Despite the odds, Sudan emerges as fastest-growing
African economy

For an impoverished African country wracked by decades of political instability, 18 years of civil war and years of international isolation and condemnation, it comes as a surprise to learn that Sudan last year had the highest economic growth rate in Africa.

Al Fatih Al Siddig, Director, Ministry of Finance Sabir M. Hassan, Governor of the Bank of Sudan

What’s more, the 8.3 percent rise in Gross Domestic Product was not a fluke. It capped eight years of growth that has averaged seven percent. Not a mean feat.

But this success has been achieved through several parallel developments for which the government of Omar Al Bashir deserves credit.

Perhaps the most important element in the positive developments has been Bashir’s ability to walk a policy path that while not angering important Islamic elements of society clearly recognizes the way of the world economy.

“Everyone in the country knows that market forces are key,” says Elfatih Ali Siddig, director of the Ministry of Finance.

Everyone also understands that “we are entering the era of globalization in which efficiency is most important,” he adds.

As one of the architects of Sudan’s economic reforms, Siddig says that the government is trying to increase the efficiency of the economy.

The erstwhile ally of Bashir, Islamist Hassan Turabi, had, in public at least, shrugged off Sudan’s terrible relations with international lenders, including the International Monetary Fund and World Bank, and had spoken rather glibly of his country’s self-sufficiency.

The eventual break between Bashir and Turabi in the late 90s proved an important step in Sudan’s de facto move towards a pragmatic economic policy driven by secular rather than religious or ideological aims.

Siddig of the Finance Ministry says that Sudan’s economy was chronically crippled by excessive government regulation, a bloated public sector and a controlled exchange rate.

Change began in 1992 when a liberalization of the economy was initiated through the floatation of the Sudanese currency, the privatization of state enterprises, the removal of most import and export regulations and the ending of subsidies.

It was also decided at that time to invest heavily in agriculture, but this proved an inflationary move and by 1996 the annual inflation rate had reached 133 percent.

The exchange rate was once more controlled by the central bank, the Bank of Sudan, and in 1997 a stabilization program was put in place to bring down the inflation rate and control the exchange rate.

The banking sector was forced to put its house in order and every bank made to conform to international norms of capital adequacy.

The banks have been freed from government control over their sectoral lending, but in the second stage of reform, all Sudan’s banks have until 2003 to meet the Basel criteria. If they fail, they will be forced to sell out or close, says Bank of Sudan Governor Sabir Al Hassan.

A strict monetary policy has worked well in Sudan. Excess liquidity in the market created in the period of high inflation was absorbed through two instruments designed to be consistent with the principles of Islamic banking (all banks in Sudan are ‘Islamic’, meaning they do not charge interest for the use of money). Certificates were issued in the place of the treasury bills used in most countries.

The first was a Government Musharaki Certificate, which raised finance for the government from the public and paid back investors out of profits from state enterprises.

The second instrument was Central Bank Musharaki Certificates which were used for inter-bank trade.

At the same time, contrary to IMF advice to unify the exchange rates at once, a Bank of Sudan committee was set up to gradually close the gap between the official and black market rates for the currency, which once achieved resulted in the currency being traded freely once more.

The success of this program has been born out through the dinar maintaining its value at 256 to the dollar since mid 1999, when it was floated.

So successful has the exchange rate control program been that the IMF told Governor Hassan it was worried that the Sudanese currency was too stable!

Annual inflation was brought down to 3.2 percent by the end of 2000.

Also important, as part of the government’s fiscal policy the central bank began to accumulate reserves of foreign currency, which now are approaching $100 million, enough for some two month’s imports. This will need to be raised, but it is a lot better than the empty till of a few years back.

None of this could have worked, however, had not the government tightened its budgetary belt by cutting spending.
In 1996 the budget deficit was 3.8 percent of GDP, whereas in ’99 it was only 0.5 percent of GDP, a gap that can be covered by borrowing from local banks and donor contributions.

In other developments that have helped boost the economy, tariffs on imports have been reduced from 13 bands to three with the highest rate dropping from 120 percent to 40 percent.

Sudan got a huge boost when its oil exports began in 1998, turning a $300 million annual hard currency bill for petroleum products into a source of revenue which at current prices and a current export level of 140,000 barrels a day could earn $1.2 billion this year, at least half of which goes to the treasury. This figure will of course rise as new wells come on line.

Wisely, the government has not gone on a spending binge with the new petrodollars, having noted that based on the experience of other countries oil wealth can be a blessing or a curse.

Oil revenues, now the main forex earner, are spent according to pre-determined national priorities. Sixty percent go to investments in power, roads and irrigation, in the belief that these infrastructure improvements will attract foreign investment. The remaining 40 percent is used to pay down the foreign debt and to provide funds for the states to use for education, health and water supply development.

But Sudan is still dogged by some serious economic problems.

One of these is the slow progress of privatization. Only 57 of 88 state companies have been privatized (through outright sales, joint ventures and other methods) and it is difficult attracting foreign investors in the continuing uncertainty created by the civil war and international isolation.

The other major problem is the foreign debt, which stands at $24 billion, a huge figure for Sudan which has a GDP of only $10 billion.

Sudan’s debts have been particularly damaging since the country in the early 90s was so lax in its repayment of $1.7 billion in debts to the IMF that it lost its voting rights with the organization and was on the verge of being expelled.

From 1996, however, Sudan began to rebuild its relationship with the IMF. It has made its payments on time and is now considered cooperative and enjoys voting rights once more.

It hopes to qualify for HIPC, the Highly Indebted Poor Countries initiative of the IMF and World Bank, which helps such countries through debt forgiveness, re-scheduling and other means.

Siddig says that Sudan qualifies based on its economic policy as well as its debt-to-GDP and debt-to-export ratios, but will have to win political support, especially from the United States, if it is to be admitted to HIPC.

Sudan is paying the World Bank $1 million a month against a debt of over $100 million, and the bank is now funding three technical studies in the country.

It has also won the confidence of Arab lending institutions, in particular the Arab, Kuwaiti, Abu Dhabi and Saudi funds for economic development.

It expects its first loan from these bodies since the Gulf War, $90 million for a highway to Port Sudan, from the Arab Fund for Economic Development in Spring this year.

Also helping the government in Khartoum, an IMF study of the budget showed that the war is costing a decreasing percentage of total government spending.

Although it has been said the war costs $1 million a day, Siddig says it is less than that, and the IMF figures indicate it is now 19 percent of the total government expenditures of 343 billion dinars ($1.34 billion) or $254 million a year.

Looking ahead, Siddig points to three major obstacles to the development of the economy: stalled privatization, unpaid debt and inadequate infrastructure.

But as the car-choked streets and well-stocked shops indicate, Sudan has already come a long way from the dark economic days of the early 90s.