Financial System in South Sudan Key Developments and Challenges Research Paper

Albino John Ajack

albinoajack@gmail.com

5/18/2015

1

Contents

1. Introduction …………………………………………………………………………………….…………………. 2

2. Macroeconomic Environment and Financial Structure ……………………................... 3

2.1 Macroeconomic Environment …………….................................................................................. 3

2.2 Financial Structure ……………......................................................................................................... 6

2.3 Financial Depth and Access ……………...................................................................................... 9

2.4 Microfinance …………….................................................................................................................... 13

3. Financial Sector Development ……………………………………………………………………….. 14

3.1 Financial Intermediation ……………………………………………………………….…………….. 14

3.2 Size of the Banking Sector ……………………………………………………………….………….. 14

3.3 Financial Soundness Indicators ……………………………………………………………….…… 14

3.4 Enforcing Contracts ……………………………………………………………….…………………….. 16

3.5 Foreign Investment ……………………………………………………………….……………………… 17

3.6 Protecting Property Rights and Private Ownership ………………………………………. 17

3.7 Entrance of New Foreign Banks to the System ……………………………………………. 19

4. Challenges faces the financial sector …………………………….…………………..………….. 20

4.1 Financial Stability ……………………………………………………………….……………………... 20

4.2 Longer-Term Finance Challenges ……………………………………………………………….. 25

5. Conclusion………………………………………….………………………………………………..………….. 27

2

1- Introduction

South Sudan is the newest country in the world, and a landlocked country located in north-

eastern Africa. Its area is about of 644,329 square kilometers slightly smaller than the state of

Texas in the US or the area of France in Europe. The country became independent from Sudan

on July 9th, 2011. The referendum was agreed in the 2005 Comprehensive Peace Agreement

(CPA), an agreement that brought peace to one of the longest conflicts in the African continent,

and split the largest country in Africa “Sudan” into two countries. In the past Sudan was under

the control of British and Egyptian, and got its independence from the British and Egyptian

control in 1956.

Following the first Civil War, the Southern Sudan Autonomous Region was formed in

1972 as per Addis Ababa Peace Agreement and lasted until 1983. A second Sudanese civil war

soon developed and ended with the CPA of 2015. Later that year, southern autonomy was

restored when an Autonomous Government of Southern Sudan was formed. In July 9, 2011

South Sudan became an independent state, and then on July 14, 2011, South Sudan became a

United Nations member state number 193 and joined the African Union on July 28, 2011 to

become member state number fifty-four.

The CPA itself was mediated by the Intergovernmental Authority on Development

(IGAD), a regional economic community that worked heavily in addressing the situation in the

former Sudan in collaboration with the African Union (AU), and the United Nations (UN).

During the six-year interim period of the Comprehensive Pease Agreement CPA (2005 to 2011),

foreign aid and technical assistant were provided to the country, and government spending was

large due to large oil outflows, but their effectiveness was constrained due to poor budget

execution and governance problems.1

Due to the above events South Sudan is one of the fragile states with high level of

poverty, low human development indicators, weak governance, and lack of infrastructure and

institutions. However, the country is resource-rich with abundant resources of oil, minerals, and

arable land (about 90% of the area of South Sudan is arable land). These weaknesses in the

economy make it depend heavily on imported goods and services; about 90% of its consumption

1 Addis Ababa Othow, and Issam AW Mohamed, Cooperation Agreements between Sudan and South Sudan

and prospect of Economic and political stability (Jan 2013)

3

is from imported good.2 South Sudan financial sector is in its early stages of development and

access to finance is limited, because the banking services are more focused on foreign exchange

transactions, bank transfers and remittances, with few banks offering loans, and saving accounts

services.3

In which the major findings of this study are as follow:

1- Since the economy is fragile one with macroeconomics indicators below Sub-Saharan

Africa then South Sudan needs to work hard in the development programs by establishing

a good infrastructure and social facilities such as roads, electricity, health to insure high

productivity in the economy, and these things will also reduce the cost of doing business

in the country.

2- Insure the political stability and establishing good government institutions, besides

solving the critical issues with Sudan because that will help in stabilizing the financial

sector.

3- South Sudan needs to conduct an intensive capacity development program by train the

citizens in all levels, especially bankers and judgers to insure financial development.

4- Generate electricity by using the hydropower resources, which will help in attracting

more investments, industrial activities, lighting and exploitation of mineral resources.

5- Develop the legal framework by improving the laws in the country for insuring the

contract enforcement issues, then that will have a positive effect on the financial sector

development and economic growth.

6- The monetary authorities needs to work hard in mitigating all types of risks, to give more

rooms for the banking sector in providing loans to the most productive businesses.

7- Regarding the banking supervision the country need to focus on simple regulation which

can measure the real risk in the economy, instead of only focusing on Basel II.

8- Finally, the country needs to establish the required infrastructure for enhancing the

payments system, since it will help in reducing the cost of financial transactions.

2 African Business Institute, Investment Climate Update – South Sudan (September 2011, Vol 2, No 3)

3 African Development Bank, Making Finance Work for Africa report (2011)

4

This paper is organized as follows. Section 2 discusses macroeconomic environment and

financial structure. Section 3 discusses financial sector development. Section 4 discusses the

challenges facing the financial sector. Section 5 presents the conclusion.

2- Macroeconomic Environment and Financial Structure

2.1 Macroeconomic Environment

South Sudan is a fragile state as we mention before, with social indicators below the average for

Sub-Saharan Africa. During the six-year interim period of the Comprehensive Pease Agreement

CPA (2005 to 2011), foreign aid and technical assistant were provided to the country, and

government spending was large due to large oil outflows, but its effectiveness was constrained

by poor budget execution and governance issues.

Some progress was made in lowering child mortality rates, increasing school attendance,

and reducing poverty, but a lot has to be done in terms of energy, ITC and transport

infrastructure.

Moreover, in January 2012 unresolved issues with Sudan led to the shutdown of oil

passage through Sudan to the international market. Then a new cooperative agreement was

signed in September 2013 led to oil production resumption and South Sudan now pays oil transit

and pipeline fees of about $ 10 per barrel.4

In December 15, 2013, a political struggle escalated into a power struggle between

President Salva Kiir Mayardit and his former vice president Riack Machar, triggering a conflict

and it was precursory to become a civil war. President Salva Kiir announced that the coup

attempt was put down, but fighting resumed on 16 December, 2013 and spread beyond the

capital city Juba, to Jonglei, Unity and Upper Nile states. Many people were reported to have

been killed and others were injured. President Kiir blamed former vice president Dr. Riek

4 Addis Ababa Othow, and Issam AW Mohamed, Cooperation Agreements between Sudan and South Sudan and

prospect of Economic and political stability (Jan 2013)

5

Machar for instigating the “coup” but Dr. Machar denied any knowledge of it and instead blamed

Kiir for playing power politics.

Consequently, economic performance has been unsteady; growth has been volatile due to

disruptions in oil production, weather conditions, corruption, and internal conflicts. Despite the

fact that private investment has increased in recent years, especially in the capital city Juba, but

macroeconomic indicators have been volatile.

Inflation rose after the independence of South Sudan reaching a peak of 80% by the mid-

2012. However, fiscal austerity which has been adopted by the government because of the oil

passage shutdown for 15 months started from late January 2012 by the government of Sudan,

and the austerity measures which took place in early 2012 because of the oil shutdown has

brought inflation down until it became negative in early 2013, leading the economy to a

deflation. Moreover, in order to address the fiscal challenges, particularly deficit of its budget,

then government issued treasury bills to finance it through financial institutions, by annual

interest rate of 3 percent.5

Since the Bank of South Sudan started peg exchange rate regime in November

2011, the value of South Sudanese Pound SSP to the USD an overvalued exchange rate

led to the depreciation of the value of SSP against the USD in the black market, since the

black market was exists in South Sudan before the independence. By the end of

September 2014, net foreign assets of the central bank were the equivalent of about three

weeks of imports, leading the country to high level of distortions in the foreign exchange

market, because the foreign exchange market is inefficient in South Sudan.6

Fiscal Challenges

South Sudan has a high fiscal deficit, and 95 percent of its foreign currencies comes

from its oil revenues. The authorities are considering exchange rate unification, which

could have a significant effect on the fiscal situation, but no decision has been made yet

5 Research and Statistics Reports and Data, Bank of South Sudan (2013)

6 IMF IV Country Report South Sudan (2014), Report No. 14/345

6

by the government regarding exchange rate unification. Certainly, on Tuesday

November 12, 2013 Bank of South Sudan had devalued its national currency (SSP)

against the dollar by 52.5 percent to bring it onto a par with the black market rate, a

move that risks fanning inflation. The Bank had indicated the official foreign exchange

rate as one dollar to 4.5 pounds from 2.95 pounds before the devaluation. The

devaluation was part of Foreign Exchange reforms intended to bring the parallel markets

into the formal economy, but the decision was revoked by South Sudan Legislative

Assembly.7

Budget execution has been complicated and disturbed by unbudgeted emergency

expenditure and extra spending by government agencies, especially security.

Capacity constraints, corruption, a lack of legal framework, and “resource curse”

problems have delayed setting up an efficient system for non-oil resources

administration.

Spending needs to be reoriented towards development, because about 40 percent of

public spending currently goes to military and security. Another 40 percent to public

sector salaries, while spending on infrastructure has been declining since 2012.8

The country’s GDP per capita in 2013 was $1081. And 85% of the population is engaged

in non-wage work. Oil production has fallen by around 20% due to the conflict, which started in

December 2013. And also the recent decline in oil prices from $110 per barrel to $55 per barrel

in mid-2014 has further great effect on macroeconomic indicators in the country, and creates a

fiscal deficit of 4.5billion South Sudanese Pounds SSP, (10% of GDP).9 As we know oil prices

have declined sharply since June 2014 and are expected to remain low for a period of time. 10

2.2 Financial Structure

Before delving in explaining the financial sector for South Sudan, it is beneficial to have a

historical background about the banking system in Sudan, and what have been inherited by from

them by the new born country South Sudan. Sudan took its independence from British since

7 Research and Statistics Department, Bank of South Sudan (2013)

8 IMF IV Country Report South Sudan (2014), Report No. 14/345

9 Word Bank, Economic Overview for South Sudan update of (March 5, 2015)

10 John Baffes et al, The Great Plunge in Oil Prices, World Bank Group (March 2015)

7

1956 and the banking system in Sudan was comprised of commercial banks that were branches

of non-indigenous expatriate institutions.

Central Bank of Sudan was established in 1962 and it became one of the first operational

central banking institutions in Africa. In the 1970s the government of Sudan nationalized many

commercial banks for enhancing balance of payments position. Then by mid-1970’s, the

government reduced its restrictions on opening private foreign banks in the country, which

facilitated trade of Sudan with the rest of the world.

Although Islamic banking system started as an idea only in the early 1960s, it has grown

since then, and in the 1970s, the concept grow very fast in the Middle East then Sudan became

one of the major players in implementing the system. Following that in the 1990s Sudan

converted all its banking system to the Islamic Banking System. And the banking in South Sudan

was part of that system before signing the CPA. 11

Signing of the Comprehensive Peace Agreement, signed in 2005, between National

Government of Sudan and the Sudan People's Liberation Movement (SPLM) led the county to

have a dual banking system during the interim period. The Bank of Southern Sudan was

established as a branch of the Central Bank of Sudan. The northern part of Sudan continued to

operate under an Islamic financial system, while Southern Sudan region established a

conventional banking system. The Bank of Southern Sudan was operating as a conventional

window of a dual banking system.

Regarding monetary policy, Sudan and Southern Sudan maintained one monetary policy

managed and announced by Central Bank of Sudan, during the period from (2005 – 2011) the

Bank of Southern Sudan was responsible for supervising the financial sector in the Southern

Sudan region.

After independence in 2011, the Bank of South Sudan (BSS) began to operate as the

central bank for South Sudan with a full mandate of the central banks of the new country, to

11

United States Institute of Peace, Development of the Banking Sector in South Sudan (September 30, 2012)

8

mandate monetary policy in order to insure price stability in the country, and ensure a stable

exchange rate. 12

Financial sector in South Sudan is still underdeveloped. The system grew after the

independence for a while until it deteriorated in 2014 in terms of activities due to the civil

conflicts, and the reduction of oil exports. Moreover, South Sudan economy is cash-based, with

limited use of demand deposits. And the ration of M2-to-GDP is 15 percent, and it is below Sab-

Saharan Africa average of 36 percent. This put South Sudan among the lowest levels of financial

depth in the world. Also, the banking sector assets are about 18.4 percent of the GDP.

There are 29 licensed commercial banks with 75 branches operating in the country, out of

that six are foreign-owned banks, the largest three banks in terms of branches are, Kenya

Commercial Bank with 19 branches (Foreign Bank), Nile Commercial Bank with 12 branches

(Local Bank), and Equity Bank with 11 branches (Foreign Bank). Most of the other banks have

2 branches in average. In addition there are 84 licensed forex bureaus, 12 microfinance

institutions, and more than 15 insurance companies. Most of the foreign banks are subsidiaries to

their mother banks in Kenya, Ethiopia, Ghana, and among other African countries.13

Most of the deposits are short-term deposits, and the credit to private sector is 10 percent

of deposits. The capacity of supervisors is weak, data is poor or unavailable, and the IT system is

not well established; therefore the reporting of the commercial banks to the central bank are in

hard copy and mostly inaccurate and the clearance system is manual. 14

The allowance for many new commercial banks to enter the banking system have made

the numbers of banks rise from 10 in 2011 to 28 banks by the end of 2014. Therefore, the rapid

growth in the number of commercial banks with weak banking regulations and supervision may

lead to crisis, if the BSS does not adopt the best international practices by train its staff and cap

the increasing in the number of commercial banks.

Therefore, South Sudan is required to develop its financial system because, that will

enhance the soundest of the sector to work better in trade financing since the country imports

12

IMF IV Report et al (2014) 13

Bank of South Sudan data and Reports, Research and Statistics Department (2015) 14

IMF IV Report et al (2014)

9

about 90% of it is consumed goods and services. In addition the country’s financial system needs

to cooperate with the systems of neighboring countries like Sudan, Uganda, and Kenya in order

to develop.

2.3 Financial Depth and Access

Financial Depth as defined by King and Levine (1993 b) is reflecting the size of the financial

intermediary sector and is equal to the liquid liabilities of the financial system (currency plus

demand deposits of the banks and nonbank financial intermediaries) and for South Sudan we can

calculate it as M2/GDP which is 15 percent according to IMF IV report No. 14/345.

Commercial banks’ balance sheets are not dollarized, while most payments and contracts

are conducted in foreign currency (e.g. hotels, hose rental, and purchases). However, access to

USD is difficult and the black market in the foreign exchange transactions plus uncertainty about

the future prices of foreign exchange in the black market contributed to dollar denominated

transactions in the economy. Moreover, an estimated 1 percent of the population has bank

account in 2011, while in 2015 only 2.22 percent of the population has bank account.15

Collateral availability is another concern, because land titles are not available and

property right not established yet, and most of the places of doing business are leased from local

citizens by foreign investors. This situation makes commercial banks reluctant against leased

land because if the land is leased to an investor, then there will not be clarity about asset

ownership and assets cannot be seized for foreclosure, because in this case the borrower is the

investor who is not the ultimate owner of the land. This practice made it difficult to the

commercial banks to finance economic activities and perform the banking intermediation in the

country.16

Looking at South Sudan from the prospective of World Bank report in Doing Business

(2015), and its position among the countries in East African region, explains the high cost of

doing business in South Sudan reduces the efficiency of the economic activities in the country,

and raises the cost and the risk of the banking sector in lending. For us as policy makers it would

be important to evaluate the financial sector and access to credit, to know first the standing point

15

Bank of South Sudan, Research and Statistics Department, Depository Corporation Survey Data (2011 – 2015) 16

IMF IV Report et al (2014)

10

rank of the economy in the ease of doing business relative to the regional average, and distance

to frontier scores on the topics included in the ease of doing business ranking. Figure 1 shows us

the ranking of South Sudan relative to other countries in the region and the average of Sab-

Saharan Africa countries.17

Figure 1: How South Sudan Ranks on the Ease of Doing Business Compered to Other Countries

in East African Region (2015)

Note: The rankings are for 189 countries in the world, and based on the average of each economy’s distance to

frontier (DTF) scores for the 10 topics included in this year’s aggregate ranking. An economy’s distance to frontier

score is indicated on a scale from 0 to 100, where 0 represents the worst performance and 100 the frontier.

Source: Doing Business Economy Profile South Sudan, 12th

, Edition (2015)

Furthermore, we can look at another table showing the indicators, on their own in credit

related issues and comparing them with the indicators of a good practice economy on the other

economies in East African region which will reflect the possibility of the businesses in South

Sudan to have access to credit and the ability to perform their business in the country effectively.

By looking at the table below most of the indicators refer to how costly and risky is the

environment of performing a business in the country.18

17

World Bank Report, Doing Business Economy Profile South Sudan, 12th

, Edition (2015) 18

World Bank Report, Doing Business Economy Profile South Sudan, 12th

, Edition (2015)

11

Table 1: Summary Indicators of Doing Business, and Distance to Frontier (DTF) scores for

South Sudan

Ind

icato

r

So

uth

S

ud

an

DB

20

15

So

uth

S

ud

an

DB

20

14

Eth

iop

ia

DB

20

15

Ken

ya D

B2

01

5

Rw

an

da D

B2

01

5

Su

dan

DB

20

15

Tan

zan

ia

DB

20

15

Ug

an

da D

B2

01

5

Best

p

erf

orm

er

glo

ball

y

DB

20

15

Depth of credit

information index (0-8) 0 0 0 0 7 0 0 0

23 Economies

(8)*

Credit registry coverage

(% of adults) 0 0 0.2 0 2.4 0 0 0 Portugal (100.0)

Credit bureau coverage

(% of adults) 0 0 0 4.9 15.7 1.3 0.6 4.9

23 Economies

(100.0)*

Protecting Minority

Investors (rank) 173 172 154 122 117 174 141 110 New Zealand (1)

Protecting Minority

Investors (DTF Score) 32.5 32.5 41.67 45.83 46.67 31.67 43.33 47.5

New Zealand

(81.67)

Extent of conflict of

interest regulation index

(0-10)

2.7 2.7 2.3 4.7 6.3 3.7 5.3 5 Singapore (9.3)*

Extent of shareholder

governance index (0-10) 3.8 3.8 6 4.5 3 2.7 3.3 4.5 France (7.8)*

Strength of minority

investor protection index

(0-10)

3.3 3.3 4.2 4.6 4.7 3.2 4.3 4.8 New Zealand

(8.2)

Paying Taxes (rank) 98 97 112 102 27 139 148 104 United Arab

Emirates (1)*

Paying Taxes (DTF Score) 71.59 71.59 69.11 71.49 85.79 62.34 58.95 71.32 United Arab

Emirates (99.44)*

Payments (number per

year) 36 36 30 30 17 42 49 31

Hong Kong SAR,

China (3.0)*

Time (hours per year) 218 218 306 201.5 107 180 181 209 Luxembourg

(55.0)

Trading Across Borders

(rank) 187 187 168 153 164 162 137 161 Singapore (1)

12

Ind

icato

r

So

uth

S

ud

an

DB

20

15

So

uth

S

ud

an

DB

20

14

Eth

iop

ia

DB

20

15

Ken

ya D

B2

01

5

Rw

an

da D

B2

01

5

Su

dan

DB

20

15

Tan

zan

ia

DB

20

15

Ug

an

da D

B2

01

5

Best

p

erf

orm

er

glo

ball

y

DB

20

15

Trading Across Borders 5.7 5.7 38.58 54.49 44.67 46.98 62.96 48.01 Singapore (96.47)

Source: Doing Business Economy Profile South Sudan, 12th

, Edition (2015)

The scores of the indicators such as depth of credit information, credit registry coverage,

and credit bureau coverage South Sudan scores are zero, which is very low and reflects the high

risk in the country. Simultaneously, protecting minority indicator and the other indicators in

Table 1 above reflect also the poor performance of property rights protection. And the indicators

reflect how well the credit information system and collateral and bankruptcy laws in South

Sudan facilitate access to credit. However, the country scored zero on the depth of credit

information index and score 2 on the strength of legal rights index.

Globally South Sudan rank is 171 among the 189 economies in the world on the ease of

getting credit, this ranking show us useful information on how well the economy is doing in

terms of regulations and institutions for supporting lending and borrowing.19

From the above

mentioned indicators and weaknesses, the low lending, poor regulation, and small banking

inclusion will make the economy grow in lower rate, because a study made by Ross Liven

(2003) found out that country with more development in financial sector enjoyed more economic

growth than countries with less developed financial sector, therefore it will be very important for

South Sudan to work in encouraging commercial banks in providing lending to the more

productive activities, because they are the wheels of economic growth in the country.

2.4 Microfinance

There are 12 microfinance institutions MFIs in South Sudan, and most of them are NGO base

funded by international organizations such as, (UNCDF) the UN’s capital investment agency,

International Finance Corporation (IFC), United Nations Development Program (UNDP), and

Oxfam Novib/ Triple Jump. Most of fund is channel through an apex institution called South

19

World Bank Report, et al 12th, Edition (2015)

13

Sudan Microfinance Development Facility (SSMDF). However, since these microfinance

institutions operates in South Sudan they are still facing many challenges which made the spread

of finance difficult to all the areas with important activities. These challenges can be summarized

such as: lack of a unique credit reference bureau, lack of security in the rural areas, difficulty of

movement between states during the rainy season, and high cost of operations in South Sudan.

Therefore, we suggest that the government to create some facilities for these MFIs to

operate properly because they helps in providing finance to those who have no access, 20

and

contribute in reducing poverty in the country since 51% of the population are under the poverty

line (earning less than 1 dollar a day). Also, it is important for the government to establish credit

information bureau to collect data and disseminate information about creditworthiness for both

individuals and firms. Therefore, banks and financial institutions can access borrowers’ credit

information online, because this information plays the role of public good that benefits both the

borrowers and the lenders. 21

3- Financial Sector Development

3.1 Financial Intermediation

Intermediation expanded a bit after the independence of the country, but it stagnated again after

the civil conflicts which started in December 2013. Banks assets and deposits grew at the rate of

16 percent per year until the end of 2013, and then it grew little in 2014 and 2015. Commercial

banks in the country remain highly liquid. The liquid assets ratio average is about 70 percent the

reason behind this high ratio of liquidity is that, banks are reluctant in providing loans due to the

risky environment in the country.22

3.2 Size of the Banking Sector

The banking sector in South Sudan is small and the deposits and credit ratio to GDP is small, and

most of deposits and loans are short-term deposits/loans, meaning that there is no maturity

mismatch on them. Credit to the private sector is 10 percent of deposits. Moreover, the allowance

of many new commercial banks and forex exchange bureaus to operate in the economy after the

20

Milody Atil, Expanding the Provision and Impact of Microfinance in Southern Sudan (April 2009) 21

Global Financial Development Report, The Role of the State in the Financial Infrastructure (2013) 22

Et al Bank of South Sudan Data (2011 – 2015)

14

independence in 2011 has increased the number of commercial banks from 10 banks with 42

branches in 2011, to 29 banks with 75 branches in 2015.23

3.3 Financial Soundness Indicators

From the other depository corporation survey report, regulatory Tier 1 Capital to Risk-Weighted

Assets ratio was 41.2 percent in 2011, and it continued increasing until up to 76.2 percent in

2014. Earning of the banking sector represented by return on assets ratio (ROA) rose from 5.8

percent in 2011 to 7.7 percent in 2013 and due to the civil conflicts in the country which started

in December 2013 and the fall in oil exports which means fall in foreign exchange allocation of

the central bank to the commercial banks and forex exchange bureaus the ration of ROA has

fallen to 5.9 percent in 2014.

The ratio of non-performing loans (NPLs) to total gross loans was 10.2 percent in 2012 and fell

to 5.5 in 2014.24

Looking at South Sudan’s financial sector development, from the prospective of doing

business indicators, the country’s overall ease of doing business rank get worse from 159 in 2011

to 187 in 2015 ranking. And the development of the financial sector is clear when we compare

South Sudan indicators with the ones for Sudan and the average of Sub-Saharan Africa countries.

The reverse changes in that indicator are going with the changes in the financial sector indicators

due to the oil shutdown passage by the government of Sudan in February 2012, and the conflicts

which have started in December 2013. Therefore, in order to stabilize the financial and

macroeconomics indicators, the country should first look for solutions to stop the civil conflicts,

and make good relationships with Sudan and the other neighboring countries.

Table 2: Doing Business (DB) Ten Topics Indicators for South Sudan, Sudan, and Sab-Saharan

Africa 2011 & 2015:

Country

South

Sudan -

Juba

Sudan -

Khartoum

Sub-

Saharan

Africa

South

Sudan -

Juba

Sudan -

Khartoum

Sub-

Saharan

Africa

Topics DB 2011 Rank DB 2015 Rank

Starting a Business 123 121 126 178 139 129

23

Banks of South Sudan, Banking Supervision Department Reports (2011-2015) 24

IMF IV Report et al (2014)

15

Country

South

Sudan -

Juba

Sudan -

Khartoum

Sub-

Saharan

Africa

South

Sudan -

Juba

Sudan -

Khartoum

Sub-

Saharan

Africa

Dealing with Construction Permits 49 139 117 167 160 111

Getting Electricity - - - 179 136 139

Registering Property 124 40 121 180 46 125

Getting Credit 176 138 120 171 165 122

Protecting Minority Investors 173 154 113 173 174 121

Paying Taxes 84 94 116 98 139 129

Trading Across Borders 181 143 136 187 162 142

Enforcing Contracts 74 146 118 94 163 121

Resolving Insolvency 183 183 128 189 156 128

Overall Ease of Doing Business Rank 159 154 137 187 160 142

Source: IFC 2015, and African Development Bank Group, South Sudan Interim Country Strategy Paper (2012)

3.4 Enforcing Contracts

Regarding the enforcement of contracts the country’s rank got worsened from 74 in 2011 to 94 in

2015 ranking according to World Bank report in doing business. South Sudan score in enforcing

contracts in 2015 is 57.71, a bit better than Sudan and Kenya; or above the average of Sub-

Sahara Africa which is 50.14. Figure 2 shows the comparison of the country with the other

countries in the region.25

25

World Bank Report, Doing Business Economy Profile South Sudan, (2011) and 12th

, Edition (2015)

16

Figure 2: South Sudan Compared to Other African Countries Ranks in Contract Enforcement

Scores

Source: Doing Business Economy Profile South Sudan, 12th

, Edition (2015)

3.5 Foreign Investment

The Republic of South Sudan has officially encouraged foreign direct investment (FDI) and the

country made some progress on that after its independence to open a market for foreign

companies. There are many Acts have been passed in South Sudan such as: The 2009

Investment Act, the 2011 Insolvency Act, the 2012 Imports and Exports Act, and the 2012

Companies Act.

However, under the 2009 Investment Act, foreign investors may own or control a

business or organization in any sector; meanwhile, non-South Sudanese nationals attempting to

incorporate new businesses in South Sudan are required by the law to have 31 percent South

Sudanese ownership; but as part of the progress in encouraging FDI this requirement does not

appear in the Companies or Investment Promotion Acts.

In general the existing legal system is ineffective, and underdeveloped, and subject to

interference. For example high-level government and military officials are often interfering with

court decisions. Parties in contract are sometimes arrested and imprisoned until the party agrees

17

to pay an amount of money then released without going to the court and charges will not be

formally registered. Therefore, providing an intensive training to the judges, and imposing the

laws on everyone in the country without any exceptions or discrimination whether the person is

military or a civilian will be a good solution for that problem.26

3.6 Protecting Property Rights and Private Ownership

Foreign and private entities have the right to establish and own business in all forms of the

remunerative activity. Under the investment law, the government of South Sudan leases land to

foreign investors for a period not to exceed 60 years, with possibility of renewal. Therefore,

foreign investor use to lease land from the government or sometimes directly from the local

communities. Under the Land Act, non-citizens are not allowed to own land in South Sudan.

Laws on mortgages and the registration of titles have not been drafted.

Moreover, ownership of lands is not clear in the country sometimes government and

communities claim the same land. And in most cases multiple individuals hold registration

certificates demonstrating sole ownership of the same piece of land. Since investment law

includes intellectual property rights, but laws in trademarks, copyrights, and patents have not yet

been passed.

In terms of trade South Sudan is not a member of the World Trade Organization (WTO)

or World Intellectual Property Organization (WIPO), and also the country does not yet join the

East African Community (EAC) or the Common Market for Eastern and Southern

Africa COMESA. But at the moment we can keep the priority for developing our financial

sector first in the medium run, and try to think about joining EAC and COMESA in the longer

term when we develop our local economy and make it fit to compete with the EAC.

Also, in terms of opening a new business process bureaucracy is clear in the country,

when the government official claim registering a business the process will take with them less

than one week, while the foreign investor spend one month or more for doing the same process.27

Furthermore, we can support the above-mentioned characteristics of South Sudan’s

financial sector by presenting Figure 3 which compares South Sudan with the region countries in

terms of protecting minority investors.

26

U.S. Department of State, Investment Climate Statement – South Sudan Report, Bureau of Economic and

Business Affairs (February 2013) 27

Et al U.S. Department of State, Investment Climate Statement (February 2013)

18

Figure 3: South Sudan Score Compared to the Region’s Countries in Protecting Minority

Investors index

Source: Doing Business Economy Profile South Sudan, 12th

, Edition (2015)

3.7 Entrance of New Foreign Banks to the System

Entrance of new foreign banks in the financial sector for South Sudan has a positive effect on the

development of the financial sector because it helps the country in facilitating trade, since the

country imports 90% of its consumption of goods and services from abroad, therefore the

entrance of the foreign bank which are subsidiaries to reputable bank in some countries in the

region like Uganda, Kenya, and Ethiopia have made a good push to the financial sector

development especially to trade finance. The number of foreign owned banks was 4 in 2011, and

in 2015 the number increased to 6 foreign banks.28

The above mentioned weaknesses in the development of commercial banks in terms of

entrance of foreign banks, dependency of foreign exchange transactions, and the poor legal

framework as indicated by doing business indicators, are slowing the economic growth of the

28

Et al Addis Ababa Othow and Issam AW Mohamed (Jan 2013)

19

country, therefore the government need to take some actions in order to improve the financial

sector, since the development of the financial sector will lead to economic growth.

Ross Levine (2005) found that laws and endowment matter for economic growth, and

endowments influence property rights, and tropical locations lead to underdevelopment. Since,

Sudan location is tropical then the colonizer didn’t establish good institutions there because of

the diseases in the area, then South Sudan will have also a poor law, besides the region of

Southern Sudan did not witness any type of legal institution before the independence and the

region was isolated because the civil war between the SPLM and NCP was taking place in

Southern Sudan region for long time.

4- Challenges faces the financial sector

4.1 Financial Stability

a. Risk and Vulnerability in the Banking System

Financial Sector is cash-based, and only 2.22 percent of the total population have bank account

in 2015, which will make it difficult to the monetary authorities to conduct a proper monetary

policy. The most common risk for the financial sector in South Sudan is foreign exchange risk,

because before the independence of the country a black market foreign exchange rate has been

existed, and in November 2011 BSS has pegged the value of the South Sudanese Pound (SSP) to

the value of USD as 2.9623/USD. This practice and the high demand for foreign exchange in the

country led has widened the gap between official and black market exchange rate, Figure 4

shows the gap between the official exchange rate and the black market rate.29

29

Et al Bank of South Sudan Data (2011 – 2015)

20

Figure 4 Official Exchange Rate and Black market Rate – South Sudan

Source: Bank of South Sudan – Research & Statistics Department

This gap between the two exchange rates, and the continuous depreciation in the black

market rate, creates uncertainty about the prices and the trade transactions in the country which is

one of the important risks for the financial sector. Therefore, we can say the foreign exchange

market distortions are one of the major challenges for South Sudan, because the difference

between the official and the black market rates will encourage rent-seeking behavior and more

corruption in the country.30

In addition, the sharp decline in the oil prices in the mid-2014, and

the conflict in the country led to a sharp depreciation in the black market rate which worsened

the profitability of the commercial banks and forex exchange bureaus, since they depend heavily

on their revenues in foreign exchange transactions. But with the fall in international oil prices,

the currency has to depreciate, and no one will want to use it, so no deepening until that happens

and the government should commits to policies that will sustain the new rate.

South Sudan also faces the challenge of lack of data and reliable information in the

financial sector, because credit reports are not yet established in the country, but BSS is trying to

have it, and the negative data about firm and individuals are not yet published.

30

IMF IV Report et al (2014)

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00Ju

l-1

1

Sep

-11

No

v-1

1

Jan

-12

Mar

-12

May

-12

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

Mar

-14

May

-14

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

SSP

/ U

SD

Official and Black Market Exchange Rate Monthly Data - South Sudan (July 2011 - April 2015)

Official Exchange Rate

Black Market Rate

Official Exchange Rate

Black Market Rate

21

The low score of South Sudan in contract enforcement and protecting minority investors,

in Figure 2 and Figure 3 show the risk of doing business in the country, and the difficulties that

faces the investors in running their businesses.

Scarcity of skilled labor in the commercial banks and MFI’s have created some

difficulties for them in finding staff with good financial sector skills in South Sudan, therefore

most of the foreign commercial banks in South Sudan use to bring foreign staff for running the

banking business for them. Lack of training for the staff of the commercial banks, is also another

challenge. In addition to limited access to fund, because most of the commercial banks are not

providing loans due to the high risk and weak legal framework in the country.

Moreover, there is a limited diversification in lending is concentrated in the services and

trade finance sectors. While the sector is in position to help in diversification like agricultural is

not getting access to finance.

Lack of infrastructure and electricity is one of the challenges which increases the cost of

doing business and the risk of paying back the loans, since the country has only 2 percent of its

primary roads network are paved roads, and 1 percent of the population have access to

electricity.31

Also we can reflect the challenges for South Sudan’s financial sector in the following

table which expresses that the country’s index is below the requirement, except for inflation it

has inflation below the maximum, but in reality the country witnessed a deflation (negative

inflation) since December 2013 until October 2014, this will explain why the inflation rate is

very low in South Sudan. The other measure which the country have scored above the

requirement is the freedom of information measure, but the problem here as we mentioned

before is that there is lack of data in the country, even if we have freedom on disseminating

information we are still lacking the quality and the existence of the most important part of the

information which is data.

31

IMF IV Report et al (2014)

22

Table 3: Millennium Challenge Corporation Indicators (MCC) for South Sudan FY2015

Measure Index/Ranking Requirements

Economic Freedom Indicators 100% best & 0% worst

Fiscal Policy -6.3 (10%) Median -3.2

Inflation 0.0 (98%) Max 15

Trade Policy NA Median 69

Regulatory Quality -0.74 (9%) Median 0.00

Business Start Up 0.462 (10%) Median 0.857

Land Rights Access 0.575 (33%) Median 0.615

Access to Credit 8 (10%) Median 24

Ruling Justly Indicators 100% best & 0% worst

Political Rights 8 (21%) Min 17

Civil Liberties 16 (21%) Min 25

Freedom of Information 62 (51%) Median 63

Gov’t Effectiveness -0.57 (17%) Median 0.00

Rule of Law -0.55 (11%) Median 0.00

Control of Corruption -0.50 (11%) Median 0.00

Source: Millennium Challenge Corporation, USA FY 2015

b. Banking Sector Regulations

Banking supervision in the country is very weak, and the staff of the central bank as a regulators

for the banking sector, lack the capacity in the risk-based supervision such as risk analysis and

early warning system. BSS is trying to implement Basel in its reporting about the commercial

banks performance but still there is a lack in implementing it in a good way.

Therefore, we can suggest that the country need to focus on simple regulations because, in

a study made by Caprio et al (2004), found out that only the diversification will lead to stability

but the other Basel requirement has zero effect on stability. Therefore, the regulators should look

at the most important risks in the economy and regulate them, rather than only focusing on Basel,

and as known that one size cannot fit all. Certainly we can say that South Sudan needs a simple,

un-weighted minimum capital requirement and a simple liquidity ratio as two key pillars of its

system. Basel is just a distraction that the country cannot afford.32

32

J. Caprio, Center for development Economics, Williams College, Finance and Development class of ( April 13,

2015)

23

c. The Payments System

Payment systems in South Sudan are still underdeveloped, when we look at the clearance system

in the country is still manual clearance which requires delegates from the commercial banks to

come and attend a clearance session for settling what they owe other banks. In this light the

country needs to establish the required infrastructure for changing this system to be an electronic

one, or introduce the Real Time Gross Settlement Systems (RTGS), which reduces the cost of

the transaction and facilitate the same day clearance fund.

The other important issue related to the payment system is the Automated Teller

Machines (ATMs). There are 61 ATMs in South Sudan and about 79 percent of them are owned

by foreign owned bank, and actually 75 percent of the total number of the ATMs in the country

is owned by two big foreign banks which are Kenya Commercial Bank (KCB), and Equity Bank.

This can be a good sign that the foreign banks can introduce some new technologies which in

turn disseminate the experience to the local banks in the country.33

4.2 Longer-Term Finance Challenges

a. Capital Markets

Since, the establishment of Financial Markets in South Sudan will need a long period of

experience and transaction on the financial sector. The paper suggests that the country would

better focus on harmonizing its system to meet the requirements for joining the regional financial

markets of the regions’ countries, e.g. residences of South Sudan can access the capital markets

of the regions’ countries like Kenya, Uganda, and Tanzania. Therefore, joining EAC or

COMISSA will have a great effect in attracting individuals from South Sudan to access the

capital market of the regional countries in the long run.

Moreover, EAC is planning to establish capital market integration which will regionalize

the capital market for the region and the third set of the Council Directives was drafted in

November 2014 and is ready for stakeholder consultation. After that all the EAC Partner States

shall transpose these Directives into their respective national legal frameworks following

approval by the Council of Ministers. And the capital Act is already there in Nairobi Securities

Exchange website. 34

33

Bank of South Sudan, Depository Corporation Survey et al (2015) 34

Nairobi Securities Exchange website

24

b. Pensions Fund and Insurance

Regarding the pension fund in South Sudan, it’s already established and The Pension Fund Act,

2012 has been enacted and assented by the president of South Sudan Gen. Salva Kiir Mayardit in

June 27th

, 2012. Before the independence of South Sudan pension fund benefits were centralized

at the headquarters of the National Pensions Fund in Khartoum (Sudan), and after the

independence of South Sudan in 2011, government of South Sudan started drafting the Civil

Services Pensions Scheme (CSPS). 35

Regarding the calculation of pension benefits, the old pension calculation in Sudan was

based on final salary, while the new one for South Sudan based on full career salaries. One

important thing the pensions fund system in South Sudan has inherited from Sudan is that the

pension will be paid for the employee in old-age, and a pension has elements of life insurance as

payments are made to surviving family members upon the death of the employee or the

pensioner. 36

The purpose of The Pension Fund is to serve as management trustee and to collect

contributions and premiums, invest assets and calculate and make payments to the civil servants

as prescribed by the laws of South Sudan. Also, the pension fund is an independent body, and

has its own seal and logo. Moreover, pension assets shall be deposited in banks or invested in

financial instruments. And this system of pension fund will help the country in providing cash

for smoothing the consumption of the population when they are not able to work.

The pension fund works like a tax because it takes money from those who are working

now and pay it to those who are retiring now. In addition the country should try to have part of

their pension fund to be invested in other countries for risk diversification. 37

Moreover, the country does not need to worry about the pyramid shape to change a lot

since the country is in the early stages of population growth. and from the World bank report on

pyramids shape for South Sudan 2015, the population which are in the working age are grater

that those who are in the retirement age. And the projected population in 2050 is indicating also

the number of the population in the working age will still be greater than the aged population.

35

Ministry of Justice, Laws of South Sudan, Pension Fund Act, 2012 (December 2012) 36

South Sudan.Net Website, (2011) 37

Caprio, CDE Spring Class of 2015, Lecture in (May 11, 2015)

25

Therefore, the country is in a good position, but in the long run it need to manage the population

growth to make sure that in the future the shape of the pyramid will not change rapidly. 38

c. Capital Account Liberalization

South Sudan in order to harmonize its financial system with the region countries will need to

liberalize its capital account, and as we mention before in this paper the government of South

Sudan is working in encouraging FDI, and that well help in the development of the economy.

Also, liberalization will ease the process of joining the regional integration with other countries

and helps in accessing capital market of the other countries in the region.

5- Conclusion

South Sudan is a fragile state with unstable macroeconomic indicators, due to the internal

conflicts within different groups in the country, and the unsolved political issues with the

government of Sudan, which in turn led to instability in oil exports passage through Sudan.

Therefore, the country needs to solve these issues because they help in stabilizing the financial

sector.

Most of the laws and financial institutions in the country are inherited from Sudan, and that end

up with weak legal framework in the country since it inherited weak legal framework from

Sudan. And here the country needs to work in improving these laws, because they have a great

effect on the financial sector development, and then on the economic growth.

Financial sector in the country is small and underdeveloped, and is cash-based with limited use

of demand deposits, and there is limit in loans provided by the banking sector, because of the

high risk, weak legal framework, and the absence of credit reference bureau, which is a negative

sign for financial sector development and economic growth.

Moreover, the few loans which are provided by the banking sector are not diversified and

concentrated in services and trade finance sectors, because the country depend heavily on

imports. While the most productive sectors in the economy like agricultural, industry, and

mining are not getting access to finance. Therefore, the country needs to make some policies in

encouraging lending by commercial banks to those sectors, and diversifying lending activities.

38

World Bank Website, Population Pyramids of the World

26

Regarding the banking supervision the country need to focus on some simple regulation which

can measure the real risk in the economy, instead of only focusing on Basel II. In addition the

country needs to establish the required infrastructure for enhancing the payments system, since it

will help in reducing the cost of financial transactions.

27

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