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Page 1: Afrikadit Research--South Sudan Macroeconomic and Buiness Enviornment Overview
Page 2: Afrikadit Research--South Sudan Macroeconomic and Buiness Enviornment Overview

TABLE OF CONTENTS

Southern Sudan Macroeconomic and Business Environment Overview

EXECUTIVE SUMMARY

BACKGROUND

Economic and Growth Challenges

MACROECONOMIC SETTING

GDP Structure and Developments

Fiscal Developments and External Aid

Recent Inflation Developments and Monetary Policy

Exchange Rate and External Debt

BUSINESS ENVIRONMENT AND PRIVATE SECTOR OVERVIEW

Challenges facing the private sector

Financial Sector Review

FUTURE BUSINESS PROSPECTS AND OPPORTUNITIES

ANNEX 1: Doing Business in Juba 2011 Highlights

ANNEX 2: South Sudan--Major Macroeconomic and Business Indicators (2008-2010)

ANNEX 3: Sudan--Selected Macroeconomic Indicators (2007-2010)

June 2011AfrikaDit Research

Research Highlights

1

2

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7

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15

22

6

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Page 3: Afrikadit Research--South Sudan Macroeconomic and Buiness Enviornment Overview

Helping bring the hopes and aspirations of the world’s youngest nation to fruition is Afrikadit’s singular mission.

Page 4: Afrikadit Research--South Sudan Macroeconomic and Buiness Enviornment Overview

Southern Sudan: Macroeconomic and Business Environment Overview

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EXECUTIVE SUMMARY

Background

The Republic of South Sudan became the world’s newest nation on July 9, 2011 as it seceded from Sudan following a historic referendum on self-determination. Political stability in South Sudan has gradually been established in recent years though occasional setbacks remain a possibility given still unresolved issues with northern Sudan over oil rights, Nile waters, border regions, and external debts. South Sudan will be confronted with the wide array of challenges that face any new country, but the availability of significant oil resources, strong donor support, early signs of foreign investor interest (especially from the region), and good governance can all help to address and gradually overcome these challenges over time.

Macroeconomic setting

South Sudan’s formal economy is dominated by a single resource, namely oil, while a large portion of informal economic activity takes place through subsistence agriculture, livestock rearing, and small scale services. The overall size of the economy is very roughly estimated at $11 billion, which is about one-fourth that of North Sudan, about one-third that of Kenya (GDP: $32 billion) and Ethiopia (GDP: $31 billion), but notably larger than the regional economies of Rwanda (GDP: $6 billion), Malawi (GDP: $5 billion) or Burundi (GDP: $2 billion). South Sudan’s urban economy has expanded dramatically in recent years—from a very tiny base—particularly in the areas of hospitality services (hotels), building and construction, and finance. Current Business Environment and Private Sector Overview

Though the formal private sector is still at a very nascent stage, and hampered by severe infrastructure and regulatory constraints, a fast-growing private business community is beginning to emerge. The government has, in its policy documents, very positively indicated that it intends to leave business and enterprise development to the private sector and is in the process of putting in place relevant laws, regulations, and institutions to make this possible. Partly reflecting such efforts, more than 7,333 businesses are presently registered in South Sudan according to government statistics, including several thousand foreign businesses in areas as varied as telecommunications, air transport, timber, oil production and distribution, farming, mining, building & road construction, importation of goods, road transportation, and hotels. Trade with neighboring countries—involving agricultural products such as maize, wheat, rice, and sugar—is growing fast. The financial industry is also expanding rapidly, with eight banks already in place alongside other financial institutions that include 5 insurance companies, 45 foreign exchange bureaus, and 49 Micro-finance outfits.

Future Business Prospects and Opportunities

Despite tough starting conditions, the Republic of South Sudan has the potential—given it’s very favorable natural resource base—to lay the basis for an open and fast-growing economy with a vibrant and gradually diversifying private sector. Besides business opportunities that will arise on account of the dominant oil sector, the economy offers huge potential growth in the following notable areas: agriculture (given excellent soil and climatic conditions); forestry, mining; infrastructure; and services such as hotels and banking. Capitalizing on these opportunities will, however, require a macroeconomic framework that is conducive to private sector growth and a business climate that is relatively transparent and predictable. Good political and economic governance on the part of South Sudan’s domestic leadership and external support from outsiders (including through large-scale technical assistance to build capacity in key economic institutions) will also make a critical difference. Assuming these are gradually put in place, there is a very wide and virtually unexploited range of business opportunities in South Sudan whether it is for the emerging pool of local entrepreneurs, for neighboring country investors ready to seize expansion opportunities, or for an even broader source of foreign investors—from the Middle East, Asia, Europe and beyond—that can contribute to and benefit from the transformation of the newly independent country.

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Southern Sudan: Macroeconomic and Business Environment Overview

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BACKGROUND

The Republic of South Sudan became United Nation’s 193rd member country on July 9th 2011, as it officially separated from Sudan following a historic referendum on self-determination that took place in January 2011. South Sudan is in its sixth year of peace following the 2005 Comprehensive Peace Agreement (CPA) that officially ended the 22-year North-South civil war1. The region has suffered from decades of underdevelopment, war, famine, drought and flood, resulting in the devastation of the region’s economic, political and social structures. According to the recent USAID engagement agenda for post-conflict economic recovery and growth in South Sudan (2009), only about 15 percent of the adult population is literate. Up to the mid-1990s, and even now, basic health and social services were provided mainly by a few non-governmental organizations (NGOs), faith-based organizations, and international humanitarian relief agencies. The limited physical infrastructure that existed in South Sudan was devastated during the conflict years.

The official leadership of South Sudan, the Government of South Sudan (GoSS), emerged in 2005 at the signing of the Comprehensive Peace Agreement (CPA). Considering the short time frame since its establishment, the GoSS has made notable accomplishments in setting up basic institutions. Ministries and commissions are now operating, though with still limited capacity, and there are structures at central and state levels as well. These were all created nearly from scratch, including the need to build basic structures such as buildings and staff accommodations. These achievements were exceptionally difficult given the rudimentary nature of physical infrastructure (i.e., electricity, water, roads and communications).

The Government of South Sudan (GoSS) has adopted a vision for equitable development and poverty eradication, but starts from a very low level in terms of institutional capacity and socio-economic development. Key education and health indicators, such as child and maternal mortality and primary enrolment, are among the worst in the world. Physical infrastructure is virtually non-existent, with no paved roads outside the main urban centers, and civil service and proper structures for service delivery is currently being created essentially from scratch. Some key socio-economic indicators of South Sudan are presented in Chart 1 below.

The last six years under the 2005 peace deal—the Comprehensive Peace Agreement (CPA)—have yielded some institutionalization by South Sudan including growth in decision-making structures for the rich hydrocarbons sector (oil production). The GoSS already has an oil ministry in place and an embryonic national oil company Nilepet, mirroring to some extent the lines of responsibility in North Sudan. The Wealth Sharing Agreement provided a framework for resource allocation and sustainable decentralization, establishing comparative underdevelopment and war affected status as the key criteria for prioritization of public revenue allocations. The Agreement assigns a share of almost 50% oil and non-oil revenue that is collected in the South to GoSS, as well as the right to collect additional domestic revenue and external assistance, and the right to have its own banking system (and its regulator-- Bank of South Sudan-BoSS) within the framework of the Central Bank of Sudan (CBoS).

With respect to the economy, this has primarily been based on subsistence agriculture and livestock rearing, with some local variations. According to WFP findings (2007) approximately 85% of households in South Sudan cultivate land and around 65% own cattle. While 53% of food consumed comes from own production, while market purchases stand at 32%--accounting for the next important food source. In some areas households rely on wage labor, and in others, consumption is supplemented by the gathering of wild foods, hunting and fishing. In rural areas, many of those who don’t cultivate are returnees without immediate access to land.

1The Comprehensive Peace Agreement (CPA) was signed in January 2005 between the Government of Sudan based in Khartoum and the Sudanese People’s Liberation Movement (SPLM) in the South, ending one of Africa’s longest civil wars. The CPA addressed some of the long-standing causes of North-South conflict by institutionalizing autonomy for South Sudan and by sharing resources. Several aspects of the CPA were reportedly scheduled to be implemented over the remaining period of the six-year interim period. To this date, the key remaining issues include: the resource-sharing and border demarcation issues of Southern Kordofan, Blue Nile, and Abyei, collectively referred to as the Three Areas.

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Poverty is pervasive across South Sudan. The economy remains highly uneven with significant regional disparities in investment allocations, health care, education and industries. Internally displaced persons (IDPs) of South Sudan living in the North are estimated at about 4 million. The social and economic impact of the massive current and expected wave of returnees is also a major concern. Another challenge relates to the restoration of productive assets and the delivery of basic services, especially given the highly militarized context in which a large section of the pastoral communities in the South are used to managing their affairs with limited interaction with any form of government.

Despite tough starting conditions, the return of peace has allowed the resumption of normal economic activity, most notably in the urban and its surrounding areas. The informal sector of the economy has been thriving and growing during the past few years. Construction is booming, not in large capital-intensive sectors, but mainly in the construction of hotels, lodges, and residential buildings. Retail trading including cross-border trade from Uganda and Kenya, and transportation services has surged over recent years. Though there is very are few official statistics, casual observations and subjective evidence from traders, businesspeople, and long-time residents all agree on the observation that the informal and small-scale sector of the economy is flourishing. This is clearly evident in Juba and in other urban and semi-urban areas.

* The 5th Sudan Population and Housing Census, a high point in the implementation of the 2005 Comprehensive Peace Agreement (CPA) was conducted from 22-30th of April 2008. The CPA required that Sudan organize a population census as a key precondition to prepare the ground for the 2010 elections and the 2011 referendum on the right to self-determination, as well as the basis for repatriation of political power and economic wealth across the country. Furthermore, the data collected during the census was supposed to be the primary source of information to decide the number and re-allocate the electoral constituencies and to re-demarcate the administrative boundaries. Accordingly, the population of South Sudan was estimated at about 8.26 million, with about 500,000 southerners living in the north of the country. However these census results of South Sudan were highly contested by Southern Sudanese officials on a multitude of issues, for instance the GoSS accused that “the Central Bureau of Statistics in Khartoum refused to share the raw census data with Southern Sudan’s Centre for Census, Statistic and Evaluation.” External observers have also suggested that the 5th Population and Housing Census in Sudan had been politicized and contentious, to say the least, falling short in meeting universal standards. According to Darfur Relief and Documentation Centre’s comprehensive assessment in 2010 “The Census was simply an incomplete exercise, as it was the most polarized, controversial, inconsistent and unscientific census to be organized in Sudan’s history”. The census showed the Southern Sudan population to be 8.26 million; however President Salva Kiir suspected figures were being deflated in some regions and inflated in others, and that made the final tally “unacceptable”. He reaffirmed GoSS’ official position that the Southern Sudanese population was in fact estimated to reach one-third of Sudan overall population (close to 15 million), while the census results showed it to be only 21%. .Many Southern Sudanese were said to not have been counted “due to bad weather, poor communication and transportation networks, and some areas were unreachable, while many Southern Sudanese remained in exile in neighboring countries, leading to ‘unacceptable results’, according to GoSS authorities.” The GoSS insisted that the population of Southern Sudan residents in North Sudan were grossly undercounted. According to the GoSS’ own estimates, the population of Southern Sudan in Khartoum alone was over 2 million inhabitants, yet the census results showed that their number is little more than 500,000. The chief American technical adviser for the census in the South also reportedly said that the census staff could have probably reached 89% of the population. More so, the census results also showed inconsistency in the numbers of the population of Northern Sudan, in particular the unmatched increase in the numbers of the nomad population in Darfur and exclusion of millions of internally displaced persons (IDPs) and other war-affected communities in areas under the government control. In sum, the 5th Population and Housing Census was considered by many as a partial population assessment--at best.

Southern Sudan Population by State (in ‘000) [Fig. 1]

Western Bahr El Ghazal

Unity

Western Equatoria

Lakes

Northern Bahr El Ghazal

Eastern Equatoria

Upper Nile

Warrap

Central Equatoria (Juba)*

Jonglei

Southern Sudan

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

333

586

619

696

721

906

964

973

1,104

1,359

8,260*

Source: Southern Sudan Centre for Census, Statistics and Evaluation (SSCCSE -- 2010)

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KEY SOCIO-ECONOMIC INDICATORS OF SOUTHERN SUDAN (2010) [Chart 1]

Southern SudanCentral Equatoria State (Juba)

Area ('000 sq.km.) 644 43

Population

Total Population (in millions) 8.3 1.14

Male 4.29 0.58

Female 3.97 0.52

Average HH Size 7 8

Rural population (%) 83 65

Age Group > 18 (%) 49 49

Education

Literacy rate: 15 years and above (%) 27 44

Literacy rate: between 15-24 (%) 40 55

Gross enrolment rate for primary school (%) 72 57

Net enrolment rate for primary school (%) 48 42

Students per teacher 52 32

Students per classroom 129 77

Water, Health and Sanitation

Population with access to safe drinking water (%) 55 51

Population with access to toilet facility (%) 20 47

HH with at least one mosquito net (%) 60 54

Infant mortality rate (per 1000 live births) 102 107

Under 5 mortality rate (per 1000 live births) 135 141

Maternal mortality rate (per 100,000 live births) 2,054 1,867

Children fully immunized (%) 17 44

Household Characteristics

Population living in Tukuls (%) 83 87

Population using charcoal of firewood for cooking (%) 96 97

HH who own a phone (%) 15 28

Poverty and Consumption

Average per capita consumption per month--Country (SDG) 100 127

Average per capita consumption per month—Poor (SDG) 39 35

Population below poverty line (%) 51 44

Economic and Business Activity

HH depending on crop farming or animal husbandry (%) 78 58

HH who have a bank account (%) 1 N/A

Working population that are unpaid family workers (%) 53 37

Working population that are paid employees (%) 12 21

Number of registered (formal) business 7333 2683 (Juba)

Source: Southern Sudan Centre for Census , Statistics and Evaluation (SSCCSE--2010), National Baseline Household Survey (NBHS) 2009

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Economic and Growth Challenges

The growth challenges in Southern Sudan are significant and center on initiating broad-based domestic economic activity in a post-conflict environment2. A recent World Bank’s Country Economic Memorandum (CEM) on Sudan (released in 2009) highlighted the importance of planning for non-oil economic growth in the South, to further the development efforts in the new country. The highest priority constraints to unleashing growth in the South are found to be infrastructure shortcomings, particularly those related to transport structures such as inter-state and intra-state road networks; uncertainties around the country’s political future as well as local security; and policy inconsistencies at various levels of government including multiple taxes. These constraints are binding across all sectors and scales of activity, with the effect of restraining productive and marketing activities, and impeding long-term investments.

According to a mid-term evaluation report of the Joint Donor Team (JDT) for Southern Sudan (2009), one of the GOSS’s notable short-term challenges is to select and coordinate outside interests to benefit the South. The international community is expected to play a particularly an active role given the capacity shortfalls in evidence, already promising the new state a clean slate in terms of sanctions and debt obligations in order to open the pave the way for private investment. A number of multi-lateral donor reviews have indicated some prospect of debt relief (still the subject of negotiation and a rare point of harmony between the North and South). In all of this, oil revenues will play an integral role, providing the core funding of new institutions and the funds necessary for economic diversification, making revenue management and transparency particularly key measures. Meanwhile, early action on incentivizing enhanced recovery from existing fields and encouraging exploration for new resources will be critical to maintaining those oil revenues at current levels, putting significant pressure on the GoSS to have reportedly draft an effective Oil Law in the coming July—both in terms of its provisions for investors and safeguards around revenue handling.

While pursuing security improvement and supporting sound macroeconomic policies, developing an enabling environment to attract private investment is the most important strategic element for encouraging sustainable, inclusive economic growth and poverty reduction in the medium and long term. Transitional employment creation is seen as an important short-term requirement to keep the recovery going forward; but there is no substitute for longer term private investment and enterprise development. GoSS has just developed a mid-term a growth strategy aimed to stimulate private sector activities and leverage its considerable non-oil resources. Growth is expected to contribute to all key targets of GoSS’ policy objectives—security and avoidance of conflict, higher employment, and the well-being of its population. Furthermore, achieving rapid, sustained, and shared growth is within Southern Sudan’s reach given its immense natural resource potential. What is necessary is a vision and plan for growth and development that builds on Southern Sudan’s strengths and exploits the available opportunities to bring prosperity to all its citizens.

2According to this core diagnostic Country Economic Memorandum (CEM), which is the first for Sudan since the Comprehensive Peace Agreement in 2005 and World Bank re-engagement, the Government of Southern Sudan (GoSS) with an autonomy over roughly 25 percent of the country’s land area (larger than France) currently contains the majority of the country’s proven and probable oil reserves and the best quality agricultural land. Nowhere in the country is the gap between economic reality and unrealized potential greater than in Southern Sudan. With its oil revenues, Southern Sudan has a major advantage over most emerging post-conflict governments, with significant resources potentially available for development. To deliver a peace dividend and increase the likelihood of continued peace for the country, development of a long-term growth strategy ought to be given a high priority for the South.

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MACROECONOMIC SETTING

GDP Structure and Developments

South Sudan’s formal economy is dominated by oil. Apart from the oil sector, the economy can best be described as an agricultural economy, which accounts for limited market activity and low export levels. Southern Sudan produces agricultural crops such as cotton, gum, sorghum, sesame, and peanuts which can play productive roles for the overall economy. It reportedly reportedly exports some animal products (i.e., camels, goats and sheep) to Egypt, the Middle-East and Europe. Southern Sudan also has a vast forest cover which is rich in diverse tree species which provide rare timber, wood fuel, fruits, medicinal barks or roots, and plant oil. Although GoSS official statistics do not provide sufficient information, especially international trade data crossing borders out of the South, some new regional markets have emerged and cross-border trade has improved since the establishment of the CPA.

A recent study by Benjamin Leo (2010) focusing on a systematic examination of Sudan‘s external debt dynamics and the potential eligibility for traditional and multilateral debt relief initiatives, as well as providing an indicative roadmap on possible scenarios for debt-division and a viable post-secession financial framework, suggested that, the structure of Northern and Southern Sudan’s current macroeconomic states vary quite significantly. Currently, there are no official figures for the regional GDP decomposition Northern or Southern Sudan. In the absence of such figures, Benjamin Leo of the Centre for Global Development derived GDP estimates--by using multiple data sources available for 2009, and a standard expenditure model. As can be seen from Chart 2 & Figure 2 below, except for exports, the contribution of the South to Sudan’s economy is quite small. Based upon estimates by Leo (2010) and regardless of the final status of Abyei, Alemayehu Geda (2011) highlighted that Khartoum’s GDP share would be around 80 percent, assuming a national GDP (aggregating both the South and North) of approximately $54.7 billion in 2009. This implied a roughly $1,348 per capita for the whole Sudan—with $1,361 per capita for the North and $1,300 per capita for the South. The private consumption expenditure component of Sudan‘s GDP is estimated to be $ 31.4 billion - about 88% of which is attributed to the North and the remaining 12% to the South. The government consumption expenditure component of Sudan‘s GDP is estimated to be $ 9.2 billion - about 85% of which is attributed to the North and the remaining 15% to the South. The gross investment expenditure component of Sudan‘s GDP is estimated to be $ 13.8 billion - about 92% of which is in the North and the remaining 8% in the South. While, the export component of Sudan‘s GDP is estimated to be $ 8 billion - about 38% of which is from the North and the remaining 62% is from the South. Finally, the import component of Sudan‘s GDP is estimated to be $ 8.5 billion - about 92% of which is for the North and the remaining 8% is for the South. One can reasonably observe that, the economic growth of the South has a very narrow base, since it is almost entirely derived from oil revenues.

Structure of GDP between Northern and Southern Sudan (in millions of USD) [Chart 2]

North Sudan Southern Sudan

GDP 43,760 10,940

Private Consumption 27,632 3,768

Gross Investment 12,696 1,104

Export 3,040 4,960

Import 7,820 680

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One of the main challenges and constraints to GDP growth in the coming years related to the lack of physical infrastructure. The construction, rehabilitation and maintenance of strategically important roads remain vital to enhance the accessibility of state capitals, major towns and markets. Road access has improved since the signing of the CPA, but the existing infrastructure network of roads and bridges, river transport, telecommunications and energy remain limited and poorly maintained. Juba was and still is the only place with a bridge across the White Nile in all of South Sudan. But the latest achievement in inaugurating the first major paved road project since the signing of the CPA, which the 192km Juba-Nimule Road, is expected to provide a vital link from Juba to Uganda—currently the primary regional trade partner of Southern Sudan.

Fiscal Developments and External Aid

Under the Comprehensive Peace Agreement (CPA), Southern Sudan shares the incomes from oil—its dominant fiscal resource—with the North. Although agricultural products formed the backbone of the Sudanese economy for many years, recent discovery and the resultant trade in oil has boosted the economy greatly. The Wealth Sharing Agreement under the CPA provides a framework for resource allocation and sustainable decentralization, assigning a share of oil to the South, as well as the right to collect additional domestic revenue and external assistance. According to this agreement, 50% of the net oil revenue derived from oil producing wells in South Sudan will go to Government of South Sudan (GoSS) and the remaining 50% to the National Government and Northern Sudan States. The GoSS share percentage has been determined by the actual production on a monthly basis. The country now has surplus incomes resulting from oil revenues. In 2010, the total GoSS budget of around $2 billion assumed nearly 98% to come from oil revenue, while the sheer remaining 2% was assumed to come from non-oil revenue, including personal income tax (1.2%), while VAT and customs duties account for less than 1% of GoSS revenue(See Chart 3 & Figure 3 below).

Share of GDP between Northern and Southern Sudan [Fig. 2]

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

GDPPrivate

ConsumptionGross

InvestmentExport Import

80%

20%

88%

12%

92%

8%

38%

62%

92%

8%

North

South

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Estimated GOSS Revenue Sources (2010) [Chart 3]

SourceRevenue (in millions SDG)

Revenue(millions of USD)

Oil 4,401.7 1,913.8

Personal Income Tax 54.0 23.5

Customs, VAT and other National Revenue 19.0 8.3

Other GOSS Revenues 28.1 12.2

TOTAL 4,502.8 1.957.7

Source: Southern Sudan Centre for Census, Statistics and Evaluation (SSCCSE--2010)

At the state level the key sources of tax and non tax revenue are Personal Income Tax, Customs duties, Value added tax (VAT), Business Profits Tax applied to large corporations, Rental Income Tax, Capital Gains Tax and Stamp Duties. There are also a number of fees and charges on trading and professional licenses, state service tax on hotels, fees on contracts and the sale of various commodities. The proportion of expenditure financed from own source revenue generation varies significantly across states.The World Bank’s regional Public Sector reform unit reported that, in 2010 Central Equatoria financed 38% of its expenditure from own source revenues whereas the proportion is negligible in Jonglei and Lakes states. The variation is explained by the maturity of the tax administration system with Central Equatoria being a well established state which was earlier a Regional Government while the administrative structures are under-developed in Lakes and Jonglei. The second feature is the level of urbanization. Central Equatoria has three well developed urban centers: Juba (the federal capital), Yei and Kajo Keji. Non tax revenue accounts for 20.6% of the state’s own revenues (i.e., Traffic charges and Housing being major sources). In contrast, Jonglei State is predominantly a rural region, while the urban population in Lakes State is minimal with very limited market-places and urban facilities. Nevertheless, the share of tax revenue to the overall Southern Sudan economy is quite negligible (currently standing at less than 2 percent).

Despite significant oil-related revenues, expenditure management and deficit control has been a challenge since the signing of the CPA. Excessive wage bills in the government ministries have, for instance, been a recurring difficulty. With the establishment of some 14 ministers at the end of 2006, the magnitude of public service (inclusive

Estimated GOSS Revenue Sources 2010 [Fig. 3]

97.8%

1.2%

0.4%

0.6%

Oil

Personal Income Tax

Customs, VAT and other

National Revenue

Other GOSS Revenues

Source: Southern Sudan Centre for Census, Statistics and Evaluation (SSCCSE--2010)

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of the states and counties) ranged from 3 to 8 times the optimum civil service size of 40,000 as deemed by the development partners GoSS. A World Bank Public Sector Review for Sudan (2007) noted that, the excessiveness in the wage bill in the GoSS included a substantial proportion of recent recruits, unclassified personnel and ‘ghost’ workers, and crowded out development spending. It further pointed out that, the wage bills of SPLA and the ministries of Interiors, Environment and Finance were particularly enormous, while salary expenditure for other agencies were less than a million SDGs, resulting to skewed distribution of expenditures across function.

GOSS Expenditure Estimates by Sector [Chart 4]

SectorExpenditure (Millions SDG)

% Share

Accountability 157.5 4%

Economic Functions 164.5 4%

Education 323.5 7%

Health 189.5 4%

Infrastructure 601.9 13%

Natural Resources 217.1 5%

Public Administration 571.4 13%

Rule of Law 487.9 11%

Security 1,145.8 26%

Social and Humanitarian 98.9 2%

Block State Transfers 524.7 12%

TOTAL 4,482.7 100%

Source: Southern Sudan Centre for Census, Statistics and Evaluation (SSCCSE--2010)

Share of GOSS Expenditure by Sector (2010) [Fig. 4]

Accountability

Source: Southern Sudan Centre for Census, Statistics and Evaluation (SSCCSE--2010)

Economic Functions

Education

Health

Infrastracture

Natural Resources

Public Administration

Rule of Law

Security

Social and Humanitarian

Block State Transfers

12%

4%

4%

7%

2%

4%

13%

25%

11%

13%

5%

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Financing of deficits has largely relied on drawing down accumulated oil reserve funds. In 2006, the gap between current revenue and total spending (excluding anticipated grants from multilateral agencies) was three 3 times higher than the planned budget, and could have even been higher once suspense expenditures were cleared. The cash deficit of $429 million was financed through significant draw-downs on accumulated reserves from the Oil Revenue Stabilization Account (ORSA).

Given early fiscal challenges encountered, crucial reforms were undertaken since early 2007 to improve the various aspects of public fiscal management. The fiscal mismanagement in 2006 put to test some of the newly established fiscal infrastructure – systems and procedures in budget management, especially on the expenditure controls, budget execution, payments, financial and accounting. According to the World Bank Public Expenditure review (2007) the large number of expenditure items that were unmatched up until November 2006 reflecting the poor technical capacity of budget implementers to impose ex ante control in the approval of expenditure and to provide a complete systemic structure of recording. An important component of instigating fiscal discipline was the design and implementation of a comprehensive payroll and payment system for both the civil service and the army. Sound public expenditure management is the most important fiscal challenge still reportedly faced by the GoSS.

Besides domestic problems of public financial management, recent fiscal challenges have also been due to external factors emanating from the global financial crisis. In 2009, for example, South Sudan faced a severe fiscal strain, linked to several factors. First, the funds available to GoSS diminished sharply in 2009 following the global financial crises (including its impact on oil prices), reducing the fiscal room for public spending. GoSS oil revenues dropped by almost 40% during 2009. This meant that in the early months of 2009, GoSS could only meet its most essential expenditures, namely salaries, state transfers and cash advances to GoSS institutions and units to meet their basic operating costs. All other expenditures were severely constrained. As a result, local entrepreneurs supplying GoSS had run into trouble since GoSS has large amounts arrears outstanding, mostly on huge infrastructure contracts. Second, the GoSS is by far the largest employer in South Sudan. The dramatically lower oil revenue inflow oil revenue receipts from the Government of National Unity (GoNU) in January 2009 of only SDG 84 million, which was less than 55% of the monthly salary bill, led GoSS to temporarily suspend payment of salaries. The recent collapse in oil prices has shown how vulnerable Southern Sudan’s fiscal situation is and its dependence on oil price developments.

Historical GoSS Fiscal Outturns 2006-2009 (in SDG) [Fig. 5]

Source: Statistical Yearbook for Southern Sudan 2010 (SSCCSE)

Fiscal Balance

GoSS Salaries

8,000,000,000

7,000,000,000

6,000,000,000

5,000,000,000

4,000,000,000

3,000,000,000

2,000,000,000

1,000,000,000

(1,000,000,000)

(2,000,000,000)

-2005 2006 2007 2008 2009

Operating

Expenditure

Capital Expenditure

Gross Expenditure

Gross Revenue

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The fiscal situation in South Sudan is notable for its heavy dependence on donor assistance. Following the signing of the CPA, the level of engagement by the international community in South Sudan has increased, including various donor conferences and meetings. The main objective was to lay the groundwork for a short to long term program aimed at supporting the peace process, settlement of external debt and arrears, and post conflict reconstruction. Donor coordination in South Sudan has developed to be effective, with a well established system of thematic groups. Development partners in Juba include UNDP, World Bank, bilateral donors through the Joint Donor Team, DfID, USAID and others. A Joint Donor Team (JDT) is currently working with other donors to help GoSS address the fiscal crisis. The Team is also a member of the Task Force established in 2008 to come up with a Compact between the GoSS and the donor partners. The Juba Compact was formulated as a mutual accountability results framework, with the GoSS and donors pledging to monitor progress in implementation of the reforms. The Task Force also oversees the implementation of the Multi-Donor Trust Fund (MDTF). The Juba Compact contained a number of austerity measures to help GoSS weather the fiscal crisis. These include freezing the signing of new contracts, a 10% reduction in block transfers to oil producing States and the waiving of GoSS counterpart contributions to the Multi-Donor Trust Fund.

The scale of donor financing is on the order of several hundred million US dollars per annum. Southern Sudan is said to have benefited from significant funding through five pooled donor aid mechanisms amounting to $180 million in 2010. The five pooled funding mechanisms include the Multi-Donor Trust Fund (MDTF), the Basic Services Fund (BSF), the Capacity Building Trust Fund (CBTF), the Sudan Recovery Fund (SRF) and the Common Humanitarian Fund (CHF). As of March 2011, more than $400 million was disbursed--out of the total $548 million paid to the Multi-Donor Trust Fund for Southern Sudan (MDTF-SS) by its 14 donors and the World Bank. Total disbursement in 2010 was $188 million, almost as much as the previous four years combined. By the end of the first quarter of 2011, JDT’s projections indicate cumulative disbursements (donor funds) of about $415 million. They are also targeting total Fund disbursements of about $450 million by end-June 2011and between $475 million and $500 million by end-2011 (see Figure 6 below). Looking ahead, a recent donor meeting (held in Brussels) in September 2010 aimed to provide assistance under the National Development Plan (2011-2013) and 19 core governance functions for South Sudan, of which seven have been prioritized. The seven governance functions fall under Executive Leadership, Rule of Law, Law Enforcement, Security, Public Administration, and Natural Resources. However, donors have also expressed the need for mutual accountability urging the GoSS to improve transparency and management of public funds, fight corruption and engage in peace building and reconciliation efforts.

Southern Sudan Multi-Donor Trust Funds (MDTF--SS) Allocation to Key Sectors [Fig. 6]

Source: Multi-Donor Trust Fund for Southern Sudan (MDTF-SS) Factsheet (2011)

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Recent Inflation Developments and Monetary Policy

South Sudan is currently a high-inflation economy. According to the regular monthly survey of the Southern Sudan Centre for Census and Evaluation (SSCCSE), the annual Juba Headline Consumer Price Index (CPI) at end May 2011 amounted to 35.6 percent (see Chart 5 and Figure 7 below). The pace of future inflation seems to be moderating, however, given the decline observed in the month-on-month inflation rate, which has fallen from its peak level of 12.1 percent in January to just 0.8 percent in May 2011.

Juba Consumer Price Index--General Inflation (May 2010-May 2011) [Chart 5]Month Price Index Month-on-Month Inflation Year-on-Year Inflation

May-10 137.6 -0.53 1.39

Jun-10 138.0 0.27 0.08

Jul-10 135.4 -1.86 -0.07

Aug-10 137.4 1.48 1.16

Sep-10 134.6 -2.02 -1.96

Oct-10 139.8 3.83 -3.09

Nov-10 140.6 0.60 -3.46

Dec-10 153.0 8.78 12.79

Jan-11 171.5 12.10 22.69

Feb-11 181.5 5.84 32.22

Mar-11 183.0 0.81 33.73

Apr-11 185.1 1.17 33.82

May-11 186.5 0.77 35.57

Source: Southern Sudan Centre for Census, Statistics and Evaluation(SSCCSE)

Since food makes up 67% of the basket of goods in Juba Southern Sudan, inflation in consumer prices is driven primarily by developments in food prices. Monthly inflation in Food & Non-Alcoholic beverages increased by 0.8 percent in May 2011 while on a year-on-year basis it was found to be 44.3 percent (between May 2010 and May 2011). According to the Southern Sudan Centre for Census, Statistics and Evaluation’s (SSCCSE) latest Consumer Price Inflation Press Release for the city of Juba, the price of bread and cereals increased by 67.2 percent between May 2010 and May 2011; while, the price of wheat flour more than doubled during the same period from

Juba Year-on-Year Inflation (%) [Fig. 7]

Source: Southern Sudan Centre for Census, Statistics and Evaluation (SSCCSE)

50

40

30

20

10

0

-10

Year on Year Inflation--

FOOD COMPONENTS

Year on Year Inflation--

OVERALL

May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11

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3.5 SDG/kg to 8.0 SDG/kg-- all together accounting for the exponential rise observed on the year-on-year inflation in the prices of Food & Non-alcoholic beverages. Similarly, looking at monthly inflation by the non-food components of the CPI, Furnishing & Household equipments show the highest inflation rate of 17.1 percent followed by Alcoholic beverages & Tobacco and Transport prices with a monthly inflation rate of 4.85 and 4.51 percent respectively in May 2011. Housing, water, electricity & gas inflation drop to just -5.9 percent in May 2011. One a year-on-year basis the prices of Furnishing & Household equipments recorded the highest inflation at close to 97 percent. (See Charts 6-8 below).

Consumer Price Index3 (May 2010-May 2011) [Chart 6]Consumer Price Index

Base (Apr-07)

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Food & non alcoholic beverages

61.0 86.0 86.0 84.5 85.3 85.2 89.9 88.6 102.5 114.4 119.3 119.1 123.2 124.2

Alcoholic beverages & Tobacco

3.9 5.1 4.2 4.2 4.2 4.0 4.2 4.2 4.2 4.2 4.9 6.2 6.2 6.5

Housing, water,electricity,gas etc

16.3 19.7 20.9 20.3 21.4 19.7 19.7 20.0 19.0 20.4 22.0 22.0 23.6 22.3

Furnishing & household equipments

2.8 4.3 4.3 4.3 4.0 3.9 3.9 4.0 4.0 4.3 5.9 6.5 7.2 8.4

Transport 4.7 6.5 6.5 6.5 6.4 6.5 6.5 6.5 6.5 10.9 11.5 11.5 7.1 7.4

Recreation & Culture

0.9 1.3 1.1 1.3 0.9 1.4 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3

Restaurants and Hotels

2.5 3.1 3.4 3.1 3.3 3.0 3.1 3.1 3.7 3.7 3.7 3.7 3.7 3.7

Miscellaneous goods & services

8.0 11.6 11.5 11.3 12.1 10.9 11.3 13.0 12.0 12.4 12.9 12.7 12.8 12.8

ALL ITEMS 100.0 137.6 138.0 135.4 137.4 134.6 139.8 140.6 153.0 171.5 181.5 183.0 185.1 186.5

Source: Southern Sudan Centre for Census, Statistics and Evaluation (SSCCSE)

Monthly Inflation (May 2010-May 2011) [Chart 7]

Monthly InflationMay-10

Jun-10

Jul-10Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Food & non alcoholic beverages

-3.78 0.02 -1.81 0.93 -0.07 5.46 -1.42 15.74 11.60 4.26 -0.12 3.40 0.79

Alcoholic beverages & Tobacco

6.57 18.67 0.00 0.00 -3.60 3.74 0.00 0.00 0.00 18.02 25.87 0.00 4.85

Housing, water,electricity,gas etc

10.76 6.27 -2.87 5.35 -7.86 -0.25 1.61 -5.03 7.49 8.04 -0.22 7.60 -5.88

Furnishing & household equipments.

-2.33 0.41 0.35 -8.18 -0.90 -0.98 3.71 -2.21 8.05 38.36 9.76 11.19 17.11

Transport 0.00 0.00 0.00 -1.69 1.72 0.00 0.00 0.00 68.25 5.90 0.00 38.30 4.51

Recreation & Culture 7.39 13.35 15.41 -34.11 61.42 -5.98 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Restaurants and Hotels 0.22 9.72 11.19 7.01 -8.19 4.46 0.00 16.55 0.17 0.00 0.00 0.74 0.00

Miscellaneous goods & services

3.84 -0.60 -1.86 7.30 10.00 3.56 14.63 -7.90 3.79 3.82 -1.48 0.74 0.00

ALL ITEMS -0.53 0.27 -1.86 1.48 -2.02 3.83 0.60 8.78 12.10 5.84 0.81 1.17 0.77

Source: Southern Sudan Centre for Census, Statistics and Evaluation (SSCCE)

3 The consumer price index contains 85 items, weighted according to how much of the item households consume.54 of these are food items or non-alcoholic beverages. In April 2011, food items made up 67% of the basket of goods. And the initial weights for each of the items were generated in a welfare-monitoring survey conducted in Juba.

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Annual Inflation (May 2010-May 2011) [Chart 8]

Annual InflationMay-10

Jun-10

Jul-10Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Food & non alcoholic beverages

2.25 -0.84 -0.76 -0.91 -1.87 -2.50 -6.42 19.93 30.08 39.60 36.31 37.80 44.33

Alcoholic beverages & Tobacco

19.74 -1.53 4.68 5.11 0.40 16.22 4.69 2.34 3.74 18.02 32.90 28.75 26.67

Housing, water,electricity,gas etc

-7.48 -6.84 -6.68 1.49 -1.84 -5.90 -1.16 -4.98 -4.43 8.76 16.72 33.20 13.19

Furnishing & household equipments

9.49 12.02 12.01 1.93 -1.39 11.08 -7.07 -7.89 -1.28 14.21 49.24 64.08 96.75

Transport -6.88 11.88 11.88 9.99 1.72 9.81 -3.36 1.72 71.13 81.23 78.17 9.92 14.88

Recreation & Culture 25.37 8.62 25.37 -17.40 6.35 0.00 0.00 11.26 11.26 0.00 7.39 7.39 0.00

Restaurants and Hotels 11.19 14.70 -5.20 -3.29 2.51 6.52 8.68 15.91 16.02 23.05 47.05 17.87 17.62

Miscellaneous goods & services

2.34 7.00 5.35 13.85 -7.79 -3.37 11.83 7.13 8.22 10.98 11.14 14.38 10.15

ALL ITEMS 1.39 0.08 -0.07 1.16 -1.96 -3.09 -3.46 12.79 22.69 32.22 33.73 33.82 35.57

Source: Southern Sudan Centre for Census, Statistics and Evaluation (SSCCSE)

Imported items also seem to be a major driver of overall inflation. Because food makes up such a large percentage of the basket of consumer goods and Southern Sudan is heavily dependent on imported food, world/neighboring food and fuel prices are likely to impact strongly on movements in consumer prices. World food inflation is currently high—FAO’s World food price index increased by 36.5% between April 2010 and April 2011. Other important factors are the recent depreciation of exchange rate between Southern Sudan and its major trading partners, low development in infrastructures improvements along the major trade routes, political uncertainty which can cause traders and wholesalers to reduce supply and price pressures caused by inflow of returnees. Hence most of the recent inflation observed in Juba is attributed to the rise in prices of food and non-alcoholic beverages--which if it continues at current rates will progress to a moderate 9.1 percent annualized inflation rate (see Chart 9 below).

OVERALL Vs. FOOD INFLATION (May 2010-May 2011) [Chart 9]Year-on-Year Month-on-month Annualized rate of monthly increase

Overall Inflation 35.57 0.77 8.87

Food & Non-alcoholic beverages Inflation 44.33 0.79 9.11

Source: Southern Sudan Centre for Census, Statistics and Evaluation (SSCCSE)

Compared to the region, inflation in Southern Sudan is considerably higher than in neighboring countries. Assuming inflation outturns in Juba can serve as a rough proxy for overall developments in consumer prices of Southern Sudan (to complement for the lack of country-wide inflation surveys), one can note that in contrast to conditions in 2009 when inflation in Southern Sudan was markedly lower than the average Sub-Sahara African norm, in 2010, the near 13 percent inflation recorded for South Sudan (on year-on-year basis) was roughly 6 percent points higher than the average year-on-year inflation registered during the same period (according to the IMF at just 7.2 percent), signifying the recent toll imported inflation of food products has had on the general CPI for Southern Sudan (see Figure 8 below).

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The Bank of South Sudan (BoSS), as a unique branch of the Central Bank of Sudan (CBoS), has in principle a mandate to overlook the implementation of monetary policy--with important responsibility for controlling inflation. In practice, however, BoSS, does not (yet) have the full independence of a regular central bank that can control monetary policy through the instruments of a conventional banking system. Indeed, without an independent monetary policy capability, inflation developments in South Sudan will necessarily be linked to credit conditions set by the CBoS in Khartoum and by a combination of local, supply-side, and import developments in the Southern Sudanese economy.

Exchange Rate and External Debt

South Sudan does not yet have an independent exchange rate and is still using the Sudanese Guinea (SDG) as its unit of currency. South Sudan’s exchange rate developments have thus been no different than those of North Sudan. Looking at the exchange rate movements in Sudan over recent years, there was a nominal appreciation between 2005 and 2008, followed by a gradual nominal depreciation between 2008 and 2010 See (Figure 9 below). The salient feature of the Sudan foreign exchange market is the existence of an active dual market for foreign exchange, operating side by side, an official exchange rate (which is managed and determined by the Central Bank of Sudan) and freely floating parallel market, which is sensitive to speculations and rumors about the economic and the political situation in the country.4 The depreciation after 2008 has been linked to declines in foreign direct investment and net private transfers. The IMF reported foreign direct investment fell by $500 million and private transfers by $800 million in 2008. By the end of 2008, net official international reserves fell below $1 billion (equivalent to 6 weeks of import cover), and to about $300 million by March 2009.

4 The major Exchange Rate policy objectives outlined the Central Bank of Sudan for the year 2010 included achieving durable stability of the exchange rate by enhancing its flexibility within the framework of a managed flexible exchange rate regime and considering the shift from pegging of the national currency exchange rate to a single foreign currency to pegging to a basket of currencies. Moreover, the CBoS highlighted focus on continuation in the rationalization of demand for foreign exchange, rationalization of importation, increase of supply by focusing on promoting non-oil exports, as well as working toward the encouragement of direct foreign investment flows and building of the reserves.

Inflation, Southern Sudan Vs SSA [Fig. 8]

Source: Southern Sudan Centre for Census, Statistics and Evaluation (SSCCSE) and IMF

SSA

Sothern Sudan

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.002009 2010

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According to the latest IMF staff review in April 2011, excess liquidity and uncertainty in the run-up to the referendum have intensified pressure on the exchange rate, prompting the CBoS to undertake in November 2010 a depreciation of the Sudanese guinea (SDG) by about 19 percent. At the outset, instead of opting for an outright depreciation, the central bank introduced a daily premium for purchases of the guinea—roughly equivalent to the amount of the subsequent depreciation —on top of the official exchange rate, in a bid to close the gap with the parallel market rate. The authorities also introduced new measures to curb the demand for foreign currency, including an increase in custom duties on various consumption goods, and an increase from 5 to 10 percent of the development tax rate, which were applied on some imports. Gross international reserves continued to decline, as a result of shortfalls in external financing as well as the Sudan authorities’ exchange rate intervention policies in the run-up to the November depreciation. Pressure on the exchange rate eased somewhat, following the depreciation. Since then, the official and parallel rates have continued to converge. This has allowed the Central Bank of Sudan (CBOS) to limit its intervention and rebuild its international reserves.

The choice of a suitable new exchange rate and new exchange rate regime is something that the authorities will soon confront and that has been a subject of recent IMF missions. In this respect, IMF advice appears to be for the government of Southern Sudan to issue and manage its own currency in the near future. However, the preparations for the introduction of a new currency may be prolonged. As gathered from IMF reports, the GoSS appears ready to continue using the Sudanese pound for 6-9 months after the expiration of the CPA in July.

Several exchange rate options can be considered following South Sudan’s formal independence. One possibility is a currency board arrangement (CBA), an arrangement similar to that in Djibouti, which would likely serve South Sudan best in view of its relative simplicity and its ability to fiscal discipline and economic stability.5 However, a currency board arrangement would require sound public finances, absence of lending to the government, and an adequate banking supervisory framework. A flexible exchange rate regime for a new currency is also a possibility, but this would require a more challenging institutional framework for the conduct of monetary and exchange rate policy.

With respect to debt, South Sudan does not appear to have external debt that it has independently contracted on its own, but nonetheless shares its portion of the overall external debt accumulated by Sudan in the past several decades. According to recent IMF reports, Sudan’s external debt stood at roughly $34.7 billion in net present value (NPV) terms – up from approximately $15 billion in 2000. The majority of the recent increase was due to the further accumulation of arrears to Paris Club and non-Paris Club creditors as well as sizable new loans from Arab creditors, China, and India. Sudan‘s external debt is approximately 64 percent of the country‘s gross domestic product, 426 percent of annual export receipts, and 423 percent of government revenues. Sudan‘s

5 A currency board arrangement involves a fixed exchange rate link to a selected dominant currency (say USD or EURO) and the issuance of new domestic currency only in response to and on the basis of foreign exchange inflows.

Average Exchange Rate, 2003-2009 [Fig. 9]

3

2.5

2

1.5

1

Source: IMF Staff Reports (2009 & 2010)

2003 2004 2005 2006 2007 2008 2009

SD

P/U

SD

2.61 2.582.44

2.172.02 2.09

2.3

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external debt ratios reportedly exceed those deemed sustainable for-poor performing countries under the World Bank/IMF Debt Sustainability Framework (DSF) as well as the enhanced HIPC Initiative threshold6.

Given the huge debt burden, both North and South Sudan will need to soon put in place a roadmap towards some sort of debt relief in the near future. One important issue that needs to be addressed in this regard is the issue of debt apportionment between North and South Sudan. While the two parties expressed different views regarding debt apportionment, from the perspective of the Khartoum authorities, debt can only be solved in the context of a comprehensive agreement on all outstanding CPA-related issues. They also consider that the South should shoulder part of the debt. The South, on the other hand, refuses to take on any of the debt, but pointed that in case of apportionment, the debt should be allocated geographically, according to the ultimate beneficiary principle. A Sudan Debt Technical Working Group (TWG) tasked with addressing some of these issues has met in recent months.

Although the issue of debt apportionment is still outstanding, if South Sudan receives a debt treatment received by HIPC countries (under IMF and World Bank programs), then it may look forward to substantial debt relief. Such debt relief would first involve “traditional” debt relief from Paris Club creditors (usually involving a two-thirds reduction of total bilateral debt), and then a broader reduction by to Sudan’s multilateral creditors to reach certain “safe” thresholds, such as a 150 percent debt-to-exports ratio.

6 The respective DSF thresholds are utilized to gauge the probability that a respective country will experience debt distress over time. In contrast, the HIPC Initiative threshold largely is used to determine the extent of debt relief required (i.e., not necessarily determine sustainability). In 2009, Sudan‘s new debt-service totaled only 4 percent of exports. However, this only reflects what Sudan paid to creditors – not the total amount actually due. In contrast, Sudan has failed to fully repay the majority of its debt obligations. Instead, the Sudanese government has mobilized scarce public resources to repay new obligations due for selected creditors – largely those that have continued to provide new loan financing. In the absence traditional debt relief, Sudan‘s external debt burden will remain unsustainable over the medium to long-term. However, the application of a traditional Paris Club treatment (i.e., Naples terms) would greatly reduce Sudan‘s external debt ratios. According to a recent study on Sudan’s debt sustainability, assuming that all bilateral and private creditors participate in a 67 percent Net Present Value (NPV) reduction of eligible pre-cut off debt, Sudan‘s outstanding external debt obligations would decline from $34.7 billion to approximately $19.3 billion in NPV terms. In relative terms, this would equal roughly 188 percent of annual exports. That said, this profound indebtedness situation is expected to pose a huge challenge for the post-independence Southern Sudan

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BUSINESS ENVIRONMENT AND PRIVATE SECTOR OVERVIEW

A major and positive theme outlined in the GoSS Mid-Term Growth Strategy (2009) is that business and enterprise development in Southern Sudan should be left to the private sector, since experiences have shown that it is the private sector that is a key driver of investment and economic growth. The interim constitution of Southern Sudan grants authority to GoSS concerning matters relating to commerce, trade and commercial regulation. GoSS is increasingly taking over this role and is making efforts to create a conducive and transparent regulatory framework for the private sector. Yet, the first few years after the signing of the peace agreement has shown that this work is still in its very early stages.

The formal private sector is still at a very nascent stage in Southern Sudan.7 As would be expected given the stage of economic development, micro- and small-scale enterprises and informal retailers are large in numbers. A large portion of private enterprises currently active in Southern Sudan tend to have business owners whom are Kenyan, Ugandan, or North Sudanese in origin. Some returning Southern Sudanese have started to set up businesses, but few number indigenous entrepreneurs have developed sizable enterprises. It is reported that a limited number of European (non-oil) investors are active, mostly in service delivery in the fringe of international assistance programs, a few to implement one-off projects. Obviously, the high level of both political risk and day-to-day insecurity will mean that investors are calculating very high margins leading to short payback periods. Nonetheless, there are a number of local private entrepreneurs currently involved in economic activities across Central and Western Equatoria. A fair number of these companies are reportedly part of one of the business conglomerates of the Southern Sudanese “tycoons” who have successfully targeted the most promising segments in the last few years (a prominent example being the ALOK group of companies, widely engaged in diverse economic activities like water purification and bottling, air transportation, stone crushing, building and road construction and hotel management).

Registered Businesses in Southern Sudan by Type of Activity in 2010 [Chart 10]Type of Business Activity Number % ShareAgriculture, Forestry and Fishing, Mining and Quarrying, Electricity, Gas, Steam and Air-conditioning Supply

10 0.1%

Manufacturing 199 2.7%

Water Supply, Sewage, Waste Management and other services 7 0.1%

Construction 89 1.2%

Wholesale and Retail Trade; Repair of motor vehicles and motorcycle 5,116 69.8%

Transportation and Storage 45 0.6%

Accommodation and Food Service 1,037 14.1%

Information and Communication 97 1.3%

Financial and Insurance Activities 52 0.7%

Professional, Scientific and Technical Activities 46 0.6%

Administrative and support service activities 10 0.1%

Education 31 0.4%

Human Health and Social; Service activities 361 4.9%

Arts, Entertainment and Recreation 22 0.3%

Other Service Activities 211 2.9%

TOTAL 7,333 100.0%

Source: Southern Sudan Centre for Census, Statistics and Evaluation (SSCCSE)--Statistical Yearbook for Southern Sudan (2010)

7 The Peace Security and Development Network country report in its Public-Private Cooperation in Fragile Sates (2009) describes the private sector as undeveloped, largely fragmented, and primarily geared towards setting up government structures and housing as well as providing services for a large (but temporary) expatriate community (accommodation, logistics and restoration). Moreover, the formal private sector is noted to be mostly in and around the capital, Juba. The rural areas are virtually neglected of any entrepreneurial activity above household-level micro-enterprises. The report also notes that some investments in Southern Sudan are made by “rogue investors” – individuals with a taste for high-risk, high-gain ventures. Often, these are regarded as “hit and run” investments, meaning a risk venture with a low initial investment and a very short repayment period, typically less than one year. Most enterprises, irrespective of their origin, are in trading and service activities, the local added value is generally low, and “sunk capital” investment is rarely seen according to this report.

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A total of 7,333 businesses are presently registered in the 10 state capitals of Southern Sudan, according to government statistics (see Chart 10 above). According to data obtained from the Southern Sudan Centre Census Statistics Evaluation (SSCCSE), at present, the majority of the business interests in Southern Sudan are observed to be engaged in wholesale and retail trade--accounting for nearly 70 percent of all registered business, followed by accommodation and food services with 14.1 percent share. Given Southern Sudan’s promising resource endowments, promising business ventures involving agriculture, forestry, fishing, mining and quarrying; as well as businesses ventures in public infrastructure services including provision of water supply, sewage and waste management currently seem to contribute insignificantly to the overall private sector activities currently available in Southern Sudan, with each currently commanding a mere share of less than one percent. Moreover out of the total, it is reported that, a third (or 2,683) business entities are presently registered in the capital Juba--with 84 percent of them engaged in retail & wholesale trade and restaurants.

The international private sector operates in diverse sectors and activities including telecommunications, banking, air transport, timber, hydrocarbon (oil) production & distribution, mining, building & road construction, importation of goods, road transportation, hotels and lodges. Some notable international players in Southern Sudan include the Kenya Commercial Bank, Jetlink, East African Airlines, Ethiopian Airlines, Air Uganda, MTN, ZAIN, Vivacell, JIT Supermarket, ROKO Construction, Equatoria Timber Company, SAB Miller, Civicon Construction, Davinci Lodge, Intra Africa, Afex Hotels, KK Security, SDV Transami, Delbit Petroleum, Spring Petroleum, Total Ltd, Heineken and Ascom Petroleum. A large number of international investors come from the region (i.e. Uganda, Kenya, North Sudanese and Ethiopian).

Regional Business Ownership by Type in Southern Sudan [Chart 11]

NationalityAgriculture, Forestry, And Fishing

Construction

Transportation, Communications, Electric, Gas, And Sanitary Services

Wholesale Trade

Retail Trade

Finance, Insurance, And Real Estate

ServicesPublic Administration

Ethiopia - - - - 2 - 2 1

Kenya - - - 2 9 - 9 1

South Africa - - - - 1 - - -

Sudan - - 3 35 521 2 36 6

Uganda - 1 - 1 4 - 3 1

Southern Sudan

1 - - 5 53 - 47 4

Total 1 1 3 43 590 2 97 13

Source: Government of Southern Sudan Ministry of Commerce and Industry-- Southern Sudan Business Registration Database

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Non-oil trading is conducted primarily by the private sector across Southern Sudan. While input and product markets are undeveloped, inter-regional trade flows exist for agriculture products and livestock marketing at present. Although regional export and import data are not publicly available in Southern Sudan, studies suggest the majority of trade has been localized—focused predominantly with neighboring countries like Uganda and Kenya—and occurring when security conditions allow. According to Alemayehu Geda (2011), mirror trade data shows that Kenya and Uganda may have an estimated export to South Sudan of about $75 and $55 million in 2006 composed predominantly of manufactured goods, while the export from Southern Sudan being virtually none. A recent World Bank field survey (2009) suggests Uganda to be the leading exporter to Southern Sudan putting the value to an even higher estimated amount of $1.2 billion per annum. A rapid food assessment survey (2008) conducted in the main physical locations of food commodity markets in Southern Sudan also revealed that the source of supply for major urban markets in Southern Sudan is North Sudan and Uganda. Together, North Sudan and Uganda account for the bulk of sugar, maize flour, rice, onion, wheat flour and sorghum sold in the four commodity markets surveyed. According to this survey, 53 % of the traders in Juba were Ugandan while the rest being Sudanese. In all other study sites, however, the Ugandans are only 20 percent the rest being Sudanese. This information suggests the existence of significant cross-border trade between North and South Sudan—suggestive of a post-secession cooperative framework and significant trade growth potential.

A large majority of local entrepreneurs are working in the informal sector, where many activities are also carried out by SMEs from surrounding countries. A major area of local entrepreneur preoccupation is the retail sector (sugar, rice, salt, maize flour, soda, beer, biscuits, hardware from China, building materials). Others trade foodstuffs, livestock, motor vehicle and motor cycle sales and repair, the sale of (top-up) call time for mobile phones, repair and maintenance of electronic equipment (i.e. computers), carpentry, telecommunication services, money transfers and exchange, public transports (mini-buses and bodas) and river transportation.

Challenges facing the private sector

The lack of physical infrastructure (particularly all-weather roads) in Southern Sudan is generally cited as one of the major constraining factors for private sector development. The construction, rehabilitation and maintenance of strategically important roads remain vital to enhance the accessibility of state capitals, major towns and markets. Road access has improved since the signing of the CPA, and GoSS together with donors have reportedly initiated emergency repairs of the main roads. But still, the existing infrastructure network of roads and bridges, river transport, telecommunications and energy remain limited and poorly maintained. Juba was and still is the only place with a bridge across the White Nile in all of South Sudan. According to a country report by Peace Security and Development Network focusing on Public-Private Cooperation (2009), only three towns (Juba, Malakal and Wau)

Share in Volume of Annual Imports to Southern Sudan (January-December 2010) [Fig. 10]

35%

30%

25%

20%

15%

10%

5%

0%

Source: Ministry of Interior, Sudan Customs Station ( Customs Station--Southern Sudan)Nimule

Sal

t

Su

gar

Soap

Cooki

ng

Oil

Wh

eat/

Flou

r

Texti

le

Fuel

Mac

hin

ary

Elec

tron

ics

Med

icin

e

Bu

ildin

g

Mat

eria

ls

Cer

eals

Footw

ear

Bev

erag

es

Var

iou

s

0% 2% 0% 1% 1% 1%3%

16%

1%4%

19%

32%

0%3%

16%

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have partial access to diesel stations for electricity. The existing national grid only covers six states and the northern parts of the Blue Nile. Southern Sudan has particularly poor access to electricity services. Southern Sudan is critically dependent on Kenya and Uganda for its access to the sea and to trade facilitation services. This poses challenges of rapidly evolving services in transport while simultaneously establishing institutions for the development of the sector. The physical recovery program in Southern Sudan is (out of necessity) tuned to basic infrastructure needs and includes building an internal (rural) road network, ensuing transport and trade facilitation links between the north and the south of the country, and establishing trade facilitation systems for better connectivity to regional countries and the Northern Corridor to the Mombasa Port in Kenya.

Because Southern Sudan is effectively a land-locked region, it also faces the unique challenges of developing a logistics industry that is well integrated with neighboring countries. In Southern Sudan this industry would help to provide that part of the country with competitive services and the two routes to the sea through Port Sudan and Mombasa. Some recent industry-specific studies have pointed out that, in Southern Sudan there is a potential for establishing private sector inland container depots (ICDs) and a logistics industry with external collaboration.

With respect to policies, according to USAID Agenda for engagement in Post-conflict economic recovery and growth in Southern Sudan (2009), one of the key challenges facing business and investors in Southern Sudan identified (as in most post-conflict economies) is the uncertainty and unpredictability of the laws and regulations governing doing business. The key challenge is ensuring the commitment and ability of the government to implement business laws and regulations in a transparent, accountable, and consistent manner. Although major steps have been taken in order to develop appropriate legal and regulatory frameworks for Southern Sudan (drawing from national laws), the legal environment is still to be clarified in critical areas such as land, investment, and registration. In addition, the implementation process of the already enacted laws is rather slow and confused as a result of the sheer magnitude of the laws and regulations as well as the lack of capacity within the institutions responsible for their implementation.

Access to land is a particularly limiting factor for private sector development. Currently, the lack of functionality pertaining to land administration both at the central and local levels is a key part of the problem. Any investor wanting to make use of land in either urban or rural areas should be aware of old land rights (i.e. land rights from before the war in 1983) and the rights of returnees to that land (including the right to make use of the land for pasture). The purpose of land use (i.e., agriculture, industry etc.) and the origin of the land (i.e., State-owned lands, Communal areas, etc.) both play key roles in the rights involved. A well functioning framework includes a coherent land policy, adequate legislation, functioning institutions, law enforcement capacity and supporting services. A reliable, sustainable and transparent functioning land registration system is also a critical enabling factor for private sector investment.

In all of the above areas, some progress is being registered; one notable example is concerns the new Southern Sudan Land Bill. Southern Sudan still lacks an overall framework for land issues and the security of land tenure is still very weak. Land access issues and resulting disputes are not effectively managed and handled. But still, for investment in agriculture and natural resources, the possibility has been opened for securing land on long-term leases following a Land Bill that came into force in February 2009. Although foreign investors cannot buy land, they have the rights granted to them to lease it. Moreover, it is possible to take over the lease from another lessee or obtain a lease for a new plot directly from the government.

Some steps have also recently been undertaken to improve the regulatory framework for investors in Southern Sudan, although implementation is still a challenge. Key laws intended to promote a viable investment climate such as the Investment Act, Contract Act, Limited liability and Partnership Acts, the Agency Act, and Trade & Industrial Licenses regulations have all recently been endorsed by GoSS. The development of a comprehensive Investment Bill is slowly progressing. It is also important to note that provisions requiring foreign investors with

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Southern Sudanese partners to pay start-up funds have been removed recently. The Investment Promotion Act (2009) prohibits discrimination in that foreign Investors may own, or control business organizations in any sector of the economy of Southern Sudan as domestic business organizations. Also, the GoSS has taken steps to recently bring all customs operations under the administration of the national customs department. But significant investments in staffing, training, and equipping customs administration in the South will still be required to ensure that customs operations are integrated throughout the country. The overall judiciary remains weak. There are yet no commercial courts in Southern Sudan, and in most cases it is difficult to discover where one can turn to when one becomes involved in commercial disputes.

In May 2011, the International Financial Corporation’s (IFC) released its first-ever city profile in Doing Business in Juba 2011, in which the city of Juba was ranked 159th out of 183 economies on the ease of doing business, emphasizing that the Government of Southern Sudan is making strides to improve the business environment for small and medium enterprises (SMEs). Doing Business in Juba 2011 was the first assessment of business regulations in Southern Sudan capital. It attempted to fill the data gap in the semi-autonomous region, which is expected to become Africa’s newest nation in July. Measuring business regulations and their enforcement in Juba, particularly from the perspective of SMEs, the report cited improvements in eight laws on business registration, operations, and land ownership that have GoSS business registry since it started in 2006. The report notes that more than 9,000 businesses have signed up with the government business registry since it started in 2006. In addition, commercial banks have been established and basic infrastructure is being rehabilitated. At least five regional commercial airlines serve Juba alone, and another five cargo airlines have made it easier to transport goods to the region. Based on the aggregate ranking, Juba was ranked 159th on the ease of doing business, a little behind Khartoum (154th), while variations were observed on a topic by topic basis. (See Annex 1).

Financial Sector Review

The Bank of Southern Sudan (BoSS), with a network of four branches (spread across three Southern Sudan states), is a unique branch of the Central Bank of Sudan (CBoS) responsible for administrating the conventional banking window and exercises a number of functions to achieve macroeconomic objectives, particularly the promotion of monetary stability and sound financial system. For the most part, the working responsibilities of BoSS include: serving as a treasurer to the government and management of foreign exchange; acting as the bankers’ bank in many respects including provision of clearing house services and controller of credit as well as lender of the last resort to the banking sector when faced with short term liquidity problems; assuming a role in promoting economic growth and development of the whole country; acting as an agent of the government in collecting revenue; assuming an economic advisory role to the public sector; and performing supervisory duties to ensure commercial banks and other financial institutions behave responsibly.

The Government of Southern Sudan does not have full autonomy when it comes to macroeconomic policies—in particular, with that of monetary policy making. To a large extent, Southern Sudan’s macroeconomic situation is linked closely to and dependent on Sudan’s overall macroeconomic developments and Khartoum’s monetary and credit policies. The Wealth Sharing Agreement (2004) of the CPA recognized “a dual banking in Sudan during the interim period. An Islamic banking system shall operate in the Muslims dominant Northern Sudan and Conventional banking system in Southern Sudan”. As there was an urgent need for banking facilities in Southern Sudan during the interim period-- when the Islamic banks withdrew from the Southern Sudan, the Bank of Southern Sudan (BoSS) was established as a ‘branch’ of the Central Bank of Sudan (CBoS). The primary responsibility and mandate of BoSS was to contribute in ensuring price stability, maintaining stable exchange rate, sound banking system and issuance of currency note. In practice, however, the GOSS does not have control over the growth of money supply and credit, the change in monetary reserve requirements, or other monetary policy instruments. Neither does the BoSS have control over the exchange rate policy or the management of international reserves. This state of affairs will likely change only following formal independence as and when South Sudan opts for its own domestic central bank and domestic currency.

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8 According to IFC’s Doing in Juba 2011, access to credit is very limited as business firms consider this as the second biggest obstacle in doing business (following physical infrastructure constraints). The financial system in Southern Sudan is underdeveloped due to over 2 decades of war. Most lending is short term (3 to 6 months) and interest spreads are high. Only 10% of loans are extended to small and medium-size enterprises. Microfinance institutions cover approximately 5% of clients in Juba and less than 1% of the potential market across Southern Sudan.

The commercial banking industry in South Sudan consists of eight banks with a combined network of forty-five branches.8 Commercial banks provide a variety of services to the Southern Sudan economy through mobilization of deposits and allocation to promising investment projects that can spur growth. Besides these basic functions, the commercial banks in Southern Sudan perform a number of support services of specialized nature to their customers. They facilitate transfer of funds (remittances) from one area to another through telegraphic transfers; provide overdraft and documentary credits to customers who wish to cover temporary liquidity shortages and import goods respectively; and render consultancy services to their customers through financial and economic appraisal of investment projects. In terms of the composition of the sector, a recent by the BoSS notes that, “…commercial banking in Southern Sudan is a domination of the branches of foreign commercial banks pursuing business without regard to non-financial objectives of contributing in development”. Ranked the largest bank in Kenya by assets, the Kenya Commercial Bank (KBC) spearheads the commercial banking industry in Southern Sudan. It formed a subsidiary company, KCB (Sudan) Ltd, almost a year after the signing of the CPA. Currently, KCB has 14 branches in Southern Sudan, while it is reportedly looking at expansion plans to have around 30 branches across the post-independence state of Southern Sudan by 2015 and 100,000 customers in the next three years, up from around 10,000 most recently. Its Ethiopian counterpart, Commercial Bank of Ethiopia (CBE), despite entering this market some few years ago, still operates out of a single branch in the capital.

The Distribution of Commercial Banks across Southern Sudan States [Chart 12]NAME OF BANK EQUATORIA BHAR ELGHAZAL UPPER NILE TOTAL

Nile Commercial Bank (NCB) 5 4 3 12

Kenya Commercial Bank (KCB) 9 2 3 14

Buffalo Commercial Bank (BCB) 2 1 0 3

Ivory Bank 2 2 3 7

Equity Bank 3 0 0 3

Commercial Bank of Ethiopia (CBE) 1 0 0 1

Agricultural Bank of Sudan (ABS) 1 1 2 4

Mountains Trade and Development Bank MTDB 1 0 0 1

Total 24 10 11 45

Source: Bank of South Sudan (2010)

Market Share of Commercial Banks in Southern Sudan [Fig. 11]

27%

Nile Commercial Bank (NCB)

Kenya Commercial Bank (KCB)

Buffalo Commercial Bank (BCB)

Ivory Bank

Source: Bank of South Sudan (2010)

31%7%

15%

7%

9%

Equity Bank

Commercial Bank of Ethiopia (CBE)

Agricultural Bank of Sudan (ABS)

Mountains Trade and

Development Bank (MTDB)

2%

2%

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As part of several reforms anticipated for Southern Sudan’s Banking and Financial Institutions (post-independence), the Bank of South Sudan, encourages the establishment of national commercial banks and international banks linking South Sudan to global financial market. BoSS also promotes the establishment of specialized banks such as agricultural banks, industrial banks, investment banks, saving and mortgage banks. Each of these banks would be expected to focus its lending on those specialized areas or domains. In addition, BOSS encourages the establishment of foreign banks branches and claims to be pursuing a policy of paying share capitals in multiple (three) installments. The BoSS also sees the need for the eventual establishment of a Bank Deposit Insurance Corporation to complement regulatory and supervisory role of the Central Bank of South Sudan. Its basic aim would be to strengthen public confidence in banking system, protection of depositors’ rights and safety of banks. The BoSS also plans to institute a financial services company entrusted with the task of issuing and selling government securities. This would be used as a monetary policy tool as well as a source of financing the government’s budgetary deficits.

Non-Bank Financial Institutions in Southern Sudan consist of forty-five Foreign exchange bureaus, five Insurance companies, and a network of forty-nine Micro-finance institutions spread across Southern Sudan. The Forex bureaus are established according to a Foreign Exchange Dealing Act (1999) in Southern Sudan with a sizable number of branches outside Juba. These foreign exchange bureaus are involved in selling and purchases of foreign exchange. Their major objective is to widen the supply of foreign exchange for small users such as travel and medical treatment abroad, and of recent educational and living expenses of Southern Sudanese nationals abroad. Whereas, the insurance business consists of five insurance companies, which are under control of the Bank of Southern Sudan as they practice partial banking activities in collecting risk premiums from the public and invest them. Finally, the Microfinance Institutions (MFIs) in Southern Sudan are a collection of eight civil society organizations, non-governmental and government organizations, with a network of forty-nine units across Southern Sudan (see Chart 13 and Figure 12 below). The objective of microfinance institutions is to make financial resources available to the poorest echelons of the South Sudanese people, mostly women, to start or expand very small, self-sufficient businesses in Southern Sudan without collaterals. The CBoS through its annual credit policy directs commercial banks to allocate a certain proportion of (12%) from their total lending portfolio to Micro-finance projects. While, there is a dedicated MFI Unit in the BoSS with a mission to promote Micro-finance in Southern Sudan--through mentoring and supervising MFI providers and coordinate the government (BoSS) & non-government technical resources (including looking after the application of the wholesale credit from the Unit to the micro-finance providers). But still, the microfinance industry in Southern Sudan is presently seen to be undeserving popular financing needs and estimated to be reaching a mere 1-3% of the potential market.

The Distribution of Microfinance Institutions (MFIs) across Southern Sudan States [Chart 13]NAME OF MFI EQUATORIA BHAR ELGHAZAL UPPER NILE TOTAL

Sudan Microfinance Institution (SUMI) 4 1 1 6

BRAC 16 7 6 29

Financial Sudan Limited (FSL) 2 3 1 6

Rural Finance Initiative (RUFI) 2 - - 2

Enterprise Microfinance Institution (EMI) - 1 - 1

Women& Youth Empowerment (WAYE) 2 - - 2

Christian Agenda For Development (CAFD) - 1 - 1

JASCO 2 - - 2

TOTAL 28 13 8 49

Source: Bank of South Sudan (2010)

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Market Share of Microfinance Institutions (MFIs) in Southern Sudan [Fig. 12]

59%

Sudan Microfinance Institution (SUMI)

BRAC

Financial Sudan Limited (FSL)

Rural Finance Initiative (RUFI)

Source: Bank of South Sudan (2010)

Enterprise Microfinance Institution (EMI)

Women & Youth Empowerment (WAYE)

Christian Agenda For Development (CAFD)

12%

4%

2%4%

2%

4% 13%

JASCO

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FUTURE BUSINESS PROSPECTS AND OPPORTUNITIES

South Sudan will be confronted with the wide array of challenges facing any new country, but the availability of significant oil resources, strong donor support, early signs of foreign investor interest (especially from the region), and good governance can all help to address and gradually overcome these challenges over time. According to Global Insight’s recent assessment, with some 80% of Sudan’s oil production—equivalent to 380,000 b/d—based in Southern Sudan, the region has the near-term economic resources to assist its state formation and development. Besides having the majority of Sudan‘s currently known proven and probable oil reserves, South Sudan also has some of the best quality agricultural land, much of which is largely unutilized or under-utilized (only 31% of households have put all their available land into cultivation according to the WFP). With increased access to oil revenues and its immense untapped agricultural prospect, the Republic of South Sudan has a major advantage over most emerging post-conflict governments. It is reported, for example, that only around 2% of the total available land in South Sudan is currently fully cultivated.

Indeed, despite tough starting conditions, the very favorable natural resource base of South Sudan has the potential to lay the basis for an open and fast-growing economy with a vibrant and gradually diversifying private sector. Private sector opportunities are plentiful and often virtually untouched many areas. According to investment opportunities identified by GoSS ministries, Southern Sudan chamber of commerce, industry & agriculture, and a recent private-public cooperation country report on fragile states, the Southern Sudan economy can effectively diversify into the following main areas:

• Agriculture and livestock: This sector is of major importance to the Southern Sudanese economy, in particular with respect to food security and employment, and given the government’s commitment to produce enough food to be self-sufficient. Out of close to 82 million hectares of land surface in Southern Sudan, about 50 percent is prime irrigable agricultural land, endowed with 8 months of rain and two planting seasons. The Ministry of Agriculture has indicated that the Green Belt, reaching from the Central to the Eastern Equatorial state, is very much suited for medium and large scale commercial agriculture as it is has some of the most fertile soils in Sudan. Agricultural produce here include: sorghum, maize, sesame, groundnuts, shea-nuts, cotton, vegetables, and fruit. In contrast to this potential, most of the present agricultural production in the South is at subsistence level, and commercialization currently only takes place on a very small scale. Increased productivity in the agricultural sector requires an increased level of mechanization and improved inputs (seeds, fertilizers, etc.). Direct inputs that could be provided by the private sector are knowledge about and the provision of new agricultural techniques and varieties, technical expertise to set up and run a commercial marketing company. Setting up agricultural service supply companies would present a market-oriented solution for attaining this objective. While, with an estimated amount of nearly 8 million cattle in Southern Sudan, livestock plays a significant role. There is a great deal of potential for international investment in cattle rearing, dairy products, meat processing, fishery and cattle feed development9. Southern Sudan also has potential in related more value adding industries including leather processing and sugar cane development (including ethanol production). The development of agriculture can also be driven by cross-border trade in key foodstuffs that could be produced in South Sudan for export markets in the East Africa Community.

• Forestry: Southern Sudan has large areas of both timber and non-timber forests. The 2007 FAO report on the State of the World’s Forests estimated that natural forests and woodlands cover a total of 192,000 square km., or more than a quarter of the total land area in Southern Sudan. Currently, commercial utilization is limited to teak (from plantation forests) and mahogany (natural). Gum Arabic is also considered to be a potentially interesting

9 An often mentioned agro-investment opportunity in Southern Sudan is that of poultry development, in that there is a growing market which is currently only being served by poor quality imports with very high prices. Thus, even under the challenging (and costly) business climate conditions prevailing in Southern Sudan, the cost price difference is so large that a competitive and import-substituting industry can be developed. A further advantage mentioned is that in the case of poultry meat there is already a well-established distribution system in place. Developing production is then simply an issue of backward integration.

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10 As the troubled gas transit relationship between Russia and Ukraine has demonstrated, the South’s imminent reliance on the North could render the former vulnerable to the latter’s control of export infrastructure. This implies that North and South Sudan must co-operate, at least in the short to medium term; but renewed efforts should be considered to minimize reliance on a neighboring country for export is fraught with uncertainties and changing political conditions.

area for commercialization. Southern Sudan contains six ecological zones: semi-desert, low rainfall woodland savannah, high rainfall woodland savannah, flood region, montane forest, and lowland tropical forest. The flood region includes the Sudd, considered the largest floodplain in Africa. Southern Sudan also has extensive and diverse forest and woodland resources that provide timber, poles and firewood, food, oils, medicines, as well as habitat for much of Southern Sudan’s wildlife.

• Infrastructure: The restoration of roads and buildings has been ongoing in Southern Sudan since the signing of the CPA. With the exception of Juba--all other urban, inter-urban, interstate and regional highways have a dirt-surfaced roads. Water resources in Southern Sudan still remain underdeveloped and underutilized and much of the sparsely existing infrastructure does not function efficiently. Currently, there are no commercialized irrigation schemes. However, the demand for both the domestic and productive use of water is expected to increase rapidly as peace takes full effect in Southern Sudan, and as people are returning and looking for means to start and restart agricultural production. Electricity also necessitates all-round investment since there is no national electricity grid to supply consumers from a central location. The demand for power is largely unmet despite existing potential to generate over 500 MW and hence a great potential for private investment. Due to the absence of a national grid, rural areas will have to be catered for by various types of small-scale energy systems. As for construction, there is ongoing work to build more government buildings and hotels. The cities are expanding rapidly and the demand for construction materials coupled with high transportation costs has led to high prices of residential units, which makes this a very ‘lucrative’ sector (i.e., real estate development is widely viewed as a promising venture given that only an estimated 12 percent of housing demand is currently met across Southern Sudan). Nonetheless, the key short-term challenge of the new state of South Sudan’s lack of oil infrastructure. While most of Sudan’s oil resources are in the south of the country, its export infrastructure is in the north10.

• Transportation: Southern Sudan still lacks an established public transportation systems. According to GoSS’ own review, the present costs of transport in Southern Sudan are high even for Africa, which typically has high transport costs relative to other parts of the world. The cost of transport, telecommunication, water and sanitation services, power and energy, raise the cost of production and service delivery, thus undermining the private sector to do business in South Sudan. The sector is currently dominated by private operators. Road transportation is largely undeveloped mainly due to poor roads and has left huge gaps which present a good potential for private firms. The same is true for commercial railway schemes. Air transportation is still largely undeveloped although regional operators are presently pouring into the market. There are a total of 16 ports along the White Nile in Southern Sudan, of which seven are major and nine are small. Some recent industry-specific studies have pointed out that, in Southern Sudan there is a potential for establishing private sector inland container depots (ICDs) and a logistics industry with external collaboration.

• Tourism & Hospitality: Southern Sudan has seven National Parks and 12 Game Reserves, some of which still have large numbers of wildlife. However, none of these parks are currently operational. Hospitality is currently in a transitional stage, and more luxury hotels and regulated game spotting could be developed as a longer-term investment. Mobile safari operations could also be a starting point in the short-term.

• Manufacturing: Mainly small-scale manufacturing is taking place in Southern Sudan, including carpentry and metal processing. The production of mineral water is already taking place while the production of soft beverages and beer (by SAB Miller) is being developed in Juba by foreign investors. Nevertheless, the shortage of finance and technology in manufacturing, coupled with high transportation and procurement costs (input costs), limits growth in this sector. Potential fields of medium and large scale manufacturing investments identified by the Southern Sudan chamber include in developing existing defunct agro-processing industries that presently in need to be revitalized, including old factories across Southern Sudan engaged in sugar processing, brewery, meat and fruit canning, agro-industrial complex, weaving and bags).

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Beyond sector-specific opportunities, macroeconomic developments—most notably, a new currency, IMF entry, and debt relief—can each potentially play an important role in deepening private sector growth:

• New Currency: The establishment of a new and stable currency could allow the South Sudan to manage its economy in line with its own domestic conditions and circumstances. Hence, specific policies could be adopted to hold down inflation, to provide a competitive boost to exports, and to manage external inflows more broadly. If properly administered, this provides greater flexibility and policy tools to the government and could allow for a more growth-conducive macroeconomic environment to be put in place.

• IMF Entry: South Sudan’s likely and expected entry into the IMF can help in securing assistance needed for a wide range of technical macroeconomic challenges (inflation control, public financial management, monetary policy, and banking supervision) and can also facilitate—via a formal Fund program—wider access to donor funding in these and other areas.

• Debt Relief: Debt relief for both North and South Sudan, once debt apportionment issues are settled, can provide a new financial starting point for both countries in their relations with external providers of credit. Without debt relief, it will be difficult for both countries to successfully access the wide range of funding that is available from multilateral banks, export credit agencies, bilateral lenders and the like. Such funding will, however, be very important especially for a newly independent country that faces large financing needs to meet urgent social and infrastructural requirements. To access such funding, especially that provided on concessional terms (i.e., at low interest rates), debt relief will be indispensable. The benefits of such debt relief will flow to the overall economy and to the private sector that will face a more stable and less risky macroeconomic environment.

In summary, even with many demanding tests that lie ahead for the newly independent country, South Sudan is fortunate to have several strong assets on which to build a fast-growing economy with a vibrant and gradually diversifying private sector. As noted above, however, capitalizing on these opportunities will require a macroeconomic framework that is conducive to private sector growth. Good political and economic governance on the part of South Sudan’s domestic leadership and external support from outsiders (including through large-scale technical assistance to build capacity in key economic institutions) will also make a critical difference. Assuming these are gradually put in place, there is a very wide and virtually unexploited range of business opportunities in South Sudan whether it is for the emerging pool of local entrepreneurs, for neighboring country investors ready to seize expansion opportunities, or for an even broader source of foreign investors—from the Middle East, Asia, Europe and beyond—that can contribute to and benefit from the transformation of a newly independent country.

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ANNEX I

Doing Business in Juba 2011 Highlights

Nine indicators were included in the aggregate ranking on the ease of doing business that was comparable with the 183 economies covered in the study. The indicators in Doing Business in Juba 2011 are also comparable with 346 cities in 38 economies benchmarked in other sub-national Doing Business studies. Doing Business in Juba 2011 investigated the regulations that enhance business activity and those that constrain it. It benchmarked the ease of starting a business, dealing with construction permits, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business

A.Starting a Business: measures the procedures, time and cost for a small to medium- size enterprise to start up and operate formally. The number of procedures shows how many separate interactions an entrepreneur are required to have with third parties. Business entry requirements go beyond simple incorporation to include the registration of a business name, tax registration, registration with statistical, social security and pension administrations, and registration with local authorities. Starting a limited liability company in Juba takes 11 procedures, 15 days, and costs 250.2% of income per capita. No minimum capital is required by law. The process in Juba is faster but more costly than it is in Khartoum, where an entrepreneur spends 36 days and 33.6% of income per capita to start a business. Juba would rank 123rd of 183 countries on the ease of starting ahead of Kenya (125th), but behind Rwanda (9th) and South Africa (75th).

Starting a Business

Rwanda 9

Egypt 19

UAE 45

South Africa 75

Nigeria 109

Sudan (Khartoum) 120

Juba 123

Kenya 125

Uganda 140

Guinea-Bissau 183

SS Average 126

B.Dealing with Construction Permits: measures the procedures, time and cost for a small to medium-size business to obtain all the necessary approvals to build a simple commercial warehouse and connect it to basic utility services. Such indicators can be telling. A construction company wishing to build a warehouse in Juba spends 30 days on 10 procedures to obtain building approvals and utility connections, at a cost of 5,936% of income per capita. In Khartoum, the same process is more complex--19 procedures and takes 9 times longer. On the other hand, it is much cheaper, costing 192% of income per capita. Compared globally, Juba would rank 49th out of 183 economies on the ease of dealing with construction permits. Juba is behind Kenya (35th) but ahead of South Africa (52nd), Rwanda (82nd), Uganda (133rd), and Egypt (154th). With just 10 required procedures, Juba requires fewer steps than the global average (18).

ANNEXES Southern Sudan: Macroeconomic and Business Environment Overview

29

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Dealing with Construction Permits

200

160

120

80

40

0

29

UAE Kenya Juba South

Africa

Rwanda Uganda Sudan

(Khartoum)

Egypt Nigeria Eritrea SS

Average

3549 52

82

133140

154168

183

117

C.Registering Property: records the full sequence of procedures necessary for a business to purchase a property from another business and transfer the title to the buyer’s name. The transaction is considered complete when it is opposable to third parties and the purchasing company can use the property as collateral for new loans or, if necessary, sell it to another business. To register a property in Juba, an entrepreneur must spend 18 days on 7 procedures that cost 14.7% of property value. The same process in Khartoum requires fewer procedures (6), takes less time (9 days) and is much cheaper (3% of property value). Compared globally, Juba ranks 124th of 183 economies on the ease of registering property--ahead of Uganda (150th) and Kenya (129th) but behind Rwanda (41st) and Egypt (93rd). In Saudi Arabia, the global best performer, property can be registered in 2 procedures and 2 days at no cost.

D.Getting Credit: measures 2 types of institutions and systems that can facilitate access to finance and improve its allocation. The 2 types of institutions are measured by 2 sets of indicators. One describes how well collateral and bankruptcy laws facilitate lending. The other measures the scope and accessibility of credit information available through public credit registries and private credit bureaus and provides information on coverage. Access to credit is very limited in Juba. Businesses cite it as the second biggest obstacle after electricity constraints. The financial

Registering Property

SS Average

Timor-Leste

Nigeria

Senegal

Uganda

Kenya

Juba

Egypt

South Africa

Rwanda

Sudan (Khartoum)

0 40 80 120 160 200

121

183

179

166

150

129

124

93

91

41

40

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system in Southern Sudan is underdeveloped due to over 2 decades of war. Most lending is short term (3 to 6 months) and interest spreads are high. Only 10% of loans are extended to small and medium-size enterprises. Microfinance institutions cover approximately 5% of clients in Juba and less than 1% of the potential market in Southern Sudan. Considering the depth of credit information and the strength of legal rights indexes, Juba would rank 176th of the 183 economies--far behind Kenya (6th), Uganda (46th), and Egypt (72nd). Khartoum ranks 138th, scoring 0 out of 6 in terms of depth of credit information and 5 out of 10 on the strength of legal rights.

Getting Credit

South Africa 2

Kenya 6

Rwanda 34

Uganda 46

Egypt 72

UAE 72

Nigeria 89

Sudan (Khartoum) 138

Juba 176

Palau 183

SS Average 120

E. Protecting Investors: measures the transparency of related-party transactions, the liability of company directors for self dealing and the ability of shareholders to sue directors for misconduct. If investors fear potential expropriation by a company’s officers, they tend to invest in fewer companies in which they take majority stakes. According to a recent journal of financial economics, the presence of legal and regulatory protection for investors explains up to 73% of the decision to invest. Because of this, both governments and businesses have an interest in strengthening investor protection. A higher ranking on the strength of investor protection index indicates that an economy’s regulations offer stronger investor protection against self dealing in the areas measured. The indicator does not measure all aspects related to the protection of minority investors, such as dilution of share value or insider trading. With a score of 2.7 out of 10 on the overall strength of investor protection index, Juba ranks 173rd out of the 183 economies. Within the region, minority shareholders are better protected from director’s misuse of corporate assets for personal gain in South Africa (10th), Nigeria (59th), Egypt (74th) and Kenya (93rd). New Zealand, the global top performer for this indicator, scores 9.7 on the strength of investor protection index.

Protecting Investors

200

160

120

80

40

0

Sou

th

Afr

ica

Rw

anda

Nig

eria

Egypt

Ken

ya

UA

E

Uga

nda

Su

dan

(Kh

arto

um

)

Juba

Afg

han

ista

n SS

Ave

rage

1029

6174

94

120133

154173

183

113

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F. Paying Taxes: measures the payments, time and total tax rate borne by a standard firm with 60 employees in a given year. The number of payments indicator measures the frequency with which the company has to file and pay different types of taxes and contributions, adjusted for the way in which those payments are made. The time indicator captures the number of hours it takes to prepare, file and pay 3 major types of taxes: profit taxes, consumption taxes and labor taxes and mandatory contributions. The total tax rate measures the tax cost borne by the standard firm. High tax rates and burdensome tax administration are consistently ranked among the main obstacles to doing business by entrepreneurs around the world. In Juba, a medium-size company spends 218 hours per year making 46 tax payments, and pays 25.5% of its annual commercial profit in taxes. This is more cumbersome but less expensive than in Khartoum, where the same company spends 180 hours every year on 42 payments and 36.1% of its commercial profits. Globally, Juba would rank 84th among 183 economies on the ease of paying taxes--ahead of Egypt (136th) but behind Uganda (62nd) and Rwanda (43rd).

G.Trading Across Borders: measures the time and cost (excluding tariffs) associated with exporting and importing by ocean transport, and the number of documents necessary to complete the transaction. The indicators cover procedural requirements such as documentation requirements and procedures at customs and other regulatory agencies as well as at the port. They also cover trade logistics, including the time and cost of inland transport to the largest business city. Juba is an inland city. The primary port used by its local traders is the port of Mombasa in Kenya, situated 1,400 kilometers away. Even though Sudan is home to Port Sudan--a deep-water port in the northwestern part of the country--geography and conflict have constrained Sudan’s north-south infrastructure linkages. In order to trade overseas, cargos to and from Juba have to go through 2 customs border posts—at Nimule/Bibia border between Sudan and Uganda and at Malaba between Uganda and Kenya. An entrepreneur in Juba needs to submit 11 documents, wait 60 days, and spend USD 9,420 to import a standardized container of cargo through the port of Mombasa. To export through the same port, an entrepreneur needs to submit 9 documents, wait 52 days, and spend USD 5,025. This is slower and more expensive than from Khartoum where, via Port Sudan, importing takes 46 days and costs USD 2,900, while exporting takes 32 days and costs USD 2,050. In other parts of Sub-Saharan Africa, the process is quicker and cheaper: importing takes, on average, 38 days and costs USD 2,492 while exporting takes 32 days and costs USD 1,962. Compared globally to 183 economies, Juba would rank 181st on the ease of trading across borders--only ahead of Afghanistan (183rd) and the Central African Republic (182nd).

Paying Taxes

SS Average

Belarus

Kenya

Egypt

Nigeria

Sudan (Khartoum)

Juba

Uganda

Rwanda

South Africa

UAE

0 40 80 120 160 200

116

183

162

136

134

94

84

61

43

25

5

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Trading Across Borders

UAE 3

Egypt 21

Sudan (Khartoum) 143

Kenya 145

Nigeria 147

Uganda 149

South Africa 151

Rwanda 160

Juba 181

Central African Republic 182

Afghanistan 183

SS Average 136

H.Enforcing Contracts: measures the time, cost and number of procedures needed to resolve a commercial lawsuit between 2 domestic businesses. The dispute involves the breach of a sales contract worth twice the income per capita of the economy. The case is disputed on the merits and the court hears an expert on the quality of the goods sold. Enforcing a contract in Juba requires 46 procedures over 111 days and costs 26% of the value of the claim--faster and cheaper than the Sub-Saharan average (which requires 639 days and costs 50% of the value of the claim). Compared globally, Juba would rank 74th of 183 economies--behind Rwanda (39th) but ahead of Khartoum (146th), Kenya (125th), and Uganda (113th). A functional dispute resolution system is essential for sustaining a healthy, stable economy. Efficient contract enforcement is associated with greater access to credit for firms. Well-functioning courts help businesses expand their networks and markets.

I. Closing a Business: studies the time, cost and outcome of insolvency proceedings involving domestic entities. Speed, low costs and continuation of viable businesses characterize the top-performing economies. It does not however measure insolvency proceedings of individuals and financial institutions. Juba is among the world’s poorest performers in the area of closing a business. Globally, Juba would rank among the bottom 26 economies on this indicator. This does not put Juba far behind other countries in the region. Sub-Saharan Africa has the largest share of economies with little or no insolvency practice. In fact, 12 of the region’s 46 economies have had fewer

Enforcing Contracts

200

160

120

80

40

0

Rw

anda

Juba

Sou

th

Afr

ica

Nig

eria

Uga

nda

Ken

ya

UA

E

Egypt

Su

dan

(Kh

arto

um

)

Tim

or-

Lest

e

SS

Ave

rage

39

7484

97113

125134 143 146

183

118

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than 5 insolvency cases annually in recent years. To close a business in Sub- Saharan Africa costs, on average, 20.7% of the value of the debtor’s estate and takes 3.4 years.

Closing a Business

SS Average

Sudan (Khartoum)

Rwanda

Juba

UAE

Egypt

Nigeria

Kenya

South Africa

Uganda

New Zealand

0 40 80 120 160 200

128

183

183

183

143

131

99

86

75

57

17

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ANNEX 2: Southern Sudan--Major Macroeconomic and Business Indicators (2008-2010)

2008 2009 2010

(SDG in millions; unless otherwise indicated)

Money, Banking and Credit

A. Money supply 1,281 5,020

of which;

Currency with the Public 963 4,254

Demand Deposits 318 766

with - Commercial Banks 318 491

- Bank of South Sudan (BoSS) N/A 275

B. Factors Affecting money supply

Net Foreign Assets 118 888

Net Local Assets 389 460

Revaluation -8 -625

C. Claims by government (BoSS)

of which;

GOSS, States and local government 318 25

Public corporation 39.1 136

Claims on private sector 200 138

Claims on commercial banks 176 25

D. Position of commercial banks financing by economic activities or sectors 119 139

of which;

Agriculture 19.3 28

Industry 34.5 37

Imports 0.6 2

Exports N/A N/A

Local trade 57.6 66

Others 7 6

Consolidated commercial banks balance sheet 715 1,098

Deposits 484 650

Current deposit 392 483

Saving & other deposits 92 167

Bank of Southern Sudan consolidated balance sheet assets 3,321 4,442

Government Finance

GoSS Revenue 6,790 4,239 4,503

Oil Revenue 6,671 4,121 4,402

Non-Oil Revenue 119 118 101

GoSS Expenditure 5,713 3,606 4,483

Salaries 1,873 1,840 2,179

Operating 2,227 899 1,313

Capital 1,612 867 990

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ANNEX 2: Southern Sudan--Major Macroeconomic and Business Indicators (2008-2010)

2008 2009 2010

Fiscal Balance 1,077 633 20

Direct Expenditures of GONU 24 - -

Reserves 988 52 20

Overall Budget Deficit/Surplus

Agriculture

Estimated Cattle numbers (thousands) 10,860 11,735

Estimated Cereal Production in Traditional Sector (in ‘000 tons) 1,068 660

Businesses and Cooperatives

Businesses by Type of Activity (Number) 7,333

off which;

Agriculture, Forestry and Fishing, Mining and Quarrying, Electricity, Gas,

Steam and Air-conditioning Supply 10

Manufacturing 199

Water Supply, Sewage, Waste Management and other services 7

Construction 89

Wholesale and Retail Trade; Repair of motor vehicles and motorcycle 5116

Transportation and Storage 45

Accommodation and Food Service 1037

Information and Communication 97

Financial and Insurance Activities 52

Professional, Scientific and Technical Activities 46

Administrative and support service activities 10

Education 31

Human Health and Social; Service activities 361

Arts, Entertainment and Recreation 22

Other Service Activities 211

Businesses by Year of Founding. (Number) 1,555 1,786 2,136

Memo items:

South Sudan Population (millions) 8.26

Source: Southern Sudan Centre for Census, Statistics and Evaluation (SSCCSE)--Statistical Yearbooks for Southern Sudan (2009& 2010)

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ANNEX 3: Sudan--Selected Macroeconomic Indicators (2007-2010)

2007 2008 2009 2010 Proj.

Economic Activity and Prices

Real GDP growth (annual percentage change) 8.1 7.8 6.1 5.5

Oil 33.0 -4.4 2.6 -3.0

Non-oil 7.5 8.5 6.4 6.1

GDP Sector Share (percentage)

Agriculture 28.9 29.3 31.1 32.1

Industry 29.2 29.2 23.9 29.0

Services 41.9 41.5 45.0 38.9

Nominal GDP (in millions of SDG) 93,811 121,287 128,429 159,174

GDP at current market prices (USD millions) 46,531 58,028 54,644 66,595

Nominal GDP per capita (in U.S. dollars) 1,251 1,523 1,398 1,661

GNP per capita (in USD) 1,147 1,394 1,316 1,488

Oil Production (average, in thousands of barrels per day) 484 462 474 460

Crude Oil Exports (volume, in thousands of barrels) 139,000 144,748 151,273 137,319

Gross National Saving (% GDP) 15.6 15.0 10.9 13.5

Gross domestic fixed investment (% GDP) 26.5 22.7 21.8 23.3

Government investment (% GDP) 9.5 6.5 5.5 7.1

Private investment (% GDP) 17.0 16.2 16.3 16.2

Consumer prices (year-average) 8.0 14.3 11.3 11.0

Consumer prices (end of period) 8.8 14.9 13.4 10.0

Money and Exchange Rates (in millions of SDG; unless otherwise specified)

Broad money (M3) 19,715 22,933 28,314 34,827

Credit to the public sector (Govt. & SOEs) 3,960 3,663 6,632 7,904

Credit to the private sector 13,308 15,390 18,497 21,358

Net foreign assets 4,918 5,458 3,977 5,552

Exchange rate (SDG/US$) end-of-period 2.02 2.09 2.30 …

Balance of Payments (in millions of USD; unless otherwise specified)

Exports of goods (in millions of USD) 8,902 12,480 7,834 10,236

Oil exports 8,443 11,904 7,131 9,433

non oil products 460 576 703 803

Imports of goods (7,722) (9,097) (8,528) (9,150)

Current account balance (% GDP) (10.9) (7.7) (10.8) (7.7)

FDI and Portfolio investment (net) 3,036 2,628 2,615 2,981

External debt (in billions of USD) 31.9 33.7 34.7 36.8

External debt (% GDP) 68.5 58.1 64.0 58.8

External debt-service ratio (% exports in Cash payments & Commitment basis) 13.6 12.4 23.8 19.9

Gross official international reserves 1,378 1,399 897 1,081

(in months of imports of goods & services) 1.4 1.6 0.9 1.0

Government finances (in percentage of GDP; unless otherwise specified)

Revenue and Grants 20.6 21.8 15.4 16.0

Tax revenue 7.0 6.3 6.7 6.3

Oil revenue 11.6 14.3 7.4 8.3

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ANNEX 3: Sudan--Selected Macroeconomic Indicators (2007-2010)

2007 2008 2009 2010 Proj.

Grants 0.6 0.5 0.6 0.7

Expenditure and net lending 25.9 23.3 20.4 21.5

Current expenditure 21.1 20.1 17.6 17.8

Investment expenditure 4.8 3.2 2.8 3.7

Overall fiscal balance (incl. discrepancy) -5.4 -1.4 -4.7 -3.4

External financing of the deficit 1.0 0.4 0.7 2.2

Domestic financing of the deficit 4.4 1.1 4.0 1.2

Change in arrears (in millions of USD) 887 854 1,033 1,222

Memo items:

Population, mid-year (in millions) 37.2 38.1 39.1 40.1

Sudanese Crude Oil Price (USD dollars per barrel) 58.0 81.3 47.4 69.1

Source: IMF Staff Report on Sudan (June 2010 & April 2011)

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