Future peace bound in oil

28 April 2010

Sudan must ensure a more even distribution of its oil wealth, or risk more conflict in the run-up to a referendum on independence in January 2011

On 26 April, Sudan’s election commission declared President Omar Hassan al-Bashir and his ruling National Congress Party (NCP), the winner of the country’s first multiparty elections in 24 years, despite allegations of ballot irregularities.

Following his victory with 68 per cent of votes, he now faces a stack of economic challenges, chief among them the possibility of a split between the largely Arab north and the sub-Saharan African south, which is to be decided in a January 2011 referendum.

If, as predicted, the south votes next year to secede from a united Sudan, the government of South Sudan (GOSS) and its Khartoum counterpart will have to agree on how to share strategic national resources. The country is already facing stark economic choices. Its external debt stands at $34bn, which exceeds projected oil revenues – the source of 93 per cent of the country’s exports and at least 50 per cent of state income in 2009.

Sudan GDP and inflation
Real GDP growth (% change)10.26.845
Inflation (annual average %)814.398
f = forecast. Source: IMF

Both North and South Sudan experienced fiscal pressures in 2008-2009 as a result of the collapse in oil prices and revenues, adding to the already large debt arrears with foreign lenders. Sudan has been excluded from debt relief due to the conflict in Darfur, which led to the International Criminal Court ordering President Al-Bashir’s arrest in March 2009.

The country’s myriad conflicts have proven a drain on state finances. The 2010 budget envisages that spending on defence and security will be SP6.5bn ($2.9bn), about a quarter of the total budgeted current expenditure of SP25.1bn. However, the strong oil sector growth of the last decade has driven a substantial improvement in Sudan’s economic performance, even as the country was mired in damaging military conflicts.

Oil output

Real gross domestic product (GDP) growth surged from about 5 per cent in the 1990s to 7.5 per cent in the 2000-2008 period, one of the strongest records in the region, according to the International Monetary Fund. This was thanks largely to an increase in oil production, from 130,000 barrels a day (b/d) in 1999 to about 500,000 b/d today, coinciding with a long-term rise in global prices.

Despite its international pariah status, Khartoum has attracted support from regional lenders. In February, Kuwait’s Arab Fund for Economic and Social Development agreed a $175m loan for the construction of the Khartoum New International Airport. In October 2009, the Saudi Development Fund offered a $93m loan to help fund a sugar project and improvements to the Roseires Dam.

But the benefits have not been uniformly enjoyed by the Sudanese – wide disparities between the relatively wealthy Arab north and the impoverished south, marginalised farming communities in Darfur, the Nuba Mountains and the Eastern states.

Despite increased agricultural output, Sudan remains dependent on imported food. According to a report, Decisions and Deadlines: A Critical Year for Sudan, published in January by UK think-tank Chatham House, most investment has been directed to dams rather than agricultural development.

If the peace settlement agreed in 2005 is to hold firm and the anticipated division between north and south is not to lead to another conflict, Khartoum needs to ensure a more even distribution of wealth.

But this task has been made more onerous by the recent global economic crisis. Sudan was hard hit by the fall in oil prices in 2008. GDP growth shrank to 6.8 per cent that year, compared with 10.2 per cent in 2007, and moderated further in 2009 to an estimated 4 per cent. The continued global recession will slow recovery prospects in 2010, though Sudan’s finances will feel the positive impact of higher oil prices this year, with the government forecasting oil revenues of SP10.5bn.

More challenging economic decisions will arise over the next year. “The likelihood of separation between north and south will have a lot of costs associated with it. Cash will need to be found to enable them to go through the processes needed for separation,” says one western analyst.

Though diplomatically still at the bottom of the pack in western donor eyes, Khartoum may yet be upgraded in the wake of the election, and it would then later be in a position to do deals on its unpaid debt – for example, by trading some of this with the newly independent south, which would be able to obtain better terms for the debt.

Sharing wealth

According to the Chatham House report, in the event of a secession, Southern Sudan could assume central government debt in return for concessions on other issues, calculating that its diplomatic position will encourage debt-forgiveness, which remains a distant prospect in the north.

Both sides will also have to come to an agreement on sharing oil revenues as their economic fortunes are inextricably linked; 80 per cent of Sudan’s oil production is based in the south, while the north controls the country’s refinery and export pipeline. GOSS ministers have already warned an independent South Sudan would review all deals struck between Khartoum and foreign oil firms.

Oil may have perpetuated the war, but it may also be the basis for lasting peace. For the more developed north, oil is a vital bonus; for the impoverished south, uninterrupted exports will be a source of long-term revenue. And neither can afford conflict to jeapordise this resource.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications