................................................................................30 The Need to Counter Pro-cyclical, Volatile and Unsustainable Fiscal Policy .........................................................31 Toward a More Reliable and Sustainable Fiscal Framework ..................................................................................34 CHAPTER 2. BROADENING PRIVATE SECTORLED GROWTH .................................................................................................. 41 A. The Importance of the Investment Climate ..........................................................................................................41 B. From Investment to Broad­Based Growth ............................................................................................................42 Investment Is Creating Pockets of Growth but Also Driving Up Costs .................................................................42 Low Competitiveness Has Contributed to Poor Economic Integration ................................................................44 Characteristics of the Enterprise Sector ................................................................................................................45 Regional Variations in Performance ......................................................................................................................45 Regional Differences in Firm Size, Capital Intensity, and Skills ............................................................................47 Manager Perceptions of Constraints .....................................................................................................................48 Poor Market Integration .......................................................................................................................................49 Administrative Barriers .........................................................................................................................................49 Formalizing the Informal Sector ...........................................................................................................................50 Private Sector Development in Conflict-Affected Regions: Southern and Western Sudan .....................................51 Summary and Agenda for Policy Reform..............................................................................................................53 iv SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH CHAPTER 3. EFFECTIVE MANAGEMENT OF THE OIL SECTOR ...................................................... 57 A. Overview of the Sudanese Oil Sector ....................................................................................................................57 B. Institutional Structure ..........................................................................................................................................62 C. The Petroleum Sector and the CPA.......................................................................................................................63 D. Key Policy Issues ...................................................................................................................................................64 Exploration and Production .................................................................................................................................64 Domestic Consumption .......................................................................................................................................66 Institutional Structure ..........................................................................................................................................66 CHAPTER 4. RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR ............................................................. 69 A. Introduction .........................................................................................................................................................69 B. Sub-Sector Performance and Cross-Cutting Issues ................................................................................................71 Crops: Irrigated, Semi-Mechanized Rainfed, and Traditional Rainfed Systems .....................................................71 Forestry ................................................................................................................................................................76 Livestock ..............................................................................................................................................................79 Key Agro-Industries: Sugar, Leather, and Vegetable Oil ........................................................................................80 Impacts of Productivity and Marketing Costs on Export Competitiveness of Agriculture .....................................83 Cross-cutting Issues: Agricultural Credit, Land Use, and Research and Extension ................................................85 C. Policies, Investments and Actions .........................................................................................................................87 Strategy for Competitiveness and Poverty Reduction ............................................................................................88 Short Term Actions for Northern Sudan ..............................................................................................................88 Medium- to Long-Term Actions ..........................................................................................................................91 Government Partnerships with the Private Sector .................................................................................................95 Sustainable Natural Resource Management ..........................................................................................................96 CHAPTER 5. MAKING SERVICES COMPETITIVE: THE CATALYST OF NONOIL GROWTH ..... 97 A. Introduction .........................................................................................................................................................97 B. Finance .................................................................................................................................................................98 Access to Service...................................................................................................................................................98 Improving Efficiency of the Financial Sector ......................................................................................................102 Agenda for Policy Reforms .................................................................................................................................104 C. Infrastructure Services ........................................................................................................................................106 Decentralization to Boost Basic Infrastructure ....................................................................................................107 High Cost of Services in Sudan ..........................................................................................................................108 Access and Efficiency..........................................................................................................................................109 Public Investment and Private Sector Participation.............................................................................................115 Agenda for Policy Reforms .................................................................................................................................118 CHAPTER 6. TOWARD A COMPREHENSIVE GROWTH STRATEGY IN SOUTHERN SUDAN .. 121 A. Motivation .........................................................................................................................................................121 B. Growth Diagnostic .............................................................................................................................................122 C. Binding Constraints to State-Level Growth ........................................................................................................124 Upper Nile State ................................................................................................................................................124 Eastern Equatoria State ......................................................................................................................................131 TABLE OF CONTENTS v D. Toward a Comprehensive Growth Strategy for Southern Sudan ..........................................................................136 Syndrome Characterization ................................................................................................................................136 Implementation Diagnostics ..............................................................................................................................138 Additional Messages for GoSS ............................................................................................................................140 REFERENCES ............................................................................................................................................... 143 LIST OF BOXES Box 1: Same Resources, but Different Outcomes: What Explains It? .......................................................................3 Box 1-1: Indonesia's Successful Management of Oil Rents ........................................................................................31 Box 1-2: Impact of Past Oil Booms and Busts on Other Oil Exporters .....................................................................32 Box 1-3: Calculating a Permanent Income Equivalent for Sudan's Oil Revenues.......................................................37 Box 2-1: The Southern Sudan Private Sector Development Project...........................................................................53 Box 3-1: Production Trends of Major Projects ..........................................................................................................60 Box 3-2: State Involvement in the Oil Sector............................................................................................................62 Box 3-3: Key Elements of the Wealth Sharing Protocol of the CPA ..........................................................................63 Box 3-4: The Abyei Area...........................................................................................................................................64 Box 4-1: Reforms in the Gezira Irrigation Scheme....................................................................................................73 Box 4-2: Investing for Competitive Rainfed Agriculture: Experiences of Brazil's Cerrado and Northeast Thailand ....................................................................................................................................75 Box 4-3: Impact of the Elimination of Agricultural Sales Taxes on the Competitiveness of the Crop and Livestock Sectors and on the Environment in Traditional Farming Areas.............................................81 Box 4-4: Agriculture and Export Potential in Southern Sudan ..................................................................................84 Box 4-5: Main Programs in the Agricultural Revitalization Program (ARP) ..............................................................89 Box 5-1: The National Vision for Microfinance in Sudan and the Role of the MDTFs...........................................102 Box 5-2: National Emergency Transport Rehabilitation Project (NETREP) ...........................................................112 LIST OF FIGURES Figure 1: Some Notable Signs of Economic Change since the Advent of Oil ...........................................................1 Figure 2: Sudan Has Achieved Considerable Macroeconomic Stability in Recent Years............................................2 Figure 3: Sudan's Growth Has Been Driven Largely through The Expansion of Its Public Sector .............................4 Figure 4: Large Disparity in MDG Indicators within Sudan ....................................................................................5 Figure 1-1: Sudan's Near Term Macroeconomic Situation Will Differ from Recent Experience .................................26 Figure 1-2: The Dynamics of Sudan's External Imbalance .........................................................................................28 Figure 1-3: Sudan's Unusual Growth and Import Pattern: What Do They Imply? .....................................................30 Figure 1-4: GoNU Expenditure, Revenue and Sudan Oil Price ................................................................................32 Figure 1-5: ORSA Account Withdrawals and Deposits .............................................................................................34 Figure 1-6: Expected Government Oil Revenues, by Production Scenario ................................................................35 Figure 1-7: Volatility in Oil Prices and Effects on Revenue Forecasts ........................................................................35 Figure 1-8: Split in Government Oil Revenues, Base Revenue Scenario ....................................................................36 Figure 1-9: Permanent Income and "Frontloaded" Revenue Scenarios, Base Case .....................................................39 Figure 2-1: Total Factor Productivity Growth of Manufacturing Industries...............................................................43 Figure 2-2: Share of Surveyed Firms that Export .......................................................................................................44 Figure 2-3: Distribution of Manufacturing Enterprises by State ................................................................................46 vi SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH Figure 2-4: Densities of Manufacturing Value Added and Sales Per Worker ..............................................................47 Figure 2-5: Total Factor Productivity Growth in Khartoum and Other Areas............................................................47 Figure 2-6: Regional Differences in Firm Inputs .......................................................................................................48 Figure 2-7: Top 10 Constraints to Sudanese Firms, by Size .......................................................................................48 Figure 2-8: Days of Inventory Held by Manufacturers ..............................................................................................49 Figure 2-9: Percentage of Management Time Dealing with Regulation .....................................................................50 Figure 3-1: Oil Production by Project .......................................................................................................................59 Figure 3-2: Oil Production Scenarios ........................................................................................................................60 Figure 3-3: Oil Production and Consumption ..........................................................................................................62 Figure 3-4: Diagram of Basic Petroleum Institutional Reform Principles...................................................................67 Figure 4-1: Trend in GDP from Agriculture in Sudan ..............................................................................................69 Figure 4-2: Trends in Food Crop Production in the Three Farming Systems (1991/92 to 2007/08) ..........................71 Figure 4-3: Yield Gaps between On-farm Research Trials and Farmers' Average Yields in the Gezira Irrigation Scheme ...................................................................................................................................72 Figure 4-4: Relative Sorghum and Sesame Yields in Semi-Mechanized Farming Areas, and International Comparison of Average Sorghum Yields 2005­2007 .........................................................74 Figure 4-5: Trends in Gum Arabic Exports (1970 to 2005) ......................................................................................77 Figure 4-6: Exports and Imports of Vegetable Oils, 1990­2005 ................................................................................83 Figure 4-7: Simulated Impacts of Yield Increases and Elimination of Marketing Taxes and Fees on Export Price/Border Price Ratio .................................................................................................85 Figure 5-1: Size and Depth of Financial Sector in Sudan ..........................................................................................99 Figure 5-2: Firms' Perception of the Access to Finance Constraint ............................................................................99 Figure 5-3: Freight Transport Rates for International Trade.....................................................................................108 Figure 5-4: Median Ratio of Transport Cost to Sales Revenue among Manufacturing Firms ...................................108 Figure 5-5: Geographical Spread in Input Supplier Locations and Firm's Perception on Transport in Sudan ...........109 Figure 5-6: Fuel and Electricity Cost and Telecommunication Cost as Ratio to Sales Revenue ................................109 Figure 5-7: Maps of Transport and Power Infrastructure Coverage in Sudan ...........................................................110 Figure 5-8: Historical Traffic Volumes of Internal Water Transport in Sudan...........................................................111 Figure 5-9: Location of Power Network ..................................................................................................................113 Figure 5-10: Quality of Electricity Service ................................................................................................................114 Figure 5-11: Mobile Cellular Density .......................................................................................................................117 Figure 6-1: A Growth Diagnostic Framework .........................................................................................................124 Figure 6-2: Sectoral Size of Economic Activity ........................................................................................................124 Figure 6-3: Monthly UNS Oil Revenue Share: January 2007 ­ December 2008.....................................................125 Figure 6-4: Breakdown of State Expenditure by Type of Spending: 2008 and 2009 ................................................126 Figure 6-5: Indicative Relative Share in State Economy ..........................................................................................127 Figure 6-6: UNS Cereal Production and Cultivate Area: Mechanized and Traditional Farming ..............................127 Figure 6-7: Sources of Funding among Manufacturers in Malakal ..........................................................................130 Figure 6-8: Indicative Relative Size Shares in the State Economy ............................................................................133 TABLE OF CONTENTS vii LIST OF TABLES Table 1-1: Permanent Income Scenarios ...................................................................................................................38 Table 2-1: Productivity Measures for Manufacturing in Sudan and Comparators .....................................................43 Table 3-1: Oil Consumption ....................................................................................................................................61 Table 4-1: Growth of Production (Value Added) and Share in Agriculture GDP by Farming System........................70 Table 4-2: Research and Farmers' Crop Yields in Marginal Rainfed Areas in North Kordofan ..................................76 Table 4-3: Share of Production Cost for Medium-Size Tannery ................................................................................82 Table 4-4: Costs Incurred at Port Sudan ...................................................................................................................85 Table 4-5: Volume and Percentage of Credit to Agriculture Compared to Other Sectors ..........................................86 Table 4-6: Comparison of Agricultural R&D Spending in Sudan and Brazil ............................................................87 Table 5-1: Ratio of Agricultural Credit to GDP in 2005 ........................................................................................100 Table 5-2: Flow of Banking Finance by Sector ........................................................................................................100 Table 5-3: Cost of Rehabilitation and Reconstruction Two-Lane Inter-Urban Roads ..............................................112 Table 5-4: Sector Shares of National Development Projects ....................................................................................115 Table 6-1: Boat River Transport to and from Malakal .............................................................................................129 Table 6-2: Price Comparison of Select Intermediate Inputs: Malakal and Other Cities ...........................................130 Table 6-3: Cost and Time of Cargo from Kosti to Malakal by Mode of Transportation ..........................................131 Table 6-4: Livestock Slaughter in Torit ...................................................................................................................134 Table 6-5: Livestock Transport Costs for EES .........................................................................................................134 SUDAN ­ GOVERNMENT FISCAL YEAR January 1 ­ December 31 CURRENCY EQUIVALENTS (NOVEMBER 2009, CBOS) Currency Unit: Sudanese Pounds (SDG): 2.26 = US$1.00 ABBREVIATION AND ACRONYMS ABS Agricultural Bank of Sudan EITI Extractive Industries Transparency AICD Africa Infrastructure Country Initiative Diagnostic EU European Union ARHC Agricultural Revival High FAO Food and Agriculture Organization Council FDI Foreign Direct Investment ARP Agricultural Revitalization FIAS Foreign Investment Advisory Services Program FBO Farmers Based Organizations BoSS Bank of Southern Sudan FOB Freight on Board BPD Barrels Per Day FSAP Financial Sector Assessment Program BRAC Building Resources Across GAC Gum Arabic Company Communities GACC Gum Arabic Commodity Council CBO Community Based Originations GDP Gross Domestic Product CBoS Central Bank of Sudan GIC Government Iiara Certificate CFSAM Crop and Food Supply GMC Government Musharaka Certificate Assessment Missions GMP Green Mobilization Program CFSVA Comprehensive Food Security GNPOC Greater Nile Petroleum Operating and Vulnerability Analysis Company CNCP Chinese National Petroleum GoNU Government of National Unity Company GoS Government of Sudan COMESA Common Market for Eastern GoSS Government of Southern Sudan and Southern Africa IDP Internally Displaced Persons COMESA FTA Common Market for Eastern IFAD International Fund for Agricultural and Southern Africa Free Trade Development Area IMF International Monetary Fund CPA Comprehensive Peace INC Interim National Constitution Agreement JAM Joint Assessment Mission CRS Catholic Relief Services JMP Joint Multipurpose Program DDR Disarmament, Demobilization, JOC Joint Operating Companies Reintegration KNC Kunda Nordic Cement Corporation DNB Dutch Central Bank LDCs Less Developed Countries DTIS Diagnostic Trade and MAL Marginal Arable Lands Integration Study MARF Ministry of Animal Resources and EBA Everything But Arms Fisheries EES Eastern Equatoria State MDG Millennium Development Goal x SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH MDTF Multi Donor Trust Fund SFMC Savanna Farmers Marketing MDTF-N Multi-Donor Trust Fund ­ National Company MoEM Ministry of Energy and Mining SGB Sudan Gezira Board MFI Micro Finance Institutions SMDF Sudan Microfinance Development MoFNE Ministry of Finance and National Facility Economy SME Small and Medium Enterprises MSME Micro, Small and Medium Enterprises SOE State Owned Enterprises MVA Megavolt Ampere SPC Sudan Petroleum Corporation NCB Nile Commercial Bank SPLM/A Sudan People's Liberation Movement/ NEC National Electric Company Army NETREP National Emergency Transport SRC Sudan Railway Corporation Rehabilitation Project SRTC Sudan River Transport Corporation NGO Non Governmental Organization SSCCSE Southern Sudan Center of Census, NHA National Highway Authority Statistics and Evaluation NOC National Oil Company SSDB Social Development Bank NOPD Non-Oil Primary Deficit SSMDF South Sudan Microfinance NPC National Petroleum Commission Development Facility NPL Non-Performing Loan SSL Sudan Shipping Lines NTC National Telecommunication SSTC Southern Sudan Trans-Nile Company Corporation TAZARA Tanzania Zambia Railway Authority NTRC Nile River Transport Corporation TTCA Transit Transport Coordination O&M Operation and Maintenance Authority ORSA Oil Revenue Stabilization Account UAE United Arab Emirates PDOC Petrodar Development and Operating UNDP United Nations Development Company Program PI Permanent Income UNIDO United Nations Industrial PICS Productivity and Investment Climate Development Organization Survey UNS Upper Nile State PPP Public Private Partnership USAID United States Agency for PSA Production Sharing Agreement International Development PSP Private Sector Participation USD United States Dollar ROSCA Rotating Savings and Credit VAT Value Added Tax Association WB World Bank RTC River Transport Corporation WEO World Economic Outlook SAF Sudan Armed Force WFP World Food Program SCC Sudan Cotton Company WUA Waters Users Association SDG Sudanese Pounds WVS World Values Survey Vice President: Obiageli Katryn Ezekwesili Country Director: Kenichi Ohashi Sector Director: Sudhir Shetty Sector Manager: Kathie Krumm Task Team Leader: Bill Battaile ACKNOWLEDGMENTS The World Bank is appreciative of the collabora- nor Dr. Sabir Mohamed Hassan, Director Gen- tion provided by the Sudanese authorities in the eral of the Foreign Debt Directorate Layla Omer preparation of this Country Economic Memoran- Bashir and other staff. The team is also grateful for dum (CEM), in consultation with ministries of the the inputs received from the Ministry of Agricul- Government of National Unity (GoNU) and the ture & Forestry led by Undersecretary Dr. Abdel Government of Southern Sudan (GoSS), private Lateef Ejaimi, from the Chair of the High Coun- sector organizations, academics and with support cil of Agriculture Revitalization Professor Ahmed from development partners, including financial Ali Ganaff and his staff, and from the Ministry of assistance from the Department of International Animal Resources and Fisheries led by Undersec- Development, United Kingdom and the African retary Dr. Mohamed Abdel Razig. The CEM team Development Bank. would like to extend special thanks to the Minis- The counterpart team in GoNU was led by try of Energy and Mining led by Deputy Secretary the Ministry of Finance and National Economy General Hamid El-Nil Abdelgadir for consultations (MoFNE), under the guidance of H.E. Minis- with senior management and staff. Special thanks ter Dr. Awad Ahmed Eljaz, State Minster Dr. Lual also to the GoSS Ministry of Energy and Min- Deng, State Minister Tarig Shalabi, and Undersec- ing, led by H.E. John Luk Jok. We would also like retary Dr. Eltayeb Mustafa Abou-Ganaya. Other to thank the authorities and other stakeholders we members of MoFNE senior management that were worked with in Upper Nile and Eastern Equato- particularly helpful include Director General Bud- ria states for their excellent cooperation during the get Mustafa Houli and Director General Inter- state case study work in Southern Sudan, especially national Cooperation Elfathi Khalid. For work Major General Gatluak Deng Garang, Governor of focused on Southern Sudan, a counterpart team in the Upper Nile State and Brigadier General Aloisio GoSS was led by the Ministry of Finance and Eco- Emor Ojetuk, Governor of Eastern Equatoria State. nomic Policy, under the guidance of Undersecre- The CEM team was led by Bill Battaile (Senior tary Aggrey Tisa. The team greatly appreciates their Economist, AFTP2), under the supervision of close engagement and valuable inputs, including Deepak Mishra (Lead Economist, AFTP2). The Fiona Davies, Richard Efil, Ben French, Maxwell CEM's team contributors included Lant Pritch- Melingasuk Loboka, Lee Crawford and Tom Hart. ett (Kennedy School of Government, Harvard The CEM team worked in collaboration University), Michael Levitsky (Lead Energy Econ- with a dedicated Steering Committee and would omist, COCPO), Stephen Ndegwa (Lead Special- like to thank the members for excellent support ist, AFTPR), Alwaleed Alatabani (Senior Financial and many hours of discussions during the exer- Sector Specialist, AFTFP), Magdi Amin (Princi- cise, in particular the Committee Chair Dr. Wani pal Strategy Officer, CEADR), Sanjeev Ahluwalia Tombe and Co-Chair Dr. Taj Elsir Mahjoub. The (Senior Public Sector Specialist, AFTPR), Mosl- team is also very grateful for the inputs of the lem Alamir (Economist, AFTP2), Lebohang Lijane Central Bank of Sudan, especially from Gover- (Economist, AFTP2), Yutaka Yoshino (Economist, xii SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH AFTPM), Yadviga Semikolenova (Energy Econo- ager, AFCE3), and Laurence Clarke (Juba Office mist, ECSSD), Ji-Young Choi (Senior Economist, Manager, AFCE3). The team also wishes to thank AFTP2), Greg Toulmin (AFCET), Assaye Legesse the Bank's Sudan country team members for the (AFTAR), Asif Faiz (AFCET), Jeeva Perumal- many useful insights and advice. pillai-Essex (SACNP), Mohamed Osman Hus- The peer reviewers for the report included sein (AFTAR), Negede Lewi (AFTTR), John Roberto Zagha (Country Director, SACIN), Jorge Oloya (AFTAR), Charles Yoere (AFTAR), Mai- Arbache (Senior Economist, AFRCE), and Kab- soun Alaaidin Badawi (AFTFE), IJsbrand de Jong bashi Madani (Professor, University of Khartoum). (AFTWR), Siobhan Murray (DECRG), Somik Lall Many thanks for their valuable comments and sug- (FEUUR), Olasupo Olusi (ECSP3), Halla Qad- gestions, and also to inputs from Alan Gelb (Direc- dumi (AFTWR), Edward Dwumfour (AFTEN), tor, DECRG). Thanks also to the University of Dirk-Jan Omtzigt (Joint Donor Team, Juba), Has- Khartoum Faculty of Economic and Social Stud- san Al-Atrash (IMF), Abdul Naseer (IMF), Ali ies for discussions during the exercise, as well as Abbas (IMF), Anders Hannevik (Norway Minis- the University's Development Studies and Research try of Foreign Affairs), Laura James (DFID, UK), Center for hosting a consultation workshop in Freddie Carver (DFID, UK), Wandia Gichuru October 2009. The team also thanks the staff of the (DFID, UK), Appolenia Mbowe (Africa Develop- World Bank resident missions in Khartoum and ment Bank), Prajesh Bhakta (Africa Development Juba for advice and logistical support: Azza Abdel Bank), and Jack Van Holst Pellekaan, Greg Sny- Magid Imam, Tarig Mohamed Osman, Abir Abdel ders, Derek Byerlee, Shawki Barghouti, Ali Salih, Rahman, Ali Mohamed Adam, Yousra Mohamed Ahmed Mina, Tilahun Temesgen, Peter Ajak, Elias Abdelrahman, Mohamed Osman Hussein, Yousif Leonardo, Beauty Jiji, Kimo Guoy, Tarig Ismaeil, Mubarak ElFadil, Hassan Abdel Moneim Gaafar, and Rahi Abdula (Consultants). Jennifer Asego, Juliette Guantai, Anne Akwii Ken- The CEM was undertaken with the over- nox, Sit Elnesa Ali Mohammed Babiker, Evans all guidance of Kathie Krumm (Sector Manager, Kijore, Moses Jala, James Mou Badi Aloro, and AFTP2). The team wishes to acknowledge feed- Millicent Ndolo. Tremendous gratitude is also back and guidance received from Kenichi Ohashi, owed to Tanisha McGill, Dora Harris, Arlette Country Director (AFCE3), Sudhir Shetty (Sector Sourou and Fulvia Toppin for support provided Director, AFTPM), Alassane Sow (Country Man- from Washington. SUMMARY: SUSTAINING RAPID GROWTH IS IMPORTANT, BUT BROAD-BASED GROWTH IS AN IMPERATIVE1 A. Oil-led Growth Has Changed the The economy has changed considerably Sudanese Economy, But Will It Last? since the onset of oil. Oil wealth has enabled Sudan to roll out a massive expansion of its phys- Sudan is in the 10th year of its longest and stron- ical and social infrastructure. The road network gest growth episode since independence, benefit- has increased from 3,358 kilometers in 2000 to ing from the advent of oil in 1999.2 The size of its 6,211 kilometers in 2008, electricity generation has economy, measured by nominal gross national prod- more than doubled from 2,569 mw to 5,506 mw uct, has grown fivefold--from $10 billion in 1999 to during the same period and the number of chil- $53 billion in 2008. Per capita income, a summary dren enrolled in primary schools has registered a measure of the living standard of average citizens, has sharp increase from 3.3 million to 5.3 million in increased from $334 to $532 (constant 2000 USD) over the same time period. This is in sharp contrast to the pre-oil period when real per capita income 1 This chapter has been prepared by Deepak Mishra and Bill Battaile, with inputs from individual chapter authors. kept mostly within the $200­300 range during a 2 Oil was discovered in 1978 in the Bentui area, but significant exports four-decade period (left panel, Figure 1). became a reality only in 1999. FIGURE 1: Some Notable Signs of Economic Change Since the Advent of Oil GDP per capita (constant 2000 USD) 2000 2008 6.2 6 5.5 5.3 500 1.8X 1.6X 4.4 2.1X 4 Advent of oil 1.8X 3.4 3.3 400 2.6 2.5 2 300 0 Road network Electricity Child primary Trade/GDP 200 ('000 kms) generated enrollement ratio (times 10 1960 1970 1980 1990 2000 ('000 MW) (millions) to normalize) Source: World Bank Development Indicators. 2 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH a span of eight years.3 The Sudanese economy has ment best exemplified by a low and stable inflation also become more integrated with the rest of the rate, a steady exchange rate, a sustainable external world--its trade to GDP ratio has increased from balance, and moderation of its business cycle. 25 percent in 2000 to 44 percent in 2008, and the But the sustainability of Sudan's oil-led country has emerged as one of the highest recipi- growth is under threat from a number of eco- ents of foreign direct investment (FDI) in Africa nomic and political factors. The economic threats (right panel, Figure 1). As econometricians would come from Sudan's over-reliance on a single com- say, the Sudanese economy seems to have under- modity as its main source of growth, the neglect of gone a structural break after the advent of oil.4 growth in non-oil sectors (a manifestation of the One of the less discernible but important "resource curse") and the increasingly dominant role shifts has taken place in the management of the of the public sector. The political challenge to con- macro economy. Sudan was in economic turmoil tinued growth and prosperity arises from Sudan's during most of the 1970s and 1980s when double- legacy of persistent spatial disparity between the digit inflation was a common occurrence, and there center and periphery, which despite some attempts were large swings in the growth rate. Between 1971 through the Comprehensive Peace Agreement and 1991, the average inflation rate was 33 percent, (CPA), has not been fully resolved during the period in contrast to 8 percent since the advent of oil (left of oil boom and therefore remains a potential source panel, Figure 2). During 1970­90 the real GDP for conflict and political instability in the future. growth rate fell below ­5 percent in six years (1972, 1978, 1979, 1984, 1985, and 1990) and exceeded 3 Data for most macroeconomic variables for Southern Sudan are not 10 percent in four years (1974, 1975, 1976, and available. However, in sectors like education, where data are available, 1987). In contrast, the growth rate has hovered its inclusion will further strengthen the case being made in Figure 1. 4 Some observers have argued that it is not the export of oil, but the within the 5­11 percent range during the 1999­ stabilization reforms of the 1990s, that set the foundation for a phase 2008 period (right panel, Figure 2). After success- of rapid growth in Sudan. We don't disagree with such a viewpoint. In fact, Sudan's recent growth success is most likely a combination of macro ful stabilization in the mid-1990s, Sudan has built stabilization policy of the 1990s, the advent of oil and the return of peace a strong track record for macroeconomic manage- following the signing of the CPA. FIGURE 2: Sudan Has Achieved Considerable Macroeconomic Stability in Recent Years Inflation (annual %) Real GDP Growth Rate (in %) 160 Start of the 20 stabilization Annual Start of the 140 program stabilization 15 program 120 Advent 6 year Moving Average of oil 100 10 80 Advent of oil 5 5.1 60 3.1 40 0 1.0 20 ­5 0 ­5.1 ­5.5 ­5.9 ­6.3 ­20 ­10 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: Left panel ­ Central Bureau of Statistics annual reports; right panel ­ IMF staff reports. SUMMARY: SUSTAINING RAPID GROWTH IS IMPORTANT, BUT BROAD-BASED GROWTH IS AN IMPERATIVE 3 Economic Threats from Oil Dependency that have affected "resource curse" economies. and External Volatility These problems include (also see Box 1): The immediate challenge to sustaining rapid Macroeconomic deterioration. There is a tendency growth comes from Sudan's overdependence on for large external imbalances, and exchange oil revenue, which is intrinsically temporary and rate appreciations associated with commod- fundamentally unreliable. By most accounts, the ity booms that weaken the competitiveness of best days of Sudan's oil windfall are likely in the the non-commodity sectors of the economy. In past. At presently known oil reserve levels and pro- Sudan's case, recent global crisis underscores the duction plans, oil revenues are likely to last for vulnerability of the economy to external insta- another 20 to 30 years, with oil production peak- bility. In addition, the real exchange rate appre- ing by 2012 in the most optimistic scenario. The ciated by 40 percent between 2005 and 2006, recent extreme fluctuations in global oil prices and and the share of non-oil sectors in exports fell the corresponding volatility in government revenue from 24 percent in 2000 to 5 percent in 2008. have made it an imperative that comparative advan- The depreciation of the local currency during tages in non-oil sectors are developed and promoted 2009 has however moved the real exchange rate while oil wealth is available. Strengthening the per- closer to the equilibrium level and hence this is formance of non-oil sources of fiscal revenues will a less pressing issue now than a year back. also help counter the country's oil dependency. Fiscal volatility and looseness. There is a pro- A second economic factor that threatens con- clivity for significant fluctuations in export tinued growth is the fact that Sudan's economy is revenues--often exacerbated by pro-cycli- beginning to exhibit some of the same problems cal government spending--to accentuate eco- BOX 1: Same Resources, but Different Outcomes: What Explains It? Among the resource rich countries, what separates the successful ones from the ones plagued by the resource GDP per capita (current US$) curse? Countries like Botswana, Chile, Indonesia and 12,000 Norway were resource rich and succeeded in either managing their resource-driven wealth wisely or diversifying 10,000 their economies away from natural resources to modern, competitive economies. As the adjacent figure shows, the 8,000 average per capita income in these countries has increased five-fold over a two decade period. In contrast, countries 6,000 like Angola, Gabon, Nigeria, Kuwait and Saudi Arabia have seen wide swings in their per capita income coinciding 4,000 with the global commodity cycles, and the average citizen in these countries have hardly seen any change in their per 2,000 capita income over a two decade period. The successful 0 countries had put in place the necessary policy and T T+4 T+8 T+12 T+16 T+20 institutions early enough to enable them to diversify their economy and share their prosperity more inclusively and thereby buffeting their economy from economic and political Resource success stories Resource `curse' stories (Botswana, Chile, Angola, Gabon, Nigeria, risks. The resource curse countries, on the other hand, Indonesia and Norway) Kuwait and Saudi Arabia squandered their opportunity and remained stuck in weak policy and institutional environments. 4 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH nomic cycles and depress economic growth The third economic challenge to Sudan's over the medium term. This aptly characterizes growth prospects comes from its large and rap- the fiscal position of both GoNU and GoSS. idly growing public sector, which has become GoNU has run fiscal deficits and accumulated an impediment to the development of a robust domestic arrears even when oil prices were his- private sector. During the last ten years, the pub- torically high, while GoSS spent SDG 6.1 bil- lic sector's share in GDP has increased from 6 per- lion in 2008 and then drastically reduced cent to nearly 40 percent (left panel, Figure 3). The planned spending to SDG 3.6 billion in the public sector has also become the principal con- 2009 budget. tributor to the growth process, while private sec- Governance lapses. There is a tendency for high tor growth has been considerably weaker and even commodity revenues to induce individuals and negative in three of the last six years (right panel, firms to attempt to appropriate the wealth gen- Figure 3). This follows directly from the domi- erated by the resources and, in the worst cases, nance of the oil sector--which is almost entirely to engage in outright graft. The high unit cost owned and managed by the government--in the of civil construction, extremely high level of growth boom. Oil revenues have fueled a sharp non-performing loans (NPLs) in the bank- increase in the investment plan of government ing system, construction of large infrastructure and public enterprises, escalating the competition projects in far flung areas, excessive cost and for scarce resources in the domestic economy, like time overruns in public infrastructure projects, bank credit, skilled labor and land. Given the lack and large amounts of contractual obligations of a level playing field between the public sector by the government, especially in Southern and private sector firms, the emergence of a dom- Sudan, are believed by many to be signs of ineering public sector has meant reduced growth weak governance. prospects for the private sector. FIGURE 3: Sudan's Growth Has Been Driven Largely through the Expansion of Its Public Sector Share of GDP (in %) Contribution to GDP growth (in %) 100 15 12 0.3 80 9 60 8.2 6 10.9 11.5 9.6 4.3 40 7.1 7.9 5.5 3 3.1 2.5 20 0.7 0 ­0.7 ­1.3 ­1.3 ­1.5 0 ­3 1998 2000 2002 2004 2006 2008 2001 2002 2003 2004 2005 2006 2007 2008 Private sector Public sector Private sector Public sector Source: World Bank staff estimates from MoFNE data and various IMF staff reports. Note: The public sector GDP is calculated as the sum of public consumption, public investment and oil exports, net of imports by the public sector. Since there is no reliable data on the latter, we use the ratio of public and private consumption to estimate the size of imports by the public and private sectors. SUMMARY: SUSTAINING RAPID GROWTH IS IMPORTANT, BUT BROAD-BASED GROWTH IS AN IMPERATIVE 5 Political Threats from Conflicts and The inability of oil-induced growth to be Unbalanced Development sufficiently inclusive poses the ultimate chal- lenge to its sustainability. Sudan's growth pro- The fundamental challenge to Sudan's prosper- cess has been historically unbalanced, with the ity is unlikely to be the above economic fac- majority of its manufacturing firms and irrigated tors, but its deep-seated political issues. Sudan land concentrated in Khartoum and Gezira states. has experienced conflicts for most periods since Such economic concentration is not unusual its independence in 1956. While these conflicts and perhaps inevitable (see World Development are often layered with religious, linguistic and eth- Report, 2009), but the persistent spatial dispari- nic overtones, at their core lies the issue of unbal- ties are neither desirable nor inevitable. As Figure anced development between the center and a far 4 shows, there is a huge disparity in the develop- larger periphery. While the Comprehensive Peace ment indicators between the best and worst per- Agreement (CPA), signed on January 9, 2005 by forming states in Sudan. For example, in 2006 GoS and the Sudan Peoples Liberation Movement/ the net attendance rate in primary schools in the Army (SPLM/A), has created a window of oppor- best performing state was 91 percent, while in the tunity for peace in certain parts of Sudan, it did not worst performing state it was 4 percent. Sudan's address the concerns of other peripheries, such as capital city consumes nearly a third of the total the Eastern States and Darfur. A subsequent East- electricity produced in the country, while less ern Sudan Peace Agreement in 2006 has brought than 7 percent of households in the country have peace to that region, while the Darfur Peace access to the national grid. There are eight bridges Agreement the same year has not, and continu- over the river Nile around the Khartoum city, ing conflict in Darfur has threatened stability and while the remaining 1,500 kilometer stretch of development for all of Sudan. During the Interim the river has only eight such bridges, and only one Period, there have been repeated concerns about in Southern Sudan. Going by the public spending the sustainability of the CPA process itself. pattern of recent years, it is likely that the dispar- FIGURE 4: Large Disparity in MDG Indicators within Sudan Use of improved sanitation facilities (%) 300% Underweight prevalence (%) Net attendance rate (%) 250% 200% Use of improved sources of drinking water (%) 150% Births attended by qualified health personnel (%) 100% 50% Under five mortality rate, per 1000 live births 0% Survival rate to grade 5 (%) Anti-malarial treatment (under-fives) (%) Under-fives sleeping under ITNs (%) Maternal mortality ratio, per 100,000 live births Measles immunisation coverage (%) Gender parity index (basic education) Best performing states relative to national average Worst performing state relative to national average Source: GoNU and GoSS 2006. Note: The figure shows the ratio between the number for the best and worst performing state with respect to the national average. 6 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH ity between Juba, the capital of Southern Sudan, dent countries and the complexities of its own and its other cities has widened as well. These political situation. Oil can help, but could easily be statistics illustrate the persistence of large spa- a curse rather than a benefit to long run economic tial, regional and ethnic disparities within Sudan, performance. which have been the source of most of its domes- tic conflicts. B. Toward a New Growth Vision Since lack of inclusive development is one of the main causes for post-conflict relapses How do countries grow richer and sustain their around the world, it is in Sudan's interest to not growth? The recent development literature suggests only sustain the rapid growth but also to make that sustained economic growth generally involves it more broad-based and inclusive. An examina- a structural transformation in what countries pro- tion of the growth history of post-conflict devel- duce and trade, from producing a relatively small oping countries indicates that Sudan, with good number of simple products requiring few capabili- policies and sound institutions, can avoid degen- ties to more complicated products requiring many erating into a conflict environment. Collier and capabilities.6 Cross-country empirics and case stud- Hoeffler (2004) show that around half of all civil ies of success stories (e.g., Korea, Chile, and China) wars are due to post-conflict relapses, with a high support a strong correlation between higher income risk of resumed conflict during the first post-con- per capita and greater diversification and produc- flict decade--typically around 50 percent.5 Many tion of goods and services. However, the ability to of these relapses are due to insufficient progress on acquire additional capabilities and make this trans- reducing disparity and unbalanced development in formation is influenced by the types of products the immediate post-conflict period. The challenge in the country's existing production set, as well as therefore before Sudanese policymakers is to find the income levels of its trading partners. For coun- ways to endure the current high growth rate and to tries like Sudan that are dependent on resource- share the growth proceeds more equitably than in intensive sectors, the structural transformation is the past. difficult because of the enclave nature of the oil sec- Sudan needs a new, more balanced growth tor, which does not have significant inter-industry vision that is less reliant on oil, while using the spillovers. Being good at producing oil, especially oil wealth to create an economic foundation for when predominantly led by foreign operators and a diversified, inclusive and sustainable growth supporting services, does not readily lend itself to path. The first task is to decouple the economy diversifying into more sophisticated products and away from oil and to adopt policies that can stimu- moving up the value chain. late private sector-led growth in the non-oil sector What is an appropriate approach for Sudan's of the economy. At the same time, it is imperative current situation? This Report recommends a gen- that the gains from growth be shared more broadly eral approach of working to sustain the current to raise the living standard of the vast majority of Sudanese people. Without a tangible peace divi- 5 Even outside the post-conflict setting, sustaining growth spurts is un- dend for most, political and economic stability will common. A study by Haussmann, Pritchett and Rodrik (2004) identifies remain fragile. Effective resource management and instances of rapid acceleration in economic growth that are sustained for at least eight years and found more than 80 such episodes since the consideration of complex political economy issues 1950s--only 22 of which were sustained over a decade. The Growth will be critical for planning a new growth vision. Commission Report (2008) found that there are only 13 countries that have experienced fast and sustained growth since the 1950s. The growth challenge for Sudan is particularly 6 For example, see Zagha and Nankani 2005, Hidalgo et al 2007 and great, given the track record for resource depen- Hidalgo and Hausmann 2009. SUMMARY: SUSTAINING RAPID GROWTH IS IMPORTANT, BUT BROAD-BASED GROWTH IS AN IMPERATIVE 7 growth episode in the near term while laying the Ensuring Macroeconomic Stability and groundwork for broader private sector-led growth Effective Fiscal Management and structural transformation over the medium and long term. Tailoring of growth strategies is crit- Following successful stabilization in the 1990s, ically important,7 and important dimensions of Sudan has built a track record of successful mac- the Sudanese context must be taken into account. roeconomic management under successive IMF First, in order to address the root cause of con- Staff Monitored Programs. However, the advent flict and tension in the country, the greatest prior- of an oil-based economy and sharp fluctuations in ity should not be just to achieve rapid growth, but global commodity prices have presented new mac- also to ensure that it is broad-based and inclusive. roeconomic challenges for policymakers--from Second, domestic political uncertainty and tensions preventing the economy from overheating to find- with the international community have created a ing ways to keep the economy growing. At the large risk premium for investment and economic same time the authorities will have to address some planning from both domestic and foreign sources, of the risks associated with economic deteriora- whose resolution is critical for sustaining trade and tion on account of natural resource dependence, investment. Third, oil is a non-renewable resource with more than 90 percent of Sudan's exports com- and not a solid basis for sustainable growth for ing from the oil sector. The wealth effect of exploit- the future. The current global crisis is a strong ing oil has also caused a large increase in non-oil reminder of the need to diversify, as well as the par- consumption imports. As incomes rise, consump- ticular macroeconomic and governance challenges tion demand generally shifts away from food and in the near term. Fortunately Sudan has significant basic goods to manufactured goods and services. In factor endowments outside of oil. an exporting country, this demand shift can occur This Report proposes a growth strategy for through increased consumption of imports rather Sudan that reduces its dependence on oil, while than of domestic supply. In the case of Sudan, oil building an economic foundation for a diversi- exports have generated a foreign exchange wind- fied, inclusive and sustainable growth path. Spe- fall, which has facilitated the increase in domestic cifically, Sudan's near term strategy should focus on: demand to be met in large part by imports. The rel- ative attractiveness of imports has, until recently, a. Developing and maintaining the necessary been enhanced by the appreciation of the real enabling environment for growth, specifically exchange rate. macroeconomic stability and effective fiscal The recent experience with the global cri- management (Chapter 1); sis underscores the challenges in the macroeco- b. Implementing policies aimed at improving the nomic management of Sudan's oil economy, investment climate and broadening private sec- including the need to flexibly adjust to exter- tor-led growth (Chapters 2 and 5); nal imbalance pressures. The cumulative impact c. Increasing returns to the agriculture sector as of the various transmission channels of the cri- the highest potential engine of growth and pov- sis--exports, fiscal, FDI, remittances and the bank- erty reduction over the medium-term (Chap- ing sector--could imply upwards of $4­5 billion ter 4); less in foreign exchange flows in the short term. In d. Developing a comprehensive reconstruction early 2009, the Central Bank of Sudan (CBoS) was plan for the South (Chapter 6); and e. Complementing technocratic reforms with good governance. 7 Growth Commission 2008. 8 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH therefore forced to impose several restrictions on then expenditure volatility, tends to harm innova- operations of foreign exchange bureaus and reduced tion and economic growth, particularly if finan- the amount of foreign currency for foreign travel. cial development in a country is weak, as is the These measures provided a temporary breathing case in Sudan. The efficiency of public investment space, but did not address the source of the for- can be especially affected. Full absorption of oil eign exchange shortfall, which are likely to be struc- earnings into the budget, as in the case of Sudan, tural in nature. Following the recent depreciation can lead to unsustainable increases in govern- of the currency, the onus of creating a competitive ment expenditure, as evidenced by the recent dif- economy rests largely on structural reforms, which ficult fiscal adjustments. To effectively manage oil can help to diversify its economic base, strengthen revenue volatility, current expenditure should be non-oil sectors and reduce the country's reliance on decoupled from current resource revenues. Break- imported goods. ing this link leads to smoother and more efficient Pro-cyclical fiscal policy and weak manage- public expenditure and investments, and helps ment of oil revenues have contributed to Sudan's mitigate the significant costs of future short-term macroeconomic deterioration. Two key charac- fiscal adjustments. Toward this end, fiscal planners teristics have defined Sudan's fiscal management of need to take a medium term approach to man- the oil revenue boom--expected revenues are tem- aging oil revenue. This is especially critical in the porary in nature and absorption has been nearly South where the dependence on oil revenues is complete with volatility transferred to expendi- extreme and expenditure volatility is more severe. tures. At presently known oil reserve levels and pro- The medium term focus can include deriving and duction plans, revenues from oil in Sudan will run monitoring estimates of expected oil revenues, out in 20 to 30 years, with oil production peak- for example over a three year basis for the budget, ing by 2012 in the most optimistic scenario. And and consideration of fiscal sustainability frame- with nearly all oil revenues to date spent under works to benchmark natural resource manage- an expansive fiscal policy, the authorities have not ment. For example, estimates for the permanent managed to accumulate significant savings. The income equivalent applied to Sudan under a set lack of public expenditure smoothing has led to of production, future price and country discount two worrying fiscal results: substantial increases in assumptions suggest permanent income levels of non-discretionary expenditures (e.g., wages and roughly $1.3 billion for GoNU and $800 million benefits) that are difficult to reduce in a downturn, for GoSS (all in constant 2008 USD). Revenue and declines in the efficiency of public investments, diversification to non-oil sources is also important with budget execution on large investment proj- in revenue and expenditure smoothing and thus to ects that is considerably above planned allocations, achieving more reliable and sustainable fiscal posi- and erratic funding/underfunding of the rest of the tion. Lastly, negotiations with creditors on exter- portfolio. Hence, difficult fiscal adjustments have nal debt a la the HIPC and MDRI initiatives can been required following the recent sharp decline in also augment considerable resources for develop- oil revenues. ment purposes. Fiscal planners need to consider a medium term outlook on oil revenues to effectively Broadening Private Sector-led Growth manage volatility and promote a more reli- able expenditure basis for priorities laid out in Sudan's nascent private sector faces major risks, the Report. Greater volatility in oil prices, when often beyond its control, to grow and diver- transmitted through oil revenue volatility and sify. The top three constraints identified by pri- SUMMARY: SUSTAINING RAPID GROWTH IS IMPORTANT, BUT BROAD-BASED GROWTH IS AN IMPERATIVE 9 vate sector firms in Sudan holding back growth and out Sudan. Data show that 47 percent of firms sur- investment are political instability, corruption and veyed considered access to finance a major obstacle economic uncertainty--factors that are intricately to doing business.8 Southern Sudan, where only linked to the governance of the country. The sec- conventional banking is in operation, remains ond set of constraints is infrastructure, finance and heavily under-banked. While the Central Bank has taxation, which are not very different from some embarked on a number of reforms, further efforts of the major constraints facing firms in stable mid- are needed to, inter alia, strengthen supervision, dle-income countries like China and India. Not minimize the crowding out of private sector credit, surprisingly, the competitiveness of the private sec- promote rural finance and clarify the policy envi- tor in Sudan remains low, due to a combination of ronment for operation of a dual banking system-- high transaction costs, poor market institutions, a conventional and Islamic banking--in the North lack of infrastructure, and high administrative bar- and the South. riers and transaction costs. Ensuring access to a minimal basic level of A program to address the key constraints infrastructure services and connectivity is essen- faced by the private sector should focus on tial to support basic livelihoods of the popu- increasing economic certainty and predictabil- lation and reducing regional disparities. Most ity, lowering transaction costs and building areas in Sudan, including conflict-affected areas basic infrastructure, and institutions that will and rural areas, lack access to affordable basic ser- help integrate its disparate markets. In this con- vices and connectivity between regions. This text, the following areas are particularly important: implies the need for some level of investment in (i) reducing the reliance on executive decrees and life-sustaining infrastructure, particularly in the involving the legislature to adopt laws for private lagging regions. Beyond providing access to basic sector development; (ii) reducing the cost structure infrastructure, there may be a need to address for manufacturing and agri-business through con- areas where infrastructure deficiencies present con- tinuing progress on infrastructure development, straints to growth in areas with strong economic particularly electricity and transport such as rural potential, particularly in agriculture. Weak effi- roads and connectivity with areas that were histor- ciency of existing infrastructure services, even ically developed, but have lagged behind because when they are available, hinders overall productiv- of conflicts and apathy; and (iii) focusing on urban ity in the country. Costs of infrastructure invest- development, which can be a source of growth in ments are currently prohibitive for many potential itself in secondary cities throughout the country, activities. More strategic prioritization of invest- including Juba, Nyala, Port Sudan, Malakal, Ed ments is important. For effective planning to Obeid and others. improve access and efficiency of transport services, As a post-conflict country, there is a strong there is a need for clear division of labor and pol- need to improve access to life-sustaining infra- icy coordination among different levels of govern- structure and social services. Accessibility to ser- ments--GoNU, GoSS, and states. vices is reasonable in the North, particularly in the The large presence of government and state economic centers of Khartoum and Gezira areas. enterprises and its adverse impact on private Areas outside these economic centers, particularly investment needs to be curtailed. To scale up the the South and Darfur as well as rural areas in gen- volume of infrastructure services, the government eral, lag substantially. Inefficiency of services is a nationwide issue. Access to finance remains one of the major constraints faced by businesses through- 8 Sudan PICS 2008. 10 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH has been pursing various large-scale public invest- age growth rate of the sector has been 3.6 per- ment programs for infrastructure such as the cent, down from 10.8 percent growth during the Merowe Dam. Domestic borrowing from the Suda- previous decade. As a result agriculture's share of nese private sector to finance public investment GDP in the economy has declined, rural incomes projects has led to a credit crunch in the private have decreased and poverty in rural areas may have credit market. Similarly the presence of state enter- intensified. The value of agricultural exports as a prises in selected sectors like agro-processing and proportion of GDP from agriculture is now insig- automobile assembly, sometimes with preferen- nificant and Sudanese agriculture largely caters to tial treatment from the government, has become an the domestic market. Over time the uncompeti- entry barrier for private investment. For efficiency tive status of Sudan's agricultural sector has resulted improvement, more direct participation of the pri- in reduced incentives for farmers and discour- vate sector in infrastructure services through pub- aged younger Sudanese from taking up farming. lic private partnership (PPP) in construction and In Southern Sudan--partly because of decades of operation should be encouraged through stron- conflict and lack of infrastructure--trade has been ger institutional and legal frameworks. GoNU has highly localized and sourced predominantly from recently taken steps to liberalize services in inland Uganda and Kenya. water transport, rail, and telecommunications and There is tremendous potential in the near encourage private sector participation, which have term for the sector to boost diversification of led to some improvements in the capacity and the the economy and to revitalize the rural areas. efficiency of service delivery. However, the produc- Agriculture is perceived to be Sudan's comparative tivity of state-owned enterprises in infrastructure advantage, and in response to the sector's poor per- services remains a challenge. formance, GoNU has launched the Agricultural Revitalization Program (ARP) with a high level of Recovery and Growth in the political support. The government's vision is for Agriculture Sector diversification of production and markets leading to increased growth of the agricultural sector, with The agriculture sector has historically provided the ultimate goal of poverty reduction based on over two-fifths of national GDP, employing the harnessing the energy of the private sector in vari- majority of the population and earning the bulk ous ways supported by an improved environment of the country's foreign exchange. Exploiting its for commercial agriculture through policy change largest irrigated area in Sub-Saharan Africa, Sudan and public investments. Policymakers envision a produced a diversified basket of exports in the past focus on agriculture as a source of growth and as that included cotton, gum arabic, livestock, sesame, a way to diversify Sudan's economy. While this and a number of smaller commodities. Several of the is laudable, realizing such a goal will require new major exports (e.g., sheep and gum arabic) are pro- approach and determined implementation. duced in traditional rain-fed areas and provide crit- Achieving higher rural incomes and agri- ical sources of income for the rural poor. The sector cultural export growth will involve a significant also provides inputs to many major manufacturing change in the government's attitude towards the industries (e.g., edibles oils, leather, and sugar). sector, especially with regard to policies meant Since the advent of oil, agriculture has per- to enable the private sector to play a greater formed poorly in the North, and is just get- role. In the past the government has intervened ting off the ground in the South where most in agricultural markets through a variety of instru- food items are imported. Since 2000 the aver- ments that reduced incentives to produce. Inter- SUMMARY: SUSTAINING RAPID GROWTH IS IMPORTANT, BUT BROAD-BASED GROWTH IS AN IMPERATIVE 11 ventions were ad hoc and inconsistent over time Sudan (GoSS) has autonomy over roughly 25 per- and included distorted exchange rates, export taxa- cent of the country's land area, which is 648,000 tion, tariff policies, incentive payments, and trading km2 (larger than France). This area contains the monopolies. Many of these distortions have been majority of the country's currently known proven reduced, but government involvement in the sector and probable oil reserves and the best quality agri- remains strong. Reforms highlighted in the recent cultural land. With its oil revenues, Southern Gezira Act emphasize the need for fundamental Sudan has a major advantage over most emerg- changes, including new responsibilities for water ing post-conflict governments, with significant user groups, farmers' freedom to choose crops, and resources potentially available for development. To tradable long-term land leases. Direct government deliver a peace dividend and increase the likelihood investment, and the accompanying drain on the of continued peace for the country, development federal budget, should decrease, and government of a long-term growth strategy is a high priority for should focus on supporting research, technology the South. Planning for non-oil economic growth transfer and market information services. While the in the South is relevant, regardless of the outcome Act reflects much needed reform, implementation of the 2011 referendum, to further development in is facing substantial delays. the autonomous South under a united Sudan or as Specific reforms for the sector, outlined in a new country. Chapter 4, include transformation of traditional GoSS is currently initiating the develop- farming to generate increased production and ment of a growth strategy for Southern Sudan, income. Actions in the traditional sector should and Chapter 6 lays out a useful framework to focus on improved management and marketing of inform and shape this strategy. The growth diag- livestock and gum arabic, and for improved crop nostic framework can be a useful tool as it does not varieties, sustainable soil and water management, begin from any preconceived notions about what water harvesting and other low risk technologies. the correct policies for growth are, but rather tries The main constraint for traditional farming is the to approach the economy from where it is and pro- current land policy. While improved infrastruc- duce a prioritized, sequenced, set of policy actions ture in the traditional rainfed farming areas will to get where it wants to be. This is crucial in South- be important for improving access to markets, the ern Sudan in two ways. First, the situation is first priority should be to improve the incentives unique and the region faces a large number of very for traditional farmers to invest in improved tech- challenging conditions and so cannot simply rely nology and increase production. This can be started on "conventional wisdom" to formulate policies. and sustained if there is a reform of the land policy Second, the environment for analysis is largely free leading to the issuance of long-term leases. of reliable data, so a method that is based on cre- atively applying all available data and information Developing a Comprehensive Growth to form a coherent narrative is well suited to the Strategy for the South problem at hand. Based on findings for two states, applica- The growth challenges in the South are especially tion of the growth diagnostic framework point daunting, and center on initiating domestic eco- to three main constraints to private investment nomic activity in a post-conflict environment. and entrepreneurship in Southern Sudan. Case Nowhere in Sudan is the gap between current eco- studies were carried out in Upper Nile and Eastern nomic reality and unrealized potential greater than Equatoria states, to illustrate the type of analysis in Southern Sudan. The Government of Southern that is necessary to assess the South's comparative 12 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH advantage and essential policies and programs to Investment climate. According to the roughly unleash its growth potential. The basic syndrome 900 firms surveyed for the ICA report, Sudan's of these economies is that of an under-investment private sector perceives weak governance--man- state, with extremely low or non-existent access ifested in the forms of political instability, cor- to financial services, serious transport infrastruc- ruption and economic uncertainty--as its main ture bottlenecks, existence of ex-ante risks, and constraint to growth. So by addressing supply government failures. The sudden closure of the side constraints Sudan's policymakers may lower Islamic banks, while the traditional banks have not costs of production, but a wholesale boost to expanded beyond Juba, has meant a large major- private sector growth will not occur until gov- ity of Southern Sudanese have no access to bank- ernance reforms increase economic certainty ing services--which appears to be the single-most and predictability. Other potential governance important barrier to growth in the near-term. reforms include adopting processes mandated Infrastructure shortcomings, particularly those by the CPA, which will reduce reliance on exec- related to transport structures such as inter-state utive decrees and the resulting overlaps, gaps and intra-state road networks, are binding con- and unpredictability in the legislative frame- straints to almost all sectors and scale categories. work. Improved federal, state and local-level Ex-ante appropriability risks are high. Uncertainty policy coordination can also help to eliminate over the future of the country and the post-2011 the overlapping fees, taxes and customs tariffs, phase as well as continued concerns over the local as well as cross-state tariffs in some areas that security condition, restrain productive operations are currently hampering economic activities. and impede long-term investments. Ex-post failures Oil sector. Implementing recommendations at various levels of the government are also rele- on improved fiscal management of oil reve- vant. The multiple taxes and the lack of fiscal policy nue volatility requires a more transparent and coordination among various government entities reliable flow of sector information, including discourage production and marketing activities in for the South where oil dependence is extreme various sectors. Misguided incentives are given by and technical capacity is low. Effective gover- the government, which result in lowering agricul- nance of the oil sector can also ensure avail- tural productivity. able resources for investing in non-oil sources of growth and set an example of transparency Complementing Technocratic Reforms with and accountability to improve the broader Good Governance investment climate. Specific areas for improve- ment include: reforming the role of the Minis- While technocratic solutions to the economic try of Energy and Mining and related agencies; constraints to growth may look good on paper, strengthening environmental and social gover- in the case of Sudan, they would be of lit- nance of the oil industry; and repositioning of tle use unless underlying governance issues are Sudapet. addressed. The manner in which the state exercises Agriculture. Technical analysis of the agricul- control over resources (i.e., governance) is linked to ture sector demonstrates much lower produc- many of the reform areas discussed in this Report. tivity than potential as defined by research and Without adjustments to the role and performance field trials. This suggests a program of improved of government and its interface with the private seeds, modern irrigation technologies and the sector, the benefits of the economic reforms will be provision of fertilizers and other farm inputs. limited. For example: Better inputs are certainly part of the solu- SUMMARY: SUSTAINING RAPID GROWTH IS IMPORTANT, BUT BROAD-BASED GROWTH IS AN IMPERATIVE 13 tion toward higher productivity, but commer- states to fund decentralized responsibilities as fore- cialization in the traditional rainfed sector also seen in the CPA. The rollout of the new national requires changes in land policy to give small currency in 2007 facilitates economic transactions. farmers the option of selling their small sub- In the South, the GoSS's institutions and programs sistence farms or purchasing additional land to are building up gradually. increase their farm size. An overarching message of the proposed strategy is a reorientation of the role of the State The CPA has gone a long way to create some in productive sectors that will enhance politi- enabling institutions for sustained peace and cal stability and sustain more broad-based growth. prosperity in Sudan. Key institutions at all lev- This reorientation will require strong political buy- els of governments (executive, legislature, and in at the highest level and efficient implementa- judiciary) have been established and seem to tion of the agreed policies. And for growth to be be operating with reasonable success. The sign- broad-based, this reorientation will depend on ade- ing led to the formation of GoNU, the approval quate progress in the decentralization agenda. Sub- of the Interim National Constitution (INC) and national governments should play important roles the establishment of GoSS, which has extensive for providing basic services and supporting private and unprecedented autonomy. The CPA also led sector activities, but they require adequate resources to improved decentralization within the North- and strong implementation capacity to support ern States. GoNU has rapidly increased transfers to inclusive development. : 5,506 2,569 . 3. 5.3 3.3 -- 44 2000 25 2.1999 .2008 53 1999 10 -- .(1 ) .2008 4 . 532 334 . (2000 ) . Bill Battaile Deepak Mishra 1 (Bentui) 1978 2 .1999 300­200 . 3 .1 .(1 ) . 4 . . . . . 2008 6,211 2000 3,358 :1 7 550 (2000 ) 6.2 6 5.5 1.8X 5.3 500 5 1.6X 4.4 2.1X 4 1.8X 450 3.4 3.3 3 2.6 2.5 400 2 350 1 300 0 ) / ( ( ) ) 250 () 10 ( 200 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2000 2008 . : 16 : . . . 30 20 1991 1971 . . 2012 ) 8 33 1990­1970 .(2 1979 1978 1972) 5­ . 1976 1975 1974) 10 (1990 1985 1984 . 11­5 .(1987 .(2 ) 2008­1999 :(1 ) .« » . . . . . (« » ) . 2006 2005 40 24 .2008 5 2000 . 2009 . . -- -- . :2 160 ( ) 20 ( ) 140 15 120 100 10 80 5 5.1 60 3.1 40 0 1.0 20 ­5 0 ­5.1 ­5.5 ­5.9 ­6.3 ­20 ­10 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 1965 1970 1975 1980 1985 1990 1995 2000 2005 . ­ ­ : : 17 : : 12,000 ( ) 10,000 8,000 . 6,000 4,000 . 2,000 0 T T+4 T+8 T+12 T+16 T+20 . . «» ) ) ( ( . . . 6.1 . 3.6 2006 .2009 . . . ( ) .1956 . .() / 2005 9 . . 2006 .(3 ) 40 6 .(3 ) . -- . . -- 18 : :3 100 ( ) 15 ( ) 12 0.3 80 9 60 8.2 6 10.9 11.5 9.6 4.3 40 7.1 7.9 5.5 3 3.1 2.5 20 0.7 0 ­0.7 ­1.3 ­1.3 ­1.5 0 ­3 1998 2000 2002 2004 2006 2008 2001 2002 2003 2004 2005 2006 2007 2008 . : . : . (Hoeffler (2004 . 5 . 50 -- . . (2009 ) 4 . . . 2006 . 4 91 . 7 () . . . . 1,500 . . . . . . . .2008 5 Collier . : 19 :4 () facilities Use of improved sanitation (%) 300% Underw eight prevalence (%) Net attendance rate (%) () 250% 200% () drinking w ater (%) Use of improved sources of 150% Births attended by qualif ied health () personnel (%) 100% 50% ive 1,000 Under f mortality rate, per 1000 live births 0% Survival grade 5 () rate to (%) () ( ) ives) (%) Anti-malarial treatment (under-f Under-f ives sleeping under ITNs (%) Maternal mortality 1,000 100,000 live births ratio, per () Measles immunisation coverage (%) ( ) Best performing states relative to national average performing state relative Worst to national average . : . : . . . . . 6. . ( ) : . . ( ) . . ( ) . . ( ) ( ) . . .( ) . . 6 7 . (Rodrik (2004 Pritchett Haussmann ­ 80 . 13 (2008) . 22 . Hausmann Hidalgo 2007 Hidalgo Nankani 2005 Zagha 7 . .2009 20 : . / . . . -- . . 90 . . . . . . . . . . . . . -- . -- . 5­4 2009 1.3 . ) 800 .(2008 . . . . . -- . . 30 20 . 2012 -- . . ) : ( : 21 . . . . . . . -- (1) : . (2) . . (3) . . . . . . . . 47 . . . 8. . . -- . -- . ( ) . . ) () .( . . 2000 . 10.8 3.6 . .2008 ­ 8 22 : . . . . 25 . -- .( ) 648,000 . . . . . 2011 . . . . . . . . . . . « » . . . . . . . . . . . -- . . appropriability . . 2011 . . : 23 . . . . : . . .() . . ( ) . () . ( ) . . : . . . ( ) -- . . -- . . . . . 2007 () . . () . . . . . . CHAPTER 1 MACRO AND FISCAL MANAGEMENT IN A VOLATILE WORLD ECONOMY9 A. Sudan's Oil Driven Boom and ing of global prices and slowdown in the economy, Bust Cycle the inflation rate may come down gradually to a more benign level (left panel, Figure 1-1). These Following successful stabilization in the 1990s, factors imply a change in the macroeconomic Sudan built a track record of successful mac- landscape and call for different policy priori- roeconomic management. In the past five years ties, from preventing the economy from overheat- Sudan has been one of the fastest growing coun- ing to finding ways to keep the economy growing. tries in Africa. It has maintained macroeconomic The required macroeconomic adjustment requires stability with a relatively low and stable inflation mutually reinforcing fiscal, monetary and exchange rate and has managed to dampen the wild swings rate policies that safeguard the external position in its growth rate. The growth acceleration has without undermining key infrastructure and pro- been accompanied with greater openness of the poor programs. At the same time the authori- economy. International trade has expanded rapidly ties will have to address some of the symptoms of and Sudan has become one of the largest recipi- resource curse that have arisen on account of heavy ents of foreign direct investment (FDI) in Africa. dependence on oil. The country's robust economic performance, care- Sudan's ability to successfully respond to the fully documented in a series of successive IMF new global environment will largely depend on Staff Monitored Programs, has been underpinned the flexibility of its policy stance. Sudan's recent by a period of relative peace and stability, espe- growth acceleration was fueled largely by exter- cially in Southern Sudan though parts of the nal factors--a rapid increase in oil production, the country continue to experience sporadic violence global commodity price and investment boom and and conflicts. a benign world environment--all of which have The advent of an oil-based economy and the been altered dramatically since late-2008. Govern- recent sharp fluctuations in global commodity ment estimates of oil production show that out- prices have created macroeconomic challenges put from known sources is peaking and is most for Sudan that are different and more complex likely to decline in the coming years. Oil prices than the stabilization of the 1990s. The onset are unlikely to return to mid-2008 levels over the of the global economic crisis and its impact on medium term, and FDI could take at least 3 to 5 Sudan's economy has become the immediate con- years to return to its pre-crisis level. Adjusting to cern for its policymakers. The economy, which this new environment requires fine-tuning the cur- has enjoyed 7­8 percent average annual real GDP rent policy stance. Some of this flexibility in policy growth during the 2000­08 period, is expected to grow slower, between 4­6 percent in the 2009­14 9 This chapter has been prepared by Deepak Mishra and Bill Battaile, period (right panel, Figure 1-1). With the soften- with input from Mosllem Alamir and Greg Snyders. 26 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH FIGURE 1-1: Sudan's Near Term Macroeconomic Situation Will Differ from Recent Experience Inflation rate (in %) Real GDP Growth, in % (3 year moving average) 16 10 14 8 12 7.4% 10 6 5.5% 8 8% 4.3% 6% 4 6 4 Actual Forecast Actual Forecast 2 2 0 0 2000 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014 Source: IMF various staff reports. is already evident. For example, while in the past B. Managing External Imbalance a strong and stable exchange rate prevented the Pressures economy from overheating and kept inflation low, the authorities allowed the exchange rate to depre- Sudan was a big benefactor of the global com- ciate in the first half of 2009 in the face of a wid- modity price boom; it could also become one of ening external imbalance--thereby demonstrating the biggest victims of the global bust. The global the flexibility that was needed to diffuse the fall- linkages responsible for Sudan's past economic out of the global crisis. Such flexibility in policy gains are now responsible for transmitting the instruments is required to ensure macroeconomic effects of recent global shocks. With the deteriora- stability and promote growth, allocate produc- tion in the external environment, Sudan will con- tion incentives to the primary sectors in the econ- tinue to face the risk of a protracted slowdown in omy, and to rebuild foreign exchange reserves. A growth and overall economic deterioration unless quick response is also called for to reduce Sudan's prompt corrective actions are taken. Analyzing dependence on oil revenues through strengthen- the channels through which the global shocks are ing non-oil revenue mobilization and prudent fis- being transmitted to Sudan can inform the policies cal spending. needed to mitigate the downside risks in the near The rest of this chapter is organized as fol- term and strengthen the economy's longer-term lows. Section B describes the problem of external prospects for sustained growth. Some of the chan- imbalance arising out of the slump in the global nels of transmission include: economy and the policy priorities for external sta- bility. Section C looks at the implications of the Exports. Oil accounts for nearly 90 percent of economy's resource dependence and directions for Sudan's exports. Hence the most direct impact addressing structural imbalances. Finally, Section of the global slowdown has been the signifi- D deals with fiscal management issues, especially cant decline in its exports of goods and services, how to manage the oil wealth in an environment which is expected to fall from $12.5 billion in of wide gyrations in commodity prices. 2008 to $7.0 billion in 2009. Average oil prices CHAPTER 1 -- MACRO AND FISCAL MANAGEMENT IN A VOLATILE WORLD ECONOMY 27 have fallen from roughly $100 per barrel in tions and banking sectors, in addition to FDI 2008 to an estimated $60 in 2009, resulting in supporting foreign operators in the oil sector. considerable deterioration in the terms of trade. However, net inflows subsequently declined, The problem, however, is unlikely to be lim- and are projected to be $2.4 billion for 2009, ited to oil alone. Coupled with structural con- which is one-third less in relation to the peak in straints in domestic production (see Chapters 2006. In addition, there is general concern that 4 and 5), lower global demand will put signif- such flows are unlikely to be sustained without icant downward pressure on non-oil products discovery of new oil sources or renewed priva- like livestock, sorghum and gum-arabic as well. tization. According to IMF projections, it will take sev- Remittances. Like most African countries, remit- eral years for Sudan to return to its peak export tances are a significant source of external financ- performance of 2008. ing for Sudan. Remittances in Sudan have Revenues. The precipitous fall in oil revenues constituted an average of 3.5 percent of GDP has caused fiscal difficulties for Sudan, reflected and have increased substantially in recent years. in financing shortages for the 2009 federal bud- In 2000 remittances were $641 million and had get. The situation is compounded by the fact increased to $1,850 million by 2008. Between that in the past years Sudan spent most of its 2006 and 2007 these inflows increased by about oil revenue and is now being forced to make 50 percent, but in 2008 the increase was only considerable reductions in public spending-- 5 percent, perhaps capturing some effect of the GoNU expects 2009 spending to be 11 per- crisis. With about 80 percent of remittances cent below budget, with the largest cuts in originating from developed countries, Sudan is development transfers to Northern states and vulnerable to a potential decline from economic the national development program. The fiscal downturns in these countries, as the level of impact of falling prices is especially severe for income in host countries is an important deter- Southern Sudan, which relies on oil revenues minant of remittances. The World Bank esti- for more than 95 percent of total revenues. mates that in 2009, worldwide remittances will GoSS' oil revenues (excluding payments for oil decline by 5­8 percent. arrears) in the first quarter of 2009 were less Banking. Banks in Sudan have thus far escaped than one third of budgeted levels. Some part the severe impacts of the crisis observed in of the fiscal stress has been offset by improved other countries, mainly due to the reliance non-oil revenues, which are expected to be 102 on Islamic banking in the North and lack of percent of 2009 budget in case of GoNU. Nev- strong cross-border linkages. However, the eco- ertheless, unlike some of the other oil exporting nomic slowdown will adversely impact the countries, neither GoNU nor GoSS have been quality of bank assets since the corporate sec- able to afford counter-cyclical stimulus pro- tors' profitability is under pressure. In South- grams to dampen the effects of the downturn. ern Sudan, low oil revenues have led to severe Foreign Direct Investment. FDI has become a liquidity problems in the region's thin bank- very important source of external financing ing sector. While the problems may have their for Sudan, and an important source of foreign origin in some structural issues (see Chapter exchange to support the country's recent cur- 5 for fuller discussion), the crisis has exposed rent account deficits. Net FDI and portfolio the frailty of the banking sector and is likely inflows hit $3.5 billion in 2006, largely because to generate wider consequences as the result of of foreign entrants in the telecommunica- liquidity problems. 28 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH The cumulative impact of the above trans- Sudan's policymakers will need to use a mission channels has been a severe foreign combination of structural, exchange rate and exchange shortage in the short-run. Sudan monetary policies to address its external imbal- receives most of its foreign exchange from three ance problem. The CBoS has already imposed sources: exports, FDI and private transfers (mostly some restrictions on the foreign exchange mar- remittances). As shown in the left panel of Figure ket to clamp down on speculative activities and to 1-2, the hard currency inflow to Sudan from each reduce capital flight. The terms of trade shock that of these three sources is likely to decline consid- came with the global financial crisis has been sig- erably during 2009­10, with up to $4­5 billion nificantly corrected through the above mentioned less hard currency available for imports relative depreciation of the Sudanese pound. Deprecia- to 2008. Fortunately, the import bill is also likely tion will however have to be balanced against other to come down, but not enough to offset the full concerns, like the impact of depreciation on infla- decline in foreign exchange inflow. In the past 12 tion, though as a precaution to inflationary pres- months, Sudan has faced increased excess demand sures, contractionary monetary and fiscal policies for hard currency, and its exchange rate came can be simultaneously undertaken. In addition, the under pressure. Net international reserves fell prospect of a depreciation causing a boost in for- below $1 billion by end-2008, covering about 1.2 eign exchange earnings through increased non-oil months of imports and slid further to $300 mil- exports will be limited by a weak supply response lion by end-March 2009 due to the insufficient in the absence of structural reforms in other parts adjustment in the exchange rate in reaction to the of the economy. Other short-term options include sharp drop in oil prices. But the Central Bank of reducing interest outflows on foreign currency Sudan (CBoS) acted soon thereafter and allowed loans by renegotiating the terms, attracting more the exchange rate to depreciate (right panel, FDI and prioritizing public sector imports. In the Figure 1-2). medium-term, Sudan will have to diversify its eco- FIGURE 1-2: The Dynamics of Sudan's External Imbalance In Billion US$ International reserves 16 2.0 1.8 14 2.6 Projection 1.6 12 1.6 1.4 Projection 3.0 10 1.2 3.5 2.6 1.2 1.1 8 1.0 6 0.8 0.8 4 5.8 8.9 12.4 7.3 0.6 2 0.4 0 ­2 0.0 2006 2007 2008 Average 2006 2007 2008 Average 2009­2010 2009­2010 FDI Private transfers Exports Reserves (in billion US$) Reserves (in months of next year's imports) Source: IMF Staff Monitored Program for 2009­10. CHAPTER 1 -- MACRO AND FISCAL MANAGEMENT IN A VOLATILE WORLD ECONOMY 29 nomic base, expand its agriculture and domestic relation between slow economic growth and nat- manufacturing sectors and reduce its reliance on ural resource intensiveness does not imply any imports. It can also take a number of measures to causal relationship.11 Instead, certain key variables encourage non-oil exports as outlined in Chapters are associated with better management of natu- 4 and 5. Finally, Sudan should consider negotiating ral resource endowments in developing countries: with bilateral donors about its debt arrears and take strength of institutions, openness to trade, well- steps to resume normal lending relationships with developed financial systems and good governance multilateral agencies. more generally. However, such generic correla- tions associated with "escaping the resource curse" C. Symptoms of Resource Curse? are not necessarily helpful for policy makers trying to design and implement systems for the effective Resource rich countries are usually confronted management of natural resource revenues. with the challenge of trying to combine their From the pattern of growth and the compo- good fortune with appropriate macroeco- sition of its trade account, Sudan's economy does nomic policies to support broad-based develop- show some symptoms commonly exhibited by ment of their economies. Cross-country evidence resource curse economies, though the evidence shows that the discovery and exploitation of com- remains inconclusive. All of Sudan's fast growing modities (e.g., oil) has generally been associated sectors are either related to oil or non-tradable ser- with a shrinking of the non-oil tradable goods sec- vices, while the growth of agriculture and manufac- tor. Why? Because the influx of foreign exchange turing has been slower than the growth rate of the from oil exports leads to an appreciation of the real overall economy (left panel, Figure 1-3). Similar exchange rate which weakens the competitiveness evidence comes from the shift in the composition of traditional export products. Windfalls from the of exports and an increase in import of consumer oil sector also cause a wealth effect and increased goods. More than 95 percent of Sudan's exports are demand for non-tradables including domestically now coming from the oil sector, while the share of provided services. The profitability in non-tradables non-oil exports has fallen from nearly 5 percent of causes a reallocation of production inputs into this GDP in early 2000s to less than 2 percent in 2008. sector and away from non-oil tradable production On the other hand, the share of consumption activity.10 The challenge then is how to use oil reve- goods in total imports has increased in recent from nues to develop the economy away from oil depen- already high base (right panel, Figure 1-3). The flip dence and to develop the non-oil tradable sectors side of increased imports of consumption goods is a that are the ultimate source of sustainable growth. decline in the manufacturing sector's share in total Resource endowments need not be equiv- output. The appreciation of the real exchange (dur- alent to a resource curse. Evidence shows that ing the 2006­08 period) is likely to have played with sound institutions, resource rich coun- a role in making imports attractive and domestic tries have been successful in transforming their manufacturing unattractive. However this problem economies. These are countries that have diver- sified their exports, strengthened budget manage- ment and invested wisely. In most successful cases, 10 In a general model of Dutch disease, profitability in the booming tradable sector also causes a reallocation of production inputs into this countries have created and strengthened institu- sector and away from other production activity for other tradables (i.e., tional capacities and management before attempt- the substitution effect). However, this effect is dampened in the case of oil because of the sector's enclave characteristics, with limited employ- ing to use resource revenues to stimulate growth. ment and reliance on specialized foreign capital. Recent economic research has shown that the cor- 11 Collier, van der Ploeg and Venables 2009. 30 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH FIGURE 1-3: Sudan's Unusual Growth and Import Pattern: What Do They Imply? Average growth rate (2000­08) Share in total imports (in %) 80 Oil 39.3 Other mining 11.5 70 Construction 11.3 60 Other services 10.5 50 Electricity & water 10.3 Trade, restaurants and 10.2 40 Transport & communications 7.3 30 Rainfed crops 4.9 Manufacturing 4.2 20 Irrigated crops 2.9 10 Livestock 1.2 0 0 3 6 9 12 15 18 2002 2003 2004 2005 2006 2007 2008 2009 (Q1) Mining & non-tradablesectors Tradable sectors Consumption goods Capital goods Source: Left panel ­ IMF staff reports; right panel ­ Central Bank of Sudan annual reports. has subsequently been addressed with domestic able sectors. At the sector level, structural reforms currency depreciating by 20­30 percent against continue to lag behind. Sudan's growth sustainabil- currency of key trading partners. ity depends critically on being able to promote the Sudan could join the ranks of countries that non-oil sectors and integrate into the global and have successfully managed non-renewable resource regional supply chains. In particular Sudan's agri- wealth, but will require bold structural reforms and cultural sector has enormous potential that has not significant investment in infrastructure. Deprecia- been fully tapped. Consequently, Sudan will need tion following the global crisis has largely occurred, to take broad reforms and invest in infrastructure though continuous monitoring and adjustment of to improve productivity and competitiveness of both nominal and real exchange rate movements these sectors. are needed. The real exchange rate is an important relative price in an economy as it can drive the rel- D. Effective Fiscal Management ative structure of incentives across sectors and con- sequently the allocation of resources.12 Given that The advent of the oil sector has led to a dramatic the Central Bank's exchange rate policy is primar- increase in Sudan's revenues. The CPA in 2005 ily driven to keep inflation low, the onus of creat- coincided with the completion of major new proj- ing a more competitive economy largely rests on ects that led to a large increase in oil production, government. Fiscal policy in particular has influ- exports, and revenues from late 2006. Average daily enced the real exchange rate, as expansionary pub- production rose from almost 290,000 bpd in 2005 lic spending has channeled most of the oil revenue to nearly 500,000 bpd in 2008. With the dramatic inflows into the economy and raised domestic increase in oil prices, which peaked in July 2008 aggregate demand. This in turn has put pressure on the real exchange rate to appreciate, and shift the relative structure of incentives toward non-trad- 12 Elbadawi 2008. CHAPTER 1 -- MACRO AND FISCAL MANAGEMENT IN A VOLATILE WORLD ECONOMY 31 BOX 1-1: Indonesia's Successful Management of Oil Rents Indonesia provides a good example of a resource-rich country that managed to avoid the economic difficulties experienced by most oil-exporting countries. Oil still constitutes a significant part of Indonesia's exports (25 percent), however non-oil exports have also expanded significantly and the country is no longer dependent exclusively on oil. A key element of Indonesia's success was the government's commitment to macroeconomic performance and prudent fiscal and exchange rate policies. This has been particularly important as the government stance during oil booms plays a very important role in determining the extent to which the economic structure will be affected. Indonesia followed a conservative fiscal policy that entailed accumulating oil revenues and exercising fiscal discipline with respect to government spending. The government accumulated budget surpluses and spent resource gains on strengthening the production base of non-oil tradable sectors, through expansion of infrastructure and investment in social services and agriculture. The government has been particularly active with rural development programs aimed at driving agricultural growth. Despite these successes, Indonesia has had to deal with an appreciation of the real exchange rate that seriously threatened the competitiveness of the manufacturing and food sectors. In addition to other policy reforms, Indonesia undertook timely devaluations and minimized Dutch disease effects and improved the profitability of the tradable sector. at over $145 per barrel, Sudan's oil revenues have resources revenues--spending virtually all the oil also increased significantly in recent years: from earnings to date has implied significant expen- $3.7 billion in 2005 to nearly $8.3 billion in 2008. diture volatility and expected future revenues As noted above, this large increase in revenues has are risky in nature. Oil price volatility has led to been accompanied by equally large increases in gov- significant volatility in earnings for oil exporters, ernment expenditures, with GoNU expenditure ris- which in many countries has led to substantial vol- ing from 8.5 percent of GDP in 1999 to roughly atility in government expenditures. In the case of 23 percent of GDP in 2008.13 Sudan, absorption of current oil revenues by cur- Ineffective fiscal management is a key chan- rent government expenditure has been virtually nel through which commodity dependence con- complete--nearly all the country's oil revenues have tributes to weaker economic growth.14 Volatility been spent on increasing public expenditure and and exhaustibility of revenues in resource-rich investments, without regard to what level of fiscal developing countries frequently leads to unsustain- expenditure derived from oil revenues is sustain- able increases in government expenditure. Sudan is able in the long run. In addition revenues from oil no exception, as evidenced by the recent difficult are intrinsically temporary, and as detailed below, fiscal adjustments. To effectively manage oil revenue the best days of Sudan's oil windfall are likely in the volatility, current expenditure should be decoupled past. Because natural resource commodity prices from current resource revenues to stop pro-cycli- tend to be highly volatile, their revenues are funda- cal patterns of spending, make public expenditure mentally unreliable.15 and investments smoother and more efficient and National government expenditure and oil build reserves to help mitigate the significant costs revenues in Sudan have been nearly perfectly of future short-term fiscal adjustments. correlated since 2002 (correlation coefficient of 0.86), and the growth in public expenditure The Need to Counter Pro-cyclical, Volatile has outpaced revenues since the country began and Unsustainable Fiscal Policy 13 MoFNE annual budget reports and IMF staff reports. Two key characteristics underscore Sudan's 14 World Bank 2009a. need for more effective management of natural 15 Collier, van der Ploeg and Venables 2009. 32 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH exporting oil in 1999, as evident in Figure 1-4. FIGURE 1-4: GoNU Expenditure, Revenue Public expenditure has far exceeded fiscally sus- and Sudan Oil Price tainable levels in Sudan in recent years. Using the 30 $80 baseline Permanent Income (PI) approach to oil 25 revenue management detailed below, spending out $60 of oil revenues last year exceeded the fiscally sus- 20 % of GDP tainable Non-Oil Primary Deficit (NOPD) by 15 $40 nearly five-fold. Even with a "front-loaded" oil reve- nue management rule that allows a greater amount 10 of spending in earlier years, spending exceeded the $20 5 fiscally sustainable NOPD by nearly three-fold. As a symptom of the resource curse, Sudan 0 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 has entered into obligations beyond its means guaranteed by flows of oil. The fiscal balance has GoNU Expenditure GoNU Revenue turned to growing deficits since 2005, after nearly Weighted Average a decade of prudence. Including the rundown in Sudan Oil Price (right axis) the ORSA reserves, the budget deficit in the 2007 Sources: World Bank staff estimates using data from MoFNE and IMF budget has jumped to 3 percent of GDP, from 1.8 staff reports. percent of GDP in 2005 and surplus in the pre- ceding three fiscal years. The situation was further aggravated when Sudan was exposed to a shock Central Bank. Foreign financing has increased sig- of a sudden drop in oil prices in 2009, and thus nificantly, reaching over $1 billion dollar in 2009, the country was not able to fulfill its obligations compared to an annual average of $45 million from towards its creditors--both internal and external. 2000­2003. The projected 2009 budget deficit exceeded 4 per- Increased borrowing under expansionary fis- cent of GDP. The majority of deficit financing has cal policy has added to an already massive exter- been domestic, two-thirds in 2009, including gov- nal debt overhang and domestic arrears build ernment securities and net borrowing from the up. The country's external debt overhang contin- BOX 1-2: Impact of Past Oil Booms and Busts on Other Oil Exporters The experiences of Nigeria, Saudi Arabia, and the UAE illustrate the costs of macroeconomic volatility brought on by sharp changes in oil prices. In response to a substantial increase in oil prices in the mid-1970s and then again in the late 1970s, these countries significantly increased their expenditures. In Saudi Arabia, annual changes in primary spending peaked at 133 percent during the first oil boom, while in Nigeria and the UAE primary spending went up by 114 and 102 percent respectively. These spending increases fueled inflation that reached 36 percent during the oil peak in Nigeria and Saudi Arabia, and over 20 percent in the UAE. While in Saudi Arabia and the UAE, inflation gradually came down as spending increases were unwound, in Nigeria high inflation persisted reflecting continued loose fiscal policy. The quality of spending made a difference for growth outcomes. While both the UAE and Saudi Arabia enjoyed very high real non-oil GDP growth rates during the oil boom partly owing to an effective expenditure management, Nigeria saw more modest non-oil GDP growth, as poor management of its investment program and a ballooning wage bill intensified the negative impact of Dutch disease on agriculture. But as oil prices declined in the early 1980s, both Saudi Arabia and the UAE experienced a prolonged period of low growth as public expenditure increases were reversed following a drop in oil revenues. Source: Medas and Zakharova 2009. CHAPTER 1 -- MACRO AND FISCAL MANAGEMENT IN A VOLATILE WORLD ECONOMY 33 ues to be a major concern, and the level of non- diture-smoothing framework. The lack of public concessional borrowing needs careful monitoring. expenditure smoothing has led to two worrying fis- The stock of public and publicly guaranteed debt cal results: substantial increases in non-discretion- as of 2008 is estimated at $33.5 billion, a more ary expenditures (e.g., wages and benefits) that are than double increase from its level in 2000. This difficult to reduce in a downturn,17 and declines increase has been in part due to the rapid build-up in the efficiency of public investments, with bud- of arrears to both Paris and non-Paris Club cred- get execution on large investment projects that is itors and included the new drawings from Arab considerably above planned allocations, and erratic multilateral and bilateral creditors as well as from funding/ underfunding of the rest of the portfo- China and India. Another emerging concern is the lio.18 Hence, difficult fiscal adjustments have been accumulation of non-concessional borrowing. In required following the recent sharp decline in oil 2008, the government contracted about $426 mil- revenues. lion non-concessional debt. The IMF set a limit of The oil revenue boom of 2008 was a missed $700 million in its SMP programs, however this opportunity for the country. In spite of record limit may however be easily breached if the fis- revenues associated with the run up in world oil cal space and limited access to concessional financ- prices in 2008, Sudan has managed to spend all ing leave little maneuver to finance commitments of its windfall oil profits to-date. While the coun- on needed investment and development spend- try could have begun building up a prudent level of ing. Judicious settlement of arrears and accrual of reserves and comfortably adopting measures to bet- non-concessional debt must thus be undertaken ter manage oil resources in future, it chose not to. to prevent build up and worsening of the debt sit- The GoSS chose to spend the majority of the $1.5 uation. There is a need to minimize the contract- billion in oil revenue that came in above budgeted ing of non-concessional debt and the accumulation levels. If it had instead saved those funds, the 2009 of arrears as both weakens debt sustainability and budget could have been implemented as planned could delay creditors' participation in a poten- and the current painful fiscal adjustment largely tial debt-relief operation, which could substan- avoided. tially improve inflow of required financing into the While Sudan had the foresight of creating the economy. Oil Revenue Stabilization Account (ORSA) to Pro-cyclical and volatile spending have been help smooth expenditure, management has been particularly harmful. Greater volatility in oil poor. The ORSA19 has not yet functioned as a disci- prices, when transmitted through oil revenue vola- plined mechanism to promote either fiscal or mac- tility and then expenditure volatility, tends to harm roeconomic goals in the country.20 As seen below innovation and economic growth, particularly if financial development in a country is weak as is 16 Van der Ploeg and Poelhekke 2009. the case in Sudan.16 The high degree of correlation 17 The federal public sector wage bill increased nearly four-fold from 2000 to 2006. between revenues and expenditure essentially trans- 18 For more details on the composition of the expansionary fiscal policy, mits the underlying volatility in oil prices--evident see World Bank 2007, Chapter 3. 19 The ORSA is a locked sub-account for the GoNU at the Bank of Sudan, from the collapse in world oil markets in 2008--to controlled by the MoFNE. At the start of the fiscal year, a benchmark government expenditure and public investment in production figure and oil price is agreed by the GoNU and GoSS. Any revenues accruing from production or price above the benchmark are the country. In addition, because oil earnings enter deposited in the ORSA, and withdrawals are distributed to both GoNU the Sudanese economy predominantly through and GoSS in proportion to their share of total oil revenue. 20 The account accumulated to more than $300 million by early 2006, public finance channels, fiscal policy faces signifi- but there were substantial draw-downs from the account later that year to cant volatility in the absence of an effective expen- finance government expenditures in light of shortfalls from delayed new 34 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH in Figure 1-5, withdrawals from the account have FIGURE 1-5: ORSA Account Withdrawals and been highly volatile and nearly equal to deposits on Deposits net--highlighting its mismanagement and lack of $450 effectiveness in stabilizing expenditure. More impor- $400 tantly, there were heavy withdrawals when oil rev- $350 enue was well above budgeted levels.21 In addition, $300 $ Millions the process of oil price reference budgeting only $250 applies to revenues from Nile blend which currently $200 accounts for less than half of total oil revenues. $150 Revenue diversification can also help decou- $100 ple the fiscal account from oil earnings. Non- $50 oil revenues must be tapped, and tax reforms must $0 be undertaken to expand and diversify the rev- Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct 2006 2007 2008 enue base. The annual revenues in 2009­12 are Withdrawals Deposits forecasted to be lower than in 2005­08 by 6 per- centage points of GDP. To avoid large imbalances in Source: Various monthly reports of the GoNU/GoSS Technical Com- mittee on "GoSS Share From Crude Oil Revenues". the fiscal position, the resource gap will have to be bridged by tax and expenditure measures. A recent initiative is the comprehensive tax policy review, which is aimed to identify concrete measures to cut Toward a More Reliable and Sustainable Value Added Tax (VAT) exemptions, increase per- Fiscal Framework sonal income tax collections, resolve tax jurisdiction issues vis-ŕ-vis sub-national governments and maxi- More effective volatility management within mize the net take from the oil sector. The streamlin- a fiscally sustainable framework requires a ing of tax exemptions is expected to yield additional medium-term outlook on oil revenues. In order revenues of at least 2 to 3 percent of GDP over to break the link between current expenditures and 2009­12. Reforms are also envisioned in revenue current oil revenues, especially in the South where administration, which consist of widening the use the dependence on oil revenues is extreme, fiscal of unique taxpayer identification number across rev- planners need to take a medium-term approach to enue agencies, introducing a VAT refund system for oil revenue. This section looks at estimate of long- large business tax payers, and adopting WTO con- term oil revenues and an example of a useful frame- sistent valuation principles for questionable customs work to benchmark natural resource management. assessments. Other areas of reforms that the author- ities are embarking on include public financial man- Estimates of Longer Run Oil Revenue agement (PFM) and expenditure policy involving most notably the reorganization/modernization of At presently known oil reserve levels and pro- the Ministry of Finance and National Economy, the duction plans, revenues from oil in Sudan will extension of the GFSM 2001 budget classification to Northern states, strengthening of the tax collec- fields, and by end-December 2006 the account was virtually depleted. The ORSA was again built up during 2007 and early 2008, but substantial tions, and the modification of the petroleum pricing draw-downs over the course of 2008--both before the collapse in oil regime toward an automatic adjustment formula. prices and after--have left it nearly depleted yet again. 21 ORSA withdrawals between April-August 2008 totaled $849 million, New revenue measures are also targeted on bever- when oil prices were above $100/barrel relative to a budget reference ages and cigarettes. price of $63/barrel for Nile blend. CHAPTER 1 -- MACRO AND FISCAL MANAGEMENT IN A VOLATILE WORLD ECONOMY 35 run out in 20 to 30 years, with oil production 1973­79, nominal oil prices hovered around their peaking by 2012 in the most optimistic scenario.22 long-term average of $22 per barrel. However, the The major challenge for oil reserve management is therefore how to effectively manage the fleeting FIGURE 1-6: Expected Government Oil nature of its oil windfall. Figure 1-6 shows expected Revenues, by Production Scenario government fiscal receipts from oil in Sudan for $9 three production scenarios, valued at recent oil $8 price forecasts by the IMF.23 The net present value $7 of government fiscal receipts from oil for 2009­ $6 2040 are estimated at $41 billion for the base $ Billions $5 production scenario, $29 billion for the low pro- $4 duction scenario, and $51 billion for the high pro- $3 duction scenario (all in 2008 dollars).24 $2 The oil revenue forecasts carry idiosyn- $1 cratic risks from volatile world oil prices. Sudan's $0 actual fiscal revenues from oil may be higher or 2000 2005 2010 2015 2020 2025 2030 2035 2040 lower than currently expected. While future extrac- Low Base High tion volumes are relatively well known in the Sources: World Bank staff estimates based on IMF and Wood Mack- short run, they could change significantly depend- enzie data. ing on actual extraction rates or new oil discover- ies. However, volatility of oil revenues is typically 22 As explained in Chapter 3, these forecasts are based on the limited information available on oil sector exploration and investment in current driven more by volatility in oil prices. Oil prices projects. Thus oil sector forecasts in Sudan should be taken as indicative. are inherently unpredictable, with several major 23 IMF 2009. 24 Calculating the net present value of expected fiscal receipts requires shocks to the world oil market in recent decades discount assumptions that are subjective and can vary over time. See Box (see Figure 1-7, left panel). After the oil shocks of 1­3 for details on discounts used in the current estimates. FIGURE 1-7: Volatility in Oil Prices and Effects on Revenue Forecasts $140 $9 $8 $120 $7 2008 US$ per barrel $100 $6 $ Billions $80 $5 $60 $4 $3 $40 $2 $20 $1 $0 $0 1970 1975 1980 1985 1990 1995 2000 2005 2000 2005 2010 2015 2020 2025 2030 2035 2040 20-year 10-year IMF WEO Average Average Forecast Sources: World Bank staff estimates using data from U.S. Bureau of Economic Analysis and IMF 2009. 36 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH world oil price started a dramatic rise beginning FIGURE 1-8: Split in Government Oil in late 2002, and by July 2008 had reached $145 Revenues, Base Revenue Scenario per barrel. The subsequent months saw a spectacu- $9 lar collapse in the world oil price, falling 75 percent $8 from its record high to $36 per barrel at the end of $7 2008. By June 2009, the world oil price had risen $6 $ Billions above $60 per barrel. This significant volatility of $5 oil prices suggest that revenue forecasts must weigh $4 heavily on the side of prudence when identifying a $3 medium-term oil price against which to budget. $2 Assuming some reversion back to histori- $1 cal oil price averages implies significantly lower $0 forecasts. Using the baseline production volume 2000 2005 2010 2015 2020 2025 2030 2035 2040 estimates identified above, with oil price levels that GoSS Share GoNU Share return to their historical average over the past 10 Sources: World Bank staff estimates based on IMF and Wood Mack- years ($49.44 per barrel in 2008 dollars) or past enzie data. Note: The GoNU share (~61 percent) and GoSS share (~39 percent) 20 years ($37.65 per barrel in 2008 dollars) start- exclude oil revenues shared with states and other oil-producing regions. ing in 2010, Sudan could face markedly lower reve- nues as seen in Figure 1-7, right panel. Under these oil price scenarios and base production expecta- various Sudanese oil blends and estimates made for tions, the net present value of Sudan's oil revenues production costs. In addition, further estimates of for 2009­2040 would fall from $41 billion for the the division of oil resources between GoNU and base IMF price forecast to $27 billion for a return GoSS have been made based on historical reports to the 10-year average oil price, and $19 billion for of the joint GoNU/GoSS Technical Committee. In a return to the 20-year average oil price (all in 2008 this scenario, the $41 billion net present value of dollars). In any of these plausible scenarios, the oil Sudan's oil wealth from 2009­2040 is estimated to revenues will never reach levels seen last year and be split $25 billion to GoNU (61 percent) and $16 will start a steady decline in the next 3­5 years. billion to GoSS (39 percent). Sharing of revenues between GoNU and GoSS has added risks because of the limited transparency in the oil sector and the political Examples of longer-term frameworks uncertainty facing the country. Projecting future of oil revenue management oil revenues is a highly uncertain exercise in any country, but the uncertain political future of Sudan Examples of long term frameworks can help further complicates this. Specifically, it is uncertain Sudanese fiscal planners better manage volatility, how oil revenues generated from the fields that lie especially in the South, including through more within and across the South Sudan border region medium term budgets. The examples provided in will be apportioned if the South opts for inde- Box 1-3 could be used to derive and disseminate a pendence in 2011. We have assumed that the sta- tus-quo concerning oil revenue sharing will not change.25 Figure 1-8 shows the oil revenue profile 25 The wealth sharing provisions in the CPA and historical revenue sharing as reported in the Sudan Technical Committee reports have for the base production forecast and recent IMF oil been used to compute the forecasted division between GoNU and price forecast, with specific discounts applied to the GoSS oil revenues. CHAPTER 1 -- MACRO AND FISCAL MANAGEMENT IN A VOLATILE WORLD ECONOMY 37 BOX 1-3: Calculating a Permanent Income Equivalent for Sudan's Oil Revenues The Permanent Income Equivalent approach translates a nominal expected oil revenue flow into a constant annuity value in real terms. The calculation consists of two steps, expressed in the equations below: first, compute the discounted or net present value (NPV) of the projected oil revenues, and second, calculate an annual revenue level that gives exactly the same discounted value while being constant in real terms in perpetuity. Assumptions on key discounting parameters are required for the calculation. The assumptions here are one option. The authorities are encouraged to consider alternatives, for example using a declining discount rate would favor future generations. The calculations used in this section assume that a reasonable starting point is to take an equity risk premium of 5 percent, a risk-free rate of return of 3 percent, a country risk premium of 500 basis points for Sudan, and world long-term inflation rate of 3 percent. The resulting discount rate is 10.3 percent, while the permanent income "yield" on the NPV of Sudan's oil wealth is 5 percent. Following the two steps described above, and using oil revenue assumptions described in this section, the estimated permanent income equivalent is $1.24 billion for GoNU and $0.80 billion for GoSS, in constant 2008 dollars. Step 1: Where: oil NPV0 = (1 +t Ot t r P NPV0 = net present value from future oil revenues, t ­0 iR ) Ptoil= price of oil in current dollars per barrel Step 2: Ot = production volume in year t Pl0 = rS * NPV0 i R = discount rate integrating a risk premium Plt = rS * NPV0 * (1 + p)t p = long term inflation rate with r S = real interest rate in the absence of uncertainty rS = iS ­ p T is the year in which oil reserves are exhausted iR = rS + p + risk premium three-year envelope for expected oil revenues at the improving the consistency of public expenditures federal and GoSS levels. This would improve the over time, the PI approach provides a framework robustness of the budget macroeconomic frame- for thinking about how a resource-rich country can work, and provide a more reliable resource envelope. achieve some degree of macroeconomic stability. Importantly, fiscal planning using these longer term The PI approach also serves as a means for ensur- approaches should be accompanied by monitor- ing a reliable source of revenues for critical public ing of the NOPD--the difference between non-oil investment that is particularly relevant for enhanc- revenue and total government expenditure, exclud- ing economic growth in a post-conflict state like ing interest payments--otherwise what may be set Sudan. aside on the one hand can be spent with the other, The emphasis here is on using the PI thereby making the approach fiscally ineffective. approach to introduce relevant concepts to more Fiscal sustainability frameworks can pro- medium term natural resource management and vide useful benchmarks or starting points for a as a possible benchmark against which a coun- medium term approach to oil revenues. The Per- try can judge its natural resource management manent Income Equivalent approach,26 in princi- efforts. The precise numbers of the PI analysis are ple, guarantees a permanent flow of resources that less relevant than their order of magnitude, and will contribute to a country's economic develop- ment even after its oil resources have been depleted. 26 Under the Permanent Income Equivalent approach, real government In addition, it significantly reduces volatility in consumption is set at the level of the interest income on the net present value of the total oil windfall. This approach is implemented by saving in government expenditure and lead to much more high revenue years through allocation to a dedicated stabilization fund, effective macroeconomic management. As a tool for and drawing down the oil fund in low-income years. 38 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH the extent to which the PI approach--as a frame- historical average of $49 in constant 2008 dollar work--helps a government adopt a longer term terms. Under this scenario, the permanent income perspective on natural resource management. This levels are $807 million for GoNU and $521 mil- purpose is particularly strong in Sudan, where a lion for GoSS. rational and consistent management of its natu- ral resource wealth has not existed in the coun- A "Frontloaded" Approach try's eleven years of oil production. A policy of maintaining and updating estimates of the NPV The high political uncertainty and other fac- and permanent income equivalent of Sudan's oil tors in Sudan make application of a pure PI wealth is a reminder that these resources are finite approach unlikely. Given the uncertainties of the and must be managed with care. Such a policy also remaining Interim Period, discount rates of the places the inherent revenue volatility observed by future are high for policy makers, and the incen- policymakers month-to-month, day-by-day, in a tive to save is low. In addition, recent research has larger context and reinforces the value of expendi- supported the idea that increased and temporary ture smoothing and consistency of public invest- spending above the permanent income level--for ment, and improves macroeconomic fundamentals productive domestic investments with high mar- as a byproduct. ginal returns in a capital-scarce developing coun- Estimates for the permanent income equivalent try--can be an optimal use of natural resource applied to Sudan can be found in Table 1-1 for two revenues.28 This can be a compelling argument for different oil-price forecast scenarios, both of which current public investment that exceeds the perma- use the base production estimates described above. nent income level in the Sudan, especially in areas These calculations suggest permanent income levels of $1,239 million for GoNU and $798 million for 27 The IMF WEO 2009 oil price forecast assumes an average price of $52 GoSS under the baseline IMF WEO 2009 oil price per barrel for 2009, which may appear to be low given the recent uptick in world oil prices. However, a hypothetical 25 percent increase in the forecast (all in constant 2008 dollars).27 This base- assumed average price for 2009 to $65 per barrel increases the baseline line scenario can also be seen graphically in Fig- permanent income figures by just 3.3 percent, or $40 million per year, for GoNU to $1.28 billion and by 3.1 percent, or $25 million per year, ure 1-9 (left panel). The second scenario represents for GoSS to $0.82 billion. the possibility that oil prices revert to their 10-year 28 Collier, van der Ploeg and Venables 2009. TABLE 1-1: Permanent Income Scenarios (2008 $ millions) Oil Price Permanent Scenario Income 2009 2010 2011 2012 2020 2030 IMF WEO forecast -- $52.00 $62.50 $67.50 $70.50 $74.75 $74.75 GoNU Share 1,239 2,409 3,456 3,953 3,925 2,192 920 GoSS Share 798 1,525 2,224 2,613 2,582 1,380 574 Revert to 10-year -- 52.00 49.44 49.44 49.44 49.44 49.44 average GoNU Share 807 2,409 2,508 2,610 2,448 1,277 550 GoSS Share 521 1,525 1,611 1,729 1,615 812 348 Source: World Bank staff estimates using IMF and Wood Mackenzie data. CHAPTER 1 -- MACRO AND FISCAL MANAGEMENT IN A VOLATILE WORLD ECONOMY 39 FIGURE 1-9: Permanent Income and "Frontloaded" Revenue Scenarios, Base Case $6 $6 $5 $5 $4 $4 $ Billions $ Billions $3 $3 $2 $2 $1.9 B $1.2 B $1.1 B $1 $1 $1.2 B $0.8 B $0.7 B $0 $0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2000 2005 2010 2015 2020 2025 2030 2035 2040 GoNU GoNU GoSS GoSS GoNU GoNU GoSS GoSS Base Oil Permanent Base Oil Permanent Base Oil Frontloaded Base Oil Frontloaded Revenue Income Revenue Income Revenue PI Revenue PI Source: World Bank staff estimates using IMF and Wood Mackenzie data. Note: The permanent income levels were calculated using the base production estimate and IMF WEO oil price forecasts. Expenditure was "front- loaded" by 50 percent of the permanent income level for a period of five years, and then reduced to a level that can be sustained indefinitely. where basic infrastructure needs to be rebuilt like reduced to a level that can be sustained indefinitely. the South. However this will be constrained by the Using the base production estimates and the recent quality of public expenditure, the extent to which IMF oil price forecast, the "frontloaded" perma- such investment is truly productivity enhancing, nent income levels are $1,859 million for GoNU and inevitable political tradeoffs in the alternative and $1,197 million for GoSS for 2009­2013, fall- use of scarce resources. ing to $1,125 million for GoNU and $724 million Estimates of a "frontloaded" permanent for GoSS in subsequent years (all in constant 2008 income level were calculated by increasing accept- dollars). See Figure 1-9 right panel for a graphic able expenditures by 50 percent of the permanent representation. income level for a period of five years, and then CHAPTER 2 BROADENING PRIVATE SECTOR-LED GROWTH29 A. The Importance of the tional level to improve the investment climate, and Investment Climate actions to catalyze specific value chains.33 Sudan's Five-Year Plan (2007­2011) seeks: "Sustainable A stronger private sector base is a key for build- development through building the infrastructure, ing broad-based growth in the post-conflict Suda- modernizing and developing agriculture, increase nese economy. International experience assigns a production and productivity, enabling the pri- critical role to the private sector to create meaning- vate sector to guide the economic development and ful employment, revenue for the state, and to sus- building an economy of equitable supply of basic tain peace. In conflict affected settings, international services." experience suggests an important role for the pri- Enhancing productivity growth and improv- vate sector in promoting peace through creating sus- ing competitiveness is essential to fulfilling these tainable sources of employment, which becomes developmental mandates. Periods of peace follow- critically important as donor flows decline as ini- ing negotiated settlements of Sudan's conflicts have tial stabilization efforts are completed. As Elbadawi, led to increased investment and private sector activ- Collier and others have documented, economic dis- ity. But in the past this growth has been fragile and tress is a precursor to conflict. As such, breaking the not sustained. To ensure that investment serves to cycle of conflict requires cementing peace through catalyze broader growth as envisaged by policy- broad-based growth.30 This is an essential part of the makers and donors alike, international experience peace dividend expected by citizens. suggests that efforts are needed to remove barriers Over three decades, Sudan's policymak- to productivity growth, competitiveness and eco- ers have increasingly recognized the importance nomic integration. Countries in Africa that have of the enterprise sector to its development. In improved their investment climates grow faster and the early 1980s, the private sector was called upon become more competitive. For the private sector in to create urban employment and ameliorate the Africa, as a recent study explains, "the most impor- impact of rural-urban migration31 resulting from tant determinant of performance will be the busi- desertification and drought. The Government of ness environment in which firms operate." 34 Sudan's twenty-five year (2002­2027) strategy focused on restructuring the Sudanese economy 29 The chapter has been prepared by Magdi Amin with inputs from with a major emphasis on agriculture and industry Yutaka Yoshino and Tilahun Temesgen. The Sudan Productivity and with special attention to small- and medium-scale Investment Climate Survey (Sudan PICS 2008) was carried out by H&H Consultants. industries.32 The 2005 Joint Assessment Mission 30 World Bank 2003. (JAM) similarly had a key focus on the Produc- 31 USAID 1980. 32 UNIDO 2003. tive Sector (the private sector and agriculture) and 33 GoS, SPLM, WB and UNDP 2005. proposed initiatives both at the policy and institu- 34 Ramachandran, Gelb and Shah 2008. 42 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH Productivity results from investment in peo- the private sector to play a role in lagging regions. ple, institutions and infrastructure. The contri- The key question is to use these advantages to cre- bution firms make to society through investment, ate an environment more conducive to the produc- production, employment and service delivery is tivity growth not only of foreign and large firms, determined by their productivity, which in turn but also small firms, and that is more geographi- is influenced by the investment climate: loca- cally broad based. tion specific factors that create opportunities and The manufacturing sector can be crucial to incentives for firms to invest and trade. The invest- broad-based growth, but is currently thin and ment climate encompasses a range of specific attri- located in areas relatively close to the capital. butes of the ecosystem within which firms operate, During 2007, the manufacturing sector contrib- including the functioning of factor markets (land, uted to only 6.1 percent of GDP. In better-per- finance, and labor), product markets, the predict- forming countries in Sub-Saharan Africa, the able regulatory environment, and efficient compli- value-added of the manufacturing sector accounts ance with administrative requirements. It has been for 20 to 40 percent of GDP. The value-added well established that investment climates charac- of the sector did not significantly increase in real terized by high costs and high risks result in lower terms over the past four decades. levels of firm creation, formalization, investment, The manufacturing sector is associated trade, and employment. Other work clearly dem- with high capital intensity and high produc- onstrates that the level of corruption, and the rule tion costs that work against the competitive- of law are strongly associated with growth.35 ness of the country. The influx of investment has translated into high asset values of Sudanese man- B. From Investment to ufacturing firms, but the high capital intensity Broad­Based Growth has been associated with high labor costs. Accord- ing to the Investment Climate report, the machin- Investment Is Creating Pockets of Growth ery and equipment per worker in Sudan is worth But Also Driving Up Costs $16,118 compared to less than $6,000 in compar- ator countries. This high capital intensity provides As in past peace agreements, the 2005 CPA led the firms' scarce labor force with a high capital to a substantial increase in investment. In the endowment, enabling it to be productive. Median two years after signing the CPA, Sudan became value-added per worker as measured in the survey the fourth largest destination for FDI in Africa is $6,700, higher than the value-added per worker in 2005, attracting $2.3 billion, before reaching a of median firms in Uganda, Egypt and Ethiopia peak of $3.5 billion in 2006. While much of this and slightly lower than the value added per worker was directed to the exploitation of energy resources, in median firms in Kenya and Morocco. Labor has there were substantial investments in other sec- become costly at approximately $500 per month, tors including financial services, telecommunica- far exceeding those of its comparators. Other things tions, agriculture, and manufacturing. Much of this being equal, firms with higher labor costs are less investment originated in Asia and the Gulf. competitive. A proper indicator of labor compet- Despite these considerable achievements in itiveness is therefore the unit labor costs, which attracting investment, much of the increase in measures the ratio of labor cost per worker to value economic activity has been limited to the cen- tral core of the country, whereas the development strategies as articulated by the government call for 35 Kaufmann and Kraay 2002. CHAPTER 2 -- BROADENING PRIVATE SECTOR-LED GROWTH 43 added per worker; the higher the unit labor cost, Manufacturing firms operate below their full the lower the competitiveness of the firm. Sudan's capacity. The capacity utilization rate, which is the median unit labor cost is 0.19, one of the highest firm's output in comparison to maximum possi- among comparator countries. ble, is only at 65 percent. Capacity utilization for TABLE 2-1: Productivity Measures for Manufacturing in Sudan and Comparators Value Added per Capital per Worker Labor Cost per Worker Worker (2006 US$) (2006 US$) (2006 US$) Unit labor Cost Kenya 8,707 11,558 2,149 0.13 Morocco 7,947 5,438 3,809 0.19 Sudan 6,682 16,118 6,280 0.19 Tanzania 3,268 1,680 899 0.15 Uganda 1,975 1,863 880 0.22 Egypt 1,657 5,447 797 0.16 Ethiopia 1,509 2,588 493 0.14 Source: Sudan PICS 2008. FIGURE 2-1: Total Factor Productivity Growth of Manufacturing Industries Food Garments Uganda Uganda Tanzania Tanzania Kenya Kenya Ethiopia Ethiopia Egypt Egypt Sudan Sudan 0 5 10 15 20 25 0 5 10 15 20 25 Wood products & furniture Chemicals Uganda Uganda Tanzania Tanzania Kenya Kenya Ethiopia Ethiopia Egypt Egypt Sudan Sudan 0 5 10 15 20 25 0 5 10 15 20 25 Source: Sudan PICS 2008. 44 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH comparator countries Uganda, Tanzania, Egypt, FIGURE 2-2: Share of Surveyed Firms that Morocco and Kenya range around 70 to 75 per- Export cent. The low capacity utilization may indicate that 60 the investment and capital may have not been prop- 50 47 erly or fully integrated or utilized in production and, 46 more generally, is a sign of a lack of competitiveness. 40 35 Percent (%) Total factor productivity is low relative to comparators. Total factor productivity (TFP), 30 which captures the efficiency with which all factors 20 19 of production are converted to output, is an indica- 14 12 10 tor of international and market competitiveness.36 10 Only food manufacturing firms have levels of TFP 0 close to their international competitors. Firms Kenya Morocco Egypt Uganda Tanzania Ethiopia Sudan engaged in food, garments, wood products and fur- niture and chemicals in Sudan perform better in Source: Sudan PICS 2008. terms of TFP than those in Ethiopia and Egypt but not to those in Uganda, Tanzania and Kenya. To raise aggregate productivity, Sudan has to raise total factor productivity at the firm level and ensure that tion Study (DTIS) identified the reduction of trade markets allocate resources to the most productive costs, including modernizing customs, the develop- firms at the sector level. ment of a trade logistics service, the need to build capacity in food and plant safety regulations, and Low Competitiveness Has Contributed to the need to reduce bottlenecks, fees and charges at Poor Economic Integration Port Sudan as priorities. The DTIS, like the Invest- ment Climate Assessment, identifies the poor com- High labor costs led to low economic integra- petitiveness of manufacturing as the most pressing tion. The high costs of labor in the manufactur- concern. ing sector has rendered it difficult for the country PICS respondents identified the profitabil- to compete either in foreign markets or at home as ity of the domestic market relative to foreign trade barriers come down, without higher levels of markets as a key cause of low exports, as well as productivity. The low economic integration is man- the inability to match foreign prices. The relative ifested in the poor share of the country's exports to profitability of domestic markets is in part a result the world market. It is also reflected in the influx of of exchange rate appreciation that occurred during immigrant workers in the country. the survey period, which changed relative prices in Sudan's private sector is isolated from inter- favor of serving domestic customers. At the same national markets with only 10 percent of man- time, well over half of respondents failed to export ufacturing firms in the Productivity and for other reasons: high shipping and transport costs Investment Climate Survey (PICS) survey able or inability to match foreign prices. These factors to export their products (Figure 2-2). This is a particularly dramatic figure relative to compara- 36 The international competitiveness of manufacturing firms can be tive countries Kenya, Morocco and Egypt in which assessed in terms of firm-level TFP. TFP growth can be achieved by greater firm level productivity and reallocation of market shares to more more than 30 percent of manufacturing firms productive players even while within firm productivity remains constant. export. The 2008 Diagnostic Trade and Integra- Allocative efficiency is therefore a measure of a market's competitiveness. CHAPTER 2 -- BROADENING PRIVATE SECTOR-LED GROWTH 45 reflect a poor business environment and, in combi- age. Large parastatals dominated the economy for nation with poor firm-level productivity, add up to decades following Independence. Along with Egypt, Sudan's low competitiveness. Sudan reverted to an "Infitah" policy in the 1970s that welcomed foreign investment but maintained Characteristics of the Enterprise Sector a large state role in enterprise ownership as well as industrial policy with features of import-substituting To better understand the factors underpin- industrialization. In the 1980s, the Sudan's financial ning the poor competitiveness of manufacturing crisis precipitated a policy of privatization, particu- industries, it is useful to better understand the larly focused on enterprises that created substantial basic characteristics of the enterprise sector. The losses or contingent liabilities. This was carried out enterprise sector is diverse, including a traditional with minimal international financial support, such base of sectors linked to the agricultural base of the that only seventeen enterprises were initially priva- economy, and an increasing number of firms linked tized. More recently, the government has sought to to increasing domestic demand for goods and ser- revive the program for remaining firms.37 vices. According to the 2003 United Nations The evidence suggests that a more funda- Industrial Development Organization (UNIDO) mental reorientation of the State's role in the industrial survey, the largest industrial sectors were productive sector is needed. In addition to direct food processing, followed by metalworking and ownership of enterprises by all levels of government wood processing. More traditional subsectors have (National, GoSS, and State), the state indirectly been the sugar industry, leather, textiles, pharma- owns enterprises through government officials and ceuticals, oilseed processing, soap, and cement. political parties. In Southern Sudan, the SPLM More recently, in addition to oil refining, automo- owns Nile Commercial Bank and the telecom- tive assembly, plastics, cable, and pipe manufac- munications firm GEMTEL. The broad range of turing have been developed primarily for domestic activities in which the state participates as direct consumption. The enterprise sector as a whole con- or indirect owners of enterprises distorts competi- sists largely of small firms, structured as private tion in those markets, as the presence of state firms limited companies (60 percent) and sole proprietor- provides a strong disincentive to private entry. This ships (37 percent) arrayed over a wide range of sec- undermines policies both at the national level and tors. Of the sample of formal manufacturing firms in Southern Sudan to allow greater entry of the pri- in the PICS only 8 percent of firms were partner- vate sector. On the other hand, there is a need for ships, 2 percent state-owned, and 3 percent listed. a more effective and stronger state role in provision The enterprise sector is predominantly pri- of public goods such as infrastructure, and in estab- vate, but a strong legacy of state participation lishing institutions that support fair competition. remains. The 2003 UNIDO industrial survey found that private ownership accounts for 96 percent in Regional Variations in Performance 2002, and the Sudan PICS 2008 found only 2 per- cent of surveyed firms to be government owned. Within Sudan, productivity varies significantly Yet the enterprise sector in Sudan emerges from a by region and by size of firm. Labor productivity deep historical legacy of state participation in many forms. At independence, British colonial adminis- trators turned over control of the economic appa- 37 The Public Sector Enterprises Disposition Bill (1990) and the State Corporation Act (1992) codified the privatization program, and the ratus supporting production and supply of cotton High Council for the Disposition of Public Enterprises was established and other commodities of the government to man- to carry out the policy. 46 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH measured as value added per worker is one of the support large-scale, formalized manufacturing. As basic measures of establishment level productiv- such, most of the country is endowed with a large ity. Differences in labor productivity so measured, number of smaller or informal enterprises. however, can be the results of differences in tech- The distribution of average sales revenue per nology used, skills of workers including manage- worker and value added per worker for the manu- rial quality as well as differences in the intensity facturing industries in Sudan shows that businesses of capital used. Gezira and Khartoum regions in Juba, Malakal, and Red Sea perform relatively appear to have relatively high labor productivity worse than those in Khartoum and other bigger on average, which is due primarily to far higher cities (Figure 2-4). This can be due to a number of productivity of large firms. West and South positive factors in the larger cities such as capital regions as well as North regions other than Khar- intensity, access to markets (for inputs and prod- toum and Gezira (e.g., Red Sea and River Nile ucts), better infrastructure facilities, as well as bet- states) have very low productivity levels, includ- ter access to technology. The following chart shows ing large firms. Interestingly, microenterprises in the kernel density distribution for value added the West outperform those of Khartoum and the and sales per worker in Sudan by geographic loca- national average. tion. In both cases, establishments in Khartoum Larger firms, which are more intensive in the perform better than those in Southern Sudan and use of formal institutions and benefit from econ- other states. omies of scale, are located primarily in Khar- Firms operating in Khartoum have higher toum. Small firms can be found everywhere, but propensity to assimilate technology and to gain larger firms are located primarily in Khartoum and market competitiveness than those in other to a lesser extent El Gezira, Nyala, Port Sudan and areas. The TFP growth of manufacturing firms in North Kordofan (Figure 2-3). Few parts of Sudan food, textile, wood and wood products, chemical offer infrastructure and factor markets necessary to and non-metallic products located in Khartoum is FIGURE 2-3: Distribution of Manufacturing Enterprises by State Manufacturing Establishments by State Large Manufacturing Establishments by State 5000 1200 4500 4000 1000 3500 800 3000 2500 600 2000 400 1500 1000 200 500 0 0 Khartoum S. Darfur El Gazira White Nile Sinnar N. Darfur N. Kordofan River Nile Northern South Kordofan Kassala West Kordofan Blue Nile Red Sea W. Darfur Upper Nile Bahr El Ghazal Equatoria Gadarif Khartoum S. Darfur El Gazira White Nile Sinnar N. Darfur N. Kordofan River Nile Northern South Kordofan Kassala West Kordofan Blue Nile Red Sea W. Darfur Upper Nile Bahr El Ghazal Equatoria Gadarif Industrial Survey (2003) Industrial Survey (2003) CHAPTER 2 -- BROADENING PRIVATE SECTOR-LED GROWTH 47 FIGURE 2-4: Densities of Manufacturing Value Added and Sales Per Work Densities of Value Added per Worker by region Densities of Sales per Worker by region .25 .20 .20 .15 .15 .10 .10 .05 .05 0 0 5 10 15 20 25 30 0 10 20 30 y y2 Khartoum Other states Juba and Malakal Source: Sudan PICS 2008. higher compared to those operating in other areas Regional Differences in Firm Size, Capital (Figure 2-5). Only the firms outside Khartoum Intensity, and Skills engaged in metal and metal products have higher TFP growth than those in the main city. This indi- The PICS 2008 data reveals that enterprises in cates that there is a big disparity in the productivity Khartoum, Red Sea and Gezira are, in terms of and competitiveness of firms operating in and out- employment, bigger on average than those in the side the city center of Khartoum. South, are more capital intensive, and have bet- ter educated managers and work force (Figure 2-5). Non-managerial skilled human capital is lacking in some states, particularly those in the South more so FIGURE 2-5: Total Factor Productivity Growth than in others. in Khartoum and Other Areas Lack of skilled manpower was cited as a serious Food and beverages business obstacle by close to 40 percent of respon- Textile dents to the PICS 2008 manufacturing survey for the whole of Sudan. However, the labor skills Garmets related constraints are more pronounced in two Wood and wood products areas--Malakal and Nyala, where 53 percent and Chemical and 56 percent of respondents cited it as major to severe chemical products business constraints. The majority of Sudanese edu- Non-metallic products cated labor force is concentrated in the capital and Metal and metal products other large cities. Similarly, the entrepreneurship skill gap is also enormous from one region (state) to 0 5 10 15 20 another as, for example, indicated by the share of Khartoum Other areas business managers with university degree. 48 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH FIGURE 2-6: Regional Differences in Firm Manager Perceptions of Constraints Inputs The perception of managers of the investment (A) Average book value of machinery by region as percent of the national average climate is important, since the decision making process of investors is ultimately an estimation of 300 280 risk and reward for undertaking an activity. Per- 250 ceptions of high costs and risks of investment will 200 serve to deter investment. The "Major" or "Severe" constraints perceived by managers are political 150 instability, corruption, macroeconomic conditions, 100 economic policy uncertainty, electricity, tax rates, 50 and the cost of finance. 65 30 Perceptions of key challenges to the invest- 0 ment climate vary by firm size. A survey of Khartoum Other states Juba and Malakal manufacturing firms suggests corruption imposes (B) Median Employment Level and percent of a substantially greater constraint on small and Managers with University Degree by Region medium enterprises (SMEs) than on large enter- 18 17 100% prises. It is the leading constraint identified by 14 80% SMEs but only the fourth leading constraint 12 12 12 identified by large enterprises (Figure 2-7). SMEs 60% 9 8 are also more likely to find a number of other 6 6 40% 6 5 factors seriously constraining: electricity, access 20% to land, access to financing (especially for small 0 0% firms), anti-competitive practices, and crime. For Khartoum Red Sea Gazira state Nyala North Kordofan Juba River Nile Malakal Total FIGURE 2-7: Top 10 Constraints to Sudanese Median employment % degree holder manager Firms, by Size (percent identifying constraint as "major" or "very severe") (C) Education Level of Workers 100 Corruption Political instability 75 Economic Policy Uncertainty 50 Macroeconomic condition Electricity 25 Access to Land 0 Cost of financing Red Sea River Nile Khartoum Gezira North Kordofan Nyala Malakal Juba All Sudan Tax rates Access to financing, Tax administration 0 10 20 30 40 50 60 70 80 90 Below secondary Secondary University & above Large Medium Small Source: Sudan PICS 2008. Source: Sudan PICS 2008. CHAPTER 2 -- BROADENING PRIVATE SECTOR-LED GROWTH 49 larger firms, political stability is the most signifi- FIGURE 2-8: Days of Inventory held by cant concern. However, other constraints suggest Manufacturers a lack of confidence in government as well-- Days of inventory including high rankings of political instability, 90 economic policy uncertainty, and macroeconomic 80 conditions. 70 The absence of reliable infrastructure emerges Days of inventory 60 as a key constraint both in the perception of 50 managers and in objective measures of infrastruc- 40 ture availability. While all of Sudan has limited 30 infrastructure, including the lowest road densities 20 in Africa and among the lowest in the world, those 10 regions that report lower productivity have partic- 0 Uganda China Vietnam India Tanzania Saudi Arabia Egypt Kenya Morocco Sudan Ethiopia ularly acute infrastructure gaps. For Southern and Western Sudan, the war has destroyed basic infra- structure and disrupted maintenance (see Chapter 5). As a result of mass urbanization which resulted All manufacturing firms Firms holding inventories from rural insecurity as well as land degradation, Source: Sudan PICS 2008. over two-thirds of citizens of Nyala, Gineina and El Fasher are not served by water or electricity. Power outages cause many up to 100 percent of firms to self-generate power, particularly in Red Sea, Kordo- the need for inventories, thereby freeing capital for fan, and Central Equatoria. more productive investment. Poor Market Integration Administrative Barriers The private sector maintains inventories as a While Sudan has few restrictions on foreign buffer against disruptions of supply. As such, investment, there are high administrative bar- high inventories are an indication that firms lack riers that the government has moved to reform. confidence in market functioning, and a reliable Since the mid 1990s, Sudan's national govern- indicator of weaknesses in market-supporting insti- ment has made remarkable legal and institutional tutions. Aside from Ethiopia, Sudanese firms hold changes to promote domestic and foreign invest- the largest level of inventories in the region (Figure ments and economic growth. Few sectors are not 2-8). Given the size of the country and the logis- open to full foreign ownership: import and export tical issues associated with transporting raw mate- trade, security, civil aviation, and energy and min- rials to all regions, this is maybe not be surprising. ing. Unlike many developing countries, Sudan has But it undoubtedly penalizes Sudanese manufactur- also opened its service sectors, such as banking and ers. For the firms that accumulate large inventories, telecommunications, to foreign investment. The these inventories immobilize valuable working cap- Investment Encouragement Act of 1999 and its ital and are a symptom of serious stocking-out con- amendments, the "one-stop-shop" of the Ministry cerns among manufacturers and artisans. Delays in of Investment, and the reduction in the corporate import deliveries are long and common. A reduc- tax rate to 10 percent demonstrate a commitment tion in delays at the port of entry would reduce to pro-investment policies. National data suggest 50 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH that business start-up has been facilitated as a result FIGURE 2-9: Percentage of Management of these measures. However, many administrative Time Dealing with Regulation barriers still make the business entry process cum- 25 bersome and costly for investors particularly at the state level. 20 18 In the first year Sudan was ranked, it ranked 151 out of 155 countries in the World Bank's 15 Doing Business Report (2005). Through a series of reforms, it has risen to 147th out of 181 countries. 10 9 8 7 Although business start-up is relatively smooth 5 in Sudan (ranked 107 out of 181) and registering 5 property is efficient (35), it is extremely difficult to 0 enforce contracts (143), to employ workers (144), Kenya 2007 Liberia 2006 Sierra Leone 2009 Gambia 2009 Sudan 2008 to close down a business (181), to trade across bor- ders (139), and to get credit (131). These prob- lems are all considerably more complex at the state level particularly outside of Khartoum. A recent interviewee in Foreign Investment Advisory Ser- Source: Sudan PICS 2008. vice (FIAS) suggested that a medium-sized soft drink firm requires some 22 licenses and fee pay- ments for the operation of its business. The share of cent of surveyed households in South Kordofan in management time required to deal with regulatory 2005 reported trade (mostly petty trading) as a sec- issues is 18 percent, significantly higher than other ond occupation. countries (Figure 2-9) The Presidentially-mandated The informal sector provides an alternative Administrative Barriers Reform Program,38 imple- service delivery mechanism. In a country with mented with technical support from the World the distance characteristics of Sudan, it is not sur- Bank Group has begun to make substantial prog- prising that a large informal sector has expanded ress on reducing the barriers. to provide services and employment in areas where the public or formal private sector has failed to Formalizing the Informal Sector reach. Much of the informal sector has emerged to fill service delivery gaps, particularly in larger The informal sector is a large source of employ- urban areas. In more rural settings, since few for- ment. Economists have emphasized the heteroge- mal institutions have emerged to reduce the risks neity of the informal sector, both in the nature of of trade, the informal sector has developed resilient the informality--the degree to which firms are in and sometimes elaborate mechanisms to provide full compliance with regulations concerning wage credit, wholesaling, and marketing and distribu- employment, taxation, registration or licensing-- tion services throughout the country. Nizam el and in the range of activities undertaken. As early Sheil, the traditional merchant-form of agricultural as 1982, the International Labor Organization esti- credit, has continued where formal and microfi- mated that the informal sector provided employ- nance schemes have failed, due to the ability of ment to up to 25 percent of the labor force in Khartoum. According to the International Fund for Agricultural Development (IFAD), almost 36 per- 38 Presidential Decree of May 2007. CHAPTER 2 -- BROADENING PRIVATE SECTOR-LED GROWTH 51 merchants to more effectively supervise borrow- Private Sector Development ers they interact with frequently. In the peri-urban in Conflict-Affected Regions: centers of Darfur and Southern Sudan, the infor- Southern and Western Sudan mal sector provides water services where the public grid has failed to extend. Southern Sudan presents a particularly difficult The informal sector, while offering important challenge, in that the two decades of conflict not services and a critical employment buffer for new only destroyed lives, property and institutions, it urban residents, presents a challenge both to the also severely limited the emergence of an entre- formal sector and in terms of Sudan's aggregate pro- preneurial class. Few formal businesses initiated ductivity. The formal sector perceives that the infor- by Southern Sudanese exist even four years after the mal sector creates major obstacles by not observing end of war. The challenge for Southern Sudan is duties or regulations and avoiding taxation. to simultaneously develop policies and institutions Informal firms are affected differently by that typically emerge over long periods of time the investment climate than larger firms. We while at the same time working to catalyze private find that the reported severity of constraints differs investment and job growth. quite significantly by status, even after controlling In most post-conflict environments, infor- for size and managerial capacity. Our most strik- mal and micro enterprises are the first to emerge, ing results concern access to land and inadequacies as they respond to gaps in availability of basic in the functioning of the judiciary. Informal firms goods and services. They are also more tolerant of also report greater concern over corruption and risk than larger capital investment projects, and are economic policy uncertainty than do formal firms. less demanding of public institutions and infra- On the other hand, they tend to worry less about structure. At early stages, this is likely to involve electricity.39 There seems to be no significant differ- basic retail services such as small trade, repair, and ence in how they view other infrastructure obstacles construction. The dual challenge is to create the such as telecommunications and transport. enabling conditions for these micro-entrepreneurs The incentives currently do not reward for- to grow, while at the same time preparing the envi- malization and the overall investment climate ronment for development of larger, formal clusters needs to be improved for formalization. With the of activity. Attracting larger domestic and foreign possible exception of finance, there are few require- investments depends on: reducing costs and risks ments for operating a business in Sudan that can- of investment through the policy framework and not be met as easily by informal as by registered infrastructure; competitive access to finance; ade- firms. Indeed some markets-- notably for labor-- quate technical and managerial skills; and efficient appear to be more flexible for informal than for for- markets for the inputs and products of firms. mal firms. Similarly, while there are costs and risks Growth will depend on a better investment associated with informality, but these seem man- climate. Market failures in South Sudan include ageable compared to the larger and perhaps less a lack of market information, unchecked nega- predictable risks associated with paying taxes for- tive externalities, imperfect competition, and an mally. The main implication of this analysis is that absence of public goods due to the early stage achieving significant reductions in informality will of governance. Constraints include unpredict- require actions to increase aggregate productivity able administrative costs and difficulty obtaining in the economy. This calls mainly for general policy initiatives to improve the functioning of markets 39 This is possibly because almost 80 percent of them are involved in for finance, skills, and other inputs. trade and services rather than manufacturing. 52 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH operating inputs. South Sudan's legal and institu- level, government land continues to be allocated in tional framework is undeveloped, and has not fully some states but not others. Outside of Juba town emerged from clear articulation of policies in dia- land is being seized arbitrarily, by force, by simple logue with the private sector. The FIAS conducted marking, and by negotiating with local tribes. It is a diagnostic assessment of the investment climate unlikely that these methods will deliver distribution in May 2006. The study found that the current of land at its highest and best economic use. legal system is based on multiple sources of author- Input and product markets are undeveloped. ity, which causes confusion. FIAS has subsequently There can be no investment in scaling up produc- supported the GoSS in developing a set of baseline tion without improved markets. The period of civil commercial laws. disorder has largely destroyed the traditional mar- The GoSS and GoNU have yet to estab- ket linkages and channels--including the complex lish effective mechanisms to coordinate policy set of social and economic relationship between toward private sector development. Some efforts intermediaries necessary for markets to work. The at coordination were made in the areas of invest- present system of fresh supplies to retail markets in ment and trade policy, but these efforts were not urban areas is dominated by imports--in the case institutionalized. Similarly, border control has not of Juba by supplies from Uganda. Apart from these been fully established, and instances of overlap- imports, inter-regional trade flows only really exist ping fees, taxes and customs tariffs have begun to at present for livestock marketing. There are cur- appear. Establishing uniform, consistent border rent moves to try to re-establish former production control has been difficult. Under the CPA, customs levels of fruits and vegetables. New or improved is a national function, but the customs services on assembly market centers in key production areas many borders were controlled by SPLA somewhat will be required to supply the evolving wholesaling autonomously, without full reporting to GoSS system. or GoNU. Tariffs different from the national tar- Whereas the conflict in Southern Sudan pre- iff schedule are applied, notwithstanding Sudan´s vented the establishment of an indigenous pri- membership in the Common Market for Eastern vate sector, in Darfur the conflict has had a and Southern Africa (COMESA) Free Trade Area, profound impact on what had been one of the which has precise schedules and prescriptions for most established areas of private activity outside tariff reduction. Some states have begun to apply of the country's economic center. Based on field cross-state tariffs in order to supplement their rev- interviews in 2006, we estimate that only 10­20 enues, despite the CPA's provision that inter-state percent of the 5,530 enterprises measured in the trade will be free of restrictions. A Tax Bill, which Industrial Survey of 2002 were operational by late calls for low, simple income tax and value added 2006, meaning that the manufacturing sector has tax, has been passed by the Southern Sudan Legis- declined to between 500 and 1,000, and mostly lative Assembly SSLA and is awaiting presidential very small manufacturing shops like blacksmiths. signing. This suggests maximum formal industrial employ- Land policies have not been established, and ment of 10,000 (less than 1 percent of the popula- land acquisition is haphazard and risky. The tion in Nyala). The Nyala Chamber of Commerce Land Commission is undertaking important work estimates that those factories that have remained in defining policies and frameworks for allocation open operate at only around 30 percent of capacity. of land consistent with the CPA and the Interim Trade patterns have been disrupted in Dar- Constitution. In the absence of an overarching fur. Violence along trade routes has raised transport land policy and specific land legislation at GoSS costs, and is believed to have contributed to fuel CHAPTER 2 -- BROADENING PRIVATE SECTOR-LED GROWTH 53 BOX 2-1: The Southern Sudan Private Sector Development Project In 2007 the Multi-Donor Trust Fund for Southern Sudan approved the Southern Sudan PSD Project. The project, focused on early-stage private sector development in a post-conflict setting, integrates key inputs required for micro- and small-enterprises to grow. The project focuses on building capacity among South Sudanese policy makers and the private sector to develop the policy and regulatory framework for trade and investment through open consultation. It supports establishment of monitoring frameworks to feed back into the policy dialogue, and broad participation in private sector development by mobilizing grassroots support for entrepreneurship as a livelihood choice, particularly for women and ex-combatants. Secondly, the project provides policy support to the Bank of South Sudan, and a South Sudan operation of the Sudan Microfinance Development Facility funded by Multi-Donor Trust Fund National (MDTF N). The Facility will deliver technical and financial support to new microfinance institutions in South Sudan. Third, the project supports the development of a strategy for the development of key industrial sectors, as well as capacity building of the public and private sector necessary to realize growth in those industrial sectors. Finally, the project establishes a wholesale market in order to create an efficient flow of product into rapidly growing Juba, as well as backward linkages into the rural economy. The interplay of these four factors--the policy framework, finance, skills, and efficient markets--are intended to contribute to a favorable enabling environment for the growth micro and small enterprises now emerging in South Sudan, while providing a policy and strategic foundation for the emergence of larger economic sectors in the medium-term. shortages and increased isolation of rural markets. fur. Markets in the central cities of El Fasher and The cost of renting a truck to ship from El Gineina Nyala, fueled by a combination of increased inter- to Omdurman rose 150 percent between 2004 and national presence and urbanization, appeared to be 2005.40 Insecurity on travel routes has also contrib- thriving in 2006. A private sector strategy for post- uted to increased input costs. For example, the cost conflict Darfur will inevitably need to build on of cement is 75 percent higher in Nyala than in these newer service delivery needs, while overcom- Khartoum due to distance and en route payments ing the lack of market-supporting services in the for security. financial sector. The longer-term impacts of the conflict on the private sector include the loss of confidence Summary and Agenda for Policy Reform in institutions, both formal and informal. This includes a loss of confidence in government, as Since the 1990s, the country has made substantial well as a loss of social capital and trust within and progress in privatization, establishing macroeco- between different groups in Darfur. Informal insti- nomic stability, investing substantially in infra- tutions included sophisticated arrangements for structure, and liberalized much of the economy marketing as well as land tenure. Key institutions, including dismantling price and foreign exchange such as a rotating market that provided a "mar- controls. The CPA was greeted by the private sec- ket day" for different towns in a rotational pattern, tor warmly, and Sudan quickly became one of have ceased. Some towns that depended on bor- the largest destinations for foreign investment in der trade with Libya, such as Mellit in North Dar- Africa. fur, have ceased to exist as market towns at all, with most businesses simply boarded up.41 At the same time, the rapidly growing urban 40 Hamid et al 2005. centers have created some new markets in Dar- 41 Young et al 2005. 54 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH Four years after the CPA, the extent to which els, and can be a vehicle for discussion between this increase in private sector activity will lead to the private sector and government to identify the desired developmental gains remains question- and address concerns regarding specific forms of able. The 2008 PICS demonstrated clearly that administrative barriers including the possibility productivity of the private sector remains alarm- of corruption. For Southern Sudan, the effort ingly low, due to a combination of high trans- must remain centrally about building strong action costs, poor market institutions, a lack of institutions of governance. infrastructure, and high administrative barri- To raise aggregate productivity, focus on lag- ers and transaction costs. The private sector per- ging regions. The low average productivity for ceives substantial risks in the investment climate, Sudan as a whole is the result of extremely low and perceives that political stability, corruption productivity performance for firms outside of and economic uncertainty are major or severe con- the Gezira and Khartoum areas. The produc- straints, followed by infrastructure, finance and tivity performance of lagging regions should be taxation. a core focus of efforts to raise productivity as a A program to help translate investment into whole, and the emphasis of efforts in these lag- sustainable development must address the key con- ging regions should be on access to finance, straints faced by the private sector by increasing infrastructure, and governance. economic certainty and predictability, lowering Reduce the cost structure for manufactur- costs, building basic infrastructure, and building ing and agribusiness. Continuing progress on institutions that may help integrate disparate mar- infrastructure development, particularly elec- kets. In this context, the following areas are partic- tricity and transport, and efforts to improve effi- ularly important in formulating policy reforms to ciency of infrastructure services will reduce the strengthen the private sector as the basis of broad- cost and raise the productivity of manufacturing based growth in Sudan. and agribusiness. The substantial progress made in telecommunications through private partic- Continuation of key efforts will likely address ipation can be replicated in other sectors. But some of the more substantial problems raised high administrative barriers, the cost of corrup- by the private sector. Continuation of the gov- tion, and the cost of holding excessive invento- ernance reform processes mandated by the CPA ries can also lead to a high cost structure. will result in a system through which legisla- Build institutions and infrastructure to inte- tive authority is vested in an elected Parliament. grate producers and markets. The rollout of This will reduce reliance on executive decrees transport infrastructure, especially rural roads and the resulting overlaps, gaps and unpredict- and connectivity of economically lagging areas, ability in the legislative framework. This will is a fundamental requirement for reducing costs need to be complemented by more compel- and allowing improved access to markets. In ling legislative and institution building efforts addition, a basic rural roads network could be in areas such as the streamlining of administra- an important initiative to strengthen the infra- tive procedures in ways that provide more pre- structure network, along with telecommunica- dictability and reduce the areas for discretion tions and rural electrification. in the interface between the private sector and Leverage urban dynamism. Due to the suc- government. The proposed Public-Private Dia- cessive waves of conflict and drought/deserti- logue Forum is intended to support this process fication, as well as the lure of growth in major at both the Southern Sudan and National lev- cities, accelerated urbanization is likely to be CHAPTER 2 -- BROADENING PRIVATE SECTOR-LED GROWTH 55 a permanent phenomenon. Given the power ferent regions of the country and investments of agglomeration economies and returns to in power and telecommunications as well as scale, this can be a driver of growth with suf- schools in the lagging areas. In order to fully ficient focus on reforms to increase the return address the concerns of the private sector, on investment, including reforms to reduce however, these should be accompanied by an administrative costs, provide access to finance, attempt to find a lasting solution to the politi- and building adequate transport infrastruc- cal instability and improving governance in the ture. Secondary cities throughout the country, country by curbing corrupt practices. including Juba, Nyala, Port Sudan, Mal- An ongoing examination of export compet- akal, Ed Obeid and others, can raise produc- itiveness and diversification. It is clear from tivity levels to that of Khartoum or higher. the survey that the food sector--agro-industry Key mechanisms may include focusing on and food processing, including oilseeds, milling, the business-enabling environment, introduc- and juice processing--is relatively competitive ing microfinance and other financial services, within Sudan and has a good chance to be com- incorporating the private sector in housing and petitive outside of Sudan. Diversification within infrastructure provision, and skill development. the food sector is the natural place to start for Minimize regional disparities in the invest- Sudan. This will include new or upgraded prod- ment climate through strengthening connec- ucts, and new markets for existing products. tivity and more balanced delivery of basic This is taking place in Southern Sudan, where a services, but allow for flexibility in deploy- team is considering potential sources of future ment of resources. For sustainable and equita- growth: timber, forest products, fisheries, cere- ble growth dynamics in the country, therefore, als, livestock/hides, and skins. Sudan lacks creating a stronger link of the coastal and rel- current information and feedback on poten- atively undeveloped cities and regions in the tial markets for its products. An investment in country with the center is an important pri- timely market intelligence, undertaken in part- ority. This calls for an increased investment nership with the International Trade Center on infrastructure and improvement of its effi- of WTO/UNCTAD would be of great use to ciency, especially on transport linking the dif- those considering new markets. CHAPTER 3 EFFECTIVE MANAGEMENT OF THE OIL SECTOR42 A. Overview of the Sudanese Oil Sector proval, the "Western" (especially North American) companies that have had a presence in Sudan have Over the past decade Sudan has developed into mostly been forced to sell out and leave the coun- the third largest oil producer in sub-Saharan try.45 Africa and its economic dependence on oil has In allocating petroleum licenses, Sudan has correspondingly increased. The oil sector cur- not used open bid-rounds reflecting the difficul- rently accounts for around 60 percent of total gov- ties caused by the conflict. Instead, the govern- ernment revenues. The growth of the oil sector has ment has negotiated with companies deemed able taken place amidst civil conflict; however, with the to undertake the work, and ready to work in Sudan signing of the CPA in January 2005, the oil sec- without restriction. Although Sudan has been tor was able to work under less onerous security applying standard "production sharing agreements restrictions. As a consequence of the CPA, oil reve- (PSAs)"46 for exploration and production, these nues have been shared between the central govern- PSAs were negotiated based on model agreements ment and the GoSS. The final settlement regarding common before the mid-1990s, and fall short of oil resources and revenues will depend upon polit- present best international standards. For example, ical developments to 2011 and beyond. What- there is no mechanism by which the government's ever the developments beyond 2011, both GoNU share is adjusted in line with oil price fluctuations. and GoSS need to address serious institutional and Petroleum sector operations in Sudan capacity shortcomings in the sector so as to capture are conducted by joint operating companies the benefits of oil more effectively. Exploration in Sudan over the past 30 years has yielded significant discoveries. Fields discov- 42 This chapter has been prepared by Michael Levitsky, with input from Yadviga Semikolenova and Ji-Young Choi. ered in the 1970 and 1980s were slow to be put 43 The success rate of Sudanese oil wells is relatively high. Among around into production, primarily because of the civil con- 400 exploration and appraisal wells, 58 percent encountered hydrocar- bons as of end-2007. flict in the area. Since full development started in 44 The state oil company of China (China National Petroleum Cor- the late-1990s, estimated reserves have increased, poration ­ CNPC) is the largest holder of reserves and production in Sudan, followed by the state companies of Malaysia (Petronas) and reaching 2.35 billion barrels in January 2008, India (Oil and Natural Gas Corporation ­ ONGC). Shares of Sudan's according to the MoEM. Sudan's remaining explo- oil reserves by company are following: CNPC (47.3 percent), Petronas (28.3 percent), ONGC (14.5 percent), Sudapet (6.2 percent), and other ration potential is likely to be large.·43 companies (3.7 percent). Petroleum exploration and production in 45 The only remaining Western interests in Sudan are represented by Lundin Petroleum, a medium sized publicly-listed Swedish independent. Sudan are dominated by national oil compa- In addition there are many smaller companies present from the Gulf, nies (NOCs) from China, India and Malaysia.44 Pakistan and Sudan itself. 46 In PSAs, oil companies recover their costs, and receive their share Because of its history of civil unrest, coupled with of profits, through obtaining ownership of share of oil production at official sanctions and international political disap- the wellhead. 58 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH (JOCs).47 These companies are owned by all duced in Block 6 and is only used domestically. It is stakeholders in producing projects commensurate of lower quality than Dar Blend. with their share of licenses. JOC arrangements Sudan has a substantial and relatively mod- can bring benefits in terms of easier consensus ern refining sector in comparison with most between parties, but can cause higher administra- African countries. However, the country faces con- tive costs. siderable challenges in coping with future demand The quality of Sudanese crude varies sub- for oil products. This is likely to require continued stantially between fields, and a significant pro- heavy investment in the medium term. The gov- portion of production is of relatively low ernment has been developing the refining sector on quality.48 Exported crude is of two standard quali- the basis of joint ventures with foreign investors (to ties: Nile Blend (from Blocks, 1, 2, 4 and 5A) and date with CNPC). A new expansion to the Khar- Dar Blend (Blocks 3 and 7). Nile Blend is a good toum refinery has been built specifically to deal quality crude, readily saleable on international mar- with Fula blend oil, which is an effective means of kets. By contrast Dar Blend has characteristics adding value to this very low quality crude. that make it difficult to sell readily to most refiner- Sudan is heavily dependent on long distance ies. Nile Blend usually sells at a discount of $2­3/ oil pipelines. The two main pipelines are the lon- bbl to Indonesian Minas crude widely traded crude gest in Africa, extending from the production cen- of similar quality). Nile Blend's main drawback is ters in the South to the Northern coast around Port that it is waxy (highly viscous), and requires heat- Sudan.49 These major oil pipelines were constructed ing during handling. Dar Blend, while also waxy, and are now owned by the respective joint opera- suffers from an exceptionally high acid content tion companies. ("high-TAN"). The very low prices received for Dar The environmental and social challenges Blend have caused government revenues to grow confronted by oil production in Sudan have by much less than the rise in crude output since been considerable. Exploration and produc- 2006. The marketing of Dar crude has been ham- tion involve disruption of large areas for seismic pered by the U.S. economic embargo on Sudan investigation, drilling of wells, and construction that prevented sales to the U.S. and also restricted of supporting infrastructure. The government the development of new markets for this crude in has in place a comprehensive set of provisions Europe. Until recently, there was very limited refin- to deal these impacts; these provisions are pri- ing capacity for high-TAN crudes outside of the marily overseen by the MoEM. To address con- U.S. and Europe. A third crude blend, Fula, is pro- cerns about the past impacts of the oil industry, 47 It is much more common for petroleum projects to be operated (i.e. managed) by the company with the largest share of the license (the "Operator"), with the other companies covering their share of the costs. 48 Comparison of Qualities between Sudanese and International Crude Oil Blends Nile Blend Dar Blend Fula Blend Doba Blend Minas Crude Brent Crude (Sudan) (Sudan) (Sudan) (Chad) (Indonesia) (U.K) API Gravity 34.5 26.4 21.6 21.1 35.3 38.3 Sulfur ( percent) 0.06 0.12 0.12 0.10 0.09 0.37 TAN 0.27 2.40 5.62 4.78 0.06 0.09 49 The "Greater Nile Oil Pipeline" is 1,610 Km long and serves to bring Nile blend crude from the production centers both for export from Port Sudan and to the Khartoum refinery. The "Petrodar Oil Pipeline" is 1,400 km long and takes Dar crude from the Melut Basin fields to Port Sudan. CHAPTER 3 ­ EFFECTIVE MANAGEMENT OF THE OIL SECTOR 59 the CPA included mechanisms for retrospective of the Petrodar project50 in September 2006, after investigation of the effects of oil industry activi- which it reached a high of almost 500,000 bpd in ties in Southern Sudan. At the request of GoSS, mid-2007 (Figure 3-1). in late-2007 the Norwegian government sent a In the medium term (to around 2012), total team of experts to evaluate the status of environ- production is expected to increase moderately. mental and social situation in the oil areas, focus- According to the forecast of the MoEM, it would ing on past impacts. The team's findings were that reach 527,000 bpd in 2012. However, production the environmental impacts of the industry have in increases will depend on the ability of GNPOC to general been consistent with experience in simi- contain a decline in Blocks 1, 2, 4 and on the abil- lar environmental circumstances elsewhere. Public ity of PDOC to increase output in Blocks 3 and 7. consultation and disclosure were areas that could In the long term (beyond 2012), estimates of be considerably improved. The team stressed that production depend upon a combination of fac- many aspects of the "baseline" data are not yet tors. Output will depend upon the extent of new well understood, particularly regarding biodiver- discoveries around the producing areas, and in new sity, flora and fauna. It recommended that a full blocks close to infrastructure, such as 5B.51 Beyond "Strategic Environmental Assessment" be carried 2015 there is the possibility of large new fields to out as soon as possible. be discovered in areas such as Block B coming on With regard to the social impact of the oil stream. A further factor that will influence produc- industry, it is important to engage with com- tion beyond 2012 is the ability of domestic refin- munities to ensure that they benefit from local eries to take more crude from Blocks such as 6 and oil operations, and cooperate with the indus- try within the agreed framework. Although the terms of the CPA called for an assessment of both FIGURE 3-1: Oil Production by Project environmental and social impacts of oil produc- (thousand bpd) tion, the Norwegian team was only able to address 500 the environmental aspects. It noted the consider- able practical difficulties in judging social impacts 400 in a large area with complex social patterns that has been affected by conflict over decades. Therefore, 300 the provisions of the CPA for possible compensa- tion for harm caused to local communities by oil 200 activities remain to be enacted. The authorities note a committee for consideration of social compen- 100 sation has been established and that communities are involved in discussing the level and coverage of 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 social compensation. Blocks 3, 7 Blocks 1, 2, 4 Block 5A Block 6 In 2008, Sudan's oil production has reached Source: World Bank staff estimates based on MoEM data. about 475,000 barrels per day (bpd). Produc- tion started at a very low level in 1992 from Block 6, and built up rapidly following the start-up of 50 The Petrodar project is operated by the Petrodar Development and the Greater Nile Petroleum Operating Company Operating Company (PDOC). 51 Five exploration wells drilled on Block 5B in 2007 and 2008 failed (GNPOC) in 1999. Production reached 305,000 to find oil despite promising indications, illustrating the considerable bpd in 2004, and grew slowly until the start up uncertainties remaining in assessing Sudan's oil prospects. 60 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH BOX 3-1: Production Trends of Major Projects · Blocks 1, 2, 4 (GNPOC): These "older" fields have shown falling production in 2007 and 2008, due to the decline of the main fields. · Blocks 3, 7 (PDOC): Start-up of the Petrodar project was delayed from its original target in late-2005 to September 2006. Production reached 190,000 bpd within a year, but has since remained relatively constant. Production has fallen far short of targets, which were initially about 360,000 bpd for 2008, although PDOC still plans to raise it to 300,000 bpd. · Block 5A: This block accounts for only 5 percent of production. Facilities are sized for 40,000 bpd, but output is limited to about 20,000 bpd because GNPOC will not accept more into the Nile Blend mix, as more 5A crude would make the Blend too heavy for the Khartoum refinery.52 · Block 6: The production from this Block is primarily determined by the capacity of the Khartoum refinery. A possible expansion of the refinery could permit an increase in crude production, from 40,000 bpd to 60,000 bpd. 5A, which are at present constrained by refinery recovery factors would increase Sudan's remaining capacity. Moreover, forecasting of the long-run out- proven reserves by 30 percent. put is dependent upon the assumption of certain Considering the factors affecting output, recovery factors.53 long-term production scenarios can be summa- The recovery factors assumed by the govern- rized by the following three cases (Figure 3-2):54 ment appear to be relatively low; there is thus a good chance that they could be increased. The gov- Low Case: a conservative outlook, as deter- ernment expects the average recovery factor to be mined by the MoEM. Production in mature 26 percent but the global average is around 35 per- areas continues to decline, Blocks 3, 7 increase cent. Even a small increase in the recovery factor modestly but then decline from 2012. can have a big impact on remaining reserves. Based Base Case: assumes stable production in on the government data, an increase of 5 percent in the older areas, and substantial expansion in PDOC. Recovery factors increase modestly in all fields. High Case: adds to the Base Case an increase FIGURE 3-2: Oil Production Scenarios in recovery factors, and exploration bringing (thousand bpd) large new fields on stream from 2012 onwards. 800 600 52 Crude from Block 5A is considerably heavier (lower API number) than Nile Blend. 53 A recovery factor is the proportion of the total oil contained the res- 400 ervoir (field) that is expected to be produced commercially using current technology. Oil is held in pore spaces in reservoir rocks, and whatever mechanism is used to bring it to the surface most of it will usually remain 200 trapped in the rock matrix. 54 It must be kept in mind that the range of production levels beyond 2015 is extremely uncertain. While the Base and Low cases reflect reasonably likely patterns of production if no very large new discoveries 0 are made, the High case cannot capture all the consequences of such 1995 2000 2005 2010 2015 2020 2025 very large discoveries. The scenarios are designed to capture a range of Low Base High outcomes upon which prudent economic decisions can be made. They do not reflect the full uncertainty associated with continued oil exploration Source: World Bank staff estimates based on MoEM data. in a country like Sudan. CHAPTER 3 ­ EFFECTIVE MANAGEMENT OF THE OIL SECTOR 61 A major uncertainty affecting the produc- Sudan's consumption of oil is roughly in line tion outlook is the security situation. In 2008 with its income level at present. In future much an increasing number of incidents were reported will depend upon product pricing and the avail- in which local communities disrupted company ability of alternative fuels (especially in power and operations, claiming compensation for oil devel- industry). Oil prices in Sudan are not as heav- opment. If production is to increase in future, secu- ily subsidized as in most of the largest oil-surplus rity will have to be restored to oil producing areas. countries, which may prevent the most wasteful The security environment in the years up to the key forms of consumption. CPA date of 2011, and after that, will determine The main alternative fuel to oil in power the level of investment by oil companies, and hence and industry should be natural gas, which is the the trend of future production. major fuel for power generation in most oil pro- Sudan's consumption of oil products has ducing countries. In Sudan, where gas is not pres- been growing rapidly and this trend is expected ently available, the lowest cost option for power to continue if strong economic growth persists. may be hydro, but if this cannot meet all require- Consumption in 2006 was estimated at approx- ments, the next best option may be to use fuel imately 83,000 bpd, with growth of 13 percent oil. A crucial problem is that Sudan's main refin- per annum since 2000 (Table 3-1). Consumption ery (Khartoum) is so sophisticated that it produces is heavily concentrated on gasoil (diesel), which almost no fuel oil. Without substantial gas or fuel accounts for about 55 percent of consumption. oil supplies, Sudan's options for power generation Transport use is heavily biased to towards diesel, are very limited. although gasoline use is also growing rapidly. Use Oil demand in the South is currently quite of oil in power is relatively low with most electricity small, which reflects low income levels and the generated from hydro following commissioning of lack of infrastructure. The South is poorly con- the Merowe dam in 2008. nected to the national oil products distribution TABLE 3-1: Oil Consumption (thousand tons) 1998 1999 2000 2001 2002 2003 2004 2005 2006 NGL/LPG/ethane 33 33 33 55 93 103 126 148 170 Naphtha 23 14 32 5 10 9 11 11 23 Motor Gasoline 219 240 271 350 390 435 485 541 677 Aviation fuels 32 91 107 120 126 149 172 195 219 Kerosene 62 20 4 7 9 11 13 15 18 Gas diesel 795 997 998 1164 1456 1671 1897 1954 2092 Heavy fuel oil 352 305 332 308 417 531 655 517 577 Other 106 108 110 112 114 116 118 120 138 Refinery fuel 3 3 3 3 3 3 3 3 3 Sub-total 1625 1811 1890 2124 2618 3028 3480 3504 3917 Bunkers 8 8 8 8 8 8 8 8 8 Total 1633 1819 1898 2132 2626 3036 3488 3512 3925 Source: International Energy Agency (IEA). www.iea.org. 62 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH system, with most of the supplies of diesel and gas- FIGURE 3-3: Oil Production and oline being imported from Kenya. Given the high Consumption cost of transport over long distances, improving the Oil Production vs. Consumption logistics of oil product supply to Southern Sudan is 700 clearly a priority. 600 In the medium and longer term, continued 500 large scale growth in demand could have a large `000 bpd 400 impact on net oil exports. Figure 3-3 shows that exports would cease at around 2018 where High 300 demand growth (at 10 percent per annum) is com- 200 bined with Low Case production. Where Base 100 case production is combined with Low demand growth (7 percent per annum) exports would cease 0 2008 2010 2012 2014 2016 2018 2020 2022 2024 at around 2024. Official projections show demand growing at about 8.5 percent per annum. Production Consumption @ growth Low Base 10% p.a. 7% p.a. B. Institutional Structure Source: World Bank staff estimates. Transparency in the petroleum the sector is lim- ited in comparison with many oil exporting publish an annual report, and it provides accounts developing countries. This is closely related to the to Parliament based upon a government bud- monopolistic and direct role of government in all get accounting system (i.e., as if it was a Minis- phases of the oil industry (Box 3-2). try) rather that a company. Moreover, accounts for Nearly all aspects of petroleum policy and SPC's subsidiaries are also not available. administration are centralized in the Ministry of The state's equity share in petroleum licenses Energy and Mines.55 The MoEM in turn "owns" is held through the national oil company Suda- the Sudan Petroleum Corporation (SPC), which controls the state's operations in the sector. This 55 In comments to the discussion draft of this report, the GoSS Ministry centralization is accompanied by limited trans- of Energy and Mining expressed that the centralized management of oil resources by the federal government is an area where they have strong parency. SPC accounts are audited annually by the grievance and views the CPA as authorizing GoSS to share responsibility General Auditor. However, the Company does not for oil management. BOX 3-2: State Involvement in the Oil Sector The Ministry of Energy and Mines (MoEM) works in the sector mainly through the Sudanese Petroleum Corporation (SPC), which is a fully government-owned entity. The Ministry and SPC appear to be effectively one and the same. A number of other state-owned companies deal in exploration and production, oil services, refining, and distribution. Until the formation of the National Petroleum Commission (NPC) in 2006, as provided for in the CPA, the Ministry had authority to award exploration and production licenses. It currently supervises the implementation of PSAs, including monitoring of costs and tax payments. The Ministry also maintains technical sections that analyze Sudan's petroleum reserves and production, and maintain the national database on geology, exploration, and reserves. Although some environmental functions are nominally vested in the Ministry of Environment, in practice environmental compliance functions remain with the Ministry of Energy and Mines. CHAPTER 3 ­ EFFECTIVE MANAGEMENT OF THE OIL SECTOR 63 pet, which the SPC appears to control. Sudapet producing regions that have been disrupting petro- owns shares in all licenses, ranging from 5 per- leum operations. It is still not clear that the NPC cent to 30 percent, and receives a pro-rata share has a meaningful strategic and policy role. Also, the of company cost recovery and profit oil. Follow- GoSS did not take full and prompt advantage of ing the development of the Petrodar project, Suda- all the opportunities offered by the CPA to analyze pet has become a substantial upstream oil company. existing oil contracts and to assess the extent of any Sudapet does not publish any financial data or an associated social problems. annual report, and no financial data is issued for Specific revenue sharing procedures provided the state's operations in the Khartoum refinery or for the Abyei area have been difficult to imple- other downstream businesses. ment due to difficulties on border demarcation that have only recently been settled. Under the C. The Petroleum Sector and the CPA Agreement on Abyei, revenues from oil production within the Abyei area was to be divided 50 per- Based on the Wealth Sharing Protocol of the cent for the National Government, 42 percent for CPA, petroleum revenues are to be shared GoSS, and 2 percent to local authorities and groups between the GoNU and the GoSS. The CPA also in the region (Box 3-4). The boundaries of the provided for a wide range of other measures in the Abyei area were to be determined by a commission oil sector (Box 3-3). However, the implementation of five international experts (i.e., the Abyei Bound- of elements of these provisions has been incom- aries Commission or ABC). The Commission pre- plete. For instance, establishment of the NPC was sented their report in July 2005, but it was not considerably delayed, and in the first two years after accepted by GoNU. Both sides agreed the case be establishment (in November 2005), it met only decided by an Abyei Arbitration Tribunal, sitting at a few times with little result. More regular NPC the Permanent Court of Arbitration in The Hague. operations started during 2008, focusing on dis- The Tribunal rendered its final ruling in July 2009, cussions and review of social problems in the oil redrawing the boundaries relative to the original BOX 3-3: Key Elements of the Wealth Sharing Protocol of the CPA The Protocol provided for the following key elements: 1. Creating a National Petroleum Commission (NPC): The NPC is chaired jointly by the National President and First Vice President (President of GoSS), and comprises four permanent representatives each from the National Government and GoSS, and up to three non-permanent representatives of producing states (to be present when issues relating to the states are discussed). The NPC has several roles: a. Formulate, monitor and assess policies and guidelines for management of the petroleum sector (in accordance with the basic principles set forth in the CPA), b. Develop strategies and programs for the petroleum sector, and c. Negotiate and approve all exploration and production contracts. 2. Establishing the right of GoSS to have access to all existing oil contracts, subject to appropriate confidentiality provisions. 3. Asserting the validity of all existing contracts (signed before the signature of the CPA). 4. Determining any social and environmental problems with the oil contracts, and the need for their remediation by the Central Government, and granting of compensation to persons adversely affected by the contracts, through due legal process. 5. Setting a formula for the sharing of oil revenues, the primary feature of which is that GoSS receives 50 percent of the net government revenue derived from producing oil wells in Southern Sudan, after deduction of 2 percent of revenue allocated to the producing states. 64 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH BOX 3-4: The Abyei Area Blocks 1, 2 and 4 are located (in whole or in part) in the area considered for definition as the Abyei area. For the purposes of Wealth Sharing, in the monthly calculation of GoSS revenues until June 2008 Block 1 was considered as being located entirely in the South, while Blocks 2 and 4 were deemed to be located in the North. Since Block 1 accounts for the majority of production of GNPOC, the volume of total production from Blocks 1, 2 and 4 deemed to be located in the South averaged between 60 percent and 70 percent. The Abyei area as defined by the report of the international experts (of July 2005) would place all of the producing areas of Blocks 2 and 4 inside Abyei (the producing area of Block 1 would remain in the South). Under this definition of the Abyei area, the North would be entitled to only 50 percent of production from Blocks 2 and 4. However, the National Government did not accept the recommendations of the experts, and both sides agreed the case be decided by an Abyei Arbitration Tribunal, sitting at the Permanent Court of Arbitration in The Hague. The Tribunal rendered its final ruling on July 22, 2009, redrawing the boundaries relative to the original ABC ruling and ceding key oilfields and grazing lands to the North. In June 2008, the monthly calculation of revenue sharing for GoSS was altered to allow revenues to flow to the Abyei region, in general accordance with the CPA. The production deemed to be in Abyei is shared 50 percent to the North, 42 percent to the South and 8 percent to local authorities and groups inside the Abyei region. ABC ruling and ceding key oilfields and grazing currently underway. If the current situation persists, lands to the North. then by 2011, if a referendum results in indepen- If the long term trend of decline in the major dence for Southern Sudan, GoSS would not be pre- producing areas of Blocks 1, 2 and 4 contin- pared to take over the management of a world-scale ues, the revenues subject to determination of the upstream oil industry such as Sudan's. final border will also decrease. However, all of these blocks contain modest undeveloped discover- D. Key Policy Issues ies, requiring further investment. Moreover, explo- ration drilling outside the main producing areas has To ensure further efficient development of Sudan's been very limited, making it possible that further oil sector and its proper contribution to the sus- reserves will be discovered throughout this area. tainable growth of the Sudanese economy, the fol- Production in these blocks will thus continue for lowing policy issues should be considered. decades to come. An important aspect of the post-CPA struc- Exploration and Production ture of GoSS is its very low capacity in the petro- leum sector. When the GoSS was initially formed, Identifying gas reserves is critical. Unlike other there was no "Ministry of Energy and Mines" (or oil producing countries, Sudan has only mod- "Petroleum") that was responsible for oil sector est natural gas reserves. The absence of large gas activities most relevant to the South. Oil issues in reserves greatly limits the energy supply options the South were mostly handled outside the Minis- available. If gas reserves could be developed they terial framework. A Ministry of Energy and Mines would provide a low cost and relatively low-carbon was formed in 2008, but it remains very weak in fuel for power generation, industry and households. terms of expertise. This lack of expertise and gov- To encourage companies to explore for gas, the ernance experience extends also to Nile Petroleum, government will need to develop contracts includ- the state-owned oil company formed by GoSS, ing specific terms for gas discoveries, such as prices though training with counterparts at Sudapet is and guarantees of markets. CHAPTER 3 ­ EFFECTIVE MANAGEMENT OF THE OIL SECTOR 65 Encouraging competitive bidding in explo- sively, and new regions should be assessed as matter ration rights allocation will produce the best of priority. results. Given the civil conflict in the country and Addressing the environmental and social the perceived high risk, direct negotiations for allo- provisions of the CPA and improving manage- cating licenses are understandable. However, as ment of the social impact of oil activities are nec- the security situation normalizes and political risk essary steps. The CPA provides for the evaluation is reduced, allocation of future exploration rights and resolution of past environmental and social through bid rounds would produce more efficient problems caused by oil exploration and produc- results.56 tion during the period of civil conflict. These provi- The introduction of contracts that allow for sions began to be implemented at the end of 2007 varying terms would be beneficial to the govern- with the assistance of the Norwegian Government. ment. Sudan's production-sharing contracts func- However, much remains to be done, particularly tion well when oil prices remain within a narrow in respect of social assessments. Going forward, a band generally anticipated at the time of negotia- key area for improvement is in consultation with tion. However, the contracts do not contain many local communities and provision of public informa- of the mechanisms now widely used to allow the tion about oil activities and their impact. The social contracts to vary the shares of the governments and issues that have arisen from oil activities over many the companies at much higher or lower prices. It years have not yet been fully addressed, and this would be advantageous to the government to con- should be a key policy priority for both the Central sider incorporating such terms in future produc- Government and GoSS. Local resentment about tion-sharing contracts. the relationship between communities and oil com- The burden of pipeline transport costs needs panies can disrupt production operations and lead to be reduced for the government. In order to to a loss of potential local and national benefits. capture as much of the resource rent as possible It is important that these matters are resolved for for the government, it is important to ensure that large-scale investment in the oil areas to continue, transport takes place at least cost. Close attention while applying the best environmental and social needs to be paid to the costs created by pipeline practice. contracts, the terms on which new users can access Marketing efforts of "difficult" crudes need existing pipelines, and the amount of equity that to be enhanced. It is possible that better prices the government takes in new pipelines. could be achieved for Dar blend in the future if Make it a priority to maintain production a suitable relationship is built up with dedicated from existing fields through increasing recov- refiners. It may be worth comparing Sudan's experi- ery factors. While increasing recovery is a techni- ence with Dar blend to Chad's marketing of Doba cal challenge, and involves considerable investment, crude though, as mentioned earlier, the current it is important to make this a priority. It may be economic sanctions limit marketing options includ- worth considering whether existing contracts and ing those to the United States which has refining fiscal terms provide sufficient incentive for produc- capacity to process lower quality crudes. Internal ers to maximize recovery over the long term. refining capacity also needs to be able to add value The evaluation of new prospects and basins must be accelerated. If no major new fields are dis- covered in the near future, a decline in production 56 However, bid rounds would be limited under the current situation of economic sanctions. The Sudanese authorities also note that current will occur rapidly from around 2012. Areas around economic sanctions limit overall investment opportunities including for existing discoveries need to be explored more inten- increasing recovery factors. 66 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH to crude as much as possible. Further investments is clearly an important part of downstream invest- to utilize a greater amount of Fula Blend and crude ment planning. from Block 5A locally could help to release valuable light Nile Blend for export. Institutional Structure Domestic Consumption Data transparency about the oil industry must be more transparent. While there has been Excise taxes and other methods can help control improvement in the publication of oil sector sta- the growth of domestic oil consumption. Rapid tistics, information about the oil sector, includ- growth of domestic consumption due to vigorous ing reserves, production, consumption and trade is economic growth can be limited by a policy of not still not published in a comprehensive, regular and subsidizing consumer prices for gasoline and diesel, consistent manner. Given the importance of the oil and in general ensuring efficiency in the transport sector to the economy, the government should con- fleet and infrastructure (e.g., development of rail- sider how it can best make accurate information ways, encouragement of efficient diesel cars, main- publicly available in a timely manner. tenance of highways, etc.). Excise taxes on transport Revenue transparency will increase public fuels can reflect user-costs (road maintenance, pol- trust. While the government does make data about lution externalities, etc.), which further helps to aggregate oil revenues available to international improve efficiency. financial institutions, the public at large is not Refining capacity maintenance should not served by fully verified and well-presented infor- be neglected. Sudan has installed a high quality mation. This can foster lack of trust in the gov- refinery that meets current demands. However, as ernment's handling of the country's most valuable demand increases further it is important for Sudan natural resource. The government should consider to avoid the mistake made by many oil exporting adopting the principles of the Extractive Industries developing countries of paying too little attention Transparency Initiative (EITI), and implement- to refinery investments.57 In the South, the GoSS ing its procedures, as has been done in many other Ministry of Energy and Mining has expressed the resource exporting countries. view that there should be refinery capacity in the Institutional reform of the Ministry of South to supply local demand. Energy and Mines along with related agencies Oil supplies to the South need improve- will reduce conflicts of interest and improve gov- ment. Although most oil production is in South- ernance. The continued centralization of all roles ern Sudan, refining is located in the North, and in the Ministry of Energy and Mines and the SPC crude oil is transported about 800 km to be refined leads to conflicts of interest that adversely affect in Khartoum. To supply the South from Khar- the state's governance of the petroleum sector. An toum, products need to be brought over 1,000 unbundling of the MoEM's roles needs to be con- km Southwards again to the South's demand cen- sidered, with oil sector policy, regulation and ters. As a result the South usually imports products operations placed within separate agencies (Fig- from neighboring countries (Kenya and Uganda), ure 3-4). The creation of the NPC is a first step where it lies at the end of a long supply chain with towards institutional reform that could be built on. very high transport costs. Costs to Southern con- sumers have at times been four times the subsi- 57 An agreement had been reached with the Malaysians to build a new dized price available to consumers in the North. refinery for Dar blend, but was later abandoned due to high cost (around The improvement of product supplies to the South US$ 6 billion). CHAPTER 3 ­ EFFECTIVE MANAGEMENT OF THE OIL SECTOR 67 Further capacity building to deal with petroleum taxes to the central government that will usually issues across the public sector is an immediate pri- count as part of the government's overall revenues ority. Commercialization and gradual privatiza- from oil production. Moreover, even while remain- tion of some of the state-owned companies in the ing state-owned the company should operate as petroleum sector could be considered, particularly much as possible on a commercial basis, separate downstream and oil services. The possible "unbun- from the government's policy and regulatory arms. dling" of the government's activities in the petro- The company may also have a more explicit role in leum sector is illustrated in Figure 3-4. improving the technical capacity of Sudanese staff, Strengthen environmental and social gover- and encouraging development of oil-related activi- nance of the oil industry. The central government ties in Sudan. has in place a comprehensive range of environ- Strengthen the Capacity of GoSS in the mental and social standards that oil companies are Oil Sector. GoSS has considerable responsibil- required to follow. These critical areas are currently ities for oil sector management at present, and administered by MoEM, but it would be preferable these could grow very rapidly if the South moves to apply them through an independent agency or towards independence after 2011. Yet the capac- through the Ministry of Environment. ity of GoSS in the oil sector is currently extremely Reposition Sudapet for greater accountablil- limited. Capacity strengthening to enable proper ity and transparency. At present Sudapet functions governance is an urgent priority. This should as an apparently unaccountable and non-transpar- include selection of a core team of staff to be ent entity with rapidly rising revenues. The role trained in oil sector issues, and provision of exten- of this company is unclear: is it a state company sive education and practical training. In the with an operating role or a holding company for interim, GoSS could benefit from hosting in- the state share of licenses? It is also unclear where house expert international advisers. Similar con- the net income of this company is channeled. As a siderations apply to Nile Petroleum, the state oil state-owned company it should pay dividends and company owned by GoSS. FIGURE 3-4: Diagram of Basic Petroleum Institutional Reform Principles Ministry of Energy Policy National Petroleum Petroleum Authority Ministry of Energy and Mines Commission Regulation ­ Sudan Petroleum Corporation Technical Licensing ­ Sudapet Policy National Oil Company Licensing Operations Regulation Operations Ministry of Finance Technical Fiscal Fiscal Environment Ministry of Environment Environment CHAPTER 4 RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR58 A. Introduction FIGURE 4-1: Trend in GDP from Agriculture in Sudan Sudan is naturally endowed to be a large pro- 7,000 47 50 ducer and exporter of agriculture products. It 5,851 6,000 is the largest country in Sub-Saharan Africa (SSA) 40 4,732 and is a riparian country for the Nile. It also has 5,000 the largest irrigated area as well as large herds of 4,000 31 30 sheep, goats and camels comparable with other 28 3,000 large countries in Sub-Saharan Africa. Northern 20 2,639 Sudan has three major agricultural production sys- 2,000 2,109 tems, namely irrigated, rainfed semi-mechanized, 10 1,000 and rainfed traditional agriculture. Southern Sudan also has three production systems classified as cen- 0 0 1980 1985 1990 1995 2000 2005 tral rain lands, flood plains and the equatorial zone. Value added in constant Share in GDP These farming systems are used for both crop and 2000 US$ (in millions, left scale) (in %, right scale) livestock production. Increasingly these production Source: World Bank World Development Indicators activities are integrated. Other important rural pro- duction systems are forestry and fisheries, which are concentrated in Southern Sudan. In spite of the country's rich natural the drought-affected 1980s and the introduction resources, the agriculture sector in Sudan has of a major economic reform program in 1992 that performed poorly in the past decade. While it decontrolled most markets. There were, however, remains an important sector, its share of GDP in wide variations in the growth rates across the sub- the economy has declined, the rate of growth of sectors (Table 4-1). Crop and livestock production rural incomes has decreased and poverty in rural have both grown at 3.6 percent per annum since areas remains high. The average annual growth rate 2000, compared to 8.5 and 15.9 percent respec- of the agricultural sector between 2000 and 2008 tively during the 1990s. Among the three main was 3.6 percent, substantially lower than the 10.8 farming systems, the traditional farming areas that percent during the previous decade. produce a wide variety of products recorded the The high agricultural growth of the 1990s largest decline in performance. The average annual was not sustained after 2000, largely due to low productivity and reduced exports. The sector 58 This chapter has been prepared by Jack van Holst Pellekaan, with grew at 10.8 percent per annum in the 1990s due input from Yutaka Yoshino, Derek Byerlee, Shawki Barghouti, Ali Salih to a rebound effect from the low growth period of and Ahmed Mina. 70 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH growth rate for this system fell from a solid 24.6 ation from 2005 to 2007.60 Addressing these con- percent in the 1990s, due to increased produc- straints will require investments and policy change tion of oilseeds, to 2.4 percent during the 2000 to in research and extension, rationalization of taxes 2008 period due to lower yields (sorghum), weak and fees, more efficient marketing chains, contin- markets (gum arabic, sesame and groundnuts) and ued improvements in export inspection, as well drought. Another important cause for the low aver- as improved trade promotion to make agriculture age growth of the agricultural sector during this more competitive in a broader range of interna- decade was the ban on imports of Sudanese sheep tional markets. by Saudi Arabia in 2000 and 2001 and again in The policy environment in the agricul- 2007, which led to the value of livestock exports ture sector in Sudan has not been conducive to dropping to almost zero in 2001 and by about one third in 2000 and 2007 (see Table 4-1). Although agriculture continues to provide 59 The major exports are directed at only a few Gulf countries. Almost the majority of export revenue outside of the all livestock and meat go to Saudi Arabia with some cattle to Egypt, Uganda and Kenya. Cotton is currently sold mainly to Egypt. Sales oil sector, growth in recent years has been tepid. of sesame are more diversified going mainly to Egypt, Saudi Arabia, The sector suffers from low productivity and high China, Jordan, Mexico, Turkey, as well as a few European countries. Gum arabic is sold to a small number of traders in Europe, Japan, marketing costs that reduce competitiveness and India and some other Asian countries, as well as the United States. An results in lower prices for farmers. Also exports of important shift in agricultural trade over the last five years has been the increased exports to China of agricultural products such as sorghum most goods are concentrated in a few foreign mar- and sesame. In Southern Sudan, partly because of decades of conflict kets, making them vulnerable to disruptions such and lack of infrastructure, export trade is only with adjacent neighbors (e.g., Uganda and Kenya). as the import bans mentioned for sheep sales in 60 Following the start of substantial oil exports from Sudan in 2000 the Saudi Arabia.59 These factors exacerbated the loss of value of oil increased at an annual rate of 26.8 percent, while agricultural exports increased by 7.8 percent over the whole period but declined at export competitiveness caused by currency appreci- an annual rate of 15.9 percent from 2005 to 2007. TABLE 4-1: Growth of Production (Value Added) and Share in Agriculture GDP by Farming System 1991/92­1999 2000­2008a/ Growth Rate Share in Agric GDP Growth Rate Share in Agric GDP (% per annum) (%) (% per annum) (%) Irrigated 6.6 21.1 4.4 28.2 Rainfed semi-mechanized ­6.7 6.3 5.2 3.1 Rainfed traditional 24.6 12.5 2.4 14.9 Minor crops ­1.4 1.2 nab/ nab/ By-products 2.4 5.9 nab/ nab/ Total Crops 8.5 47.0 3.6 46.3 Livestock 15.9 46.9 3.6 47.2 Forestry ­21.5 4.8 2.5 6.5 b/ Fisheries 9.0 1.3 na nab/ Total Agriculture 10.8 100.0 3.6 100.0 Source: Central Bureau of Statistics. a/ preliminary; b/ not separately available ­ included with forestry. CHAPTER 4 ­ RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR 71 growth, but is improving. In the past the gov- FIGURE 4-2: Trends in Food Crop Production ernment has intervened in agricultural markets in the Three Farming Systems (1991/92 to through a variety of instruments that altered incen- 2007/08) tives to producers relative to border prices. Inter- 3,500 ventions were ad hoc and inconsistent over time 3,000 8% and included distorted exchange rates, export tax- ­3% pa trend 2,500 pa trend ation, tariff policies, incentive payments, and trad- ,000 tons ing monopolies. Since the early 1990s, following 2,000 the introduction of major economic reforms, dis- 1,500 tortions have been reduced but some taxes on gum 1,000 arabic exports remained. Given the progress already made on agricultural policy, the major priority at 500 1.9% pa trend this stage is to eliminate those taxes and charges in 0 1991/92 1993/94 1995/96 1997/98 1999/00 2001/02 2003/04 2005/06 2007/08 the marketing of agricultural products for which no services are provided. Traditional Semi-mechanized Irrigated B. Sub-Sector Performance and Source: Data are from the Ministry of Agriculture and Forestry and Cross-Cutting Issues the Central Bureau of Statistics. Crops: Irrigated, Semi-Mechanized Rainfed, and Traditional Rainfed Systems by replacing non-food crops such as cotton and Over the past decade, the volume of foodgrain increasing the intensity of land use in Sudan's production (sorghum, millet, wheat and large irrigation systems. groundnuts) produced in the traditional rain- Irrigated farming has been characterized by fed farming system has grown, while produc- low irrigation intensity and low productivity. tion from semi-mechanized rainfed farming With about 4.8 million feddans of mainly gravity has shrunk and that from irrigated farming irrigation land, Sudan has the largest area of irri- remains stagnant at a low level.61 Figure 4-2 gated land in Sub-Saharan Africa. It accounts for shows food crop production from traditional rain- fed farming system has grown since the early 61 Note that this is not a contradiction of the previous analysis in this 1990s, surpassing the level of semi-mechanized chapter of a declining growth of the total value of production in the farming; in contrast, the latter has shrunk dur- traditional farming system because numerous other crops and agricul- tural products are produced in this production system. They have either ing the same period. The semi-mechanized farm- continued to decline since the early 1990s (e.g., gum arabic), or declined ing system has ceased to be the dominant source since the early 2000s (e.g., oilseeds). 62 Cropping pattern changes affect livestock marketing. Increased of food (sorghum) for Sudan. The contribution production of winter wheat in the Gezira scheme in response to high of the irrigated sector has, apart from its surge in international prices in 2006­2008, for example, has become a source of conflict between farmers and nomadic herdsmen. Traditionally, herdsmen production in response to drought and locusts were able to feed their cattle and sheep on summer crop residues in the attacks in 2001/2002 and again in 2006/07 when Gezira on their way to markets in Wad Medani and Omdurman, but access to this source of feed has been drastically reduced because farmers wheat prices increased, remained relatively stag- in irrigated areas are using up to 500,000 feddan (20 percent of irrigated nant. This production system clearly has the area) and any remaining crop residues to feed their own animals. Lack of clear demarcation of public stock routes and inadequate livestock services capacity to make a major contribution to food accentuate the conflict over feed supplies for livestock in irrigation areas production as a result of increased area harvested but this is also an issue in other farming systems. 72 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH 28 percent of the total GDP from the agricultural farmers' yields illustrate the substantial possibilities sector since 2000. It also contributes to the live- of approximately doubling yields for cotton, wheat stock sector.62 The large irrigation schemes, owned and sorghum and raising those of groundnuts by by the central government account for about 50 two-thirds. percent of all irrigated land.63 While the infrastruc- Poor management of the irrigation schemes ture in government-managed schemes is old and has been the main reason for stagnant yield lev- often technically outdated, water is still effectively els. Weak management typically results in high delivered to most command areas. Nevertheless, costs for operation and maintenance and therefore irrigation intensity, i.e., cropped area as a percent of high costs for water, which is often not efficiently irrigable area, in most years is less than 50 percent distributed to all farms. In the Gezira Scheme a and average crop yields are much lower than their management and institutional reform program is potential. underway and if successfully completed will be a Yields under irrigation have generally not model for similar reforms in other large irrigation improved over recent decades. While sorghum schemes (Box 4-1). Management reforms and tech- yields improved, those of other crops (wheat, nological advances in government irrigation areas groundnuts, cotton) stagnated, and even declined should have spillover effects in the numerous small over the last 5 years. Figure 4-3 compares the irrigation schemes. potential research and farmer yields for the major Low yields have driven the decline in sor- crops grown under irrigation in the Gezira Irri- ghum production in the semi-mechanized farm- gation Scheme. Yield gaps between research and ing system for decades. Production has grown slightly since 2000, primarily driven by growth in the extensive margin without an increase in pro- ductivity. Productivity is obviously influenced FIGURE 4-3: Yield Gaps between On-farm by technology, location and seasonal conditions. Research Trials and Farmers' Average Yields Delayed credit, which delays planting, which in in the Gezira Irrigation Scheme turn usually results in low yield, is another cause 3.0 for low productivity. On the other hand, low pro- ductivity is not a recent phenomenon. Since the 2.5 early 1990s sorghum production in semi-mecha- nized farming areas declined at a rate of 3.4 percent Yield (ton/feddan) 2.0 1.7 1.9 per annum due to negative growth of area and yield 1.5 0.8 1.5 of 2.1 and 1.3 percent per annum respectively. Fig- 1.3 1.4 1.1 ure 4-4 (left panel) shows the trend in sorghum and 1.0 sesame yields in semi-mechanized farming areas. 1.2 0.5 0.8 0.8 0.8 Yields of sorghum in Sudan (about 80 percent of 0.6 0.7 0.6 which is rain-fed) are well below those in other 0 countries with broadly similar production condi- Cotton ­ Extra Long Staple (Barakat) Cotton ­ Long Staple (Shambat) Cotton Medium Staple (Acala) Wheat Sorghum-open pollinated Sorghum-Hybrid Groundnuts tions. One such comparison is illustrated in Figure 63 Budget allocations for irrigation have absorbed up to 41 percent of GoNU's total development expenditures in recent years. The Agricultural Rehabilitation Program proposes to allocate over 30 percent of its budget Farmer yield Increment based on trials to irrigation and water resources, which may indicate a reallocation way Source: Agricultural Research Corporation (various years). from irrigated to rainfed agriculture. CHAPTER 4 ­ RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR 73 BOX 4-1: Reforms in the Gezira Irrigation Scheme Background. Established in 1925, the 880,000 ha Gezira Scheme is one of the largest irrigation projects in the world under single management. It is managed by the Gezira Board of Directors with day to day management by Sudan Gezira Board (SGB). It can contribute 3 to 4 percent to national GDP and generate considerable employment. On the other hand the Gezira with its controlled rotations and requirements to grow fixed quantities of cotton performed poorly despite considerable central government budget support. Yields, cropping intensities, and irrigation efficiencies were chronically low, operation and maintenance (O&M) were poorly executed, and cost recovery for water delivery and O&M was weak. While the government wrote off the Scheme's and farmers' debts in 1982 and 1992, accumulated debt rose again to $95 million in 2008. New Gezira Act. In response to weak performance and unsustainable budget support the Ministry of Finance and National Economy (MoFNE) launched a review of Gezira's management in 1999. After a year of analysis, a joint Government/World Bank report recommended a reform program which was followed by four years of debate among all stakeholders and, eventually, the adoption by Parliament of a new Gezira Act in July 2005. On the basis of worldwide evidence of Water Users' Associations (WUAs) as efficient water management institutions at the farm level and a successful pilot in Gezira, the Act gives greater responsibility to WUAs and reduced responsibilities to the Ministry of Irrigation and Water Resources (MOIWR) and the SGB for water management within the Scheme. The Act also guarantees free crop choice for farmers, transfers titles and tradable long-term leases to farmers replacing short term land rental arrangements, substitutes farmers' credit accounts with the SGB with commercial banking, privatizes railways, ginneries and workshops, and refocuses the SGB's responsibilities on agricultural research, technology transfer, market information services and farmer training. The Act requires that, before responsibility for the minor canals is handed over to the WUAs, the canals be rehabilitated by the MOIWR. The Ministry is also required to establish a separate department for Gezira to foster the reforms. Implementation of the full and integrated package of reforms is expected to lead to substantial improvements in the Scheme's efficiency, productivity, farm incomes and employment, as well as lower government budget allocations. Implementation Achieved. Freedom of crop choice, payment upon delivery of cotton to ginneries, and credit from the Agricultural Bank and private commercial banks are now a reality and have led to substantial crop diversification and higher incomes in response to market demand. Some 1,575 WUAs have been established. In November 2009, under the direction of the Board of Directors, the SGB terminated (with compensation provided by the government) 2,500 employees whose roles were no longer consistent with the future responsibilities of the SGB. This action was based on an MDTF-funded study. The World Bank assisted in drafting legal agreements for water purchases and water management. Implementation not Achieved. The MOIWR retains management responsibility for the Sennar dam and main canals and has taken back the responsibility for O&M of the minor and tertiary canals, which it performed ineffectively for many years in the past before being relieved of that responsibility by the SGB. The MOIWR has also not established a department for Gezira. Its annual budget is devoted to O&M and not to the rehabilitation of minor canals. As a result, the management of the minor canals has not been transferred to WUAs. Training of WUA managers was not started because it needed coordination with the transfer of water management to the WUAs. Land policy issues have not yet been resolved. Time for Leadership and Action. The Board of Directors of the Gezira Scheme is responsible for implementing the new Gezira Act. It took action to reduce SGB staff numbers and should also ensure that the SGB trains WUAs and brings the SGB, WUAs, and researchers together to verify that free crop choice is not exercised at the cost of spreading crop diseases and parasites. The Board has, however, been unable to ensure that the MOIWR fulfils its responsibilities for integrated reform under the Act and it may need support from MoFNE to monitor that the MOIWR budget is used for rehabilitation of minors as well as O&M. The Gezira Farmers' Union supports the reform program but it should confirm that the majority of farmers support the program. The Union also needs to convince the Board of Directors that (after training) farmers will be ready to manage WUAs, in contrast to MOIWR contention that farmers are incapable of managing WUAs. In conclusion, the Board of Directors should complete implementation of the full Gezira Act package. If it fails, a high level commission could be formed to complete the task to prevent the collapse of a $4­6 billion investment capable of very large and efficient production and employment growth. 4-4 (right panel) which shows that Sudan's overall only 14­18 percent of that in some high-yield- national average sorghum yield of about 0.73 tons ing competitive countries such as Argentina, the per hectare (306 kg per feddan) which includes irri- United States and China, and was about a half of gated production for the period 2000­2007 was some African countries like Nigeria. 74 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH FIGURE 4-4: Relative Sorghum and Sesame Yields, and Comparison of Average Sorghum Yields With Other Countries: 2005­2007 Yield (tons per ha) 0.8 6.00 0.7 5.00 0.6 ­1.25% pax 4.00 0.5 0.4 3.00 0.3 0.76% pa 2.00 0.2 1.00 0.1 0.0 0.00 1991/92 1994/95 1997/98 2000/01 2003/04 2006/07 Argentina China USA Nigeria India Yemen Sudan Sorghum Sesame Source: Central Bureau of Statistics and FAOSTAT. Yield growth under the semi-mechanized der) would be included in all rotations. Gum arabic farming is constrained by inadequate public in about 10 percent of the area would be a feature management of areas at the state level and weak of rotations in areas suitable for this crop.64 Inter- incentives to use improved technology. Weak- national examples of similar achievements are dis- ness in management includes low land rentals, cussed in Box 4-2. weak enforcement of soil management covenants in While the government plays an important land leases, land policy that excludes a market for role in sorghum marketing through its pur- land rights, land use disputes between farmers and chases for the national food reserve, its pow- nomads, and lack of enforcement of environmental ers over export licenses exacerbate sorghum standards in the leases. On the technical side there production problems. When the government is clear upside potential. A recent report prepared perceives the high probability of low annual pro- for the Ministry of Agriculture and Forests iden- duction due to seasonal conditions, it places con- tified a technological package based on improved trols on export licenses for sorghum. Decisions soil moisture management through judicious cul- about export license controls, however, typically tivation that would lead to higher yields than at come late in the planting season, which in turn has present and can be achieved with current equip- a negative impact on yields.65 The price paid by the ment used by most farmers. A more sophisticated government after harvest for purchases to replenish approach would be movement to modern machin- the food security stock is typically inversely related ery and zero tillage technology, which would to the size of the crop. With few other price sig- require more purchased inputs but would achieve nals, because the government's involvement in the much higher and more sustainable yields. As that report points out, different crop rotations could be 64 GoNU Ministry of Agriculture and Forests 2009. applied for the different agro-ecological zones, but 65 Over the past 15 years the government banned exports of sorghum a leguminous crop (for either grain/seed or fod- for several years including 1991/92, 2000/01, 2004/05 and in 2007/08. CHAPTER 4 ­ RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR 75 BOX 4-2: Investing for Competitive Rainfed Agriculture: Experiences of Brazil's Cerrado and Northeast Thailand The Guinea Savannah region of Africa, which includes most of Southern Sudan, is a huge underexploited area with enormous agricultural potential. A recent World Bank study concluded that similar regions in Latin America (the Cerrado of Brazil), and Asia (Northeast Thailand) have become breadbaskets to the world, with highly competitive export agricultural sectors. The agricultural commercialization experiences of the Cerrado region of Brazil and the Northeast Region of Thailand share a number of striking commonalities. Both regions started out with low productivity agriculture and poor infrastructure, and until quite recently both were characterized as economically "backward." Yet they showed remarkable, sustained growth over a 40-year period, allowing them to become highly competitive in world markets. Producers in both regions initially concentrated on a small number of commodities that are traded internationally in large quantities and for which quality standards are relatively unimportant. In Brazil, soybeans, production of which jumped from 250,000 metric tons in 1961 to over 30 million metric tons in 2000, led the transformation. In the Northeast Region of Thailand, cassava led the export takeoff, with the country's production (heavily concentrated in the Northeast) rising from 1.7 million metric tons in 1961 to 20.7 million metric tons in 1996. Successes were achieved later in other commodities (e.g., rice in Brazil, rice and maize in Thailand). In both cases, international competitiveness was achieved in stages: only after competitiveness had been established in low- value commodities was it also achieved in higher value commodities, including processed commodities (e.g., sugar, soybean oil, cotton lint, cassava starch, and cattle). Supply-side factors as well as demand-side factors contributed to the success in both cases. In the Cerrado, the supply-side factors included (i) improved agricultural technology developed by EMBRAPA, the national agricultural research organization (especially locally adapted high-yielding soybean varieties and improved management techniques tailored to the Cerrado's acidic soils); (ii) publicly financed infrastructure, rural credit, and business development services; (iii) entrepreneurial know-how of highly skilled farmers from the southern part of the country who migrated to the Cerrado in response to the government's colonization strategy, and (iv) a supportive policy environment, brought about by a series of economic and political reforms enacted during the mid-1990s that improved the investment climate and permitted the direct transmission of international market signals to farmers in the Cerrado. These supply-side factors, combined with strong growth in global demand for soybeans and soybean-derived products beginning in the 1970s, resulted in the spectacular transformation of the Cerrado into a leading global supplier of soybeans. In the Northeast Region of Thailand, the export revolution was similarly driven by a combination of supply-side and demand-side factors. Supply-side factors included: (i) improved agricultural technologies (especially short-duration cassava varieties are resistant to common pests and diseases, and feature high improved root quality, as well as improved crop management practices for soil nutrient conservation and erosion control to combat declining soil fertility); (ii) availability of previously uncultivated land, combined with permissive government land policies, that allowed farmers to expand cultivated area rapidly in response to market opportunities; (iii) government investment in rail and road infrastructure, which reduced costs of market access; and (iv) a dynamic private sector that was able to respond quickly to market signals, paving the way for rapid supply response. The resulting spectacular expansion of cassava production in Northeast Thailand sparked broader agricultural and economic growth extending throughout the region. Source: World Bank 2009b. market is so substantial, farmers usually assume cycle of low production in response to the previ- that next season price will equal the price during ous season's low prices, and vice versa. In addition the current season, which means that after a plen- delays in announcing export licenses for sorghum tiful season farmers expect low prices during the cause farmers to delay their planting decisions and next season which acts as a disincentive to sor- reduces yields. ghum production and farmers reduce sorghum Since the early 1990s, an expansion of har- plantings and turn to other crops such as sesame vested area has been the primary source of pro- or sun flower. These policies and the reactions of duction growth for traditional rainfed crop farmers to them result in a classical cobweb type production. Area increases (extensive margin) have 76 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH been the main source of higher production for if the recorded research yields may not be fully most of the food crops under the traditional farm- realized. ing system (6.4 and 3.1 percent per annum for sor- Small-scale farms in Southern Sudan, face ghum and millet since 1991/92). More recently a low-level productivity trap. As a group, small- sorghum has started to lead the growth in food scale farmers are not prepared to risk the cost of crop production due to a substantial improvement improved technology and the associated cost of in yield (4.4 percent per annum since 2000/01 inputs in the face of uncertainty about markets compared with 3.6 percent per annum since for additional output because of distorted prices 1991/92), although since 2001/2002 there was a in an uncompetitive, isolated market due to poor substantial drop in average groundnut yields. Yields infrastructure and an almost complete absence of and area harvested for sesame, however, declined market information. This is particularly true for considerably from the mid 1990s. These trends for farmers in Equatoria and the flood plains of South- crop production in the traditional farming areas ern Sudan. Farmers are trapped in a system of shift- confirm a strong incentive to produce staple food ing agriculture and subsistence farming. For most crops and a declining incentive to produce cash rural families there is no escape because neither crops such as groundnuts and sesame for export farm households nor landless labor are able to move (see Table 4-2). out of their traditional areas to more advantageous Yield gaps between potential levels and areas within Southern Sudan because of the inabil- yields achieved in traditional farming areas in ity to settle on land or work as laborers in locations Sudan are even more dramatic than those for outside their customary communities. semi-mechanized farming areas. In North Kor- Breaking free of the low level trap requires dofan state where rainfall is both low and erratic, improved technology, better support services farmers obtain meager yields that represent small including credit, and efficient markets for land, proportions of the yields reported by research even labor and surplus production. Since the inter- under difficult crop growing conditions. Table 4-2 regional movement of families and labor is severely shows that the proportions were in the order of 8 constrained, households have had few options but to 9 percent for sorghum, millet and sesame, and to rely on their existing farms as their source of sus- about 34 percent for groundnuts. Here the poten- tenance and as a basis for barter trade for non-farm tial for improved yields is clearly substantial, even products. There are many potential avenues for increasing productivity for traditional crops such as sorghum, millet, and groundnuts, but there are also realistic opportunities to produce less traditional TABLE 4-2: Research and Farmers' Crop crops such as upland rice in the South. Yields in Marginal Rainfed Areas in North Kordofan Forestry Farmer Yields Research Farmer as Percent of Management of forestry resources has been sub- Yields Yields Research Yields optimal, in aggregate economic terms as well Crop (kg/fed) (kg/fed) (percent) as with respect to environmental sustainabil- Sorghum 540 42 8 ity and poverty reduction efforts, and demand Groundnuts 546 186 34 more attention through policy reform, budget- Sesame 180 17 9 ary allocations and investment incentives. Gum Source: Dukheri (2006). Arabic, as discussed below, is a prominent exam- CHAPTER 4 ­ RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR 77 ple of mismanagement resulting in outcomes consumption in the country is in the form of fire- well below potential in economic terms, and also wood and charcoal. The remainder of the energy directly in poverty reduction efforts given grow- budget is met by petroleum products, hydroelec- ers are largely in poor rural areas. Official estimates tric power and agricultural residues. Forestry has show a very modest 1­2 percent of GDP contribu- also contributed to food security in the past, par- tion from forestry as a whole to the national econ- ticularly in drought years when the rural poor omy, which is likely underestimated due to lack of depended entirely or partly on fruits and tree leaves data on different forestry products beyond the reg- as a source of food. istered value of wood produced from government Sudan is the world's leading exporter of gum forest reserves. For example, the government esti- arabic, a crop that is especially important to the mates that shelterbelts of forest trees established to livelihoods of poor farmers in marginal envi- protect agricultural plots can increase crop produc- ronments. Despite large increases in cultivation of tivity by as much as 15 percent. The Forest Law gum arabic, its exports have declined at an average (2002) stipulates that trees should be left standing rate of 2.2 percent per annum between 1970 and on 5% of lands mechanically cropped and 10 per- 2005 (Figure 4-5). The decline in exports has been cent on rainfed lands. The effect of these tree belts due to weak incentives for small scale farmers, who on reducing evaporation losses, decreasing wind produce the bulk of Sudan's gum arabic, coupled and water erosion and generally mitigating desert- with some serious droughts. Since 2005, increased ification effects led to increased crop productivity domestic processing of gum arabic has stimulated and significantly contributed towards food secu- domestic production and a higher volume and rity. However, mismanagement has led to desertifi- value of exports (also see Table 4-2). cation and destruction of watersheds, especially in The monopoly export concession granted central and northern Sudan. Scanty tree cover has to the GAC to export raw gum arabic drove a been removed in many places exposing the surface wedge between world and domestic prices. Sudan soil to all agents of erosion. Contributing factors include the expansion of agriculture (mainly mech- anized) on forestlands, uncontrolled tree felling, overgrazing, forest fires, prolonged drought periods FIGURE 4-5: Trends in Gum Arabic Exports and erratic rainfall. (1970 to 2005) The role of forestry in poverty alleviation 60000 in the Sudan, which has generally been under- played, is realized through its direct support 50000 to rural communities, provision of energy and 40000 through its contribution to food security. For- estry activities support the rural communities 30000 ­2.2% pa through provision of employment in forestry oper- ations (planting, thinning, guarding and harvesting 20000 of tree crops), as well as supply of non-wood forest 10000 products and community support to establish vil- lage forests for fuelwood production, shelter and 0 recreational purposes. The poor rural communities 1970 1975 1980 1985 1990 1995 2000 2005 largely depend on wood fuel as source of energy. Hashab Talha Total exports Expon. (Total exports) The government estimates 78 percent of the energy Source: Data from the Gum Arabic Company (GAC). 78 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH controlled the lion's share of world gum arabic pro- fited from the pre-arranged price levels between the duction for decades and a number of attempts were GAC and foreign buyers.68 made in the early-1960s to stabilize prices for pro- There has been a new development, renewing ducers and consumers by establishing buffer stocks, the prospect of gum arabic export liberalization. but they were generally unsuccessful because of the Recently the Gum Arabic Commodity Council lack of reliable financing. But in 1969, on the basis formed four technical committees to study different of accusations that foreign speculators had manipu- policy options needed for the revitalization of the lated domestic gum prices, the government decided gum arabic sector. They made recommendations to give one company the sole concession to export for change to the Agricultural Revival High Coun- raw gum arabic. Since then, except for a few years cil (ARHC). The ARHC have endorsed the recom- in the late 1990s, the GAC in which the govern- mendations and submitted them for the meeting ment has a major share, has had a monopoly over of the Ministerial Cabinet for consideration. The the export of raw gum arabic. GAC has imple- Council of Ministers, chaired by the President of mented a floor price system for gum at buying cen- the Republic, issued decrees at the end of April ters (referred to as auctions). Floor prices have 2009 declaring the liberalization of the gum ara- typically been about 20 percent of the freight-on- bic trade, cancellation of the exclusive concession board (FOB) price in Port Sudan, and for a period on raw gum arabic export granted to the GAC in of about 5 years between 1998 and 2003 this per- 1969 and removal of all taxes imposed on gum pro- centage hovered around 10 percent. After 2003­ duction, similar to other agricultural products. 2004, auction prices were again influenced by an The Ministry of Finance and National Economy investment surge by processors.66 Prices paid at auc- issued the relevant rules and regulations necessary tions increased to higher levels than in the past for implementing the decrees, and a technical com- although prices were also erratic because of uncer- mittee has been formed by the Ministry of Foreign tainty about the likely disposition of the large stock Trade to ensure that the liberalization move will that the GAC accumulated in 2003 and 2004.67 not harm gum arabic exports. The floor price system reduced produc- Beyond gum arabic, there is potential for a ers' earnings, lowering their incentive to pro- sound timber industry given the exotic forest duce. There was considerable controversy around species that grow in Southern Sudan. It is esti- the justification for one company having an export mated that forests and natural woodlands cover monopoly of raw gum arabic. On the other hand, GAC insisted that by providing a floor price, sup- 66 In 2003 the Ministry of International Investment issued 12 additional porting producers with extension advice, and mon- licenses to gum arabic processors including the four international agents itoring the quality of raw gum arabic exports, it who worked for GAC to sell raw gum and process it in Europe, but who then established processing facilities (crushing facilities to make "cleaned has ensured reliable supply of high quality, hand- grade") in Sudan in order to ensure their own supply of gum for their picked, and selected gum arabic. However, in prac- processing lines in Europe. 67 On August 9, 2006 the Minister of Foreign Trade signed a Ministeral tice the floor price was very low and provided no Order (No. 7/2006) stipulating "except for the GAC, all permits for the incentive for producers, and extension support was export of gum arabic in all its forms are hereby suspended until further notice." This order, which undermined the profitability of all private gum very weak. The Sudanese Standards and Metrology arabic trading and processing had a major detrimental impact on the Organization was established and authorized to ver- international reputation of Sudan's gum arabic industry. This order was subsequently rescinded following representations from the processors. ify the quality of all types of gum arabic exports. In 68 Synthetic substitutes were also developed which, because of their the meantime, gum arabic planting and production regularity of supply, became very attractive to consumers compared with supplies of natural gum arabic which were unreliable as a result of expanded in countries such as Chad and Nigeria, the weak incentives to produce on a regular basis which in turn led to which have no controls on marketing but bene- fluctuations in quantity and price on world markets. CHAPTER 4 ­ RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR 79 about 192,000 square miles, which is about 30 is increasing because domestic prices are generally percent of the area of Southern Sudan. Of this area more attractive to traders than export prices. Mar- about 17,500 square miles are said to be taken up keting costs, including deaths, for live sheep trans- by reservations under formal management. These ported by rail from western Sudan (Nyala) through reservations are owned and managed by commu- Port Sudan and Sawakin for export represent about nities, or they are part of an official government 30 percent of the fob price. For this route just over forest reserve. The remaining forests are under an 50 percent of the total cost is for transportation. "open forest management regime," and are cur- Traders complain about taxes and other charges rently outside the jurisdiction of the public for- that are not related to any services which reduce estry administration, which makes them prone to their marketing margins. An analysis of sheep mar- many abuses such as uncontrolled charcoal produc- keting prepared for this report concluded that tion and indiscriminate harvesting of lumber. The reductions in death rates, improvements in credit GoSS is acutely aware of the need to guard against arrangements for livestock marketing, improve- the destruction of its forest resources and has there- ments in the efficiency of veterinary inspections fore taken a number of steps since 2005 to estab- and the introduction of auctions could result in lish a forest policy. In 2007 it introduced a Forest considerable improvements sheep marketing effi- Policy Framework and subsequently a new Land ciency in Sudan.71 There are no significant exports Act was approved in 2009. A land policy is under of sheep from Southern Sudan. On the other hand preparation and a forest law has yet to be drafted. a substantial number of cattle have in the past No doubt guidelines on effective forestry manage- been exported from Southern Sudan to Kenya and ment will also be developed. However, it is under- Uganda, where they compete with cattle produced stood that in the interim a moratorium has been in Kenya and Somalia. established by the GoSS on any extraction of major Livestock productivity is low and highly forest products. International experience suggests variable but potential exists for productivity that while there is non-oil revenue potential from growth. Livestock productivity varies significantly traditional forestry, it may be prudent to emphasize because production is predominantly under natu- the institutional and transparency building blocks ral rangeland systems, which are subject to erratic of a forestry policy rather than immediate revenue climate and influenced by stocking rates that are generation. not under the control of any individual. The fertil- ity rates of sheep, defined as the ratio of pregnant Livestock69 to total adult females, are in the order of 60­83 percent under pastoral systems, indicating modest Livestock is the leading agricultural export prod- growth potential. The lambing rates, defined as the uct of Sudan. There are some 90 million sheep and number of lambs born per ewes mated, vary from goats in Northern Sudan, with most exported sheep 102 percent to 170 percent, indicating high vari- and goats coming from Kordofan and Darfur.70 ation in twinning incidence. Mutasim estimated a Typically about 1.5 million sheep equivalents are shipped to Saudi Arabia each year of which about 1.4 million are live sheep and the balance is made 69 The section draws on the CEM background paper: "Value Chains for Sheep, Cattle and Mutton Marketing from Western Sudan" by Ahmed up of chilled or frozen carcasses and meat. Despite Abaker Mohamed Mina and Jack van Holst Pellekaan. the high profile of live sheep exports from Sudan, 70 Sudan has 140 million livestock (sheep, goats, cattle and camels) of which 102 million are in Northern Sudan and 38 million in Southern about 20 million sheep are slaughtered for domestic Sudan consumption in Sudan each year and this number 71 Mina and van Holst Pellekaan 2009. 80 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH potential 112 percent for lambing rate in good sea- duce a surplus. States are compensated by the sons.72 The high variability revealed by these figures central government for reduced revenues through is indicative of variable production management special budget allocations. Whether the states are and hence highly uncertain herd growth prospects. receiving adequate compensation is not addressed Estimates of annual off-take rates for sheep are here, but the policy issue for the livestock sector from 15 percent to as high as 50 percent. Neverthe- is that removal of sales taxes changed the relative less, typical off-take rates in Sudan are low by Afri- profitability of the livestock and crop sub-sectors. can standards and this is in part due to a continued Box 4-3 analyzes environmental degradation and preference by traditional pastoralists to increase the reduced livestock production and exports that may size of flocks. It is unlikely that this approach to have resulted from the impact of the elimination of herd management can be sustained because exces- sales taxes of crops. sive stocking rates, destruction of tree cover to har- vest firewood because of civil conflict, increased Key Agro-Industries: Sugar, Leather, and areas used for crop production, soil erosion and Vegetable Oil periodic droughts have all contributed to a serious deterioration of carrying capacity of the rangelands Sudan has the ability to significantly expand in Sudan. This destruction is not totally irrevers- its sugar production because of available fertile ible and there is therefore considerable potential for land along the Nile and irrigation water from the productivity growth if pastoral conditions and flock Nile. This potential is not unlimited because much management can be improved through regulation of the water rights to the Nile are shared with of grazing intensity of the common rangelands in Egypt as part of the Nile Waters Agreement. How- regions such as North Darfur and North Kordofan. ever, there is enough water allocated to Sudan to An alternative approach is through changes in land allow the White Nile project to be built and allow policy such as transferring long term responsibility other sugar companies to expand production. Sugar for sustainable land use to farmers and pastoralists production costs in Sudan are generally relatively through arrangements such as long term tradable low compared with costs in other exporting coun- leases with covenants on land and forest manage- tries. At present, the industry is regulated through ment. Many of these actions require intervention controls on both imports and domestic sales that by public institutions to establish sustainable man- in effect subsidize Sudan's sugar exports. The net agement practices and to monitor and regulate nat- effect is that domestic consumers and sugar-using ural resource use, but the institutions are usually industries currently pay among the highest sugar inexperienced to undertake the professional aspects prices in the world. Government protection for of these tasks and if experienced then usually ill producers should not be necessary, and the govern- equipped to act with adequate authority. Table 5-4 ment's direct involvement in the industry could be shows how low public expenditures have been in reduced. support of the livestock sub-sector with only 0.3 Sudan has a unique opportunity to create a percent of development expenditures. more export-oriented sugar industry because of Another constraint to the profitable pro- opportunities offered by European Union (EU) duction of livestock is the more severe taxation preferences and the regional market through of this sub-sector compared with crop produc- COMESA. Preferential access under EU's Every- tion. The central government eliminated state taxes on sales of agricultural commodities sold by farm- ers because it was regarded as a disincentive to pro- 72 El-Rasheed 2005. CHAPTER 4 ­ RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR 81 BOX 4-3: Impact of the Elimination of Agricultural Sales Taxes on the Competitiveness of the Crop and Livestock Sectors and on the Environment in Traditional Farming Areas The decision in 1999 by the then Government of Sudan that the states should no longer require the payment of sales taxes by farmers selling their crops in local markets had fiscal implications for the states which the government has addressed through a mechanism for compensation for the lost state revenues. But the elimination of sales taxes is also likely to have had significant impacts on crop and livestock producers as well as a negative impact on the environment. The impacts have been direct and indirect. Direct Impact While crop producers had their sales taxes eliminated they still pay local government taxes in primary markets near production areas and traders pay taxes at points of final sale which get passed back to the producers. Livestock producers continue to pay taxes on the value of sales in local markets as well as other taxes and mandatory fees levied for various public causes such as the martyr's tax as well as a 10 percent Zakat tax on the value of sales. In addition livestock traders also pay taxes on final sales, which are inevitably passed back to producers as lower prices. Analysis of marketing cost for livestock for this report and for the earlier Diagnostic Trade Integration Study show that government taxes and mandatory fees for public causes paid by sesame and groundnut producers/exporters account for about 16 percent of total marketing costs, whereas the cost of these charges for sheep producers/exporters ranges between 17 and 27 percent of marketing costs depending on the marketing system used. This difference is the direct impact of the elimination of a sales tax on crop producers. In addition, livestock herders pay an annual head tax for which there is no equivalent tax on crop producers' assets, and annual charges for the use of arable land are miniscule. As a result there is little doubt that livestock producers are more heavily taxed than crop producers even though the precise differences will vary according to location, types of land, and crops. Indirect Impact The sales tax elimination for crop producers would have raised the profitability of crop production (which was the objective) compared to livestock production assuming no other changes took place. While the improved profitability should have provided an incentive to raise productivity on existing farm land, crop statistics indicate that farmers have enlarged their cultivated areas, which in the traditional rain-fed farming system in Sudan means an expansion of cropping into pastoral areas. Such additional cropping areas are usually marginal for sustained crop production. Customary land policy allows increases in farming areas but it usually occurs without consultation with nomads who are typically not part of the community that manages customary land rights. Continued rights to farming areas are dependent on farmers regularly cultivating these areas. This practice has, however, resulted in severe land degradation in mixed farming areas like Kordofan and Darfur. Such an outcome not only destroys the quality of pastoral areas, it inevitably raises costs for livestock producers as they search for alternative grazing and, in the process, generate friction with crop producers. The conclusion is that a policy originally intended to stimulate food production has resulted in expansion of cropping to marginal areas resulting in increased land degradation, a continued decline in average yields, more intensive stocking on the residual pastoral areas and irreversible destruction of the land resources and the environment in the traditional rain-fed farming areas. thing But Arms (EBA) Initiative to Europe's oth- ers such as the Kenana and the White Nile com- erwise highly protected domestic market gives panies can export profitably to the region. Sudan Sudan the opportunity to export potentially all its can export sugar to COMESA FTA countries duty- production to the protected EU market at prices free and quota-free.73 In addition to the opportu- about double those of the world market, while nities provided the EU and COMESA, the rest of meeting domestic demand with sugar imported at the world price. There is a risk that the EU mar- 73 ket will be restricted if sugar imports surge, how- Not all sugar exported to Kenya receives preferential treatment, due to a safeguard provision negotiated by the Kenyan Government with ever. COMESA is another important market: even COMESA in 2003, which was scheduled to expire in February 2008 but without access to the EU, some sugar produc- which was recently extended for an additional four years. 82 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH the regional market is growing rapidly and export 1990s. Exports to the U.S. ceased with the impo- competition within the region will decline because sition of its economic embargo. Pakistan and several regional exporters (Malawi and Zam- China (mostly Hong Kong) are now the two larg- bia) qualify as LDCs for EBA and will divert their est buyers of Sudanese leather, followed by Europe exports from the regional market to the EU. and India. Sudan could seize this unique opportunity However, exports of hides and skins have to expand its sugar industry through following been declining, in part due to their low qual- reforms by: (i) liberalizing sugar imports subject ity relative to competitors. Exporters lost their only to the VAT and eliminating the excise duty on markets in Italy, Spain, and Portugal because of sugar to benefit consumers and industrial users of the poor quality of Sudan's hides and skins. Sudan sugar; (ii) reducing government involvement in the receives only about 50 percent of the international four sugar companies owned and operated by the price for wet blue product because of its low qual- government by either privatizing them or allowing ity. The use of chemicals and their disposal has them greater autonomy in managing and investing environmental consequences. Scarcity of high- their resources; and (iii) encouraging the continu- quality hides and skins is also a chief constraint to ation of services provided to local communities by boosting leather production and exports. Poor ani- sugar companies by allowing the sugar companies mal husbandry and outdated slaughtering tech- a credit against the sugar export tax for the cost of niques limit the supply of high-quality hides and such services up to a specified limit. skins. Foreign tanneries are able to outbid Sudanese The leather industry in Sudan holds great tanneries for the quality skins that are produced. potential thanks to the country's vast num- The government introduced an export tax on hides ber of livestock, which is one of the largest in and skins in 2000.75 Tanneries are particularly Africa. Output is concentrated in intermediate affected by the numerous charges and local taxes leather products, much of which is sold to interna- levied on hides and skins, such as veterinary tax, tional manufacturers of leather garments. There is market authority tax, and transport tax (Table 4-3). severe excess capacity: most plants are closed, and those that remain open are operating well below 74 their capacity. Unlike other manufactured prod- The 2003 UNIDO Industrial Survey reports that 73 percent of output was exported (in value terms). ucts, leather is produced largely for exports.74 The 75 An export tax shifts income to owners of tanneries from those raising EU (primarily Italy) and the United States were livestock. It may help shift the flow of hides to local tanneries in the short run but not address factors undermining the leather industry's the main buyers of Sudanese leather in the early competitiveness. TABLE 4-3: Share of Production Cost for Medium-Size Tannery Component Share of costs (in %) Comments Raw Material 70 transport costs: 20­22 percent fees and other taxes on raw materials: 10­12 percent Imported Chemicals: Chroming 8­12 import duty: 3 percent ($600/ton) other charges: 20 percent Utilities ($0.12/Kwh) 5­10 high cost of electricity Labor + overheads 15 low productivity and few skilled workers Source: World Bank 2008a. CHAPTER 4 ­ RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR 83 Tanneries complain that these taxes are paid several The shortage of domestic oil seeds and the times every time they cross a state. Government's restriction on imports constrain Sudan has the potential to revitalize vege- oil producers. Oil seeds are the major expense table oil exports. Sudan has been exporting veg- in producing vegetable oils (95.4 percent of total etable oil for many decades, primarily to the EU cost), and oil producers report that the most crit- with steady, albeit smaller, quantities to countries ical constraint affecting the edible oil industry is in the region. Exporters could do more to diver- the shortage of oil seeds. Much the groundnut pro- sify into new markets but quality standards will duction used for oil has historically been located in need to be strictly maintained. Sudan's ground- Darfur, and the ongoing conflict in that region has nut oil exports have gone overwhelmingly to Italy. disrupted the supply of oil seeds. Moreover, irri- Sudan has not penetrated the markets of major gation farmers have been shifting from groundnut sesame oil importing countries such as the U.S., into wheat, in the past encouraged by govern- Japan, Hong Kong and Malaysia, although even ment subsidies for wheat production that were before the U.S. imposed its current trade embargo, designed to reduce the import bill on wheat, and it did not import from Sudan. None of the East now encouraged by higher import parity prices. At Asian countries identified as potential buyers report the same time, vegetable oil producers report that, importing from Sudan during the past 15 years. despite the shortage of raw materials, the govern- Imports by Sudan are made up mostly of refined ment does not allow importation of oil seeds for palm oil from Malaysia, Singapore, and Indonesia, further processing. Government authorities dispute and total imports have grown rapidly since 2000 this claim, stating that there are no prohibitions (Figure 4-6). Much of the increase in the past three or other policies (other than tariffs) that restrict years can be attributed to food aid. Local producers imports. Whatever the reason, published trade data argue that dumping (selling below cost) accounts show negligible imports of oilseeds into Sudan for some of the increase as well. until recently, and in 2006 oilseed imports reached only around $5 million. Given the seasonality of oilseed production, it will be difficult for oil proces- sors to compete internationally unless they import FIGURE 4-6: Exports and Imports of oilseeds during the off-season in order to fully uti- Vegetable Oils, 1990­2005 lize processing machinery throughout the year.76 70 60 Impacts of Productivity and Marketing Costs 50 on Export Competitiveness of Agriculture $ Millions 40 The low and declining productivity and the 30 high cost of marketing appear to be the major 20 factor explaining the declining competitive- ness of traditional agricultural exports. As dis- 10 cussed above, there are large gaps between yields 0 achieved in field trials and those typically achieved 1990 1993 1996 1999 2002 2005 Exports Imports Source: UN Commodity Trade Statistics Database. 76 India's success as the global leader in cashew processing is instructive. Notes: Mirror statistics for 1990­1992, average of reporter and mir- By importing cashews from around the world, India is able to process ca- ror statistics for subsequent years. shews year-round, not just when locally-grown cashews are on the market. 84 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH by farmers in Sudan. The high cost of bring- to the product. Analysis of value chain data shows ing agricultural products to world markets com- numerous, even if not individually large, taxes pounds the problem of low productivity. In and other charges; it is not always clear what ser- Southern Sudan, the high cost of moving goods vices the taxes and charges are paying for. Table from farms to urban areas prevents the region 4-4 shows that, for some products, costs incurred from exploiting its considerable export potential at Port Sudan are the largest of these marketing (Box 4-4). Livestock and crops grown in remote costs, frequently accounting for 7­9 percent of areas face high transportation costs. Even when the FOB export price.77 distances are short, marketing chains can be long: multiple intermediaries take advantage of market 77 See World Bank 2008a for a discussion of factors explaining the high inefficiencies to raise prices without adding value cost of using Port Sudan. BOX 4-4: Agriculture and Export Potential in Southern Sudan The available information suggests that, although Southern Sudan has historically been a net importer of agricultural products, the region has an outstanding natural resource base for the production of livestock and a wide range of annual crops (grains, fruit and vegetables), tree crops (coffee and tea), and forest products. But taking advantage of this potential will depend on making major improvements in productivity and marketing infrastructure such as roads, river transport, and airports. Livestock: In the past cattle were sold to Uganda and Kenya and this continues, but insecurity within Southern Sudan and along the borders sometimes put a stop to these market outlets. Southern Sudan currently imports meat from Uganda but also sells cattle to markets in northern Sudan such as Kosti and Omdurman. But regardless of the final market location, prices received are discounted because animals are usually in poor condition and at risk of carrying serious diseases. These constraints on livestock marketing need to be urgently addressed. Future prospects for larger incomes from the cattle industry in Southern Sudan requires improving animal nutrition, controlling chronic diseases, reducing the age of turn-off, and making more efficient use of rangelands. Prospects for crop exports will also depend on substantial increases in productivity and better infrastructure (such as transportation and communications) so that domestic producers can first increase production to compete against imports in domestic markets and then later expand to export markets. Generally, these conditions for growth in exports depend on public sector investment in infrastructure, investment in research and support services to the agricultural and livestock producers (by both public and private sectors). It will be some years before these pre-conditions exist in Southern Sudan and a comparative advantage for agricultural products has been achieved. Food crops: Rising populations and incomes in major cities and towns have resulted in a steady increase in the demand for food in Southern Sudan. High marketing costs caused by very poor, often non-existent, infrastructure within Sudan has meant that much of the increased demand for food crops in the growing urban markets have been met by imports from countries nearby. For example, supplies of basic grains and flour, sugar, vegetables and fruit, as well as some fish, are sold in markets such as Juba and Yei are typically imported from Uganda and Kenya. Forest products: As mentioned, timber and forest products were exported in the past. Continued exports of logs to Uganda and other COMESA countries is a possibility, but domestic demand--for lumber such as teak and mahogany from northern Sudanese furniture makers and for construction purposes in the South--has outstripped foreign demand. Therefore, unless there is more domestic processing into high-value export products (such as wood flooring) large export volumes from Southern Sudan are unlikely. Conclusion: There is an urgent need to increase investment in agricultural production and forestry. This will require increased government services in research and extension, dissemination of technologies, and provision of inputs that can increase agricultural output, such as seeds, fertilizers, and irrigation. Feeder roads and other physical infrastructure are needed to connect farms to urban markets. These efforts can help move traditional agriculture above subsistence levels and establish production in new areas and in new products. The GoSS, MDTF-South, and several bilateral donors are providing funds for programs to improve the institutions that will need to provide the leadership for agricultural and rural development. For forestry, GoSS is developing policies and laws aimed at more sustainable use of the considerable forest resources in Southern Sudan. Source: Based on World Bank 2008a. CHAPTER 4 ­ RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR 85 TABLE 4-4: Costs Incurred at Port Sudan FIGURE 4-7: Simulated Impacts of Yield Costs at Port Sudan as share Increases and Elimination of Marketing Product of FOB price Taxes and Fees on Export Price/Border Sheep from Kordofan 14.6 Price Ratio Groundnut 8.9 Groundnuts ­ Shelled HPS (El Obeid) Sesame 8.4 Sesame ­ Rainfed (Sennar/Blue Nile) Sheep from Nyala 7.4 Sorghum Rainfed (Gedarif) Acala cotton 6.5 Gum arabic 5.9 Sorghum (Gezira) Source: World Bank 2008a. Groundnuts ­ Shelled HPS (Gezira) Cotton ­ Acala (Gezira) There are likely to be substantial posi- Cotton ­ Barakat (Gezira) tive impacts on competitiveness arising from 0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 increased productivity and removing market- Export/Border Price ing constraints. Figure 4-7 illustrates simulated Raise yields Eliminate taxes Current regime effects of policy interventions on the exportability Source: World Bank 2008a. of major agricultural commodities to help under- stand how important these constraints are for dif- ferent crops. For example the export to border price ratio increases to above unity for all crops (i.e., well as farms in irrigation schemes. At the same all these crops could be profitably exported) if a time credit systems discriminate against small- yield as high as 70 percent of research levels can be scale farmers in the traditional farming areas achieved on farms. It is sufficient to state here that who have no collateral because land policies do yield increases to 70 percent of research levels in not provide formal tenancy for the majority of 2006 have been achieved commercially in the past farmers. and are feasible under field conditions in Sudan. Land policy fails to provide most farmers with Another scenario is a removal of all taxes and fees long-term leases and hence a formal security of related to marketing. Again, competitiveness would tenure. Customary law provide farmers with improve for most of the cases, except for cotton long-term user rights if they continue to cul- and sorghum in Gezira. tivate the land, but in practice this has led to serious land degradation. Cross-cutting Issues: Agricultural Credit, Agricultural research in Sudan has for decades Land Use, and Research and Extension received much lower shares of public expendi- tures than in neighboring Arab countries. Government policies regarding agricultural credit, land use, and research tend to undermine Despite the relatively high contribution of the competitiveness of agricultural exports. the agriculture sector to total GDP in Sudan, access to credit in the sector is limited. By the Agricultural credit for improving productiv- turn of 1990, the Bank of Sudan declared a credit ity favors those in the semi-mechanized farm- ceiling policy allocating the highest share reaching ing areas (with extraordinarily large farms) as 40 percent of the total pledged credit to the three 86 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH sectors, namely agriculture, industry and services. hold land in the Nile river valley, is government However, the bank credit supply to the agricultural land and farmers/herders have usufruct rights to sector has been fluctuating during 1995­2006, and this land through traditional communal land pol- despite its recent increases during 2001­2005, its icy. The extent and type of land use has been del- relative weight had been declining compared to egated to community leaders who are responsible total credit supplied to all the sectors (Table 4-5). for the allocation of land use rights. The land area One of the reasons suggested by the Bank of Sudan involved is vast and, although the land use con- is the weak absorptive capacity of the agricul- ventions vary considerably between states and tural sector for credit. Therefore, the CBoS began within states, one aspect is consistent, namely reforming the credit policy in favor of the sec- the value of land cannot be used as collateral for tors with the greater absorptive capacities (also see loans because it remains the government's land. Chapter 5). Hence land has no value as security for additional An effective agricultural investment pro- investment in that land--this is a severe con- gram requires a land policy that transfers the straint on investment and growth in the agricul- wealth inherent in land from the state to the tural sector. people on the basis of efficient long-term leas- General lack of tradability of land in Sudan ing--be it through statutory or customary law. limits the functioning of market economy in the In accordance with the 1972 Land Act, all land agriculture sector. Apart from the limited agri- in Sudan, except for a relatively small area of free- cultural land area that is freehold, land cannot be TABLE 4-5: Volume and Percentage of Credit to Agriculture Compared to Other Sectors (1995­2006, million Sudanese Dinars and percent) Agriculture Total Percentage Years (SD millions) (SD millions) (percent) 1995 3.6 14.5 24.7 1996 9.0 40.0 26.5 1997 12.5 41.6 30.1 1998 15.8 47.3 33.3 1999 14.8 48.7 30.4 2000 17.8 79.2 22.5 Average 12.3 44.2 27.9 2001 19.6 111.3 17.6 2002 22.8 160.0 14.3 2003 23.9 216.0 11.0 2004 46.1 429.1 10.7 2005 57.1 695.4 8.2 2006 78.6 1041.5 7.6 Average 41.4 442.2 11.6 Source: Central Bank of Sudan. CHAPTER 4 ­ RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR 87 traded.78 This means that one major factor of pro- C. Policies, Investments and Actions80 duction is removed from the market which in a market economy is a major constraint to the flexi- In response to the agriculture sector's poor per- bility of production. In principle, if there is a mar- formance, the Government of National Unity ket for labor and capital there should be a market has launched the Green Mobilization Program for land--even if it is only lease hold land. If the (GMP) with a proposed budget of SDG10.1 bil- Government were to allow land to be held as a long lion for 2008 to 2011. The GMP has been defined term tradable lease hold this could result in a large more precisely in the Agricultural Revival Program capital injection into the rural economy which (2008­2012). This strategic initiative is aimed at could be leveraged and used as security for loans diversification of production and markets leading to make investment on farms. These investments to increased growth of the agricultural sector with could be an enormous stimulus for growth.79 the ultimate goal of poverty reduction. Agricultural research and extension in The main elements of the ARP initiatives are Sudan have become weaker. Achieving a more listed in Box 4-5. ARP's targets are reflected in focused research effort requires a closer connection eight key success-indicators, namely: (a) the cre- between the problems faced by farmers (particu- ation of an appropriate atmosphere for sustain- larly those in the rainfed traditional farming areas) able development of agricultural production; and the work done by researchers. Second making (b) capacity building of producers and institu- good on the potential shown by research trials will tions; (c) reforming agricultural land-tenure system; require a large expansion of agricultural extension (d) developing support services and moderniz- programs and access to relevant inputs. As indi- ing agricultural systems; (e) protecting and devel- cated earlier, the productivity of Sudan's agricul- oping natural resources; (f ) achieving agricultural ture will be the major determinant of the sector's industrialization; (g) implementing quality con- future export competitiveness, its ability to with- trol and safety measures; and (h) establishing inter- stand exchange rate appreciation, and the source national strategic partnerships. These are important of improved incomes and welfare for rural house- holds. Sudanese agricultural research (established 78 In contrast, the land policy in the Gezira Irrigation Scheme under the in 1904), has achieved very high standards in the new Gezira Act provides for the tradability of leases, which then allows past but its capacity for sustained research has been land to be used as collateral for investments. While the details of land tradability still need to be worked out, farmers are already able to obtain weakened by serious funding reductions. Research credit more readily for their farm operations than before the approval is woefully underfunded in Sudan as demonstrated of the new Gezira Act in the expectation that land will ultimately be available as collateral for loans. by the following comparison with Brazil, a simi- 79 As part of the CPA, land commissions have been established but have lar large tropical country that has become a world not come to conclusions on future land policy for Sudan. 80 The section draws on the CEM background paper: "Assessment of the leader in agricultural markets for several commodi- Agricultural Revitalization Strategy" by Shawki Barghouti and Ali Salih, ties (Table 4-6). with financial support from the African Development Bank. TABLE 4-6: Comparison of Agricultural R&D spending in Sudan and Brazil Sudan Brazil Ratio Sudan to Brazil Agricultural research spending as percent of agriculture GDP 0.17 1.73 0.10 Expenditure per scientist (PPP in 2000 $) 10 110 0.09 Source: Agriculture Science and Technology Indicators (www.asti.cgiar.org). Data are reported for the most recent year available. 88 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH qualitative targets, but they do not measure results could lead to higher growth. In the medium to precisely. While the ARP emphasizes strengthen- longer term there is a comprehensive strategy for ing the prospects for greater commercialization of the traditional farming sub-sector. There is a need the traditional farming sub-sector, it also envisages to have a package of time-bound actions with desig- substantial private and public investments to stim- nated funding and accountabilities for each of these ulate growth in the irrigation and semi-mechanized four initiatives with reporting functions to the exec- farming areas. The ARP is overseen by a Higher utive heads of the relevant ministries in the GoNU Council under the chairmanship of the Second and the GoSS. The ARP programs would contrib- Vice President of the Republic. While the overall ute to each of these initiatives and the agricultural objectives of the ARP and its emphasis on achiev- commodity development councils could regularly ing commercial enterprises in the traditional farm- review and provide advice on these initiatives. ing areas are laudable, it is not clear to what extent the line ministries in Northern Sudan responsible Short Term Actions for Northern Sudan for agriculture, forests, livestock and fisheries have administrative jurisdiction over policies that would Increase Efficiency of Irrigation Schemes. make the objectives achievable. For example land policy would need to change. The basis for achieving this objective is already In Southern Sudan the government has being implemented in the Gezira Scheme reform chosen to focus on stimulating growth in the program, and the ARP has indicated that this small-scale farming sector. Clearly the physical cir- could be a model for similar reforms elsewhere cumstances and technologies are different. There aimed at making major improvements in the effi- are, however, three important differences between ciency of irrigation systems. The pace of reform, the South and the North: (a) the isolation of farm- however, has stalled in the Gezira because the pri- ers in some parts of Southern Sudan, where infra- mary canals are not being rehabilitated and the structure is very poor, is even more severe than in water users associations are not being mobilized the North; (b) the stock of technologies for improv- and trained. These and other bottlenecks need to be ing productivity in the South is not nearly as well removed. There already exist fairly good infrastruc- developed as in the North; and (c) the number of ture and services, so the major elements to has- trained personnel in line ministries or in the pri- ten and deepen reforms of all irrigation schemes, vate sector are not as many in Southern Sudan as in and revamp research, extension and rural finance to Northern Sudan. The South therefore faces consid- accelerate technology uptake are present. Box 4-1 erable challenges although for technology develop- examined the issues facing the reform program in ment there is potential support from neighboring the Gezira Scheme. countries with similar agro-climatic conditions. Improve Productivity of Rain-fed Semi- Strategy for Competitiveness Mechanized Farming. and Poverty Reduction A recent study (financed by the Multi-Donor Trust In the short term, there are four initiatives that Fund ­ National)81 has shown that simple adapta- could be taken by the GoNU in the irrigated and tions to the current destructive farming methods semi-mechanized farming areas in collabora- tion with the private sector, as well as actions for the livestock and gum arabic sub-sectors, which 81 Barghouti and Salih 2009. CHAPTER 4 ­ RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR 89 BOX 4-5: Main Programs in the Agricultural Revitalization Program (ARP) The following is a summary of the programs proposed for the ARP · To define the macroeconomic and sector policies, and relevant infrastructures, laws and regulations to create an appropriate conducive atmosphere for implementation. · To build and strengthen the institutional capacity of producers raising their productive efficiency through use of modern technologies and development of managerial skills. · To reform the complicated and sensitive issue of land tenure (land registration and equity of distribution). · To develop and strengthen supporting sectors (research, technology transfer, agricultural education, supply of inputs, reforming market structures and services, collecting and dissemination of statistics and information). · To upgrade the agricultural systems (the irrigated, mechanized and traditional rainfed, livestock and fisheries, and agro- based industries, and protection against pests and diseases). · To rehabilitate and conserve natural resources (desertification, gum-Arabic belt, reserves and wild life). · To encourage community based organizations to take more positive and active role in implementation of the ARP . · To establish the agricultural commodity development councils (plants and animals) to integrate different commodity production and marketing activities (research, training, production, marketing, manufacturing, consumption and export). · To realize self-sufficiency in basic staple food commodities, especially wheat being the major challenge for the ARP . can pay handsome dividends in terms of incomes areas suitable for livestock production. This and the sustainability of sorghum and sesame pro- technology is well known to be successful in duction, along with integration of livestock in the similar physical environments in countries such farming systems in appropriate geographical areas. as Australia and South Africa and would result Specifically, the study proposed a two-phase strat- in much higher yields. egy for the rehabilitation of the semi-mechanized farming areas: Cultivation in the semi-mechanized farming areas should be planned in areas that have rea- The first is to focus on an initial revival of sonable agricultural potential including rain- the semi-mechanized farming areas through fall above 700 mm and manageable soils. The technical packages aimed at better soil mois- focus should be on getting the existing large semi- ture management. This strategy (referred to as mechanized farms on a more productive and sus- the "tillage" approach) would be based on an tainable footing but there should also be attention improved timeliness of cultural practices such given to providing assistance to the small scale pro- as plowing, fallowing, crop rotations and seed- ducers who have large enough holdings to make ing. This strategy would result in higher yields the improved technology profitable. The areas and could be implemented using currently involved in these improvements could be substan- available machinery on farms. tial (between 10 and 15 million feddan) with con- The second phase of the strategy (referred to siderable improvements in growth over the short as the "zero-tillage" approach) would be aimed and longer term. Growth in both the irrigated and at achieving a more sustainable impact with semi-mechanized farming areas will have a major a more modern technology based on zero or impact on employment and poverty reduction in minimal cultivation, fertilizers, weedicides in rural areas. These are some of the issues but changes some cases, and more advanced rotations that in the semi-mechanized farming system could start would include fodder crops for livestock in with a policy decision by GoNU that substantial 90 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH changes are urgently needed. Once the policy deci- Improve the quality of livestock handling facil- sion has been made a high level group could be ities at veterinary inspection and vaccination appointed by the Ministry of Agriculture and For- points to reduce weight loss for animals await- estry, in collaboration with other appropriate arms ing inspection. of government, with the authority to design a pro- Increase the areas in Sudan which can be cess for achieving change with a wide range of declared disease free and consider financing stakeholders. an expanded program for achieving this with a small targeted levy on livestock marketing at Improve Efficiency of Production and export locations--in return for a more stream- Livestock Marketing. lined export inspection system in Port Sudan and Sawakin. In order to improve livestock marketing the gov- ernment could consider the following measures: Increase gum arabic production and promote its trade. Regulate stocking rates in Sudan's most vulnera- ble grazing environments such as North Darfur If the recent decision by the government in May and North Kordofan with the aim of regenerat- 2009 to withdraw the concession for raw exports ing the pasture and other forage vegetation. of gum arabic from the Gum Arabic Company is Consider introducing a land policy that trans- implemented, then there are prospects for Sudan fers the responsibility for the sustained manage- to regain its historical role in the international ment of Sudan's rangelands from communities market for gum arabic. It should also provide a to individuals or small groups of individuals. boost for gum arabic producers who should see some Improve the quality of stock routes and a few improvement in prices and hence production incen- strategic highways and rail tracks to facilitate tives. To improve incentives for producers it is sug- efficient transport of livestock over long dis- gested that there should be programs to provide tances. producers with support services to cultivate and mar- Rehabilitate unloading and loading infrastruc- ket gum arabic at a high standard, and to improve the ture for road transport associated with the public export inspection of all forms of gum arabic. movement of livestock. In Southern Sudan a similar short-term Regulate (with enforcement) the handling and strategy will be more difficult to achieve because, transport of livestock to improve animal wel- as already indicated, isolation, available technol- fare, reduce deaths and weight loss, and hence ogy and human capital are major constraints to improve marketing efficiency. the short term development of agriculture. On Improve livestock traders' access to credit facil- the other hand, with judicious planning and some ities to all commercial banks in Sudan by pre- financial resources some of these constraints can be paring (with government guarantees) model overcome. One issue for the GoSS is that the nat- credit contracts for various types of livestock ural resources and the agricultural sector are far trading. more varied in Northern Sudan. There is there- Introduce auctions in livestock markets in fore substantial potential for the production of Omdurman along with making commercial many temperate and tropical products for markets banking facilities available in the market--an in Northern Sudan. These opportunities need to action for the public authorities in Khartoum be investigated and it may be useful to have a full state. scale review of not only the constraints for increas- CHAPTER 4 ­ RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR 91 ing growth of food crops and fisheries but also to ing the traditional rainfed farming areas to a mixed explore the long term prospects for crops such as farming and rangeland system. Experiences gained coffee, fruit, and lumber. This discussion now turns from similar efforts in Ghana, Brazil, and India con- to the medium to longer term. firm that successful commercialization of agriculture requires active participation of small farmers. Medium- to Long-Term Actions Structural change in the traditional farm- ing system would improve its efficiency and Structural Transformation in the Traditional enhance the likelihood of diversification of produc- Farming Areas tion, improved productivity, and poverty reduction. The main constraint to the short and longer-term In the medium to longer term it will be vital to perspectives on the development of the traditional focus on a third priority, namely to achieve the rainfed farming sector is current land policy. structural transformation of the traditional farm- ing sub-sector to achieve growth and poverty Land Policy in Northern Sudan reduction. Activities should focus on improved live- stock management and marketing, better incentives Current customary land policy leaves the allo- for gum arabic production, increased resilience to cation of land use rights to customary law but crop failure through improved crop varieties, sustain- this fails to provide farmers with legal security able soil and water management, water harvesting, for land use. Customary law does, however, pro- and other low risk technologies. Major bottlenecks in vide farmers with long-term user rights if they con- the way of achieving this objective are current land tinue to cultivate the land but, unfortunately, in policy, more appropriate technology, support services most regions in Sudan pressure to justify usufruct to farmers, and infrastructure such as more efficient rights through continued cultivation has resulted in marketing facilities and roads. All these issues will serious land degradation because farmers of herders need to be addressed to improve the competitiveness have no vested interest in sustaining the value of the and incomes of the traditional farming sub-sector. land they use. Until there is a land policy that trans- Establishing economically viable units which fers the wealth inherent in land from the state (the would provide an adequate annual income to sus- government) to the people on the basis of long-term tain a farm household in the traditional rain-fed tradable leases, be it through statutory or custom- farming areas in Northern and Southern Sudan ary law, incentives to invest in agricultural and pas- compared with the predominantly subsistence toral land will remain negligible. The consequences farms would allow the establishment of sustainable of low investment in arable land and rangelands are mixed crop and livestock producing farm units. low productivity and hence high costs for domestic This structural reform leading to sustained mixed, consumers and low competitiveness for agricultural commercial farming in the traditional farming sys- exports and inevitably slow growth of the economy. tem as proposed in the ARP and the GoSS policy Under current customary land policy there will only be possible if land policy reform makes it is no legal way for farmers to increase or reduce feasible for farmers/herders to have long-term trad- the scale of their operations by buying or sell- able leases of specific areas which they can call their ing their rights to land because there are no trad- "farm." Farmers should also be allowed to sell all or able land rights and hence no formal land market. part of their farm if they wish to do so or buy other The structural transformation of these production farms to increase the scale of their enterprises. Such systems into economically viable and sustainable sales would lead to more structural change convert- farming enterprises will not take place until there 92 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH is a land policy that provides for tradable long term Natural Resources in Southern Sudan.82 This leases in a competitive market. Until land policy is focus is appropriate since land, more than any changed it will remain a bottleneck to the adoption other commodity, is of paramount significance to of improved technology and structural transforma- the largely rural communities of Southern Sudan. tion and growth in the agricultural sector. With the The ICSS gives the government the power to reg- new Gezira Act land policy provided irrigation farm- ulate land tenure, rights and use of land, to the ers tradable and transferable long term leases which appropriate level of government but recognizes that has stimulated the entry of commercial banking pro- customary land rights shall be recognized and all viding farmers with credit based on the collateral land traditionally and historically held or used by value of their long term leases. local communities shall be protected by law; cus- tomary seasonal rights of access to land shall be Constraints and Strategies protected; the development of subterranean nat- ural resources is permitted only after consultation The current land policy established under the with the communities enjoying rights in that land Land Act of 1972 stipulates that all land in Sudan and only after assuring them a share in the resul- (with some largely historical freehold land in the tant benefits and persons enjoying rights in land Nile Basin) is government land. Decisions on the are assured equitable compensation in the event of use of this land have generally been delegated to acquisition of land in the public interest. community leaders who provide farmers with usu- The Land Commission has accordingly been fruct rights. There are also large areas of rangelands constituted and is functional and the Land Act to which communities have uncontrolled access for has been approved in 2009. However, effective grazing. It is acknowledged that crafting changes land policies have yet to be framed and applied. in land policies will be difficult because the history From the perspective of investment and growth of intense conflict over land cannot be overlooked. there are three key issues in land policy: (i) own- Nevertheless, it is extremely urgent that the Land ership and tenure; (ii) land records and registra- Commissions (established under the CPA) explore tion; and (iii) effective property rights. Most of possibilities such as long term tradable and transfer- the land in Southern Sudan is owned by commu- able government leases for agricultural and pasto- nities. Members of the community enjoy tradi- ral areas. Unless some such option can be found it tional rights in land and can even transfer these is unlikely that structural transformation and com- rights without any problems, although in some mercialization in the traditional farming system will communities transfer rights do not exist. How- occur. If this does not occur, the government's revi- ever, customary law governs such transactions and talization policy for the agricultural sector will be no easily verifiable record is maintained. Private unsuccessful and farmers in the traditional rainfed investors therefore find it difficult to verify own- farming areas will remain locked into chronic pov- ership. For the same reason, land cannot be mort- erty without the option of selling their small subsis- gaged, which inhibits the capacity of the private tence farms or purchasing additional land to increase investors to leverage their assets. Some land in cit- their farm size. ies has been plotted by the government and leased to investors. These urban areas are relatively more Land Policy in Southern Sudan secure in terms of land title and land records and The Interim Constitution of Southern Sudan (ICSS) pays significant attention to Land and 82 Government of Southern Sudan 2005, Chapter II. CHAPTER 4 ­ RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR 93 registration of transfers are more easily established. incentive payments, and monopolies. These inter- However the supply of such plotted land is limited ventions were, to a large extent, removed in 1992. against the rapid increase in the urban population Nevertheless, some exports such as gum arabic have estimated at around 25 percent of the total popula- been consistently taxed (explicitly and implicitly) tion in 2008. and the "behind the border" costs in livestock mar- Attempts by the government to get additional keting have been substantial resulting in consider- land from communities for plotting and sale to able problems for exporters. Incentives for imports investors are generally not popular with communi- (wheat and sugar) have varied from negative to ties who perceive a threat of a potential change in strongly positive, but higher international food the cultural ethos with the settlement of strangers prices since 2004 have undoubtedly reduced the and also because of the perceived lack of any direct protection of imports to near zero. benefits for the community.83 In Yei the efforts of Despite the reduction in explicit and implicit the County to raise additional revenue by plotting taxation of exports, standard measures of com- and selling land is not supported by the local com- parative advantage for recent years indicate a munities though in Unity state the government has substantial weakening of Sudan's export compet- succeeded in plotting and selling land along with itiveness for agricultural exports. At the current affordable housing. low yields achieved only irrigated Barakat cotton, Tensions within and between communities irrigated groundnuts and rainfed sorghum are mar- contribute to low public investment in land. The ginally competitive in international markets. dispute between the government of Central Equa- More generally the reasons for this lack of toria and the GoSS with respect to ownership of competitiveness are appreciation of the exchange the assets of the Coordinating Council of South- rate of about 20 percent over two years to Febru- ern Sudan is still not resolved and the right of the ary 2007, high internal costs of transport and han- GoSS to appropriate these real estate assets is con- dling products moving to points of export, the tested by the state of Central Equatoria. In Juba, imposition of high charges and taxes in the market- despite the huge shortfall in housing, there has not ing chain for which no services are provided, and been significant investment in the formal real estate chronic low productivity in agricultural and pas- sector because land ownership is unclear; the pro- toral production have resulted in increased bor- cess of accessing community land is uncertain and der prices for agricultural exports at Port Sudan. ownership or lease hold rights remain uncertified In addition, inadequate attention to the quality of and based on mutual trust and informal agreement. agricultural exports such as cotton and sesame has With the approval of the Land Act in 2009 and reduced prices paid by the international market. the operationalization of the Land Commission it The core constraint to improved compet- is expected that a comprehensive land policy will itiveness is low and declining productivity soon be in place. although the causes for cost increases also need to be addressed. As a result traders of agricultural Competitiveness of Agricultural Exports commodities now face serious difficulties find- ing sustained export markets for many of Sudan's In the past, the government has intervened in core export commodities such as sesame, ground- agricultural markets through a variety of instru- nuts, cotton and livestock. Both the availability of ments that altered incentives to producers rel- ative to border prices. These included distorted exchange rates, export taxation, tariff policies, 83 Okuk 2008. 94 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH improved technology, as well as access to markets to improve extension as important public goods while provide incentives to use the technology, are neces- at the same time exploring contributions from the sary to make progress on any of the priority strate- private sector according to the distribution of bene- gies outlined above. fits from research and extension. Improved Technology and Extension Rural Finance Sudan's agricultural sector is much less pro- Agricultural credit should be used as a tool ductive than either its potential as defined by to assist farmers interested in adopting modern research and field trials in Sudan, or the produc- technology and associated cropping systems based tivity of agriculture in neighboring countries on high value crops (again, there are good lessons with similar physical conditions of production. from India and Egypt). Large scale financing for big The weak support and low rewards for agri- projects requires careful division of responsibilities cultural research have forced agricultural research between private investment and the financial con- professionals to work for private industry and tribution of public funds. The government should international development agencies but seldom on clarify priority areas where public funds could be issues of direct interest to producers such as produc- allocated for modernization of production and can tion technology, which is the public good that an effi- provide stimulus for private lending to farmers who cient national research organization should deliver. are willing to modernize their operations. These Agricultural research in Sudan to increase produc- issues should be addressed in all the schemes that tivity has for decades received much lower shares of have been proposed for modernization with a time- public expenditures than in neighboring Arab coun- table for spending by the government and for rural tries--apparently on the basis that the private sector lending to farmers by local banks. should finance agricultural research. A specific com- Access to credit is an important issue for parison with research expenditures for Brazil was also small-scale farmers who could become partners provided in an earlier section of this chapter. with large schemes as out-growers in the produc- The extension service in Sudan is seriously tion of export commodities. These farmers require underdeveloped except in irrigation schemes. The advances for seeds, labor, and agronomic inputs. role of the private sector in seed production, mod- The relationship between corporate investors and ern irrigation technology and the provision of fertil- out growers should be clarified as part of the gov- izers and farm inputs can compensate for the limited ernment drive to invite FDI in the sector. public financing resources currently available. Gov- Agricultural credit for improving productiv- ernment should enhance its role in ensuring safety ity currently favors those in the semi-mechanized and environmental sustainability of such partnership. farming areas (where farmers have large farms and Close attention is needed to ensure that modern tech- medium-term leases) as well as farms in govern- nology is tested, adapted and carefully monitored in ment irrigation schemes where (except for the soon Sudan and then made available to producers. to be reformed Gezira Scheme) farm inputs have The major constraint to an intensification of been subsidized through special credit arrange- crop and livestock research by the public sector ments. This suggests a strategy for credit to enter- is the allocation of increased budget funds and the prises in the traditional farming areas to redress fostering of public-private research partnerships. It the apparent imbalance. This would also entail a is time to revitalize agricultural research, bring its change to land policy, as the current system does work closer to the challenges faced by farmers, and not recognize even formal government tenancy. CHAPTER 4 ­ RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR 95 The main constraint to a successful resolu- The dependence of Sudan on an undiversi- tion of a sustainable credit system is a land pol- fied market for its agricultural exports is a con- icy that provides farmers and pastoralists with the straint because it limits marketing opportunities equivalent of long-term tradable leases which can and raises the risks if trading conditions in the Gulf be used as collateral to stimulate commercialization region were to deteriorate. A major effort is there- of the traditional rainfed farming system. A strategy fore needed to increase trade promotion of Sudan's towards a changed land policy and improved credit products in other regions. A related task is to institutions are likely to result in a greater partici- improve the quality of export inspections. pation of the private sector in the financing of the agricultural sector. Government Partnerships with the Private Sector Lack of Diversification of Markets for Agricultural Exports Investment in irrigation Agricultural exports from Northern Sudan are To achieve this partnership, government should diverse, but Sudan's export markets are not assist in modernizing the irrigation systems and diversified. With the exception of gum arabic, technology at the scheme and farm level. Much which is sold in Europe, Japan, India and other of the technology of modern irrigation systems is in South Asian countries, as well as the U.S., most of the domain of the private sector. Egypt and India, Sudan's three other major agricultural exports are for example, have successful lessons in moderniz- sold to Egypt (cotton), Saudi Arabia and to a small ing their irrigation system in partnership with the extent Uganda and Kenya (livestock and meat), or private sector (mostly in the form of WUAs). A predominantly Gulf countries plus a range of other key to their success has been an efficient division of countries including China, Mexico, Turkey and a responsibilities between of the private and the pub- range of European countries (sesame). lic sector. The main reason for this regional focus on trade is that Northern Sudanese traders established, Marketing, supply chains and producers' and then maintained, traditional relationships organizations. within the Gulf region and Egypt. Another impor- tant factor cementing the regional relationships has The government would benefit from working been the common language and banking systems closely with the private sector to assist farm- that facilitate negotiation, transactions and the res- ers to improve their access to both domestic and olution of disputes. In recent years U.S. trade sanc- foreign markets. Demand for agricultural com- tions have reinforced a preference for regional trade modities is increasing in the domestic market, that is independent of American banks or their which could allow for reliable outlets when exter- affiliates. Another change over the last five years has nal demand declines. Foreign investors should be been an increased trade with China in agricultural encouraged to allocate investment to support value products such as sorghum and sesame. added activities to ensure added benefits to the In Southern Sudan, partly because of decades local economy. This issue is significant when deal- of conflict and lack of infrastructure, trade has ing with cotton to be converted into textiles, oil been localized--focused predominantly on seeds to be converted into oil processing, or ani- Uganda and Kenya--occurring when security mal feed to be used for more efficient livestock pro- conditions allow. duction. The agricultural sector should increase its 96 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH attention to production quality and standards so as years) with land use covenants but, as mentioned to meet universally accepted regulations. An impor- already, they have engaged in continuous mono tant role for the government is to support is the cropping with detrimental effects on soil struc- building of marketing infrastructure to assist small- ture and productivity because these covenants have scale farmers to transport commodities to mar- almost never been enforced. In the traditional rain- kets within Sudan and for export.84 Also needed are fed farming system there is weak or ineffective cooperative or government/private partnerships to enforcement of regulations on stocking rates, tree establish cold storage for export of perishable agri- removal for charcoal production and cultivation cultural products for which there is a potential mar- unless part of a long-term rotation. The chronic ket in the Gulf region. land degradation resulting from these practices has been another cause for low and declining pro- Sustainable Natural Resource Management ductivity and often desertification. It is extremely urgent that the government stops the destruc- As has been indicated earlier, Sudan is well tive use of Sudan's natural resources as a cheap, but endowed in natural resources especially land and unsustainable source of growth. As mentioned ear- water. They have been the basis for all agricultural lier, a policy decision by the GoNU that urgent development and growth, but these resources are measures are needed to reverse the degradation of limited and under severe threat. For example, water the semi-mechanized farming areas could be fol- availability under rainfed conditions is extremely lowed by the establishment of a Commission or variable, causing high risk of crop failure. Early similar body to formulate a process for collabora- studies in Sudan of the impact of rainfall variabil- tive action by all stakeholders. ity indicate that crop failure is about 30 percent (a The current absence of regulations is a major crop failure once every three years), based on his- constraint to the enforcement of the Environment torical rainfall data throughout Sudan over more Protection Act of 2001. As emphasized already than five decades.85 above, it is crucial for the government to establish In the semi-mechanized farming areas large regulations and strategies to manage sustainable tracts of forest and rangeland were destroyed by management of Sudan's natural resources. the encroachment and expansion of this type of farming. Most soil resources have been degraded through indiscriminate, short-sighted farming prac- tices resulting in the exhaustion of soil nutrients or compaction which severely limits the ability of 84 A National Transport Master Plan is currently being prepared with these naturally fertile soils to absorb moisture and financing from the MDTF-National. The results of this study should respond to rainfall.86 be available soon and should assist to establish transport investment priorities. Farmers in the semi-mechanized farming areas 85 World Bank 1987. have had medium term leases (typically 10 to 20 86 Ministry of Agriculture and Farming 2009, page ii. CHAPTER 5 MAKING SERVICES COMPETITIVE: THE CATALYST OF NON-OIL GROWTH87 A. Introduction While services facilitate growth in other real sec- tors, the growth patterns of the latter also influence In any economy, services provide critical inputs to the development of the former. The recent growth productive activities such as agriculture and manufac- of oil production and export has led to improve- turing by facilitating allocation of necessary resources ments in infrastructure in certain geographical areas to such activities. Earlier chapters have highlighted the including oil sector related facilities, pipelines, and significance of services in promoting non-oil growth, port facilities at specialized terminals that allow the particularly in the agriculture sector. This chapter increasing crude oil production to be exported. The will assess the performance of the financial sector and oil-led economic growth has increased the volume of infrastructure services as catalysts for broad-based transportation between Khartoum, where economic shared growth beyond the oil sector. The Diagnos- activity is concentrated, and Port Sudan, the gateway tic Trade Integration Study for Sudan (World Bank of Sudan's exports and imports. A new road segment 2008a) presented a convincing case of weak domestic was completed in 2007, which shortened the travel financial sector and infrastructure services in Sudan distance between the two cities considerably.89 being the behind-the-border constraints for the coun- Finance, transport, and other infrastructure ser- try to promote trade. Quality of basic infrastructure vices considered in this chapter have a catalytic role is essential in facilitating trade, promoting domestic in such agglomeration economies. A challenge is investment and attracting foreign investors.88 how benefits from agglomeration can spill over to This chapter assesses both access and efficiency other areas and sectors at the same time. Without conditions of financial and infrastructure services in such spillovers, agglomeration forces could lock in Sudan. Sudan faces significant challenges on both wealth in certain areas or sectors and leave others fronts. As a post-conflict country, Sudan is in dire trapped in a low-end equilibrium. Sufficient con- need to improve access to basic services in many nectivity in services, in particular for lagging areas, areas of the country. Ensuring access to a minimal and efficiency of systems as a whole are crucial for level of infrastructure services and connectivity is essential to support basic livelihoods of the popula- 87 This chapter has been prepared by Yutaka Yoshino, with input from tion in the post-conflict environment. Accessibility Alwaleed Alatabani and Maisoun Badawi. to services is relatively fair in the North, particularly 88 This chapter focuses on financial and infrastructure services that provide inputs to productive sectors, given their relevance to a broad in the economic centers of Khartoum and Gezira range of economic activities and the supply side constraints they cur- areas. Areas outside of these economic centers, par- rently pose. There are also stand-alone services that can contribute directly to economic growth and have significant potential for export ticularly the South and Darfur, as well as rural areas (e.g., tourism). Development of such potentials should be pursued in in general, lag substantially and this is where there the context of longer-term enhancement to the competitiveness and efficiency of the sector. is an urgent need for improvements. On the other 89 There are plans to upgrade the rail service between the two cities by in- hand, inefficiency of services is relevant nationwide. stalling a standard gauge to improve operational efficiency in the rail service. 98 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH such spillover effects to take place and provide the but compliance with the new prudential regulations basis for broad-based growth in Sudan. requires stronger enforcement. Notwithstanding recent progress, the size B. Finance and depth of Sudan's financial sector remain lower than most comparator developing coun- Sudan has a dual banking system with an Islamic tries. As shown in Figure 5-1, M2 to GDP stood at banking system in the North and a conventional around 18 percent in 2008, well below the regional banking system in the South. Following the sign- average of 38 percent. Likewise, intermediation is ing of the CPA, it was agreed that there would be weak; only 11 percent of domestic credit as a per- a dual banking system in Sudan during the interim centage of GDP is directed at the private sector, period (2005­2011), with an Islamic banking sys- compared to 40 percent for low-income countries. tem in Northern Sudan and a conventional bank- ing system in Southern Sudan. Access to Service The financial sector in Sudan is largely dom- inated by the banking sector, which at the begin- Access to finance remains one of the major con- ning of 2009 comprised 31 banks registered straints faced by businesses throughout Sudan. nationally and three licensed by the Bank of South- Sudan ranks 131st out of the 181 countries in the ern Sudan (BoSS). While both deposits and bank Doing Business 2009 report in the ease of obtaining investments have been growing rapidly, the sector is credit. Data from the World Bank Productivity and recovering from the collapse in savings and financ- Investment Climate Survey (PICS) in 2008 indicates ing during the 1990s but continues to experience that 47 percent of firms surveyed considered access problems with performance. Nonbank financial to finance a major obstacle to doing business while institutions and markets are relatively small, but 52 percent considered the cost of finance as a major have the potential to develop and contribute to the obstacle for doing business (Figure 5-2). Access to mobilization of savings for longer term financing, credit markets is also limited--only 15 percent of the allocation of investments, and economic oppor- Sudanese firms have loans from formal financial tunities available to the poorer sections of society. institutions. This represents one of the lowest rates of Since the 2005 Financial Sector Assessment financial intermediation in the developing world. Program, the Central Bank has made considerable Banking infrastructure is also relatively weak progress in recent years on several fronts. In 2005, and may curtail access to financial services. The the IMF and World Bank conducted a Financial geographic distribution of bank branches (0.21 per Sector Assessment Program (FSAP). Following the 1000 sq km) is lower than neighbors, in spite of outcome of the FSAP, the Central Bank embarked Sudan being the largest country in Africa. This may on several reform measures designed to improve the however partly be explained by the fact that a signif- stability and performance of the banking sector. Sig- icant proportion of Sudan's land mass is not inhab- nificant progress has been made in banking regula- ited. Nevertheless, access to financial services in tion and supervision in recent years. These measures Sudan is on the most part limited to the larger cities. included enhanced supervision, consolidation in the banking sector, mergers/acquisitions in the banking Southern Sudan sector and opening up the sector for foreign banks. Regulatory oversight improvements include increas- Southern Sudan, where only conventional bank- ing the reserve requirement, the capital adequacy ing is in operation, remains heavily under- requirements, and the minimum capital requirement banked. In February 2008, Islamic banks left the CHAPTER 5 ­ MAKING SERVICES COMPETITIVE: THE CATALYST OF NON-OIL GROWTH 99 FIGURE 5-1: Size and Depth of Financial Sector in Sudan Size of the Financial Sector (M2 % of GDP, 2008) Domestic Credit to Private Sector (% GDP, 2008) Jordan Jordan Morocco South Africa Egypt Morocco Djibouti Egypt South Africa S-SAfrica Algeria LICs LICs Nigeria S-SAfrica IDA only IDA only Djibouti Kenya Kenya Nigeria Uganda Lybia Algeria Uganda Angola Sudan Sudan Angola Lybia Chad Chad 0 50 100 150 0 50 100 150 Source: World Bank World Development Indicators. FIGURE 5-2: Firms' Perception of the Access to Finance Constraint (percent of firms) Firms' Perception of the Access to Finance Constraint (% of firms) ­ International Comparisons 90 80 70 60 50 40 30 20 10 0 Kenya Tanzania Rwanda Swaziland Zambia Burkina Faso Benin Cameroon Ghana Guinea Niger Angola Mozambique Sub-Saharan Africa Senegal Uganda Sudan Ethiopia Mauritania Malawi Guinea-Bissau Source: Sudan PICS 2008, and Enterprise Surveys (others). South since BoSS enforced conventional bank- limited, margins are correspondingly high and ser- ing in Southern Sudan as the only form of bank- vices are mainly concentrated in the urban hubs. ing. The removal of Islamic banks has contributed to the huge gap between supply and demand for 90 There are currently five commercial banks operating in Southern Sudan including one foreign subsidiary from Kenya. Since end-2008, several finance in Southern Sudan.90 Despite the increased banks from neighboring countries, Ethiopia, Kenya, and Tanzania, have number of financial institutions, competition is still been issued licenses to operate in Southern Sudan. 100 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH Access to finance remains a major constraint TABLE 5-1: Ratio of Agricultural Credit to for businesses and individuals in Southern GDP in 2005 Sudan. Most lending is short-term (3­6 months Country Credit as percent of GDP maturity) with high interest rates (15­18 percent). Oman 0.3 The commercial banks' lending portfolio is small, Sudan 0.3 covering only a small percentage of the estimated Jordan 2.5 market.91 Bank loans mostly finance working capi- Tunisia 2.5 tal for large firms in the commerce, trade, and ser- vice sectors (60 percent), which have significant Pakistan 4.3 short term cash flows and turnover that banks use Egypt 4.7 to determine creditworthiness, and are the sec- Morocco 4.7 tors of government procurement and guarantees. Syria 8.0 There is a significant amount of individual loans India 8.4 (30 percent) that covers both the finance of vehi- Bangladesh 14.1 cles as well as home improvement financing. Only Thailand 15.0 10 percent of loans cover the SME sector and all Philippines 17.0 lending is concentrated in the main urban hub Republic of Korea 24.0 (Juba). Source: FAO 2006. Rural Finance sector as a percentage of the total banking credit Despite the relatively high contribution of the has decreased from 22.4 percent to 7.4 percent agriculture sector to GDP in Sudan, access to (Table 5-2).92 credit in the sector is limited. The ratio of for- mal agricultural credit to GDP in Sudan is very low 91 Seven percent of the approx. 6000 registered firms and less than 1 compared with other countries (Table 5-1). Financ- percent of GoSS's revenue. ing for the agricultural sector increased from SDG 92 The main sources of agricultural credit in Sudan include the Ministry of Finance and National Economy, the Agricultural Bank of Sudan (ABS) 16.5 billion in 1999 to SDG 78.6 billion in 2006, and a consortium of commercial banks. Other sources include the Sudan however, the share of financing to the agricultural Cotton Company (SCC), and the Sudan Gezira Board. TABLE 5-2: Flow of Banking Finance by Sector (million SDG) Sector 1999 2000 2001 2002 2003 2004 2005 2006 Agriculture 16,541 18,284 22,745 32,730 45,021 46,092 57,111 78,609 percent of Total 22.4 18.0 15.5 15.8 16.0 10.7 8.2 7.4 Industry 14,330 17,986 22,986 28,001 29,914 47,727 83,049 84,852 Export 14,453 24,591 20,550 34,308 34,033 45,734 33,949 35,130 Social Development 5,563 7,266 9,655 9,143 12,293 19,643 24,739 33,431 Domestic Trade 7,009 11,656 31,386 40,562 65,100 104,087 149,361 182,108 Others 15,825 21,541 39,060 62,038 95,565 165,788 347,159 627,399 Total 73,720 101,325 146,382 206,781 281,926 429,070 695,368 1,041,529 Source: Central Bank of Sudan. CHAPTER 5 ­ MAKING SERVICES COMPETITIVE: THE CATALYST OF NON-OIL GROWTH 101 The overall shortage of credit for agriculture scale financial services in Sudan far outweighs has limited the amount of finance available to the supply in both the North and the South. small-scale producers throughout the country. A recent market research survey on microfinance The sub-sector obtained roughly 3 percent of all demand among micro entrepreneurs in Khar- formal agricultural credit in 2001 and received few toum State revealed that the number of potential other support services such as research and exten- clients in urban areas of Khartoum State is esti- sion.93 This has undoubtedly contributed to the mated at 1.5 million (21 percent of total state pop- lower yields in rain-fed rural areas in Sudan. ulation) and the estimated potential market size Traditional farmers are risky clients for for micro-lending services amounts to $1.5 bil- banks due to high transactions costs, high infor- lion in Khartoum State alone.94 The market pene- mation costs, lack of collateral, low yields, tration of formal microfinance lenders is still low at remote locations, and inadequate infrastruc- only 8 percent of the total demand.95 In the South, ture. Providing financial services to rural house- only one bank provides microfinance credit, while holds and agribusiness in poor and marginal rural there are several specialized MFIs that have been areas remains a challenge throughout the coun- operating since 2000, in addition to a number of try. The lack of transport and telecommunication small cooperatives/ rotating savings and credit asso- infrastructure lowers the returns to rural farmers ciations (ROSCA's). The MFIs in Southern Sudan and restricts their ability to service and repay loans. estimate that they cover only 5 percent of the avail- Infrastructure constraints increase the costs of pro- able clients in the greater Juba region, and less viding financial services and banks compensate by than 1 percent of the potential market in Southern imposing higher service rates. Sudan. Despite the long history of agriculture and The development of the microfinance sec- rural finance initiatives in Sudan, reforms have tor in Sudan has been constrained by a number not resulted in sustainable access to rural finance of factors. The government is addressing several because of a lack of a comprehensive approach. areas to promote the microfinance sector, including Increasing the volume of finance allocated to the the policy and regulatory framework, encouraging agricultural sector from national and foreign sources bank entrants and the creation of microfinance pro- for the implementation of the rural sector is one viders at the individual state level (Box 5-1). How- of the priorities of the Agriculture Revival Strat- ever, the development of the microfinance sector egy. However a rural finance strategy for Sudan will is constrained both in the North and South by the require more than additional financial resources lack of scale in the market, the absence of a clear and should be based on a comprehensive approach positive repayment culture, the lack of loan capi- including the identification of the financial needs of tal and other resources for reaching sustainability. rural communities, linkages between mainstream and Other key constraints include the lack of experi- specialized financial institutions and training of rural enced professionals, poor infrastructure in rural consumers of financial services to increase awareness areas that inhibit outreach and the paucity of sta- and consumer protection. Increasingly, microfinance tistical information. In the south, the high cost of is considered as a panacea for rural finance. operation is an added challenge for microfinance Microfinance 93 The Saving and Social Development Bank (SSDB) has a leading role in mobilizing savings and extending loans to small produces. Increasingly, microfinance is considered as a 94 PlaNet Finance Group 2007. panacea for rural finance but demand for small- 95 Sudan Microfinance Development Facility (SMDF) Business Plan. 102 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH BOX 5-1: The National Vision for Microfinance in Sudan and the Role of the MDTFs The CBoS has undertaken an initiative to formulate a National Vision for developing and expanding the microfinance sector. The strategy is to maximize the learning exposure and to consult with local and international experts and solicit best practices from international and regional experiences in the pursuit of its microfinance initiative. The major components of the Action Plan for to develop the microfinance industry include: · Building on the existing system and/or developing a reformed financial system for the poor with solid infrastructure and efficient financial intermediaries that having the required outreach to meet the financial needs of the poor; · Creating the legislative and regulatory frameworks that enhances the performance of the microfinance industry; · Adopting mechanisms that support transparency among microfinance lending institutions; · Applying "best practices" and setting distinct performance standards for the sector; · Creating an efficient information network that includes access to reliable, up-to-date, market information on the financial needs of the poor and MSEs, of gender and geographical imbalances; · Increasing coordination among various stakeholders including Microfinance Institutions (MFI), government, NGO, practitioners, donors, etc. The strategy to promote microfinance is through both banks and non-bank financial institutions and will facilitate the use of both government and non-government financial and technical resources. In 2007, CBoS mandated commercial banks to lend 12 percent of their lending portfolio to microfinance. The Multi-Donor Trust Funds have supported this vision in both the North and South. Funding was approved in May 2007 for a microfinance project in the amount of $20 million. The facility is designed to support the establishment of new and existing microfinance institutions and providers through dissemination of best practices, technical assistance, training, financing, and managing donor resources. The development objective is to increase the availability of affordable financial services to 200,000 households by supporting the emergence of commercially sustainable microfinance service providers. The project will serve locations throughout Sudan including the Three Areas, marginalized parts of western, eastern and northern Sudan, as well as focusing on the urban working poor. The project is aligned with a microfinance component of the South Sudan Private Sector Development Project funded out of the MDTF-S, The microfinance component will establish the South Sudan Microfinance Development Facility. Both projects have components that will also build the regulatory capacity of the CBoS and the BoSS to regulate both deposit taking and non-deposit taking MFI's. institutions. The experience of other countries that markets facilitate borrowing in order to manage developed large microfinance sectors such as Ban- bank's assets and liabilities and ensure that there gladesh suggests that the expansion of a few well- is no risk of a mismatch between the durations of managed microfinance institutions in commercial assets and liabilities. Islamic banking requires all centers that grow to other parts of the country transactions to be based on underlying tangible organically, generate the demonstration effect nec- assets such as commodities, physical assets and ser- essary to attract other entrants in to the sector. vices. As such, inter-bank money markets in the conventional sense, are not permissible in accor- Improving Efficiency of the Financial Sector dance with Islamic banking principles.96 While this ensures that banks will not invest in high risk Constraints in Financial Intermediation financial products and any securitization will have an underlying physical asset, mismatches between Islamic banks face a challenge in raising lon- ger-term financing. Conventional banking allows 96 An Inter-Bank Market can be established through a consortium of banks to manage their liquidity through borrowing investment funds established by Islamic banks. Refer to the Central Bank on an inter-bank money market. Inter-bank money of Sudan policies for the Year 2009. CHAPTER 5 ­ MAKING SERVICES COMPETITIVE: THE CATALYST OF NON-OIL GROWTH 103 the durations of banks' liabilities and assets often they repair their balance sheets and also fear non- present a management challenge because of reli- servicing in the future. In response, the banks have ance on short-term deposit funding. This limits increased their loan loss reserves, further stifling the extent to which deposits can be used for longer financial intermediation to the private sector. The term financing and a challenge for Islamic banks to Central Bank has recognized the impact of these raise longer term financing. arrears on the banking sector and the importance To finance longer-term infrastructure invest- of resolving these arrears and has started to address ments, the government is issuing government cer- this issue. Progress was made in 2008, but full res- tificates, which are highly liquid and with high olution of the arrears is contingent upon the evo- returns, against underlying infrastructure assets/ lution of oil prices, since 50 percent of government projects. Sudan's infrastructure developmental revenues are from oil. The product range offered by needs are vast and private capital can be tapped for the banks is also limited and large corporate busi- longer-term investment opportunities in infrastruc- nesses, government enterprises and a few high net ture. Currently the domestic private sector contrib- worth individuals are the main beneficiaries of utes to the financing of infrastructure development bank financing while agriculture, SME's, housing through investments in government certificates. and infrastructure finance account for insignificant Banks are allowed to invest up to 30 percent of proportions of bank's financing. Concentration their overall investment portfolios in liquid assets.97 risks have been aggravated and NPLs have risen Both GIC's and GMC's are characterized as highly to the point that they have driven the real cost of liquid, secure and low risk securities that yield a financing to very high levels. high return.98 Banks have managed their liquidity The high level of NPLs has hindered the using GIC's and GMC's. capacity of banks to act as effective financial While providing an important source of intermediaries. A fifth of bank's lending portfo- funding for infrastructure investments, the gov- lio was classified as non-performing in December ernment certificates are crowding out bank 2008.99 NPLs increased significantly in 2006­2007 financing to the private sector and opportunities when fiscal problems prevented several government for investment in more productive activities. This departments from paying contractors, resulting in is further amplified by the fact that given the attrac- serious liquidity difficulties, especially at one of the tive returns on government certificates, liquidity in largest state-owned banks, Omdurman National the market is further reduced since the private sec- Bank.100 tor invests directly in these certificates, thus reduc- The constraints for financial intermedia- ing the liquidity available for equity (Musharaka) tion are reflected in weaknesses in the lending financing. In addition to crowding out the private environment and supporting institutions such sector, the high yields on government certificates as collateral legislation and the judicial system, raise budgetary expenditures and widen the fiscal creditor rights, and lack of reliable financial deficit. Accumulation of government arrears to the 97 Including the government Ijara (leasing) certificates (GIC's) (known private suppliers and contractors, which has as Shihab) and government Musharaka certificates (GMC's) (known as impaired capacity to service their loans to com- Shihama) and other government and non-government sukuk. 98 The average return on Shihama (GMC) certificates was 16 percent in mercial banks and generated substantial non- 2007. (Source: CBoS Annual Report 2007) performing loans (NPLs) and negatively affected 99 Central Bank of Sudan. 100 The Central Bank is addressing the NPLs in the sector and although the health of the financial sector. Banks are reluc- still high, NPLs have declined from 24 percent in 2007 to 22 percent tant to extend new credit to the private sector as in 2008. 104 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH information and credit information infrastruc- worthiness and identity of prospective clients dis- ture. These weaknesses affect small and medium courages financial institutions from expanding their enterprises more than large enterprises since micro, lending business to new market segments. small, and medium enterprises (MSME) often Inefficient land and property registries limit rely on secured and cash flow lending for access to the ability of banks to offer secured lending finance and depend on a lending environment that products and longer-term finance. This is partic- supports these modes of financing. ularly acute in the case of Southern Sudan. Protec- The lack of proper credit analysis, due dili- tion of creditor rights and insolvency systems are gence and risk management skills has also con- necessary for greater confidence in commercial con- tributed to weaknesses in the banking sector, tracts and facilitating the management and resolu- insufficient internal controls and concentra- tion of default risk. Financial institutions rely on tion risk. Efficient financial intermediation to the effective creditor rights to reduce deterioration of private sector requires bank staff to be trained in asset values and promote access to finance. Partly modern credit management techniques and risk due to a lack of a credit bureau in Sudan, most assessment tools to enable them to assess, price, and banks assess risk using a transaction-based rather manage risks in order to lend prudently. However than a client-based perspective. this also requires representative and standardized Most of the issues faced by the banking sec- statements of borrowers to reflect their financial tor in the North apply to the South, but are standing that can be verified and certified by qual- more severe in the latter. Given the level of devel- ified auditors. The banks capacity to evaluate risk, opment in Southern Sudan, these issues are more particularly the risk associated with small firms is severe due to the lack of competition in the sec- also weak--a significant proportion of approved tor, the poor capacity of local banks (in terms of loans are based on relationship lending in many credit analysis skills, controls, systems, management instances without conducting the proper due dil- capacity, and corporate governance), the lack of igence and the focus on the securities provided collateral due to the frail structures for land registry, rather than on the soundness of the project propos- and a nascent legal, regulatory, and enforcement als. framework, and the characteristics of the businesses The development of a reliable and compre- in Southern Sudan. NPLs are also a major concern hensive credit information system is essential for for one of the local banks. the proper functioning of the credit market and for diversifying the scope of lending to SMEs. Agenda for Policy Reforms A fully functional credit information system will allow banks to evaluate risks on clients rather than Following the outcome and recommendations of on individual transactions. This will reduce the the 2005 FSAP, the Central Bank embarked on information asymmetries that exist between banks a number of reforms that aimed at strengthen- and clients and allow banks to price risks or man- ing the institutions, infrastructure and markets age credit limits per client. Since SME's are inher- underpinning the financial sector and enhanc- ently more risky than corporate borrowers, one ing its own capacity to regulate and supervise the option could be allowing different ranges to differ- ent types of borrowers and manage financing rates on a portfolio basis rather than on an individual 101 Usually, banks respond to high-risk demand for credit by charging higher rates of return. However, due to several incidences in the past, the transaction basis.101 Difficulty in obtaining infor- CBoS provides limits to lending rates, further curtailing the attractive- mation about financial standing, credit history/ ness of SME lending. CHAPTER 5 ­ MAKING SERVICES COMPETITIVE: THE CATALYST OF NON-OIL GROWTH 105 banks. These measures were designed to improve in light of the global financial crisis. The finan- the stability and performance of the banking sector. cial sector cannot be considered in isolation. The The Central Bank should be commended on their low levels of savings, uncertainty regarding eco- efforts and should continue with such reform pro- nomic policy, dependence on oil revenues, and a grams in the banking sector especially with regards high-return monetary environment that crowds out to NPLs. There are several challenges facing the private sector activity, have all contributed to the financial sector in attaining the intended objectives inefficiency of the banking sector.102 Unlike South that have been set out by the Central Bank, chief Africa, which is more integrated with the global among which is the high level of NPLs in the sector. financial system, the direct impact of financial The Central Bank remains committed to restructur- contagion as a consequence of the current global ing the banking system to reduce systemic risks and financial crisis will be minimal in Sudan. How- improve the efficiency of the financial sector. The ever, Sudan has been affected indirectly through government is also working towards clearing the the impact of slower global demand that has led to domestic arrears in order to strengthen the banks' lower demand for commodities (such as oil) and balance sheets. CBoS has also recognized the impor- lower commodity prices. tance of improving the financial infrastructure nec- The key recommendations for improving the essary to promote efficient financial intermediation performance of the financial sector include: and initiated the establishment of a credit informa- tion bureau. CBoS is also considering the possibil- Strengthening the monitoring, supervision, and ity of further consolidation in the banking sector enforcement functions of the Central Bank to through mergers and/or acquisitions. The privati- maintain the integrity of the financial sector; zation of state-owned commercial banks, including Minimizing the crowding out of the private the Bank of Khartoum in 2005 has proven success- sector, especially SMEs in the credit markets-- ful. Moreover, several banks from the Middle East reducing commercial banks' investment in gov- have entered the market since 2006. ernment certificates, and promote a policy that Despite recent progress, a few concerns enables banks to deploy a proportion of their remain in improving financial intermediation lending portfolio's to MSMEs. The government such as asset quality as well as oversight and reg- has mandated commercial banks to allocate ulatory enforcement. There is a continued con- 12 percent of their lending to microfinance. A cern about asset quality and a recent legal challenge similar policy geared towards SMEs may prove to the constitutionality of the law allowing mort- beneficial. One option would be to extend a gaged assets to be sold has limited progress in the line of credit to banks dedicated to the SME protection of creditor's rights. There is also ongo- sector and/or the introduction of a loan guar- ing concern regarding oversight, particularly the antee schemes to encourage intermediation, enforcement of prudential regulation of the bank- particularly in Southern Sudan; ing sector. In addition to weaknesses in the legal Reforming collateral and securities legislation and judicial framework, lack of proper accounting and promoting its enforcement through the standards and disclosure practices, and the scarcity establishment of specialized economic courts to of banking and financial skills remain as impedi- ensure speedy foreclosure of pledged collateral, ments to channeling savings to productive invest- ment, particularly for SME's. 102 According to the Sudan PICS 2008, 65 percent of businesses cited The operational environment for the bank- economic policy uncertainty as one of the 10 major business obstacles ing sector needs to be improved, particularly in Sudan 106 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH especially in Southern Sudan, and to allow for C. Infrastructure Services the collateralization of more types of assets, in particular movables. This would strengthen Coming out of the decades of internal conflicts, recourse of creditors to improve bank loan Sudan faces immense infrastructure needs, espe- recovery; cially to ensure that the population has access Reviewing the standards and codes of the to a minimum level of basic services. The lack of accounting and auditing profession and assess- infrastructure constrains both growth and access ing the state of financial reporting in order to to basic social services, especially in the lagged improve access to credit for SME's. The World regions such as the South, the Three Areas, and Bank is assisting in undertaking a Review of disadvantaged areas in the North including rural Standards and Codes (ROSC). This will prove areas at large. The JAM conducted in 2005 laid useful in identifying the areas necessary to out needs and plans for infrastructure rehabilita- improve financial reporting; tion and expansion in the country. It estimated that Drawing on corporate governance best practice over $2 billion would be required to implement its principles, including OECD, as well as good two-phased Infrastructure Action Plan to close the practices in developing countries to improve infrastructure deficit in the post-CPA period. the corporate governance structure of banks However, given the enormity of the chal- to ensure an effective oversight function of the lenge, progress to date has been limited. Avail- banks; ability of financial resources is yet short of meeting Current efforts to strengthen financial sector the level of the infrastructure needs. Poor imple- development and the new microfinance pol- mentation capacity and human resources as well as icy provide an important overall framework in difficulty in coordinating policies among different which rural finance initiatives should operate. levels of government further challenge the country However, particular attention to the specific in addressing this issue and establishing clear prior- issues surrounding the demand and supply of ities. A national transport master plan has yet to be rural finance is necessary. This is essential since completed four years after the JAM assessment was rural finance often extends beyond the for- made. mal regulated banking sector into semi-formal The World Development Report 2009 dem- and informal provision. More analysis on the onstrates that economic growth is seldom spa- requirements of rural financing would inform tially balanced, suggesting infrastructure policymakers on the needs of rural farmers and investment focus on growth areas. Two centu- contribute towards improving access to finance; ries of economic development show that spatial The CPA has validated two separate banking disparities in income and production are inevita- systems, conventional banking in the South ble and there is no good reason to expect economic and Islamic Banking in the North without pur- growth to spread smoothly across space. The experi- suing clearly defined cross-regional linkages ence of successful developers shows that production between the two systems. The absence of ade- becomes more concentrated spatially. The most quate banking services and outlets that facil- successful nations also institute policies that make itate trade finance raises transaction cost of basic living standards more uniform across space. doing business as well as rigidities and distor- Economic production concentrates, while living tions the free flow of goods and services, par- standards converge. ticularly in regions along the border between For Sudan's post-conflict context, ensuring North and South. access to a minimal basic level of infrastructure CHAPTER 5 ­ MAKING SERVICES COMPETITIVE: THE CATALYST OF NON-OIL GROWTH 107 services and connectivity is essential to support els, and thus effective decentralization will need to basic livelihoods of the population. Most areas in play a significant role in increasing access to basic Sudan, including conflict-affected areas and rural human services. These sub-national levels of gov- areas, lack access to affordable basic services and ernment must have adequate capacity and revenues connectivity between regions. To ensure these basic to undertake basic infrastructure efforts, in addition services to all parts of population, there is a priority to their primary expenditure responsibilities includ- need for some level of investment in infrastructure, ing health and education service provision. particularly in those lagging regions with acute These capacities and resources are espe- infrastructure deficiencies. cially lacking in lagging regions like the South. Beyond providing life sustaining infrastruc- Enhancing state resources in the South is a priority, ture in all areas of the country, there is a need to especially for the eight states that do not have the address areas where infrastructure weaknesses benefit of a direct share in the oil revenue. Prop- present constraints to growth in areas with high erty taxes, taxes on trade and cattle wealth, and user potential for economic activity, particularly fees for markets and urban public property are the in non-oil sectors. Infrastructure investments in available sources of revenue. A systematic study of Sudan today have the following three main pur- the potential for non-oil sources of revenues of the poses: (i) increasing access to basic human services states is now being undertaken104 on a pilot basis such as water, electricity, and health and educa- in two states; Central Equatoria and Lakes. Com- tion services; (ii) contributing to job creation by pared to a 6 percent share in Uganda and a 14 providing basic infrastructure such as roads, ports, percent share in Tanzania the current share of own- river transport, as well as power and telecommuni- source non-oil revenue ranges from negligible levels cations, which are needed to support industry and in Jonglei to around 30 percent in Central Equa- trade; and (iii) employing people directly in their toria, Upper Nile, Northern Bahr El Ghazal and implementation which generates important multi- Unity. This is a significant achievement for nascent plier effects locally and nationally.103 Internal con- governments, and it is expected that additional nectivity is crucial for achieving economic growth resources in training and institutional development through tightening economic integration through- can enhance this share. However the high share of out the country--between different states and own-source non-oil revenue of states also highlights provinces as well as between rural and urban areas. the low level of transfers from the GoSS which con- Rural infrastructure needs to be enhanced to sup- tinues to keep 70 percent of central revenues for port the agricultural sector throughout the country. itself. This is not congruent with the scheme of decentralization and even compared to comparator Decentralization to Boost Basic countries seems too high a retention ratio for cen- Infrastructure tral revenues.105 A policy of providing incentives to states that Achieving a basic level of infrastructure across develop their own resource endowments would the periphery in Sudan will require sub-national be useful by allocating a larger share of federal capacity and resources. The CPA and Interim Constitution define the vision for a decentralized structure of governance with states and lower lev- 103 GoS, SPLM, WB and UNDP 2005. els exercising considerable revenue and expenditure 104 World Bank 2009e. 105 The post transfer share of the central government is as follows: Nigeria management powers. These responsibilities include 40%; India 42%; Canada 36%; United States 44%; South Africa 36%; development activities at the state and lower lev- Brazil 55%; Australia 56%. (Source: Shah, Anwar 2007.) 108 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH revenues on both a "needs" basis and efficiency cri- FIGURE 5-3: Freight Transport Rates for terion coupled with the transfer of administrative International Trade control over functional areas to states and counties. 0.35 This would be consistent with the decentralization 0.30 agenda and beneficial for trade and industry with GoSS restricting its role to tax and revenue policy 0.25 issues, such as the avoidance of multiple taxation 0.20 and ensuring that the tax incidence and benefits are 0.15 harmonized. 0.10 High Cost of Services in Sudan 0.05 0 Growth of oil exports and associated investments 2001 2002 2003 2004 2005 2006 2007 have lowered the relative size of cross-border Egypt Ethiopia Kenya Rwanda Sudan Tanzania Uganda transport costs for Sudan's international trade, Data Source: IMF Balance of Payment Statistics. which are now lower than its neighboring coun- Note: Freight transport rate is the ratio of the sum of absolute values of tries. Figure 5-3 shows the freight transport rates of freight credit and debit, other transportation services credit and debit, freight-related insurance credit and debit) from balance of payments Sudan and its neighbors between 2001 and 2007. statistics to the total merchandise trade volume (exports + imports). As discussed in the recent DTIS, the decline in the freight transport rate is largely due to Sudan's grow- ing oil exports. Transport infrastructure including FIGURE 5-4: Median Ratio of Transport roads, pipelines and port facilities at specialized ter- Cost to Sales Revenue among minals are being built to allow the increasing crude Manufacturing Firms oil production to be exported. The rising world oil 0.035 price during the period also led to a higher rate of 0.030 export growth (compounded average annual growth of exports between 2001 and 2007 is 30 percent) 0.025 than the rate of increase in freight cost (15 percent). 0.020 In sharp contrast, domestic transport costs 0.015 remain high for non-oil sectors and higher than the neighboring countries, limiting Sudanese 0.010 firms' geographical scope of market transactions. 0.005 The World Bank Investment Climate Survey data 0 Indonesia Kenya China Egypt Tanzania Nigeria Botswana Namibia India Uganda Senegal Rwanda South Africa Thailand DRC Ethiopia Sudan of manufacturing enterprises show that, on average, over 3 percent of sales revenue is spent for trans- portation costs (Figure 5-4).106 This is significantly higher than the numbers obtained in neighbor- Transport/Revenue (All) Transport/Revenue (Non-exporters only) ing countries based on similar survey data in those countries. The high transport cost is a binding con- Source: World Bank Enterprise Surveys and Sudan PICS 2008. Note: Transport cost excludes fuel cost for transport using own trans- straint for firms in Sudan to market their products port equipment. and source their inputs from wider geographical areas. Figure 5-5 below illustrates the correlation 106 Only firms that explicitly made payments for such costs are considered between firms' perceptions on the severity of the for Sudan and other countries due to lack of data. CHAPTER 5 ­ MAKING SERVICES COMPETITIVE: THE CATALYST OF NON-OIL GROWTH 109 transport problem they face and the geographical Costs of electricity and communication are scope of sourcing their inputs. also high. Electricity is perceived as one of the most serious constraints for doing business by Sudanese enterprises based on the recent World Bank invest- FIGURE 5-5: Geographical Spread in Input ment climate survey in 2007. Among the manufac- Supplier Locations and Firm's Perception on turing firms surveyed, 42 percent cited electricity is Transport in Sudan the first most serious constraint among 19 different 60 pre-identified business constraints. In fact, the cost of electricity from public grids as a ratio of sales rev- 50 enue is higher in Sudan (close to 3 percent) than its 40 neighboring comparator countries (Figure 5-6). The pattern is unchanged even when adding fuel, which 30 substitutes and complements electricity from pub- lic grids. The cost of telecommunications is also rel- 20 atively high, compared to neighbors. 10 Access and Efficiency 0 % of supplies % of supplies % of supplies from abroad from other cities from same city in Sudan A major factor behind the high cost of services in Firms which see transport is: Sudan is the lack of sufficient access to infrastruc- Very severe obstacle Major obstacle Modest obstacle ture and related facilities, which have not been Minor obstacle No obstacle adequately provided particularly in lagging areas. Source: World Bank Enterprise Surveys and Sudan PICS 2008. Note: Transport cost excludes fuel cost for transport using own trans- The vastness of the land and the decades of internal port equipment. conflict have made it difficult to provide an adequate FIGURE 5-6: Fuel and Electricity Cost and Telecommunication Cost as Ratio to Sales Revenue 5% 1.2% 1.0% 4% 0.8% 3% 0.6% 2% 0.4% 1% 0.2% 0% 0.0% Ethiopia DRC Kenya Uganda Tanzania Rwanda Egypt Sudan DRC Uganda Kenya Tanzania Egypt Ethiopia Rwanda Sudan Electricity Fuel Communication Source: World Bank Enterprise Surveys and Sudan PICS 2008. 110 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH level of services across the country. As can be seen coverage in the lagged regions such as South in the maps in Figure 5-7, the physical coverage of and the rural areas by rehabilitating destroyed transport and power infrastructure is concentrated road assets, upgrading some key roads to all- in the specific areas in the Northern states. Access to season roads, and developing rural feeder services is substantially limited in the South as well roads, are crucial for the development of as lagging areas in the North such as Darfur and those areas. Even in the North, the extreme rural areas. Inadequate infrastructure services, such low density of roads in war-affected areas as transport, are binding constraints for productive causes isolation of such areas. sectors in those regions (see Chapter 6). Electricity. Only 22 percent of the popula- tion of Sudan has access to electricity, either the Roads. Road transport provides over 90 per- national grid or isolated electricity networks. cent of inland transport services in Sudan.107 The existing national grid covers only nine of The total road network in Sudan is estimated Sudan's 26 states. Most of these consumers are to be 32,425 km, including both paved and in Khartoum where 57 percent of the available unpaved roads for all types of roads (national electricity is consumed. Southern Sudan has highways, state roads, and urban roads) particularly poor access to electricity services. except for tracks in rural areas. This trans- Only three towns in the South (Juba, Malakal lates to road density of 1.3 km per hundred and Wau) have partial access to diesel stations. square kilometer, which is lower than some In the medium term, Southern Sudan is fore- of its neighbors.108 There are 7,200 kilome- seen to remain isolated from the national grid, ters of paved roads in the Northern states, while only 225 kilometers of roads are paved in the South. The vast majority of roads in 107 World Bank 2008a. 108 Egypt 9.3 km, Ethiopia 3.6 km, and Kenya 11.1 km. (Source: World the South are unpaved and impassable dur- Development Indicators 2008). It has to be noted that Sudan is much ing the rainy season. Providing adequate road larger than those countries in terms of area. FIGURE 5-7: Maps of Transport and Power Infrastructure Coverage in Sudan Source: Data are from the Africa Infrastructure Country Diagnostic (AICD) project, being implemented by the World Bank (http://www.infrastruc- tureafrica.org/aicd/). Note: The railroad between Wau and Juba is only planned. CHAPTER 5 ­ MAKING SERVICES COMPETITIVE: THE CATALYST OF NON-OIL GROWTH 111 and would rely on diesel-based thermal gener- alternative route to Port of Sudan.110 The tra- ation. Sudan ranks low in terms of electricity ditional IWT link between Kosti and Malakal, consumption when compared to other neigh- Bor, and Juba on the White Nile (Southern boring countries, although the aggregate con- Reach) was significantly disrupted during the sumption at the national level is expected to be civil war. Since the CPA was signed in 2005, improved with the newly built Merowe Dam the service has resumed but is mainly limited to once it reaches full capacity. carrying goods and the overall volume of traffic Water. An estimated eight million people in is not yet back to earlier levels (Figure 5-8). rural areas need to access to water supply and Rail. Rehabilitation of the railway system sanitation facilities. After decades of war, access to connect Darfur (and a part of the South) to safe and adequate water supply and sanita- with Khartoum and Port Sudan is also impor- tion services is extremely constrained, especially tant. The Sudan Railway Corporation (SRC), in Southern Sudan. Around 75 percent of the owned by the GoNU, is managing and oper- rural population lacks access to safe water.109 ating a railway network of about 4,578 kilo- UNICEF records indicate that of the 6,500 meters, which is one of the oldest and largest rural water points that have been recorded on in Africa. The branch line from Babanusa to the national database, only 35 percent of these Wau (446km), which is the only part of the may currently be operational. Southern Sudan region covered by rail and was Telecommunications. There remain many heavily damaged during the conflict, ceased areas of the country lacking mobile access and commercial operations in 1991 but is currently advanced ICT services. In the North, there are extensive mobile networks, but they are largely limited to urban areas with relatively FIGURE 5-8: Historical Traffic Volumes of sparse network coverage in small towns and Internal Water Transport in Sudan rural areas. In the South, network coverage and 0.35 service quality are poor, though the entry of new companies (e.g., Vivacell) should lead to 0.30 improvements. Prices of ICT services in general 0.25 remain high. Data services are currently limited 0.20 and expensive. The market has focused almost exclusively on voice services. 0.15 0.10 Improved regional connectivity by long-dis- 0.05 tance transport services is also an important accessibility of the transport infrastructure and 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 services in Sudan. In particular, reconstruction of inland water transport (IWT) is crucial in connect- Cargo (thousands tons) Passenger (thousands) ing the North and the South. Source: GoNU, NRTC. Note: Data is not available between 1999 and 2003 for both cargo and passengers. Passenger data is also not available before 1961. Inland water transport. A well-functioning, From 1951 to 1999, five year annual averages are shown. container capable IWT is critical for providing a transport route integrating the national econ- 109 GoS, SPLM, WB and UNDP 2005. omy and providing Southern Sudan with an 110 World Bank 2008a. 112 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH BOX 5-2: National Emergency Transport Rehabilitation Project (NETREP) , NETREP approved on August 2006, is one of the projects conceived within the framework of the Multi-Donor Trust Fund ­ National (MDTF-N) to improve selected transport infrastructure critical to enhancing the benefits of the peace agreement. The objective of NETREP is to improve physical access to goods, markets, and administrative and social services by rehabilitating critical rail infrastructure and services, and improving river transport services and roads. The project focuses on key trade routes linking the North and the South with Port Sudan, and addressing the isolation of communities in the Three Areas, a major impediment to recovery and development. Specifically, the project comprises three components: (1) rehabilitation of critical rail infrastructure and services, in particular, rehabilitating the Babanusa to Wau rail line damaged during the civil war, as well as constructing minor rail line links at Port Sudan and Kosti; (2) institutional developments and improvements to river transport services focused on: (i) supporting the establishment of environmental and social assessment unit, including the preparation of an environmental and social assessment framework, (ii) strengthening the Inland River Transport Regulatory Body, (iii) Port Sudan trade facilitation, and (iv) promoting private public partnership (PPP) in rail transport; (3) road improvements and design, especially in the Three Areas, including: (i) the improvement of Gadamai-Hamashkoreib, Damazin-Kurmuk, and Kadugli- Kaouda roads, about 280 km in total and (ii) a detailed engineering design for about 1,125 km of national and rural roads. The latter component encapsulates establishing a pavement management system in NHA and building its institutional capacity. being rehabilitated (Box 5-2). There is a plan in Sudan. Table 5-3 compares unit costs of inter- to extend the Wau branch to Juba and connect urban road rehabilitation and reconstruction across it with the Ugandan rail network so as to gain several African countries, where Sudan (South) access to the interconnected Eastern African appears to be significantly higher than others. A rail system including Kenya.111 boom in construction is a typical phenomenon in a post-conflict economy like Sudan. As elaborated in One leading bottleneck for expanding infra- Collier (2007), this high demand for construction structure coverage in the South as well as in is often met by inelastic supply in a post-conflict rural areas is the high unit cost of construction economy due to a limited supply base for construc- tion work and limited tradability of construction services. This drives up the cost of construction work. In Southern Sudan in particular, construc- TABLE 5-3: Cost of Rehabilitation and tion materials are normally not available locally and Reconstruction Two-Lane Inter-Urban Roads are costly due to the high transport cost of shipping Country Average Unit Cost ($/km) materials to construction sites. DRC 228,872 The cost of generating electricity is also high Ethiopia 388,207 in Sudan relative to its neighbors, and trade in power could bring significant gains. Figure 5-9 Ghana 261,052 shows a range of projected generation costs for dif- Malawi 420,838 ferent generation systems in Sudan as well as in Mozambique 278,661 Egypt and Ethiopia, and the scope for positive Nigeria 329,909 gain to Sudan from power trading with neighbor- Sudan (South) 760,000 ~ 1,000,000 Source: Alexeeva, Padam and Queiroz 2008, and World Bank staff 111 estimates. The Sudan is an observer at the Northern Corridor Transit Transport Note: For countries other than Sudan, the average unit cost is com- Coordination Authority (TTCA). Uganda and Sudan have also signed puted based on the contract amounts of the WB funded procurement a Memorandum of Understanding to extend the railway link from the contracts. Sudan (South) estimate is based on extrapolation of a cost northernmost town of Gulu to Juba, a distance of 274 km (104 km of estimate from the existing project in South Sudan. which would be in Uganda); and then onward to Wau. CHAPTER 5 ­ MAKING SERVICES COMPETITIVE: THE CATALYST OF NON-OIL GROWTH 113 FIGURE 5-9: Location of Power Network services are also behind the high service cost Crude STPP nationwide. Low efficiency often comes from 130 Gasoil CCGT 120 poor quality and liability of transport infrastruc- 110 Kajbar/Shereiq ture as well as institutional inefficiencies and lack 100 of competition. USD/MWh Dagash 90 80 70 Gas CCGT Gogeb/Aleltu 60 Coal STTP Roads. The poor quality of the existing roads, 50 Genale VI mostly located in the North, is lowering the HPP Barh Border 40 30 el Jebel Karadobi/Genale III Mandaya/Chemoga Yeda efficiency of road transport services. About Halele/Baro/Geba/Gengi 20 half of paved roads require rehabilitation or 10 Egypt Sudan Ethiopia overlay. Inadequate funding for road main- 0 tenance and lack of cost recovery is caus- Source: World Bank 2008b. Note: Comparison of economic generation costs in the different gen- ing rapid deterioration of the quality of the eration mixes (6,000 hours/year) ­ Year 2030 ­ Medium fuel price existing roads. The revenue collected by the scenario ($60/bbl)--10 percent discount rate. National Highway Authority (NHA) from tolls covers only 100 km of overlay and reha- bilitation per year. However, the backlog of ing countries. Under the Nile Basin Initiative-- preventive maintenance needs have accu- administered by the World Bank and underway mulated to the extent that between 400 and since 1999--these countries are embarking on an 500 km of rehabilitation and overlay per year identification of a first joint multipurpose pro- would now be required. Inadequate enforce- gram of water-related investments in the Eastern ment of restrictions on axle loads is further Nile. The potential package of investments could accelerating road deterioration. include an "anchor project" (a large multipurpose IWT. While the privatization is expected to storage structure and hydropower facility on the scale up the overall transport capacity, many Blue Nile in Ethiopia) and "non anchor projects" hardware problems continue to constrain the (associated national projects in irrigation, water- full recovery of the Nile river transport. For shed and floodplain management, and other ancil- example, Juba Port continues to suffer from lary growth-enhancing investments). Beyond the siltation at its entrance. Navigational aids on substantial regional benefits from hydropower gen- the river need to be refurbished or re-installed. eration and trade, a multipurpose storage structure Dredging will be required to address the effects on the Blue Nile in Ethiopia could generate signifi- of two decades of neglect during the conflict. cant downstream benefits in Sudan, including flood There is a general shortage of equipment for control, increased navigation, and power uplift. operating river transport services, including the Importantly, the downstream impact of improved lack of handling equipment for containers, and flow regulation (allowing for a summer crops) and many non-operating vessels that require reha- reduced sedimentation in the Gezira scheme could bilitation. be substantial. The World Bank is currently con- Rail. SRC's operations have steadily declined ducting a study to estimate the economic benefits since the 1960s due to competition from and costs to Gezira, in addition to other impacts in the trucking industry and SRC's inability to Sudan, of a first joint multipurpose program. improve its operational efficiency. Truck trans- In addition to inadequate access to services, portation, although generally more expensive, poor efficiency and reliability of infrastructure is used increasingly for low-volume, high-value 114 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH goods because it delivers more rapidly.112 Over Inter-modal competition provides downward the years, managerial and operating inefficien- pressure on transport rates but needs to be asso- cies, poor locomotive maintenance, labor union ciated with improvements in efficiency. The rail inflexibility, and internal conflicts have exacer- service between Port Sudan and Khartoum route bated the situation by reducing rail transport is subject to competition from the road transport, capabilities. In addition, U.S. economic sanc- particularly since the new parallel road was opened tions on Sudan since 1997 affected SRC loco- in 2007. The competition keeps downward pres- motive availability adversely and the railway's sure on the rail tariff. Trucks make the trip in eight throughput and revenues then reduced fur- to twelve hours, while rail service takes two to three ther.113 Repair of locomotives was so slow that days between the two cities. As a consequence, SRC only about a third to a half of the total num- tariffs for high volume traffic between Port Sudan bers is usually operational.114 and Khartoum was equivalent to 4.25 U.S. cents Electricity. The reliability of the public grid per ton km (tkm) for general cargo as of March service is low and varies widely across the coun- 2006. On the other hand, 8.9 U.S. cents per tkm try. Compared with neighboring countries, Fig- ure 5-10 shows the high frequency of power 112 Delivery by truck takes two or three days from Port Sudan to Khar- outages and simultaneously low usage of elec- toum, compared with 7 or 8 days for express rail freight and up to two weeks for ordinary freight. tricity from the grid in Sudan and reliance on 113 This has had an impact on SRC's ability to procure needed spare self generators. Not only is access to the power parts and equipment directly from the U.S., and thereby affecting its carrying capacity. service a problem, but also efficiency of the ser- 114 In the last few years, SRC has been constrained by low availability vice has spatial variation within Sudan. The of rolling stock attributable in large part to age (about 60 percent of locomotives are between 20 and 25 years old and most of the wagon fleet South and the West (Darfur, Kordofan) have are 60 years old) and inadequate maintenance due to the multiple effects high frequency of power outage. of sanctions, low revenue base, and a high overhead cost. FIGURE 5-10: Quality of Electricity Service 25.0 120% 60.0 90% 80% 100% 50.0 20.0 70% 80% 40.0 60% 15.0 50% 60% 30.0 40% 10.0 40% 20.0 30% 5.0 20% 20% 10.0 10% 0.0 0% 0.0 0% Sudan Kenya Uganda Tanzania Rwanda DRC Egypt Ethiopia Khartoum Gezira Other North West South Public grid power outage frequency (per month) Share of public grid in total electricity (%) % of firms own/share generators Data Source: World Bank Enterprise Surveys and Sudan PICS 2008. Note: Power outage data for Ethiopia are not available. CHAPTER 5 ­ MAKING SERVICES COMPETITIVE: THE CATALYST OF NON-OIL GROWTH 115 was charged between Port Sudan and Nyala, where of the total national development projects between SRC is a virtual monopoly of long-haul transport 2005 and 2008 (Table 5-4). The single most sizable particularly during the rainy season. While inter- project is the recently inaugurated Merowe Dam modal competition works to reduce the tariff rates, project, taking up 38 percent of the total invest- unless it is accompanied with service efficiency ment amount. The new dam is expected to double improvements, financial sustainability of such com- the country's generation capacity (Box 5-3). Energy petition would be in question. (power plants) and roads (national highways in the North) are also quite significant also. Public Investment and Private Sector Domestic borrowing from the Sudanese pri- Participation vate sector to finance public investment proj- ects has led to the recent private credit market To scale up the volume of infrastructure services, crunch due to inefficiency in the financial sec- the government (GoNU) has been pursing various tor. About 73 percent of the total expenditure for large-scale public investment programs for infra- the national development projects is funded by structure. The public investment portfolio is heavily domestic sources, with the rest funded by foreign concentrated on irrigation (mostly Merowe Dam), investments. As discussed in the previous section, transportation, and energy. Those are the top-three the domestic borrowing through government cer- sectors in terms of the aggregate volume of public tificates to finance infrastructure projects imple- investment projects, taking as much as 80 percent mented by the government and provide medium TABLE 5-4: Sector Shares of National Development Projects (percent) 2000­04 2005­08 Sector 2000 2001 2002 2003 2004 Average 2005 2006 2007 2008 Average Irrigation 18.3 14.7 7.3 30.3 35.5 21.2 44.9 34.7 46.3 39.1 41.3 (Merowe Dam) 0.1 2.9 3.0 20.5 31.1 11.5 40.6 32.9 44.0 37.2 38.7 Agriculture 16.5 5.0 2.2 4.6 4.5 6.6 5.4 8.4 5.1 0.7 4.9 Livestock 0.4 0.5 0.3 1.2 0.5 0.6 0.3 0.2 0.2 0.4 0.3 Industry 17.9 17.2 12.2 10.4 8.2 13.2 4.0 12.6 3.5 2.5 5.7 Transport 12.6 7.1 3.3 8.2 9.3 8.1 18.7 13.1 9.2 25.0 16.5 (Roads and Bridges) 12.6 7.1 3.3 7.8 9.3 8.0 18.7 23.3 15.9 19.5 19.4 (Rail) 0.0 0.4 0.4 1.3 2.2 0.9 8.3 2.5 1.3 15.1 6.8 (Inland Water) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4 0.1 0.0 0.1 (Airport) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.61 5.52 1.53 Energy 14.9 18.5 16.7 15.9 17.0 16.6 17.4 16.0 26.4 27.7 21.9 Social Development 7.6 12.9 1.2 5.2 5.8 6.5 7.5 13.5 8.1 4.5 8.4 Water 5.1 2.7 0.9 1.2 3.2 2.6 0.3 0.0 0.1 0.1 0.1 Other 6.8 21.3 55.9 22.9 16.0 24.6 1.5 1.4 1.1 0.0 1.0 Total Amount 369 567 1,155 1,074 2,210 1,075 1,859 2,561 3,156 2,923 2,625 (million SDG) Source: WB staff estimates based on data from MoFNE. 116 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH term funding for State Owned Enterprises (SOE's) a turnaround time of six days in comparison for their expansion plans has led to the accumula- to fifteen days for SRC wagons.119 The private tion of NPL and the credit shortage for the domes- operators can accept a reduced profit margin tic private sector. for their operations because their costs are sig- More direct participation of the private sec- nificantly low due to their higher operational tor in infrastructure services through public pri- efficiency than SRC. vate partnership (PPP) in construction and Telecommunications. Liberalization of the operation should be encouraged from the per- sector started in the early nineties as part of spective of improving efficiency. The government the national privatization policy. The aim was (GoNU) is recently taking steps to liberalize service to overcome the persistent shortfalls in sec- in transport and telecommunication and encourage tor efficiency and performance and to mod- private sector participation (PSP), including foreign ernize the country's communication network investors, which have led to some improvements in locally and globally by shifting sector owner- the capacity and the efficiency of service delivery in ship and facilitating private sector ownership these sectors. of the sector. The National Telecommunication Authority has since been dissected into two IWT. Government-owned River Transport core competencies. The regulatory and super- Corporation (RTC) was a monopoly by law in vision function undertaken by the National river transport services as the owner and opera- Telecommunication Corporation (NTC), and tor of the IWT infrastructure in Sudan and has the service provision function through private been the dominant operator even after a num- operators. The private sector has become the ber of private operators have started providing leader in technology, network equipments, and services. In 2007, two companies, Nile River maintenance provision, while the government Transport Corporation (NTRC) and the Sudan took on the supervision and regulatory respon- River Transport Corporation (SRTC), were sibilities of the sector. Several operators entered established as the result of privatization with the mobile telephone market. By the end of 70 percent shared by the private sector and the 2007, the market recorded 8.5 million mobile remaining 30 percent shared by the public sec- subscribers and 345,000 fixed subscribers as tor (GoNU and GoSS).115 Since the privati- the market continues to expand. These posi- zation of RTC, other private operators have entered the White Nile (South Reach) mar- 115 The new entities began operations on July 1, 2008. Both companies ket.116 As of February 2009, there are six private have the same general manager and offices, headquartered in Khartoum. operators of vessels. The privatization is also The new companies also created an entity in Southern Sudan, the South- ern Sudan Trans-Nile Company (SSTC) located in Juba. anticipated to improve efficiency in on-shore 116 For example, KEERMISC/KEER Marine and Agility Logistics/ services (loading, unloading, and warehousing) Tri-Star. 117 NTRC-SRTC bought all the assets of RTC, including the fleet and port management.117 and spare parts, and obtained the right to continue to operate its ports Rail. While SRC continues its ownership of through a 50-year lease. So far, NTRC-SRTC as well as some other operators own private ports in Kosti with plan to open private ports the railway infrastructure, it allows PSP in rail- in Juba. The private ports in Kosti are relatively well equipped with way operations. Presently only private operators mechanized loading and unloading facilities that are already in place or will be installed in near future. provide passenger services.118 There are seven 118 The private operators market the services, sell tickets, maintain and PSP entities in rail freight as of 2007, carry- operate the trains. However, all of them use SRC staff for these activities and the SRC operations centre controls train movements (for logical ing about 20 percent of all originating tonnage reasons connected with safety). on the system. Private operators' wagons have 119 Based on 2003 data. CHAPTER 5 ­ MAKING SERVICES COMPETITIVE: THE CATALYST OF NON-OIL GROWTH 117 tive developments in the ICT sector have led to by the proportion of revenue spent on staff salaries, a rapid growth in the market in the past couple which is at very high levels.121 Lack of financial and of years, including in the South (Figure 5-11). human resources constrain NHA. The government is taking steps to rationalize some SOEs to improve Foreign private sector participation in infra- efficiency. National Electric Company (NEC) is structure services has increased. While Merowe the vertically integrated state-owned corporation Dam Project has a significant share of funds pro- responsible for expanding the power sector. NEC vided by foreign governments (China and Gulf was restructured several years ago to better equip it countries), foreign private companies have started to meet Sudan's electricity sector challenges. A con- participating with transport operations in Sudan siderable downsizing in personnel has taken place through PPP schemes. The majority shareholder in in NEC in the past years, reducing the staff from the new venture is the KGL Group in Kuwait. 20,000 to 7,000. Productivity of state-owned enterprises So far, benefits from efficiency improvement (SOEs) in infrastructure services remains a chal- in the deregulated rail freight service may likely lenge. Currently, Sudan Shipping Lines (SSL) in be concentrated in limited areas and sectors. The maritime transport is the only SOE monopoly as a resurgence of economic growth and peace keeping transport service operator. Other SOEs operate in more liberalized market environment with compe- 120 Current SRC figures are one half of recent productivity outputs in tition from private operators. They continue to face Tanzania Railways Corporation (a comparable railway in terms of traffic, the challenge of lower efficiency. Staff productiv- age and quality of infrastructure, etc.), one third of TAZARA's and 5 per cent of Spoornet's general freight business. ity of SRC, for example, has have been very low by 121 Wages were 86 and 90 percent of costs in 2005 and 2004, respec- African standards and only about a half to a third tively. SRC is bound by practice to follow the wage norms of the civil service. As a result, wage or pay scale revisions of the government almost of the levels in Tanzania for example.120 Contin- automatically get replicated in the railway, irrespective of whether such ued poor financial performance of SRC is caused changes are affordable. FIGURE 5-11: Mobile Cellular Density (number of subscriptions per 100 people) 45 40 35 30 25 20 15 10 5 0 Egypt, Arab Rep. Ethiopia Congo, Dem. Rep. Kenya Uganda Tanzania Rwanda Burundi Sudan Sub-Saharan Africa 2001 2002 2003 2004 2005 2006 2007 Source: World Bank World Development Indicators 2009. 118 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH and humanitarian operations in the post-CPA contract management, information technology period has led to significant increases in long dis- management and planning is particularly binding. tance traffic. At the same time, the rail freight ser- Staff skills and human resource management need vice is yet to provide significant support to non-oil to be improved for SOEs to improve staff perfor- productive sectors such as agriculture. In fact, there mance. is no discount for long distance moves in the cur- Further private sector participation should rent ruling tariff by SRC, while a 10 percent dis- also target the maintenance of the infrastruc- count is made for heavier cargo above 10,000 tons. ture to increase the quality of services. Sudan has This benefits sectors handling heavy materials but been fairly successful in privatizing transport oper- not lighter materials that still need to be carried ations. However, with respect to management of long distance such as crops. infrastructure assets, further scope of private sector participation exists. In the case of rail, the current Agenda for Policy Reforms ruling tariff structure does not compensate SRC to cover the cost of asset depreciation sufficiently. Lack of clear division of labor and weak pol- Presently PSP is not being used in SRC for other icy coordination among different levels of gov- outsourcing activities such as the maintenance of ernments--GoNU, GoSS, and states--hinder infrastructure or in maintaining the rest of the roll- effective planning to improve access and effi- ing stock fleet. Further all new rail construction or ciency of transport services. In the case of roads, rehabilitation is undertaken in-house, for example for example, NHA (GoNU) is responsible for the the reconstruction of the rail line to Wau. The next development and management of national high- logical step forward is to strengthen PSP in infra- way network (inter-state roads). The intra-state structure maintenance. roads are under the responsibility of the 26 states. There is a need for strengthening the insti- The roads in the South fall under the jurisdiction tutional and legal frameworks for promot- of GoSS and the southern state governments. There ing PSP and public private partnership (PPP) is some ambiguity in the division of labor among in infrastructure. Without proper frameworks GoNU, GoSS, and state governments. The role being in place, privatizations in infrastructure of NHA in managing the highway road network services in Sudan have had some haphazard ele- in Southern Sudan is not clear either. The lack ments. International experiences of infrastruc- of a detailed road classification system adds fur- ture reforms for greater PPP points to a number ther ambiguity to who manages what. In addition, of success factors, which include: (i) a legal sys- increasing private sector participation in various tem that safeguards private property from state modes of transportation (river and rail in partic- or regulatory seizure without fair compensa- ular) increases the need to come up with a clearly tion; (ii) strong contract laws and mechanisms for defined role of the government both in the North resolving contract dispute; and (iii) norms and and in the South. laws--supported by institutions--that delegate Institutional capacity and human resources authority to a bureaucracy and enable it to act rel- need to be strengthened to improve infrastruc- atively independently within clearly prescribed ture service delivery in Sudan. Institutional and published legislation. strengthening is needed for governmental regula- Given the high construction costs in Sudan tory agencies in GoNU, GoSS, and state govern- and current fiscal constraints, new investments ments for them to function effectively in managing in infrastructure should be considered more infrastructure services. Lack of technical skills in holistically in the context of overall cost effi- CHAPTER 5 ­ MAKING SERVICES COMPETITIVE: THE CATALYST OF NON-OIL GROWTH 119 ciency and be strategically prioritized. With no Reach (a 1,436 kilometer stretch of the White Nile large investments in linear infrastructure needed, from Kosti to Juba) will cost in the order of $100 IWT has its potential as a low-cost mode of domes- million (exclusive of tugboats and barges). This tic transportation. To build a paved road in Sudan would be equivalent for constructing only about costs at least $ 350,000 per kilometer. Preliminary 300 km of paved road in those parts of South studies suggest that rehabilitation of the Southern Sudan. CHAPTER 6 TOWARD A COMPREHENSIVE GROWTH STRATEGY IN SOUTHERN SUDAN122 A. Motivation repaired. Education and health facilities have been established across the region. Essential institutions Nowhere in the country is the gap between eco- have been established such as modern banks, court nomic reality and unrealized potential greater assemblies, and civil society groups. In addition, than in Southern Sudan. GoSS has autonomy important legislature has been passed, including the over roughly 25 percent of the country's land area, Investment Promotion Act that supports a condu- which is 648,000 km2 (larger than France). This cive environment for private sector development. area contains the majority of proven oil reserves While these achievements are substantial, more and the best quality agricultural land. GoSS has needs to be done to improve the lives of Southern received more than $6 billion in oil revenues since Sudanese people. Raising living standards through 2005, including more than half this amount during rapid growth is the most visible peace dividend that the 2008 oil price spike. Thus Southern Sudan has GoSS can give to its citizens. a major advantage over most emerging post-con- Why focus on growth in a post-conflict flict governments, with large resources available for environment? To deliver a peace dividend and development. Yet indicators of human well-being-- increase the likelihood of continued peace for the economic and non-economic--for the Southern country, development of a medium-term growth region are among the lowest in the world. The chal- strategy is a high priority for the South. Eco- lenge for the South is to translate the peace and nomic growth results in and from higher pro- resources into better lives for the people of South- ductivity and incomes, and a true peace dividend ern Sudan. results in the transition from crisis and relief to The CPA ended a long civil war that was sustained development. Growth will contribute to fought largely in Southern Sudan and left it all targets of GoSS' mandate--security and avoid- with virtually no infrastructure.123 However, in ance of conflict, higher employment, and the the short period since the signing of the CPA, vis- ible progress has been made. A substantial num- 122 This chapter is based on background state case study work by Yutaka ber of refugees and internally displaced persons Yoshino, Lant Pritchett, Dirk Omtzigt, Greg Snyders, Peter Ajak, Elias Leonardo and Jiji Beauty, with financial support from the Department (IDPs) have been repatriated with most of the for- of International Development, United Kingdom. mer militia integrated into the SPLA. A functional 123 The CPA was signed in January 2005 between the Government of Sudan (GoS) based in Khartoum and the Sudanese People's Libera- central government with ten state governments and tion Movement in the South, ending one of Africa's longest civil wars. numerous counties has been formed and relative The CPA addressed some of the long-standing causes of North-South conflict by institutionalizing autonomy for Southern Sudan and by peace has been maintained. On the physical side, sharing resources. The peace agreement led to the establishment of the substantial rebuilding has taken place with rehabil- regional GoSS in Juba and the federal GoNU in Khartoum, with the latter including 30 percent representation from the South. This started itation and construction of key structures. A sig- a six-year interim period of peace, including planned national elections nificant number of roads have been built and/or and a referendum on succession of the South in 2011. 122 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH well-being of its population. Furthermore, achiev- policies, Southern Sudan needs a strategy that cre- ing rapid, sustained, and shared growth is within ates a consistent focus on achieving the few things Southern Sudan's reach given its immense natural that are considered critical for the current situation resource potential. What is missing is a vision and while creating the preconditions for the next stages. plan for growth and development that builds on This strategy will have to address the following: Southern Sudan's strengths and exploits the avail- able opportunities to bring prosperity to all its Where will the growth come from (sectors and citizens. Consequently, GoSS is currently devel- activities)? oping a growth strategy to stimulate private sec- What are the binding constraints in the identi- tor activities and leverage its considerable non-oil fied areas? resources; this chapter discusses an approach for How will the government use its limited levers such a strategy. to alleviate the constraints? Southern Sudan is starting from a point of near complete reliance on oil wealth, which The rest of the chapter is organized as follows. is intrinsically temporary with an inherently Section B presents a brief description of the growth unpredictable revenue flow. Already known oil diagnostic framework and its four steps. Section C reserves are declining, putting in danger this source reviews the application of the first two steps of the of growth. Furthermore, the enclave nature of the framework--identification of existing growth con- oil sector makes it difficult for the growth to be suf- ditions and identification of binding constraints-- ficiently inclusive and therefore unlikely to ben- to derive the main constraints in Upper Nile and efit the majority of the people. One of the root Eastern Equatoria states. Section D extends the causes of the conflict in Sudan has been the cen- findings of the previous section to discuss the last tric-focused growth, and GoSS understands that two steps of the framework--syndrome characteris- development of the non-oil sectors in the South is tics and implementation diagnostic--and implica- paramount to transition from conflict to a viable tions that are most relevant for GoSS to consider in and integrated economic unit. Planning for non-oil formulating its growth strategy. economic growth in the South is relevant regard- less of the outcome of the 2011 referendum, to fur- B. Growth Diagnostic ther development in the autonomous South under a united Sudan or as a new country. The following analysis is based on the recent The growth strategy envisaged is a dynamic growth diagnostic approach outlined in Haus- staged sequence of prioritized actions that will man, Rodrik and Velesco (2005, hence HRV). effectively support a sustained structural trans- It provides a framework for the analysis that can formation to higher productivity. Unlike other enable an economy like Southern Sudan to assess approaches that emphasize policy and institutional its comparative advantages and identify essential frameworks for growth, the approach proposed policies and programs to unleash its growth poten- here emphasizes a growth process that is character- tial. The approach helps answer some questions ized by growth accelerations from very low to very that are key for shaping the formulation of GoSS' high levels. This type of process is particularly rele- growth strategy. Specifically, What is a realistic goal vant in fragile situations where a major concern is for the income level for Southern Sudan in 10 years? relapsing into conflict, making fast delivery of vis- What are the main binding constraints to achieving ible peace dividends critical. While not negating this goal? What can be done in the near term to put the importance of strengthening institutions and the South on the right path? CHAPTER 6 ­ TOWARD A COMPREHENSIVE GROWTH STRATEGY IN SOUTHERN SUDAN 123 A growth diagnostic exercise consists of four (say that of China or India) for the next 7 to 10 steps: (i) identification of the existing growth con- years, what would be their income (and in particu- ditions, (ii) use of a growth diagnostic decision tree lar, non-oil income and/or productivity) after that to identify the "binding constraints" to growth, growth episode. That helps fix the idea of what the (iii) identification of overlapping "growth syn- target rates of growth and feasible economic trans- dromes," if possible and (iv) an implementation formations will be. diagnostic to examine which of the binding con- The essence of sustainable, broad based eco- straints the government is capable of addressing. nomic growth is a transition from a lower to The HRV approach is used for several rea- a higher level of labor productivity. Getting to sons. First and foremost, the approach is con- higher levels of income requires that the individual ceptually straightforward. With the dearth of actors in an economy (governments, firms, indi- medium-term development planning in the South viduals) undertake greater levels of investment and and limited capacity of the nascent government at innovation--where both are broadly conceived. all levels, the approach fits the need for a diagnos- Investment includes not large physical investments tic that can be easily and readily understood to pro- like roads and factories but also clearing new lands, mote broad dialogue and ownership. Second, the planting larger acreages, acquiring new skills. Inno- diagnostic emphasizes a particular country's (or in vation is not just pushing the frontiers of knowl- this case, sub-national) situation. There is no pre- edge but also opening new businesses, growing new assumed agenda. Third, the approach aims to pro- crops, linking markets by moving goods. The very vide prioritized recommendations that fit the simple foundation of growth diagnostics is that capacity constraints of the country. This is par- private sector actors--from individual farmers to ticularly important given GoSS has only recently small and medium firms to huge industries--will celebrated its third anniversary of moving from invest and innovate when the benefits exceed the running a military campaign against the North to costs. The standard growth diagnostic decision tree trying to manage service delivery and economic from HRV is just a way of organizing the deter- policy-making in a dynamic post-conflict region. minants of the private benefits of investment and One of the keys of growth diagnostics, and innovation (profitability) and the private costs of which distinguishes it from other processes for pri- finance for investment (Figure 6-1). oritizing growth policies is the notion that growth The following section uses an application of is episodic, as a country's economic progress con- the HRV approach to two Southern states--Upper sists of quite distinct episodes. A goal is to make Nile and Eastern Equatoria--to provide an illustra- a transition from one "phase" or "state" to a more tion of the type of analysis that is needed for South- favorable growth process. This requires first an ern Sudan in its entirety. The objective is to inform examination of the current level of income and pro- and shape the formulation of GoSS' growth strat- ductivity and of the (recent) history of the growth egy and it is in no way intended to deliver a com- process. prehensive growth strategy for the South and This is particularly important as it provides the further is not meant to promote a state-by-state first indications of feasible growth targets and levels approach. of achievable income from a growth episode. This In applying the standard growth diagnostic is a useful antidote to growth analyses that focus framework to the two states we found it useful to on either growth rates or income levels but not distinguish the analysis by the size and the sector as both. So for instance, one might ask, if the states in discussions of whether "appropriability" or "infra- Southern Sudan were to grow at a very rapid pace structure" are "binding constraints" depend heavily 124 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH FIGURE 6-1: A Growth Diagnostic Framework Problem: Low levels of private investment and entrepreneurship Low return to economic activity High cost of finance Low social returns Low appropriability Low domestic Bad local finance savings + bad international finance Government Market failures failures Low Poor Bad Information Coordination competition geography infrastructure externalities, externalities Microrisks: Macrorisks: self-discovery High cost Low High risk human property rights, financial, capital corruption, monetary, fiscal taxes instability on whether one is considering the choices of a are starting from a very small base they will not in small scale farmer or a large international investor. the short to medium run, be able to sustain rapid In Figure 6-2 we illustrate the three standard sec- growth (and much less growth with broad benefits). tors (agriculture, services, and manufacturing) and the three sizes (small, medium, and large) that we C. Binding Constraints to discuss. This overlaps with the identification of the State-Level Growth current state of the economy discussed above, as one needs to know the relative sizes of these sec- Upper Nile State tors. Often it is attractive to focus on high profile investments in modern sectors--but no matter how Upper Nile State (UNS) is located in the northern- rapid the growth in these sectors are, since they most part of Southern Sudan, bordering with Ethi- opia and several states in the North. The terrain is relatively flat with the White Nile River flowing across the state. The state is endowed with rich nat- FIGURE 6-2: Sectoral Size of Economic ural resources comprising significant oil reserves, Activity vast fertile land, and abundant water sources. The Small Medium Large estimated total population of UNS is approxi- Large scale mately 1.9 million, half of which are internally Subsistence Medium size Agriculture commercial displaced persons (IDPs) and refugees residing out- farming cattle herding farming side of the state mainly in Khartoum and Ethio- Commercial pia, Kenya, and Uganda.124 The demography in Manufacturing Small metal mining, Milk factory the state is rapidly changing due to massive returns work, carpentry manufacturing for export of IDPs and refugees. In 2008, a total of 38,686 Market trader, Retailer, Big tourist Services hair Wholesaler and business, dresser Construction telecoms 124 Upper Nile State 2007. CHAPTER 6 ­ TOWARD A COMPREHENSIVE GROWTH STRATEGY IN SOUTHERN SUDAN 125 IDPs and refugees returned to the state.125 UNS is FIGURE 6-3: Monthly UNS Oil Revenue a multi-ethnic state. The major ethnic groups con- Share: January 2007­December 2008 sist of Dinka (36.3 percent), Shilluk (20.7 percent), 10 and Nuer (18.4 percent) as well as Maban, Kombo, 9 nomadic Arabs, and others. 8 7 6 $ Millions State of the Upper Nile Economy and Sectors 5 4 A unique feature of the UNS economy is the tra- 3 ditionally strong economic ties with the North, 2 though this is shifting gradually as the CPA is 1 implemented. Investors, traders and bankers from 0 the North have played catalytic roles in facilitat- Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 ing commercial transactions in those linkages but are now gradually withdrawing from UNS. While Source: Various monthly reports of the GoNU/GoSS Technical Com- UNS is still more connected to the North than mittee on "GoSS Share From Crude Oil Revenues". other Southern states, this shift has nonetheless cre- ated a significant vacuum in the economy. The CPA has also brought significant oil reve- tion, spending the bulk of its budget for the salaries nue to the state. While local backward and forward of government employees. The share of salaries in linkages of the oil sector are almost non-existent, the UNS state budget increased from 2008 to 2009 the sector has a significant fiscal implication for the (Figure 6-4).126 The government is also involved in state's economy. Based on the Wealth Sharing Pro- productive activities such as management of agri- tocol made in CPA, oil-producing states receive cultural schemes, particularly in the Southern part 2 percent of the revenue from oil produced in the of the state, with minimal private sector participa- state. In the case of UNS, this was about half of tion. Figure 6-4 indicates a significant share of cap- the state budget in 2008. In addition, the states ital expenditure in the state (above 30 percent in in the GoSS region receive transfers from GoSS the budget both in 2008 and 2009), which is larger whose budget also relies on the oil revenue share than most of other states in Southern Sudan.127 from the North. The significance of the oil rev- Half of the capital expenditure is spent by the UNS enue share in the state's budget makes the state Ministry of Physical Infrastructure.128 With its oil extremely vulnerable to fluctuations in world oil revenue, the state can allocate more resources for prices, which is evident in the rapid contraction of investing in the development of non-oil sectors in its oil revenue share since July 2008 as the oil price the state including infrastructure. dropped sharply in the world market (Figure 6-3). The share of direct oil revenue in the state bud- get is expected to decline in 2009 because of sharp 125 UNMIS 2009. This includes organized returns of IDPs and refuges (19,212) and spontaneous returns (21,878). increases in both block and conditional transfers 126 The increase in the share of salaries in the budget is largely due to from GoSS. decentralization of some public services from GoSS to the states. 127 The state has a higher share of capital expenditure in 2008 based on The fiscal impact of the oil sector, transmitted actual spending due to the fourth CPA anniversary, which took place largely through the public sector, plays a major role in Malakal on January 4, 2009, for which the state committed to more infrastructure projects than what was planned at the beginning of 2008. in the economy. The government is the dominant 128 Road construction alone accounts for 25 percent of total capital source of income for many of the UNS popula- expenditure of the state budget in 2009. 126 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH FIGURE 6-4: Breakdown of State Expenditure by Type of Spending: 2008 and 2009 2008 (Budget): 2008 (Actual Jan­Oct): 2009 (Budget): Total 131,166,810 SDG Total 171,893,330 SDG Total 203,076,196 SDG 35% 32% 45% 47% 56% 57% 9% 11% 8% Salaries Operating Capital Source: Data from UNS Ministry of Finance, Trade, and Economic Planning. The state needs to diversify its productive activ- sunflower, and sesame) has flourished in the North- ities to develop more sustainable income generat- ern counties, as well as gum arabic production ing sources driven by the private sector and hence which is part of an organized and managed value broaden the revenue mobilization basis for the state chain linked to large-scale internationalized compa- government. In what follows, we will briefly pres- nies based in Khartoum. While more farmers in the ent an overview of the three non-oil productive sec- state engage in small-scale traditional farming, large- tors--agriculture, manufacture, and services. scale mechanized farming dominates in terms of UNS is one of the leading agricultural states in cultivated land and production. For cereals, mech- Southern Sudan with a total of 36.6 million fed- anized farming has about 80 percent share of total dans (15.4 million hectares) of arable land. Leading area of cultivation and of production in the state. crops are sorghum, maize, and sesame. Gum ara- UNS has only limited scale and scope of manufac- bic is the principal forestry product that has been turing activities, concentrated in urban areas such as exported abroad.129 The White Nile is rich in poten- Malakal, the state capital. According to the Sudan tially exportable fishery resources (Nile Perch and Industrial Survey conducted in 2003, the number Tilapia). Livestock (cattle, goats, sheep and don- of manufacturing establishments in the Upper Nile keys) is also a major sub-sector. Agriculture is a crit- Region (Upper Nile, Unity, and Jonglei States com- ical sector not only as a source of economic growth bined) was less than 500. In Malakal, there are sev- for the state's economy but also for poverty reduc- eral manufacturers of riverboats and a number of tion among the state's population at large. About 90 workshops that produce simple metal and wood percent of the total income of the indigenous pop- based products such as construction materials and ulation comes from the agriculture sector.130 Most furniture. There are about 200 manufacturers regis- farmers are involved in smallholder crop production (cereals, legumes, fruits, and vegetables) as well as 129 The gum arabic belt is moving south from the traditional production fishery, forestry, and livestock products. centers in Kordofans towards Blue Nile and Upper Nile and the southern parts of Southern Kordofan and South Darfur, which increases the share UNS is unique among the Southern states in of UNS in the total gum production in Sudan. that large-scale mechanized crop farming (sorghum, 130 UNS Ministry of Agriculture 2007. CHAPTER 6 ­ TOWARD A COMPREHENSIVE GROWTH STRATEGY IN SOUTHERN SUDAN 127 tered at the local chamber of commerce in Malakal, FIGURE 6-5: Indicative Relative Share in the majority of which are small in size (less than 20 State Economy workers). The market of the UNS manufacturing Small Medium Large sector is limited to the local areas, catering to the local demand for construction materials and house- Agriculture hold durable products. The vast majority of raw materials and intermediate inputs are brought from the Northern states such as Khartoum. Manufacturing The service sector in UNS is relatively large, reflecting both its nature as a post-conflict con- Services sumption-driven economy and its proximity to the North, which is the major source of finished prod- ucts consumed in the state. Retail, transport, and construction services are the three major sub-sec- tors in terms of number of establishments. How much those three non-oil sectors poten- With the 2008 closure of 15 Islamic banks in the tially contribute to economic growth of the state in South, only one Islamic bank, the GoNU-owned a short to medium timeframe? To answer this ques- Agricultural Bank of Sudan (ABS) remains but it tion as we move to the next section where we seek suspended new lending during 2008 both in Mal- to identify constraints for growth in UNS, it is akal and Renk. The only other commercial bank helpful to distinguish different scale groups in each in Malakal, Nile Commercial Bank (NCB), is also sector in order to capture heterogeneity among pro- not currently providing loans. The credit constraint ducers, depending on their scale of activities. Given has seriously hit the large-scale private farmers in the paucity of economic data in the state, it is dif- UNS, who face difficulty in purchasing necessary ficult to measure the size of potential contributions of these sector-scale groups. Nonetheless, the indic- ative relative share of those sectors and scale groups FIGURE 6-6: UNS Cereal Production and in the state economy is schematically presented Cultivate Area: Mechanized and Traditional in Figure 6-5. Large-scale agriculture has the larg- Farming est impact on the growth prospect of the state, as 400 mechanized farming occupying 70­85 percent of 350 total cereal sub-sector both in terms of area of cul- '000 hectare / '000 ton tivation and production, followed by medium-scale 300 agriculture and service. 250 200 Binding Constraints for Growth for Different 150 Sectors and Size Groups 100 50 Agriculture-Large 0 The most immediate constraint facing large-scale 2005 2006 2007 2008 farmers in UNS is the lack of sufficient agricultural Area (Mechanized) Production (Mechanized) credits for local farmers due to the current absence Area (Traditional) Production (Traditional) of formal financial intermediation in the state. Source: FAO and WFP 2008. 128 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH machinery and equipment. Due to the acuteness of important than constraints on the other side of the the problem, the government provided emergency HRV diagnostic tree, i.e., low return to economic financing to the farmers during the 2008 farming activities. season to fill the gap, at least temporarily. The vol- Low returns to economic activities for ume, however, was limited.131 medium-sized agriculture come from both a lack of There are low returns to economic activities complementary factors as well as low appropriabil- in large-scale agriculture. There is an issue of low ity. The weak transport infrastructure network as a appropriability behind the current decline in land complementary factor to production in the state is productivity due to a lack of crop diversification. a serious constraint. Unlike large mechanized crop This is a result of repetitive planting of the same farming which is concentrated in Renk County, crops on the same plots and excessive destruction smaller mechanized crop farms exist in other coun- of natural plants during land clearance. One fac- ties where inter-state connectivity is poorer than tor behind the lack of crop diversification is the Renk, keeping the price level for agricultural inputs distorted incentive given to farmers through the from the Northern states at a high level. Limited credit policy of the government-owned ABS. Based transport networks is a bottleneck for the gum ara- on its policy, only three crops (sorghum, sesame, bic sub-sector in UNS to exploit its direct export and sunflower) qualify for ABS credits in Renk, market access and create an opportunity for local which has diverted farmers' incentive from culti- processing and trading. Companies from the North vating other crops. buy gum arabic produced in UNS for process- Low returns to economic activities in large- ing and exporting.132 Although gum marketing in scale agriculture also come from weak complemen- Sudan has become more competitive recently, the tary factors provided by the state. Land acquisition only physical marketing route from UNS is to the is open to all farmers as long as they pay a SDG North--via Kosti (auctioning) and Khartoum (pro- 200 registration fee to the government. How- cessors and exporters) to Port Sudan for export. ever, the major cost associated with exploiting pos- The development of alternative transport routes sibilities of extending cultivated areas is the poor would be essential to attracting potential inves- complementary factor, which is transport and mar- tors for local processing within UNS and for direct keting infrastructure. The current poor condi- exporting and ultimately diversifying risks related tion of road networks between rural and urban to political uncertainty.133 The poor inter-state areas (feeder roads) and poor marketing infrastruc- transport also inhibits the ability of the fishery sub- ture such as storage facilities constrain expansion of sector to expand its sales outside of the state. Nile farming areas (extensive margin). They also ham- Perch and Tilapia are sold to Khartoum and even per value-added growth in existing farms by limit- to Egypt. However, inadequate means of transport, ing their market access and by raising input costs (intensive margin). 131 The total was SDG 15,000, where the majority of recipients received only SDG 200­300. Approximately 90 percent of the recipients are local Agriculture-Medium farmers and those from Northern states. 132 Since it was established in 1969 by the Government of Sudan, GAC, The high cost of finance, due to poor local inter- based in Khartoum, had had an exclusive concession to export raw gum mediation, is also an issue for medium-scale agri- arabic. Recently export licenses were given to other 12 companies that provide primary processing. culture, particularly for the crop sub-sector. Lack of 133 UNS government has a vision to develop a road network linked access to credits and poor transport and marketing to Ethiopia and Djibouti as an alternative to the northern route. By not relying on the north-bound route through Khartoum, UNS gum infrastructure limit the growth of mid-sized crop products would be outside of the economic sanction imposed on Sudan farming as well. However, this constraint is less by the United States government. CHAPTER 6 ­ TOWARD A COMPREHENSIVE GROWTH STRATEGY IN SOUTHERN SUDAN 129 in particular refrigerated trucks, limit their external between traders/processors, who know export mar- sales, particularly in the absence of Northern trad- ket outlooks, and uninformed producers keeps the ers who used to facilitate such transport. significant gap between the floor price and FOB, Multiplicity in taxation raises transaction cost allowing Northern traders to extract rent from in both gum arabic and fishery sub-sectors is a clear UNS producers. example of low appropriability due to government failures. Fishery workers are required to pay four Agriculture-Small different fees to the UNS Fishery Department each Among small-scale subsistence producers, cost year along with taxes and fees to other government of finance is not as serious as the problem of low authorities such as crop market tax and county returns to economic activities, in particular the lack taxes. For gum arabic, a number of taxes and fees of complementary factors both in terms of weak imposed along its value chain (particularly during human capital and bad infrastructure. The lack of transit outside of UNS), raise the transaction cost skills and knowledge in basic production technique, of gum marketing. germination, marketing, and business develop- The fragile security condition in rural areas is ment impedes their ability to grow out of subsis- also a concern to fishery and forestry sub-sectors tence. Also, poor transport infrastructure, especially whose activities and access to markets are disrupted urban-rural road network, is a major constraint by recurring security incidents in the state. The for connecting with potential markets. Due to Upper Nile is one of the seven states which experi- poor quality, most of the secondary roads become enced incidents of insecurity in the first quarter of impassable during the rainy season. River trans- 2009 due to activities of the remnants of the Sudan port to rural areas away from the White Nile (along Armed Forces (SAF)-supported groups. Sobat River) takes much longer (Table 6-1) than Another low appropriability aspect in the gum points along the White Nile. High transaction cost arabic is in its industrial organization character- of marketing of agricultural products make small- istics. The gum arabic industry in Sudan is still scale farmers less competitive even in local markets. largely controlled by the government. Downstream companies (exporters and processors) still maintain Manufacturing ­ Small large market power. Consequently the gum mar- The high cost of finance from poor local interme- keting arrangements have provided producers with diation is perceived as a serious bottleneck by the only a small share of export prices (from 1993 to majority of micro and small manufacturers who 2005, the average floor price was only 21 percent have been rejected on their loan applications for of FOB export price). Information asymmetries unclear reasons or are discouraged to apply for TABLE 6-1: Boat River Transport to and from Malakal To/From Average Frequency of Service per Day Traveling Time (Days) Fee (SDG) Dry Rainy To From Renk (Hideb) 1­2 4 1 2 300 per ton Kodok 1 1 1/4 1/3 20 per passenger* Akobon 1/7** 1/7** 3 3 150 per passenger* Source: Data from the Malakal River Transport Trade Union. Note: * Passenger boats with goods carried by passengers, only charging per passenger. ** Once a week. 130 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH new loans due to demanding conditions set by the ary 2009. This reflects the recent improvement in banks. While the perception is pervasive among the public electricity grid (acquisition of new gen- all enterprises, a larger number of them have not erators). However, transportation continues to be a applied for bank loans due to lack of clear invest- major problem. The vast majority of intermediate ment plans. Thus, most enterprises depend on inputs for UNS manufacturers are from the North. internal sources (i.e., retained earnings) for invest- This higher transport cost raises purchasing cost of ment in new projects as well as borrowings from obtaining intermediate inputs (Table 6-2). family and friends (Figure 6-7). Government's policies and regulations also con- Lack of complementary factors, especially strain small enterprises. The UNS government transport infrastructure, lowers social returns recently set a policy to relocate manufacturing among micro and small manufacturers. The data workshops from the congested Malakal city cen- from the World Bank Investment Climate Sur- ter to a newly created zone on the periphery of the vey show that electricity was perceived as the most city. Entrepreneurs who have relocated already have serious problem among manufacturers in Mal- lost previous forward and backward linkages due to akal in 2007, but this was not the case in Janu- the increased distance from existing suppliers and FIGURE 6-7: Sources of Funding among Manufacturers in Malakal New Capital Investment Working Capital 80 80 70 70 60 60 Av. Share (%) Av. Share (%) 50 50 40 40 30 30 20 20 10 10 0 0 Internal funds Family Private Advances Other Internal funds Advances Family Purchase Other & retained & friends commercial from & retained from & friends credit from earnings banks customers earnings customers suppliers Source: Sudan PICS 2008 TABLE 6-2: Price Comparison of Select Intermediate Inputs: Malakal and other cities Item Price in Malakal Comparator City Price in Comparator City Iron Sheet (per sheet) 30 Kosti 20 Water pipe (per ton) 910 Kosti 790 Tire (per piece; Yokohama Tire) 600 Juba (imports from Uganda) 300 Sand (per bag) 2,000 Rumbek 90 Source: Interviews conducted by the team. CHAPTER 6 ­ TOWARD A COMPREHENSIVE GROWTH STRATEGY IN SOUTHERN SUDAN 131 customers. On the other hand, relocating could the North. They sometime use air to ensure just-in- attract new entrants to the industry, who have been time delivery. Investing in own trucks is also being deterred from entry due to congestion and lack of considered to minimize transaction cost through access to land in the old location. This would then vertical integration. lead to a growth of the sector itself in a long run if There is also a significant variation in transport sufficient agglomeration occurs at new locations. cost particularly for long-haul truck transport ser- For that to happen, predictability in the govern- vice. High transaction cost associated with trans- ment's zoning policy is important. port service operations such as poor infrastructure condition (lack of complementary factors) and Services ­ Small and Medium multiple taxes and fee payments (government fail- The high cost of finance from poor local finan- ure) could be a factor for the price variation. cial intermediation is relevant mostly among con- struction services and medium-scale businesses. Eastern Equatoria State Currently, they have to rely on internal sources for financing of operating capital. Eastern Equatoria State (EES) was at the epicenter The small and medium service sector faces low of the civil war, especially over the control of three returns to economic activities due to a lack of com- Northern-controlled garrison towns of Torit, Lafon plementary factors as well as low appropriability. and Kapoeta and the linking road corridors. Aer- Given its nature of activities, the weak transport ial bombardment and land mines destroyed most of infrastructure network is the most serious con- the existing infrastructure including roads, schools, straint for the UNS services sector, particularly health clinics, and water and sanitation facilities. retail and construction services, which depends The war also had a profound effect on the popula- on supplies from other states. Transport time is tion of EES. There are varying statistics on popula- as important as transport cost. Road truck trans- tion or returnees, however it is widely accepted that port is used almost exclusively during the dry sea- EES was one of the most severely affected states. son despite fees that are higher than those for river Available population estimates range from 730,000 transport. As shown in Table 6-3, while the ship- and 1,500,000 with about 70 percent of the pop- ping cost using trucks is almost double the cost ulation characterized as agro-pastoralists. EES cur- of using river transport, the shipping time using rently has a low level of economic development trucks is significantly lower. Medium-scale ser- with the majority of the population engaged in vices such as hotels are even more constrained by subsistence agriculture. the transport difficulties since their businesses are As hostilities ended, the EES Government Stra- more sensitive to timely delivery of materials from tegic Plan claims that the population tripled from TABLE 6-3: Cost and Time of Cargo from Kosti to Malakal by Mode of Transportation Mode Cost Time Paint cans River Steamer 140 SDG /t 7 days (5 liter can x 240, 9,000 SDG sales value) Road Truck 220 SDG /t 2 days Water pipe River Steamer 100­120 SDG /t 5­6 days (530 SDG/t sales value) Road Truck 200 SDG /t 2­3 days Source: World Bank staff estimates. 132 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH around 500,000 in 2003 to 1,500,000 in 2006. pulses (cowpeas, beans, and green grams); oilseeds EES has a low degree of urbanization (Torit town (groundnuts and sesame); vegetables (pumpkin, counts an estimated 30,000 inhabitants, while juice melon, cowpeas, okra); fruits (mangoes, lem- Kapoeta has between 5,000­10,000 inhabitants). ons, oranges, banana, sugarcane, and pawpaw); and Poverty is increasing due to an influx of returnees, tea and coffee. economic displacement, insecurity, and drought. Livestock. Livestock, classified here as medium Current estimates suggest a poverty range of 70­90 size agriculture, is the second most important source percent of the population. of income and livelihood in EES with 80 percent Eastern Equatoria State enjoys significant ara- of people in Southern Sudan being agro-pastoralist. ble land, and in the past was considered the bread- In Southern Sudan, livestock production is a way basket of Southern Sudan. Before the war, EES of life, a tradition that for centuries has shaped the produced enough cereals and groundnuts for the thought, the culture and the socio-economic life of state and excess for Juba markets. Now there are the majority of the people hence the need to focus currently 108,000 people dependent on food aid. and grow the sector. According to the MARF Ani- The state is located along two major trade mal Resources Sector Policy (2006), the growth of routes--one leading to Uganda (via Nimule) and agriculture in general and the animal resources sec- one to Kenya (via Torit, Kapoeta and across the tor in particular, is essential not only to achieve self border to Loki.). The advantages for the state are reliance at the national level but also to improve significant. Production originating in the state has household food security and bring about equitable potential access to major markets in Juba, Kam- distribution of income and wealth for rapid reduc- pala and beyond. Also, given the large dependence tion in poverty levels and economic growth. of Southern Sudan on imports, there is a large flow According to FAO, 26.4 million hectares in of trade that transits the state, implying potential Southern Sudan are marginal arable lands (MAL) development of service sectors geared toward trade that are mostly referred to as rangelands and flood facilitation. plains. These are largely used for extensive livestock production and are suitable for beef cattle, small State of Eastern Equatoria ruminants and game ranching as well as some of Economy and Sectors the game reserves/parks. The main cattle produc- ing areas are Upper Nile, Eastern Equatoria, Jon- Similar to other states in Southern Sudan, sub- glei, Warrap and parts of Bahr El-Ghazal states. sistence agriculture characterizes most economic Livestock farming is increasing rapidly as evidenced activity in EES. The traditional livelihood systems by the large increase in the numbers. For instance, rely on crop production, cattle-rearing, fishing and between 2006 and 2008, the number of cattle qua- wild food collection (SSCCSE/Livelihoods Analysis drupled, increasing from 434,000 to 2, 500,000. Forum, 2006). Cattle are also extremely important Services. There is very modest private sector for the majority of families in EES. activity, consisting primarily of small businesses Crop production. Sixty-five percent of house- operated mainly by foreign entrepreneurs from holds in EES have planted in the last year (second neighboring Kenya and Uganda. The state's cham- only to Western Equatoria, CFSVA 2006). Crops ber of commerce has 16 members consisting of pet- are grown mostly for household consumption, rol stations, hotels, wholesalers and retailers. The with limited excess sold at market. Crops grown only sizable private sector business is McDowal in the state include cereals (sorghum and maize); Construction, originally from Kenya. However tubers (cassava, sweet potatoes, and Irish potatoes); trading conditions are reported to be deteriorating CHAPTER 6 ­ TOWARD A COMPREHENSIVE GROWTH STRATEGY IN SOUTHERN SUDAN 133 and some traders are closing shops in Torit. FIGURE 6-8: Indicative Relative Size Shares in The indicative relative share of those sectors the State Economy and scale groups in the state economy is schemati- Small Medium Large cally presented in Figure 6-8. Small-scale crop agri- culture has the largest immediate growth potential Agriculture in the state, followed by medium scale agriculture (livestock) and medium-scale services. Following these sectors, there is limited potential in the near Manufacturing term for growth from small-scale manufacturing and services. Services Identification of Binding Constraints for Growth The two major contributors to employment and There is huge variability in the profit per hect- productivity are small (subsistence) agriculture and are, with cultivation primarily concentrated in low medium agriculture, which includes livestock. Ser- return crop. In Southern Sudan, households gener- vices primarily take the form of small-scale mar- ally live a subsistence lifestyle in which 40 percent ket traders. Some construction companies are clear of food comes from own production and 10 per- exceptions, not just by their sheer size but also cent from hunting, gathering and fishing. While because there appears to be considerable scope to food purchase remains an important source of food improve the productivity of these two sectors. (with 39 percent of food accessed in this way), lim- ited market access and security problems force most Agriculture ­ Small households to rely on own production. The medium-term goal for the agricultural sector Although Eastern Equatoria is located along in EES should be food self-sufficiency, reversing the major trade routes for Southern Sudan and has sev- huge cereal deficit. This is consistent with the GoSS eral major road connections running through the Ministry of Agriculture's stated goal: "to transform state, the feeder roads network is inadequate in agriculture from subsistence/traditional system to terms of density and maintenance. Most roads are achieve food security through science-based, mar- often impassable during rainy seasons. Some road ket oriented, competitive and profitable agricultural sections are suspected to be heavily mined. In addi- system, without compromising the sustainability of tion, ongoing insecurity has changed the human the natural resources for generations to come." settlement pattern, with most people moving away Yields and the average farm areas per house- from the main routes and rivers. hold in Eastern Equatoria in 2006 were the lowest The poor condition of roads and infrastruc- in Southern Sudan. Both indicators were roughly ture severely limits access to markets and restricts half the size of the South's best performing agricul- opportunities for exploiting natural resources and tural state of Western Equatoria. Comparisons with agricultural opportunities. EES has rudimentary similar agro-environments outside the country also runways that can accommodate small aircraft, but show large gaps between current output and poten- no capacity for cargo planes or commercial move- tial. Yields in Uganda are 2­4 times as high for ment of significant produce. many crops, with a difference of between 1­2 tons Generally, there is no shortage of land and of produce per hectare. most villages have uncultivated land that can be 134 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH distributed according to future needs. However, mostly consumed by returnees. It is estimated that population density is very low in EES, estimated at Juba slaughters about 120 bulls and 320 sheep/ 11­18 persons per square kilometer. There is suffi- goats daily in the 5 different slaughter slabs around cient land, and farmers are not pushed onto mar- the town. This shows the great demand for meat in ginal land yet, but the continuing threat of war has Juba. Prices for livestock are rising steadily for the resulted in a slow return of refugees. majority of the supply, for example the price of cat- Micro co-ordination failures hinder investment tle in Juba increased from SDG 1,500 in 2008 to in small-scale agriculture. In particular, due to a SDG 2,000 in 2009. history of little market activity--potential sellers, The returns to investment are significant, as traders and potential buyers are not connected, par- prices for livestock continue to rise. Despite poten- tially due to asymmetric information. tial for generating high levels of income, very little There is very little lending for agricultural activ- trade actually takes place. Currently EES has about ities. There are four commercial banks operating $1billion of wealth tied in cattle. in Southern Sudan, which mainly provide trans- Infrastructure is only of marginal importance fers between Juba and their headquarters in Khar- to marketability of livestock as they can be trekked. toum for pensioners. Nile Commercial Bank is the Indeed cattle could be walked from Eastern equa- only commercial bank in EES, but it experienced torial to Juba, which by its very nature is free. Few liquidity problems in 2006 and has not provided traders still trek animals from Kapoeta to Torit or loans since. Micro finance institutions are also in Juba especially if from Kapoeta North County as their infancy. Building Resources Across Commu- it takes 2 days to get to Juba and 3 days to Torit nities (BRAC) started operations in Torit in March (according to the livestock farmers in KNC during 2008 and lends exclusively to women. The Catholic the study). Animals that are not sold in Kapoeta, Relief Services (CRS) is currently the only NGO in EES with a micro-financing program for SMEs. Agriculture ­ Medium TABLE 6-4: Livestock Slaughter in Torit There is a steady increase in livestock off-take, espe- During cially from the Greater Kapoeta area, which sup- Type/Year war 2005 2006 2007 2008 plies livestock markets in Narus, Kapoeta, Camp 1825 1303 1882 2821 2661 Cattle 15, and Torit, which is a secondary market and Goats 1249 282 923 19,137 Juba, which is the final market in Southern Sudan. Sheep 312 425 702 378 During the war, a lot of livestock were sold in Source: EES Ministry of Agriculture, Department of Animal Resources neighboring countries like Kenya and Uganda and Fisheries, Annual Reports. because of low prices but the trend has reversed since 2005. The number of livestock processed through TABLE 6-5: Livestock Transport Costs for EES, slaughter houses in Torit are indicative of the SDG increase in livestock sales, given Torit is the second- ary market for livestock from GK, Budi, and Iko- Kapoeta ­ Torit Kapoeta ­ Juba tos. Table 6-4 shows the changes over time since Type/Route 2008 2009 2008 2009 the CPA. Cattle 60 100 100 120 Other livestock slaughtered in small num- Goats/ Sheep 7 10 15 20 bers is pigs--35 in Ikotos and 14 in Kapoeta East, Source: Case study team estimates, and SNV Livestock Survey 2008. CHAPTER 6 ­ TOWARD A COMPREHENSIVE GROWTH STRATEGY IN SOUTHERN SUDAN 135 are loaded on trucks to Torit or Juba markets. of prestige to the owner. Furthermore, cattle are the An average truck carries about 20­30 cattle and currency in which dowries are usually paid. This is 50­150 goats. Table 6-5 shows what traders are indicative of the deep cultural meaning of cows as paying for transporting their animals: assets and cattle herding as a lifestyle. The absence of value chain systems has been Credit is generally not available to livestock widely reported upon by NGO's with a belief that farmers. However it is not the lack of credit that once water-points, better slaughter facilities, and is preventing the bringing to the market, quite the other extension services are built this will increase reverse. Farmers use or retain livestock as a strat- the trade in livestock. But analogously to the case egy to cope with the lack of other financial instru- for subsistence farming this is a consequence of lack ments. Both a response to insecurity and lack of of trade instead of a cause. Once increasing num- reliable financial instruments that lead people to bers of livestock are in fact traded, there is an eco- store wealth in cows. As such it can be regarded as nomic incentive to provide extension services. different forms of capital: insurance capital, social Returns made along the value chain and the profit capital (used for dowry), and savings capital. margins for both transporters (66­82 percent gross profit margin) and butchers (65 percent gross profit Services ­ Medium margin) are significant. This would indicate there The current business climate was reported to be should be scope for more people drawn into cattle challenging. In fact many smaller traders have transport and we would not anticipate this to be a either closed up shop or are sitting on unsold constraining factor. goods. Indeed it was reported that the business cli- As most of the purchasing power for meat mate was better during the peace in the 1970's than products comes from government salaries, severe currently. fluctuations in government income might have Infrastructure inadequacies present a signif- a bearing on the price. As the price formation is icant constraint. Electricity provision to Torit is transparent, and there is no lead time in produc- strictly for domestic consumption, and explicitly tion (unlike farming) the livestock herder can sim- not for production use. Most businesses have their ply decide not to sell if the price is below his/her own generators. Electricity provision in Kapoeta is reserve price. But we have thus far only seen a ris- imminent. While electricity does not impede pro- ing price. duction, it raises operational expenditures. Roads Security is a crucial issue as highlighted are in poor condition, as demonstrated by the col- above--the frequency and severity of cattle raids lapse of the bridge on the Juba Nimule road in Feb- are high. Cattle rustling is not only an expression of ruary 2009, which instantly disrupted the main economic need but also of inter-tribal rivalry over trading route to Uganda. The poor state of roads is resources and grazing.134 In an environment of inse- also one of the main causes of high transport costs. curity it is perhaps rational to keep one's wealth in The WFP quoted the commercial rates it is paying mobile form. This allowed lot of people to leave for the transport of food as $8.8 /km for a ton of EES with their wealth during the war, and return merchandise. So a 40-ton truck (plus trailer) from with their flocks after the CPA was signed, there- Loki to Nadapal (c. 200km) costs $7,200. fore explaining the immense increase in livestock in Regarding human capital, as stressed above, lit- the state. eracy rates are low in Eastern Equatoria (only 6.7 Cultural factors explain a significant part of why there is such little trade in cattle. Beyond being a vehicle of monetary wealth cattle is a source 134 Schomerus 2008. 136 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH percent of 15­24 year old women are literate). This the transition from its initial priority of establish- is not necessarily a skill shortage that would impede ing peace under the CPA and immediate relief to scaling up of production. Specific skills are lack- its citizens, to the broader development agenda and ing, such as masonry, carpentry and building. And facilitating broad-based growth to improve the live- the construction industry relies exclusively on for- lihoods of the people of Southern Sudan on a sus- eign workers for these skills. Indeed it is estimated tainable basis. GoSS has committed to preparing that there are approximately 100,000 foreign work- a growth strategy to guide this transition through ers in Southern Sudan, excluding those working assessment of the South's comparative advan- for NGOs. World Vision Sudan states that over tage and identification of the essential policies 85 percent of skilled labor in Juba is provided by and programs to unleash its growth potential. The immigrant workers, including those from Kenya, growth diagnostic framework can be a useful tool Uganda, Ethiopia and Eritrea (WVS, 2008). It is for GoSS as it does not begin from any precon- understood from the Central Equatoria Cham- ceived notions about what the correct policies for ber of Commerce that up to 40,000 Ugandans and growth are, but rather tries to approach the econ- 15,000 Kenyans are working in Juba alone. omy from its initial conditions and produce a pri- Insecurity is also affecting the medium service oritized and sequenced set of policy actions to get industry, primarily wholesalers and retailers. The where it wants to be. This approach is appropriate risk to any cargo being raided by robbers or getting to Southern Sudan in two ways. First, the situation caught up in a cattle raid imposes additional risks. is unique and the region faces a large number of In addition looting of premises at night presents very challenging conditions and so cannot simply another economic risk. rely on "conventional wisdom" to formulate poli- Multiplicity of taxes and lack of transparency cies. Second, the environment for analysis is largely on the part of taxing authorities is an issue. There free of reliable data, so a method that is based on are two levels of taxation--the state level and the creatively applying all available data and informa- county level--and three forms of taxation--license tion to form a coherent narrative is well suited to fees, personal income and business profit taxes, and the problem at hand. trade border taxes. The preceding section is meant to illustrate how There is very little credit provision to the pri- a growth diagnostic could inform the formulation vate sector and hence availability of capital was a of a growth strategy for the autonomous region of constraining factor. All investments were financed Southern Sudan by carrying out a brief diagnos- through own capital and retained earnings. There- tic of two states. Findings for the individual states fore access to finance is a key constraint to expan- are not meant to be definitive but rather just indic- sion in medium services, scaling up of which ative of directions a fuller growth diagnostic would significantly slows investment levels and growth. pursue. The remainder of this section discusses the last two steps of the growth diagnostic--syndrome D. Toward a Comprehensive Growth characterization and implementation diagnostics-- Strategy for Southern Sudan to raise relevant analysis and potential recommen- dations for a GoSS level growth strategy. GoSS is currently developing a growth strategy for Southern Sudan, and the growth diagnos- Syndrome Characterization tic framework is a useful framework to inform and shape this strategy. With the end of the CPA The pattern of binding constraints found in the period nearing, GoSS is increasingly focusing on state-level work suggests a syndrome for the CHAPTER 6 ­ TOWARD A COMPREHENSIVE GROWTH STRATEGY IN SOUTHERN SUDAN 137 South of an under-investment state. The econ- and marketing activities in various sectors. Mis- omies of Upper Nile and Eastern Equatoria states guided incentives are given by the government, face many constraints that bind its productive sec- which result in lowering agricultural produc- tors simultaneously. The degree of multiplicity in tivity. The GoNU's control of the gum ara- binding constraints is even more pronounced due bic industry has limited market competition to their post-conflict nature. Under the growth among the processing and exporting agents of diagnostics framework, we can attempt to look at gum products at the national level. This yields the collection of constraints to see if they fall into a sub-optimal level of investment and allows recognizable patterns or "syndromes." This sug- downstream processors and exporters to extract gests the basic syndrome of these economies is that rent from upstream UNS producers due to of an under-investment state, with serious trans- information asymmetry. port infrastructure bottlenecks, existence of ex-ante risks, and government failures in public policies Access to credit is a serious constraint for vir- toward the private sector through fiscal policies and tually all sectors. This is essentially a problem of other regulations. weak financial intermediation due to the policy shift away from Islamic banking in Southern Sudan and Infrastructure shortcomings, particularly those resulting withdrawal of existing banks from the state. related to transport structures such as inter-state This is a response of the banking sector to the ex-ante and intra-state road networks, are binding con- risks and uncertainty, which leads to under-invest- straints to almost all sectors and scale categories. ment in the banking services. There may be also a In UNS, while the state is relatively well con- result of government failure in instituting a drastic nected with the North of the country with river shift in its policy toward the banking sector without and road transport, connectivity with Southern ensuring smooth transition to the new system. markets such as Juba as well as further south The under-investment state is a typical syn- in Uganda and Kenya is very poor. The poor drome for post-conflict economies, which are transport infrastructure keeps the cost of inputs often associated with these phenomena. In addi- high in all sectors and constrains access to local, tion, there are several other characteristics of post- national, and export markets for products. conflict economies. Ex-ante risks are high. Uncertainty over the future of the country and the state in the post- Being justified by the weak private sector base 2011 phase as well as continued concerns over in the post-conflict setting, excessive involve- the local security condition, driven by the tribal ment of the government in productive activ- conflicts and the tension between Sudan's Peo- ities, either by directly operating them or ple Liberation Army (SPLA) and Sudan Armed through procurement, which crowds out Force (SAF), restrain productive operations and potential private sector investment or makes impede long-term investments. The vacuum investment less efficient. created by the withdrawal of Northern inves- Post-conflict economies also face the problem tors and traders has not yet been filled by the of weak public sector implementation capac- nascent and weak indigenous private sector. ity. In implementing the CPA, administra- Ex-post failures at various levels of the govern- tive structures have been constituted but are ment are also relevant. Multiple taxes and the still nascent. Coherence of the structures is still lack of fiscal policy coordination among vari- weak. As a post-conflict economy, a signifi- ous government entities discourage production cant amount of foreign aid flows into Southern 138 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH Sudan, together with the oil revenue share. Enhance the capacity of the state-owned ports With limited institutional capacity, effective use in Malakal and Renk and their port handling of available budget through programming and services to improve efficiency of river transport. implementing public investments efficiently is No mechanized lifting is available at either a significant challenge. port.136 Inter-modal connectivity between road A boom in construction is a typical phenom- and river needs to be strengthened as well. Cur- enon in a post-conflict economy. There is a rently, both two ports are accessible only by dirt large demand for construction work. This high roads. To supplement limited public resources demand in construction is often met by inelas- and to improve efficiency of port operations, tic supply in a post-conflict economy due to a the state government could consider leveraging limited supply base for construction work and on private sector resources for example through limited tradability of construction services. This public-private partnership (PPP). drives up the cost of construction work. Set a clearer policy framework based to create more transparent and competitive environment Implementation Diagnostics of transport services. The market is still under- developed in the sense that information asym- Upper Nile State implementation diagnostic. metry exists between buyers and sellers and The UNS economy is in the fortunate situation of pre-existing buyer-seller relations seem to gov- having significant oil and agriculture resources to ern the pricing system of transport services. exploit. For immediate growth opportunities, agri- The government can also encourage broader culture plays a key role particularly in the area of private sector participation in infrastructure large-scale mechanized crop farming, gum arabic, construction work so that the supply of con- and fisheries, but will need a set of reform policies struction services becomes more elastic, lower- to remove constraints that are particularly binding ing overall cost of construction. those opportunities. The relative proximity to the North makes the future growth path of the UNS Financial sector development economy more sensitive to the degree of economic integration both with the North and with the rest An effective policy framework to enhance local of the South, combined with a good security con- financial intermediation needs to be established. dition. There are three main areas the UNS gov- This is not simply to provide a short-term stop-gap ernment and GoSS could cluster their efforts to measure to counter the credit crisis in the UNS pri- unleash non-oil growth. vate sector due to withdrawal of Islamic banks. More Improved transport in UNS would bolster both importantly, there needs to be an appropriate envi- inter-state and intra-state connectivity. ronment with a set of sound legal and regulatory frameworks to facilitate private sector investment in Road infrastructure development to improve the area of banking services. Such policy framework both inter-state connectivity and intra-state should incorporate a strategy to support channeling urban-rural connectivity is the key area for of investments from existing and potential external infrastructure improvement in UNS. Invest- ments should be prioritized for upgrading exist- ing roads particularly the most acute bottlenecks 135 GoNU has indicated they will finance the upgrading work for Renk-Malakal. along the major North-South corridor as well as 136 As a result, the Malakal Port can handle only three barges a day, and feeder roads of the key agricultural zones.135 Renk Port only two. (Source: United Nations Joint Logistics Centre 2009). CHAPTER 6 ­ TOWARD A COMPREHENSIVE GROWTH STRATEGY IN SOUTHERN SUDAN 139 investors including remittance flows, North-based tify the key constraints to investment and economic investors, and potential foreign investors. growth in the highest potential areas. What are the For the UNS economy to pursue private-sec- feasible actions in Eastern Equatoria's current cir- tor driven economic growth, it is critical to ensure cumstances that would continue or initiate an epi- transparent, predictable, and less-binding fiscal and sode of sustained, broad based, rapid growth? regulatory policies toward the private sector. The Unlocking Crop Potential. Agricultural poten- government faces a challenge of balancing the two tial in Southern Sudan is high with about 90 objectives. On one hand, overburdening the pri- percent of its total area considered suitable for vate sector with taxes and regulations will certainly agriculture, 50 percent of which is prime agricul- constrain its growth and increase the incentive for tural land. Soil and climate conditions allow for a firms to stay informal. On the other hand, the state wide variety of food and cash crops. However, the needs to pursue non-oil revenue mobilization for potential for growing cash crops such as tea, cof- ensuring fiscal stability in a long run. For the gov- fee, cotton and sugar cane remains unexploited ernment to have sustainable fiscal space, the fiscal (JAM, 2005c). Cultivated area has historically system needs to be structured in a way to increase ranged between a minimum of one percent and participation of the private sector in the system. a maximum of two percent of the total area (i.e. 640,000­1,300,000 ha). According to FAO-WFP The state-level taxation system could be sim- (Crop and Food Supply Assessment Missions- plified with improved accountability in reve- CFSAM 1996­2007), about 950,000 ha are cur- nue collection. Multiplicity in taxes and other rently cultivated under cereals (sorghum being the administratively assessed fees such as licenses main cereal, followed by millet and maize), yield- on same products or same productive activities ing less than 1 ton per hectare. should be rationalized within individual depart- Clearly, both the yield per hectare and hectares ments/ministries as well as between depart- under cultivation can increase dramatically as illus- ments/ministries. trated above. The primary policy interventions are The inter-governmental fiscal and regulatory policy coordination needs to be strengthened Infrastructure and in particular feeder roads­ between GoSS and UNS and between UNS which are especially important considering the and counties. There needs to be further har- effect insecurity has had on human settlement. monization of taxes and regulations across dif- By connecting farmers to markets they are pro- ferent jurisdictions to provide an incentive for vided with an incentive to increase produc- freer flows of goods and services as well as cap- tion per hectare, hectares under cultivation and ital and labor. The current de facto system of diversification of crops. A key policy challenge multiple taxes on inter-state commerce needs is securing sufficient funds for the continued particular attention. maintenance of these roads. The transparency in the implementation of the Tackle the co-ordination problem through revenue collection system in the state and in Farmers Based Organizations (FBOs) or Com- the counties needs to be improved to ensure munity Based Originations (CBOs). Savanna accountability. More systematic monitoring Farmers Marketing Company (SFMC) in system could be introduced. Ghana is a good example of a commercial company for the marketing of the farmers' Eastern Equatoria implementation diagnos- produce of which FBOs will become share- tic. The growth diagnostic framework aims to iden- holders. It also does not involve a big role for 140 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH the government, as frequently well-intentioned A growth strategy must clearly identify its role state interventions can turn into state monopo- and the role of other actors (e.g., private sec- lies. Relatively modest levels of seed finance are tor, NGOs, donors, etc.) with the government required for this. clearly in the lead. Without clear leadership the Skills upgrade through demonstration farmers whole can be less than the sum of its parts since (this was successfully done in the 1970's), and many actors each formulate their own strat- seed contracts with local farmers. egies. While all of these actors provide some capabilities, none of them can, or should, play Unlock Value from Livestock the role of setting strategy, but at the same time, any strategy should draw as much as pos- The amount of livestock is very high in EES--with sible on the strengths of each of the existing an estimated total value of $3 billion. While cat- actors as the government need not, and cannot, tle herding is clearly part of the culture and tradi- do everything. tion of Southern Sudan, there nevertheless exists A growth strategy needs to stipulate mecha- the potential to manage and market livestock in a nisms for policy action consistent with exist- way that unlocks part of this value for income gen- ing government capabilities. There is a strong eration. This can be aided through: temptation to rely on direct government invest- ment by line ministries as the default solution. Improved security through DDR and small However, this is not always the best option as arms control. the government may not have the capability to Introducing other forms of saving and invest- do many things and often direct investment by ment through expansion of bank branches. government agencies conflicts and confuses the Collateralization of cattle by banks. government roles between stewards of creating the policy and regulatory climate for the overall Stimulating the service sector economy and as direct agents in that economy. A growth strategy will need to articulate a clear The service sector is primarily constrained by the delineation of roles and responsibilities among absence of finance. BOSS' Conventional Bank- government tiers within Southern Sudan. A ing Circular is already having the effect of regulat- key issue for private investors--from small to ing the banking sector and new banks, such as the large--is a sense of security in knowing what Equity Bank from Kenya, are poised to enter the regulations they face and who will enforce market. This could be supplemented by capitaliza- them. The current environment often produces tion of the MFI's or mitigating risks through the multiple, overlapping jurisdictions for tax and establishment of a guarantee fund. Regulating and regulation such that no one is clear on who is stimulating the financial sector is key to removing responsible for what. constraints in the service sector. A growth strategy will need to emphasize the issue of security, which is a GoSS responsibil- Additional Messages for GoSS ity. Security was raised as an issue in both state studies, and the urgency of the issue has been While each state analysis was particular, there are made more evident by recent flare-ups of con- some common elements to the implementation flict since the fieldwork for the studies, such as diagnostic that will emerge from a larger growth the cattle rustling in Jongei and inter-commu- diagnostic. nal conflicts in Upper Nile state. While signif- CHAPTER 6 ­ TOWARD A COMPREHENSIVE GROWTH STRATEGY IN SOUTHERN SUDAN 141 icant numbers of militia have been integrated ian authority type of duties and as such have into either the SPLA or the Joint Intelligence become a major threat to security. GoSS will Units, many elements remain active, e.g., rem- need to rationalize the employment of the mili- nants of SAF supported groups in Upper Nile. tia and local police force in dealing with inse- There are apparently large numbers of armed curity, with significant coordination challenges soldiers who are not trained to support civil- involved. REFERENCES Agriculture Research Corporation. Technical and WFP Crop and Food Security Assessment Mis- Annual Reports (various years). Khartoum, sion to Southern Sudan." Sudan. Government of National Unity (GoNU), Ministry Alexeeva, V, G. Padam and C. Queiroz. 2008. of Agriculture and Forests. 2008. "Study of the Monitoring Road Works Contracts and Unit Costs Sustainable Development of Semi-Mechanized for Enhanced Governance in Sub-Saharan Africa. Rainfed Farming." World Bank Transport Papers TP-21. Government of National Unity (GoNU) and Gov- Barghouti, S. and A. Salih. 2009. "Assessment of ernment of Southern Sudan (GoSS). 2006. the Agricultural Revitalization Strategy". Back- Sudan Household Health Survey (SHHS) 2006. ground paper for the Sudan CEM. Khartoum/Juba: Central Bureau of Statistics Bureau of Economic Analysis (BEA). "Global and Southern Sudan Center for Census, Statis- Financial Data." U.S. Department of Com- tics and Evaluation. merce. Government of National Unity (GoNU) and Central Bank of Sudan. Annual Reports (various Government of Southern Sudan (GoSS). years). Khartoum, Sudan. 2006­09. GoSS Share From Crude Oil Reve- Collier, P., A. Hoeffler and M. Soderbom. 2004. nues (monthly series), prepared by Joint Tech- On the Duration of Civil War. Journal of Peace nical Committee. Research 41 (3): 253­273. Oxford: Oxford Government of Southern Sudan (GoSS). 2005. University Press. Interim Constitution of Southern Sudan. Collier, P., F. van der Ploeg and A. Venables. 2009. Government of Sudan (GoS), Sudan Peo- "Managing Resources Revenues in Developing ples Liberation Movement (SPLM), World Economies." Oxford Working Paper. Bank (WB) and United Nations Develop- Elbadawi, I. 2008. Foreign Aid, the Real Exchange ment Program (UNDP). 2005. Joint Assess- Rate, and Economic Growth in the Aftermath of ment Mission: Framework for Sustained Peace, Civil Wars. World Bank Economic Review (22) Development and Poverty Eradication. Vol- 1:113­40. umes I­III. El-Dukheri, I. 2006. "Deliveries and the Effect/ Growth Commission. 2008. The Growth Report: Impact of the Project ­ Final Report." IFAD. Strategies for Sustained Growth and Inclusive El Rasheed, M. 2005. "Determinants of Market Development. Commission on Growth and Supply of Sheep in the Sudan: Case Study of Development. Kordofan Area." Ph.D. Thesis. University of Hamid, A., A. Salih, S. Bradley, T. Couteaudier, Khartoum, Sudan. M. El Haj, M. Hussein and P. Steffen. 2005. Food and Agriculture Organization (FAO). "Statisti- "Markets, Livelihoods and Food Aid in Dar- cal Database (FAOSTAT)." www.faostat.fao.org fur: A Rapid Assessment and programming Food and Agriculture Organization (FAO) and Recommendations." USAID, European Com- World Food Program (WFP). 2008. "FAO/ mission and FAO. 144 SUDAN -- THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH Hausmann, R., L. Pritchett and D. Rodrik. Sudan Microfinance Development Facility (SMDF) 2004. "Growth Accelerations." Harvard Ken- Business Plan. nedy School of Government Working Paper Sudan Productivity and Investment Climate Survey RWP04­030. (PICS). 2008. World Bank Group. Hausmann, R., Rodrik D., and A. Velasco. 2005. UNIDO. 2003. "Sudan Industrial Survey." Growth Diagnostics. Mimeo. Harvard Kennedy UNIDO. 2003. "An Industrial Agenda for Poverty School of Government. Cambridge. Relief and Transition to Sustainable Develop- Hidalgo, C. and R. Hausmann. 2009. The Build- ment." ing Blocks of Economic Complexity. Proceedings UNMIS. 2009. Sudan IDP & Refugee Return and of the National Academy of Sciences 106 (26): Reintegration Operations Statistical Overview. 10570­10575. January 2009. Hidalgo, C., B. Klinger, A. L. Barabasi and R. Haus- United Nations. Commodity Trade Statistics Data- mann. 2007. The Product Space Conditions the base (COMTRADE). www.comtrade.un.org. Development of Nations. Science 317: 482­487. United Nations Joint Logistics Centre. 2009. IMF. Sudan Staff Reports (various years). www.imf. "River Cargo Transport Assessment: White org/external/country/SDN/index.htm Nile River, Sudan." IMF. 2009. World Economic Outlook. Washington Upper Nile State, Ministry of Agriculture. 2007. DC: International Monetary Fund. "Environment & Rural Development Annual Kaufmann, D., and A. Kraay. 2002. Growth With- Report 2007." out Governance. Economia 3 (1): 169­229. Upper Nile State. 2007. "UNS State Strategic Medas, P. and D. Zakharova. 2009. "A Primer on Plan." Fiscal Analysis in Oil-Producing Countries." USAID. 1980. "Sudan Country Development IMF Working Paper 09/56. Strategy Statement." Mimeo. Mina, A. and J. Van Holst Pellekaan. 2009. "Value Van der Ploeg, F. and S. Poelhekke. 2009. "The Chains for Sheep, Cattle and Mutton Market- Volatility Curse: Revisiting the Paradox of ing." Background paper for the Sudan CEM. Plenty." De Nederlandsche Bank Working Okuk, J. 2008. "Community Land: A Critical Paper No. 206. Socio-Economic Factor to Temper with South- World Bank. 2008. Africa Infrastructure Country ern Sudan." Mimeo. Diagnostic (AICD) Study. www.infrastructure- PlaNet Finance Group. 2007. "Khartoum State africa.org/aicd. Market Research Study." Manuscript prepared World Bank. World Development Indicators. Various for Central Bank of Sudan. years. Washington DC: World Bank Group. Ramachandran, V., A. Gelb, and M. Shah. 2008. World Bank. Doing Business Report. Various years. Africa's Private Sector: What's Wrong With the Washington DC: World Bank Group. Business Environment and What to Do About It. World Bank. 1987. "Sudan: A Strategy for Rainfed Washington: Center for Global Development. Farming ­ A Commentary on the Government Schomerus, M. 2008. Violent Legacies: Insecurity in Steering Committee Report." World Bank Sudan's Central and Eastern Equatoria. Geneva: Report No. 6502-SU. Graduate Institute of International Studies, World Bank. 2003. Breaking the Conflict Trap: Civil Geneva. War and Development Policy. Oxford: Oxford Shah, A. 2007. The Practice of Fiscal Federalism University Press. Comparative Perspectives. Montreal: McGill- World Bank. 2007. Sudan Public Expenditure Queen's University Press. Review (PER). Washington DC: World Bank. REFERENCES 145 World Bank. 2008a. Sudan Diagnostic Trade Inte- World Bank. 2009d. Global Economic Prospects. gration Study (DTIS). Washington DC: World Washington DC: World Bank. Bank. World Bank, 2009e. "Assessment of the Non-Oil World Bank. 2008b. "Nile Basin Power Trade Revenue of Three States of Southern Sudan." Study." Washington DC: World Bank. (forthcoming). World Bank. 2009a. Global Economic Prospects. Young, H., A. Osman, Y. Aklilu, R. Dale and B. Washington DC: World Bank. Badri. 2005. Darfur: Livelihoods Under Siege. World Bank 2009b. Awakening Africa's Sleeping Tufts University and Ahfad University for Giant: Prospects for Commercial Agriculture in Women. the Guinea Savannah Zone and Beyond. Wash- Zagha, R. and G. Nankani. 2005. Economic growth ington DC: World Bank. in the 1990s: Learning From a Decade of Reform. World Bank 2009c. World Development Report Washington DC: World Bank. 2009: Reshaping Economic Geography. Washing- ton DC: World Bank. THE WORLD BANK 1818 H St. NW Washington, D.C. 20433