Sudan is on course for gross domestic product (GDP) growth of 1.2 per cent this year, after a troubled 2012, when output shrank by 4.4 per cent in real terms.

Moreover, following the settlement of a dispute with neighbouring South Sudan, state coffers should benefit from the resumption of oil transit flows through the pipeline from production fields in the South to the export terminal on the Sudanese coast of the Red Sea.

Secession impacts

These are encouraging developments for a country still struggling to adjust to the impacts of the South’s independence in July 2011 and the outbreak of border hostilities last year. The conflict led Khartoum to cut off the pipeline as a means of putting pressure on the Southern government in Juba, but this action also cost Sudan itself dearly in oil transit income.

Even so, Sudan is still struggling to adjust to the loss of the bulk of pre-partition oil revenue. The majority of production is in the South, and Khartoum only has a small investment stake in this.

At the start of 2013, the government drew up a budget that envisaged revenues of S£25.2bn ($5.7bn) and expenditure of S£35bn, implying a deficit equal to 3.4 per cent of GDP. While that shortfall might seem manageable, the government planned to finance it mainly from domestic sources, risking an inflationary surge through the printing of money. That would bring the country close to a hyper-inflation spiral. According to official figures, consumer prices rose 42 per cent last year, but independent economists believe the true rate of inflation may have been as high as 65 per cent.

The Sudanese pound has been declining in value because of a trade deficit, which reflects the difficulty of weaning the economy off the income and spending habits acquired during the years of a unified Sudanese state with substantial oil income.

Oil slump

The scale of the adjustment needed is reflected by the slump in the oil sector’s contribution to Sudan’s GDP – from 15 per cent pre-partition to just 3-5 per cent now. Meanwhile, the Washington-based IMF calculates the fall in government fiscal oil revenues as a result of the South’s independence at 6.25 per cent of GDP.

The fall in Sudan’s fiscal oil revenues as a result of the [partition] was 6.25 per cent of GDP

IMF

To cope with these challenges, a year ago, the government in Khartoum adopted a wide-ranging programme of reforms. Key measures included a hefty devaluation of the Sudanese pound, tax rises and cuts in fuel subsidies and non-priority spending, partially offset by an increase in social safety nets to protect the poor.

The IMF believes that by 2014 the outlook could improve because Sudan will have made many of the painful adjustments required by partition. But it also thinks the country could make more effective use of the resources it still has, particularly in development spending.

South Sudan

South Sudan, meanwhile, began independent life as one of the world’s least-developed countries, but with long-term resource potential provided by its substantial oil reserves. The challenge is to manage these wisely in order to deliver improvements in basic services and key infrastructure on a sustained basis.

The World Bank recently pointed out the risks that face a country where a major oil industry sits amidst an otherwise almost rural economy based on pastoralism and subsistence agriculture. Some 85 per cent of the population lives on non-wage, mostly rural activity.The World Bank says South Sudan is the most oil-dependent economy in the world. Crude accounts for almost all exports and some 80 per cent of GDP. The halt in exports as a result of the dispute with Sudan therefore had a drastic impact, although the blow was cushioned by support from foreign aid donors. Before the pipeline’s closure, oil accounted for 98 per cent of domestic fiscal receipts.

Only 27 per cent of South Sudanese aged 15 or over are literate and other indicators are among the world’s poorest

Heavy dependence on oil and the fragility of the new state’s government contributed to a dramatic price surge during the first year of independence, with inflation soaring to 80 per cent at one point, before falling back to about 17 per cent at the end of last year. South Sudan now faces a massive social and economic development challenge. Unless new finds are made, oil output is projected to decline over the next 20 years or so.

Yet the country is poorly equipped to develop alternative sources of prosperity and compete in the modern African economic environment.

Some 51 per cent of the population is aged under 18. The extension of education will be key.

Development indicators

At present, only 27 per cent of South Sudanese aged 15 or over are literate and other development indicators are among the poorest in the world. Some 38 per cent of the population must walk for at least 30 minutes to reach a source of drinking water, and 80 per cent have no access to toilet facilities.

However, such challenges are not insuperable, as other low-income sub-Saharan countries have shown over recent years in making rapid progress towards some of the UN’s Millennium Development Goal targets. The international community has ample experience in helping poor countries boost school enrolment, rates of immunisation and access to basic sanitation.

The more intractable long-term challenge is likely to be employment. South Sudan is landlocked and poorly placed to develop modern job-creating activities. High unemployment or lack of access to income among young men can increase the risk of instability.

Sudan has a few painful years ahead of it as it adjusts to its new, partitioned status.