The combination of the secession of South Sudan in July 2011, an ongoing series of expensive wars and disastrous management by the Khartoum government has left Sudan’s economy on the brink of collapse.

According to the latest Article IV report published by the Washington-headquartered IMF in November 2012, South Sudan’s independence has cost the Sudan government three quarters of its oil production, half its fiscal revenues and about two thirds of its international payments capacity. In the first six months of 2012, exports contracted 40 per cent compared with a year earlier, and a $2.2bn trade surplus became a $2.7bn deficit.

The IMF estimates that in 2012 there was an contraction in gross domestic product (GDP) at factor costs of 11.1 per cent, compared with growth of 3-3.5 per cent a year between 2008-10. Oil GDP shrank by 36 per cent in 2011 and an estimated 58.2 per cent in 2012, while non-oil GDP fell by 5.1 per cent in 2012, compared with growth of 3.4 per cent in 2011.

Hydrocarbons dependence in Sudan

The Sudanese government is running deficits in both its fiscal and current accounts. The fiscal deficit was an estimated 3.7 per cent of GDP in 2012, although it is forecast to narrow to 3.2 per cent in 2013. The current account deficit is expected to be about 6.9 per cent of GDP in 2012 and 2013. Although imports are expected to fall by 20 per cent over the two years, capital inflows, including foreign direct investment, are forecast to drop by 50 per cent.

Compared with most oil producers in the Middle East and North Africa region, Sudan’s economy is relatively diversified. But since oil exports began in 1999, it has developed a growing dependence on hydrocarbon revenues.

The oil sector directly contributed only about 15 per cent of GDP before 2011, but oil earnings had a disproportionate impact on government earnings and foreign exchange receipts.

“The economy is on the brink of collapse,” says a report by International Crisis Group (ICG), a Brussels-based non-governmental organisation, published in November 2012. “Economic policy is not addressing the fiscal gap stemming from the loss of southern oil revenues, which amounted to 70 per cent of the previous budget.”

According to the IMF, the cost of the secession of the south is estimated at £SD50bn ($11.4bn), or 26.25 per cent of 2012 GDP. Net losses in government revenue amount to about £SD12bn, equivalent to 6.25 per cent of GDP, while oil export losses are an estimated $6.6bn, or 12.9 per cent of GDP.

Economic policy is not addressing the fiscal gap stemming from the loss of southern oil revenues

International Crisis Group report

Khartoum’s poor relationship with South Sudan since independence has deepened the economic costs for Sudan. In early 2012, a dispute over transit fees led Juba to cut off its oil exports through Sudan, depriving Khartoum of the revenues it might otherwise accrue from hydrocarbons production south of the border. The trading relationship between the two countries, vital for the livelihood of many Sudanese, has also been shattered.

Sudan’s debt burden, meanwhile, is expected to reach $46bn in 2013, compared with gross international reserves of a little over $1bn. Khartoum has complained it has received insufficient debt relief from its creditors, but many observers are enraged that some governments, including the UK, have agreed to cancel Sudan’s debt even while it perpetuates armed conflict within its own borders.

Economic development imbalance

The government of President Omar al-Bashir has done little to develop Sudan’s non-oil economy. There has been investment in agriculture and mining, but without a clear plan.

“There’s never been investment in the development of the broader economy, even when the regime was not short of money,” says a UK-based Sudan analyst. “There has been some investment in agriculture, but it’s been done on a piecemeal basis rather than with any strategy in mind.” Instead, Sudan’s economy has operated on the basis of patronage, with funds granted and contracts awarded as a means of cementing support for Al-Bashir’s regime.

Sudan selected economic indicators
  2010 2011 2012 2013
Real GDP growth (per cent, at factor costs) 3.5 -3.3 -11.1 -0.6
Oil GDP growth (per cent) -3.9 -36 -58.2 14.5
Non-oil GDP growth (per cent) 5.1 3.4 -5.1 -1.4
Fiscal balance (percentage of GDP) -0.4 -1.3 -3.7 -3.2
Current account balance (percentage of GDP) -2.1 -0.5 -7.4 -6.5
External debt ($bn) 39.5 41.4 43.7 45.6
International reserves ($bn) 1.6 1.3 1.1 1.2
International reserves (months of imports covered) 1.8 1.8 1.5 1.6
GDP=Gross domestic product. Source: IMF 

“Money has tended to go in a corrupt fashion either to individuals or to the National Congress Party,” says the analyst. “A lot of it is believed to have been held in bank accounts in Malaysia, Singapore and the UAE.”

As a result, what economic development there has been in Sudan has not been carried out on a rational basis. “It’s very imbalanced,” says the analyst. “If you want to get contracts you have to kowtow to the government, particularly if you’re not Islamic. Big businesses that failed to follow the party line have been hit with taxes and levies that they couldn’t afford to pay, and the government has taken them over.”

Sudan’s budgeted spending

Sudan’s current involvement in fighting on three fronts – in Darfur, Blue Nile and South Kordofan – has continued focus on military spending, established during two civil wars in southern Sudan that endured for more than 40 years.

The 2012 budget gave a much greater share to defence, security and interior ministries than to health, education and industry. In June 2012, the budget was amended to raise the allocations to security, defence and police still further and reduce funds for health, education and development by 51 per cent.

[Sudan] has … shown its capacity to withstand economic crises. I don’t think [the regime will collapse] yet

Aly Verjee, Rift Valley Institute

While Khartoum devotes its finances to funding the army and propping up the regime, the wider population is bearing the brunt of the loss of oil income. The UN Development Programme (UNDP) estimates about 47 per cent of Sudan’s population lives on less than $1 a day. Unemployment is more than 20 per cent, according to the IMF, while the UNDP estimates youth unemployment is more than 25 per cent.

Rampant inflation is rapidly eroding purchasing power. By the end of July 2012, annual inflation had reached 41 per cent, according to the IMF. Monetary policy tools at the government’s disposal are also weak.

There has been a dramatic increase in the price of basic commodities and a serious reduction in the production of cash crops and staple foods such as sorghum and millet. The result is that Sudan’s food security is in jeopardy. “Making ends meet is virtually impossible,” says the UK-based Sudan analyst.

Some analysts argue economic pressures could eventually create a groundswell of popular unrest that finally tips the balance against Al-Bashir’s government, bringing about the demise of his regime.

Sudan’s perpetual state of conflict is draining what little resources the regime has at its disposal. The secession of South Sudan led to a downward adjustment of Sudan’s official reserves by $0.5bn, or 17 per cent of the total, and banking credit to the private sector also fell, according to the IMF. International reserves amounted to just 1.5 months of imports of goods and services at the end of 2012.

There is a precedent for popular economic concerns to prompt a change of government in Sudan. In 1964, a general strike by a group of lawyers, doctors and other workers under the umbrella of the National Front for Professionals grew into a leftist challenge to the government. Several days of rioting culminated in the fall of the military regime of Ibrahim Abboud in what came to be known as the October Revolution.

Iran and Syria are present-day examples of autocratic regimes that have proved able to survive long periods of economic hardship, and Sudan’s own history makes analysts reluctant to predict the regime will fall any time soon.

“The economic situation is certainly not positive, but it’s not one of imminent collapse,” says Aly Verjee, senior researcher at the Rift Valley Institute, a non-profit research and advocacy organisation in Nairobi. “There are plenty of examples of regimes facing a worsening economic situation still lasting a very long time, and Sudan is one.

“The government has already shown its capacity to withstand economic crises in the 1990s and in the last years of the Numeri regime [in the early 1980s]. Does the exchange rate need to be £SD15 to the dollar, or £SD20 to the dollar before the regime collapses? It’s impossible to say, but I don’t think we’re there yet.”

An increasingly embattled government is already demonstrating an ability to raise money from sympathetic partners. The government leant on Qatar for substantial loans in 2012, and in early 2013 secured a $1.5bn loan from the state-owned China Development Bank, according to a statement by Sudan News Agency, the government’s official press service.

“A lot of Sudanese say there’s no money, and that the government can no longer afford these wars,” says the UK-based analyst. “In a conventional sense, that’s true. It certainly doesn’t have the resources that it had before, but there could be money from the international Islamic movement if it’s for the right cause. It might come in the form of funds from private businessmen in countries where the regime has support, such as Qatar, Saudi Arabia or Malaysia.”

Economic pressures in Sudan

The current round of talks on the expansion of Sudan’s air force is a case in point. According to a statement by Transport Minister Ahmed Babiker Nahar, the regime is in talks to buy five Antonov planes from the Ukraine. The government intends to finalise the deal in March, and hopes that Antonov itself will finance the deal through a loan to the Sudanese government.

The possibility that economic pressures may eventually contribute to a change of regime in Khartoum cannot be ruled out. But any new government would face a stiff challenge to restore a sense of economic balance to the country. Even if the most egregious elements of Sudan’s military spending were curbed, and steps taken to tackle corruption, the economy would face a struggle in the medium term.

“It’s a huge job,” says the analyst. “The country is economically crushed. Its people are crushed and there’s a limit to how much aid is available.”

Key fact

The secession of South Sudan cost Sudan $11.4bn, or 26.25 per cent of 2012 GDP

GDP=Gross domestic product. Source: IMF