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Country Report March 2004

Sudan

March 2004

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Sudan at a glance: 2004-05

OVERVIEWThe peace negotiations between the government and the leading southernrebel force, the Sudan People’s Liberation Army, remain on course and haveprogressed to the point where a final deal is imminent. However, unrest inother parts of the country, particularly the west, will continue, and, while itshould not stall the signing of a final agreement, it will add a degree of fragilityto maintaining the peace. GDP growth will remain strong, driven by high levelsof investment and growing confidence in a more stable environment. Increasesin oil output will aid Sudan's external position, reducing the current-accountdeficit as a percentage of GDP.

Key changes from last month

Political outlook• The political outlook is growing more positive with increased optimism for

the signing of a final peace accord. Continuing unrest in the west of thecountry should not stall the signing of an agreement, but will provedestabilising nonetheless.

Economic policy outlook• The economic policy outlook is unchanged since last month. Sudan's fiscal

discipline will slip over the forecast period as the costs of implementing thepeace begin to be felt. The budget will register a deficit of 2.2% of GDP in2004, overshooting the government's target of 1%. The deficit will widenfurther in 2005 to SD177bn (US$681m), or 3.3% of GDP, as expendituregrowth accelerates.

Economic forecast• Minor changes to the non-merchandise account have had a positive effect

on the overall current account, although the trends remain the same. Thecurrent-account deficit will widen slightly to US$643m in 2004, but will fallagain slightly to US$593m in 2005.

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Sudan 1

Country Report March 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2004-057 Political outlook8 Economic policy outlook10 Economic forecast

12 The political scene

19 Economic policy

24 The domestic economy24 Oil and gas26 Agriculture

29 Foreign trade and payments

List of tables10 International assumptions summary11 Forecast summary20 Changing composition of GDP20 Central government operations, Jan-Jun 200323 Broad money growth23 Inflation27 Cereal production27 Cereal production in southern Sudan28 Cereal production by type29 Trade account, Jan-Sep30 Import spending, Jan-Sep31 Current account

List of figures6 International reserves6 Foreign trade12 Gross domestic product12 Consumer price inflation24 Oil price

Sudan 3


Summary March 2004

The peace negotiations between the government and the leading southernrebel force, the Sudan People’s Liberation Army (SPLA), remain on course andhave progressed to the point where a final deal is imminent. However, unrestin other parts of the country, particularly the west, will continue, and, while itshould not stall the signing of a final agreement, it will add a degree of fragilityto maintaining the peace. GDP growth will remain strong, driven by high levelsof investment and growing confidence in a more stable environment. Increasesin oil output will aid Sudan's external position, reducing the current-accountdeficit as a percentage of GDP.

The ongoing peace talks between the government and the SPLA have madefurther progress, with the two sides reaching an accord on how they willmanage and share the country's wealth, including its oil resources. There isconsiderable optimism around the talks that a final accord will soon be signed,but difficult obstacles remain. Although a ceasefire has continued to hold in thesouth, fighting has remained intense in the western Darfur provinces, where anestimated 800,000 people have fled their homes to escape the conflict, sincethe trouble escalated in early 2003.

The IMF has released a broadly positive assessment of Sudan following itsannual Article IV consultations with the country. Despite above-budgetexpenditure, the government recorded a fiscal surplus over the first half of 2003as oil prices soared. Monetary policy has tightened, supporting a slowdown inmonetary growth and broadly stable inflation. The dinar has shown nomovement against the dollar, and the IMF has reversed previous criticism ofthis de facto peg, stating that there is no sign that the currency is misaligned.

Oil prices have remained high and there has been further growth inproduction. The Indian government has approved further investment in Sudanby the state-owned oil and gas company, ONGC. The government has claimedthat a French firm, Total, will resume activity in Sudan in the coming weeks,although the company itself has said it will not return to the country untilpeace is firmly established. Cereal production rose substantially last year,boosting the food outlook for most of the country, with the exception of Darfur,where concerns over the emerging humanitarian crisis are deepening.

Sudan generated a small trade surplus over the first nine months of 2003,helping to ease the current-account deficit year on year. Foreign directinvestment flows have remained very high, allowing the central bank to add toits reserves. External debt levels have increased substantially following thedisbursement of new loans and the continued accumulation of arrears.

Editors: Philip McCrum (editor); Neil Partrick (consulting editor)Editorial closing date: March 17th 2004

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

The political scene

Economic policy

The domestic economy

Foreign trade and payments

Outlook for 2004-05

4 Sudan


Political structure

Republic of Sudan

Under the constitution, sharia (Islamic) law is applicable countrywide in both civil andcriminal cases. In practice, much of southern Sudan is exempt

A 400-member National Assembly (parliament), of which 264 members are elected and136 are appointed by the president

December 2000 (presidential and parliamentary); next elections due to be held in 2005

Lieutenant-General Omar Hassan Ahmed al-Beshir, who took office following a1989 coup and was sworn in as president in October 1993; elected in March 1996 for afive-year term; re-elected in December 2000

A joint military-civilian cabinet, the Council of Ministers, last reshuffled in February 2001

All political parties were banned following the June 1989 coup that was backed by theNational Congress (NC). The NC, known as the National Islamic Front (NIF) until itchanged its name in 1998, is the ruling party

The Sudan People’s Liberation Movement (SPLM) and the Sudan People’s LiberationArmy (SPLA), its military wing, are led by Colonel John Garang. The National DemocraticAlliance (NDA) brings together Mr Garang’s SPLM with the Democratic Unionist Party(DUP) and the Sudan Allied Forces (SAF), another southern guerrilla force. The PopularNational Congress (PNC) and the Umma Party are leading northern opposition groups

President & prime minister Omar Hassan Ahmed al-BeshirFirst vice-president Ali Uthman Mohammed TahaSecond vice-president Moses Machar

Agriculture & forests Mazjoub al-KhalifaAnimal resources Riek Gai KokCabinet affairs Al-Hadi AbdallaCulture & tourism Abdel-Basit Abdel-MajidCommerce Mekki Ali BalailDefence Bakri Hassan SalihEducation Ali Tamim FartakEnergy & mining Awad Ahmed al-JazExternal trade Abdel-Hamid Musa KashaFederal relations Nafie Ali NafieFinance & national economy Zubayr Ahmed al-HassanForeign affairs Mustafa Uthman IsmailHealth Ahmed Ballal UthmanIndustry & investment Jalal Yousif al-DagirInterior Abdel-Rahim Mohammed HusseinJustice Ali Mohammed Uthman YassinLabour Alison Manani MagayaSocial welfare & development Samia Ahmed MohammedScience & technology Al-Zubar Beshir TahaTransport Mogo Ajak

Sabir Mohammed al-Hassan

Official name

Legal system

National legislature

National elections

Head of state

Main political parties

The cabinet

Central bank governor

Key ministers

National government

Main opposition groups

Sudan 5


Economic structure

Annual indicators1999 a 2000 a 2001a 2002 a 2003 b

GDP at market prices (SD bn) 2,601.9 2,892.3 3,130.3 3,559.2 b 4,130.3GDP (US$ bn) 10.3 11.2 12.1 13.5 b 15.8

Real GDP growth (%) 6.5 6.1 6.1 5.5 5.9Consumer price inflation (av; %) 16.0 10.0 3.0 8.4 8.8Population (m) 30.7 31.4 32.1 32.9 b 33.6

Exports of goods fob (US$ m) 780.1 1,806.7 1,698.7 1,949.1 2,449.9Imports of goods fob (US$ m) 1,256.0 1,366.3 1,395.1 2,152.8 2,382.6

Current-account balance (US$ m) -464.8 -556.8 -618.3 -960.4 -560.5Foreign-exchange reserves excl gold (US$ m) 188.7 247.3 117.8 440.7 736.0Total external debt (US$ bn) 16.1 15.7 15.3 15.8 b 16.1

Debt-service ratio, paid (%) 4.0 3.0 2.9b 1.9 b 1.7Exchange rate (av) SD:US$ 252.6 257.1 258.7 263.3 261.1 a

a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 1999a % of total Components of gross domestic product 1999a % of totalAgriculture 42.6 Private consumption 85.7Trade, transport & communications 25.9 Government consumption 4.7

Other services 15.3 Gross fixed capital formation 12.6Industry & mining 9.8 Change in stocks 4.1

Construction 6.4 Exports of goods & services 8.1Imports of goods & services -15.2

Principal exports 2002 US$ m Principal imports cif 2002 US$ mCrude oil 1,510.9 Machinery & equipment 620.8

Livestock 117.0 Manufactured goods 555.0Sesame 74.6 Transport equipment 255.8Cotton 62.2 Wheat & wheat flour 221.3

Gum arabic 31.9 Chemicals 206.5

Main destinations of exports 2002 % of total Main origins of imports 2002 % of totalChina 54.5 China 20.6Japan 13.9 Saudi Arabia 7.2

Saudi Arabia 5.4 India 5.7South Korea 3.8 UK 5.6

a IMF staff and Sudanese Ministry of Finance and National Economy estimates.

6 Sudan


Quarterly indicators2001 2002 20034 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

PricesCotton Liverpool index (US cents/lb) 40.00 43.50 42.30 49.20 52.37 58.76 59.03 61.62Financial indicatorsExchange rate SD:US$ (av) 260.8 261.7 262.9 264.7 263.9 261.3 260.9 261.0Exchange rate SD:US$ (end-period) 261.4 262.4 264.3 265.0 261.7 261.0 260.7 261.1M1 (end-period; SD bn) 271.4 285.3 307.8 322.0 352.3 362.0 359.9 402.1 % change, year on year 15.7 20.4 20.9 24.3 29.8 26.9 16.9 24.9M2 (end-period; SD bn) 432.2 474.5 500.7 532.4 563.3 592.3 611.5 658.2 % change, year on year 24.7 29.7 21.6 25.5 30.3 24.8 22.1 23.7Balance of payments (US$ m)Goods: exports fob 400.8 438.9 519.5 496.1 494.7 652.6 549.4 565.4Goods: imports fob -358.7 -399.2 -505.2 -618.1 -630.3 -536.9 -639.5 -556.6Merchandise trade balance fob-fob 42.1 39.7 14.3 -122.1 -135.6 115.7 -90.0 8.8Services balance -152.7 -151.4 -201.4 -208.7 -209.5 -156.8 -164.0 -139.5Income balance -132.2 -122.5 -173.2 -153.2 -168.2 -220.0 -179.2 -188.8Net transfer payments 71.5 127.5 148.1 171.6 184.2 150.1 148.0 236.7Current-account balance -171.3 -106.7 -212.2 -312.2 -329.2 -110.9 -285.3 -82.8Reserves excl gold (end-period) 117.8 166.9 224.0 304.1 440.9 498.8 576.1 604.8

Source: IMF; International Financial Statistics.

Sudan 7


Outlook for 2004-05

Political outlook

It is highly likely that the president, Lieutenant-General Omar Hassan Ahmedal-Beshir, will retain his hold on power, given the support of the military andhis authority over the ruling National Congress. With the signing of a peaceaccord—the prospect of which looks highly probable in the first half of 2004—hewill remain president and head of the government. However, he will beobliged to accommodate the southern rebel leadership within the powerstructure of the executive. A peace agreement will also result in the lifting of thestate of emergency, which was imposed at the end of 1999 and extended for afurther year at the end of December 2003.

The Inter-Governmental Authority on Development (an East African regionalbody designed to promote security and economic integration) will attempt tomaintain the momentum of the peace talks achieved in recent months in aneffort to finalise a comprehensive deal between the government and theleading southern rebel force, the Sudan People’s Liberation Army (SPLA).Underpinning the negotiations is the Machakos Protocol—signed by bothparties in July 2002—which requires a referendum on southern self-determination to be held six years after the signing of a final peace accord.

The prospects for a comprehensive deal were vastly improved in September2003, when an agreement was signed regarding security arrangements duringthe six-year interim period. This was bolstered by a second deal in earlyJanuary 2004, which addressed the division of resources—notably revenue fromoil. Both agreements involved significant concessions, particularly from thegovernment, who permitted the southern authorities to retain a considerabledegree of military autonomy in the south while also agreeing to divide incomefrom the country's oil resources on a 50-50 basis. The deal signalled a large shiftin the government's position, as it had originally argued for a 90% share of oilrevenue on the grounds that it was a "national resource".

Notwithstanding these deals, the complicated issues of power-sharing and thestatus of Khartoum and the disputed Nuba Mountains region are yet to besettled. Talks on these issues were at an advanced stage when they weresuspended in late January 2004 for the haj (pilgrimage) and the subsequent Eidal-Adha, although they were resumed in mid-February. The current session—expected by participants and observers alike to be the final round of talks—isnow scheduled to end on March 31st, with the likelihood that a final peace dealwill be signed in early April.

Implementing an accord will prove as problematic as reaching an agreement,however, with the difficulties of translating assurances in the text of adocument into everyday practicalities. However, both sides will be underconsiderable pressure from the US not to renege on the agreement—if eitherdoes they can expect economic penalties to be imposed by Washington and adeterioration in political relations. Both parties will also begin to appreciate thebenefits of peace, particularly the economic gains Sudan will undoubtedly

Domestic politics

8 Sudan


enjoy as the oil industry is developed and investors, lenders and donors showmore interest in the country. Ultimately, the Economist Intelligence Unitbelieves that there will be too much at stake for one party to renege on the dealand is therefore cautiously optimistic that the peace will hold.

The government must also decide how to co-opt the northern oppositiongroups into a final peace deal, which may prove difficult as they haveconsistently argued that any accord must be agreed at a national, rather than abilateral, level. Separately, the government is still taxed by continuing unrest—despite government proclamations that it has secured a military victory—inSudan’s Western Darfur region. The insurrection is led by a rebel group, theSudan Liberation Army (SLA), who see the signing of a peace accord with thesouthern rebels as an opportunity to force their own concessions from thegovernment. However, negotiations have become deadlocked, a ceasefire hasbroken down and the region remains in conflict, with widespread violentclashes having precipitated a deteriorating humanitarian crisis.

The US will remain Sudan's key interlocutor over the forecast period. Progressin the peace talks and Sudanese intelligence support for the US in its "war onterror" has softened US policy towards the regime in Khartoum. Nevertheless,the US president, George W Bush, recently extended US sanctions, in placesince 1997, against the government for another year owing to the continuingthreat he believes the regime poses to US interests. The Sudan Peace Act (anadditional congressional measure) provides a means for the US administrationto harden its stance further, although the Sudanese government is more likelyto be galvanised by the reward—in the event of peace—of the lifting of sanctionsand the removal of its name from the US's list of state sponsors of terrorism.

Economic policy outlook

With the IMF broadly satisfied with Sudan’s economic performance and theSudanese authorities' ongoing compliance with the IMF’s reform programme,begun in 1997, economic policy will continue to be guided by policies laiddown by the Fund. The programme emphasises macroeconomic stability as thecentral policy goal, in order to achieve sustained economic growth and,ultimately, poverty reduction. To this end, the main policy objectives are:attaining annual real GDP growth rates in excess of 6%; reducing consumerprice inflation to around 5% (which will prove challenging); and strengtheningthe external position (an area that remains a perennial problem), notably thelevel of international reserves. Structural reform—that is, renovation of thebanking system, parastatals and civil service—will be integral to thisprogramme, with the aim of raising efficiency and productivity and reducingbureaucratic bottlenecks. Of course, peace will bring with it different policypriorities, which will focus on regeneration and reconstruction, with the riskthat they may result in stronger expenditure pressures. Indeed, it appears thatthe government has forewarned the IMF that the transition to peace will proveexpensive and that its fiscal targets (notably restricting the budget deficit towithin 1% of GDP) are unlikely to be met in the short term.

Policy trends

International relations

Sudan 9


Figures recently released by the IMF have necessitated an alteration tohistorical data that has fed through into our forecasts. In 2003 the governmentis now estimated to have increased its total revenue by 33%, on the back ofsustained high oil prices and unexpectedly strong oil receipts. However, a32% rise in expenditure ensured that Sudan's budget remained in deficit,although, at SD37.6bn (US$145m), this is still within the government's fiscaltarget range.

In spite of a 14% drop in oil prices in 2004, increases in production will offsetmuch of the loss, with government oil receipts declining by only 1%.Although attempts to streamline tax administration will be slow, somebenefits will begin to be seen, with the tax take growing by 11%. These gainswill support a 4% expansion in overall revenue to SD655bn. Recurrentspending will continue to rise, although not at the rate witnessed in 2003. Atthe end of 2003, the National Assembly (parliament) approved a 50% rise incivil service wages, although non-wage items, such as debt servicing andnon-capital imports will fall, as the government reduces its subsidies onimported agricultural inputs and cuts debt repayments. Capital spending willrise at levels similar to 2003, resulting in overall expenditure growth of 14%,taking the projected outturn to SD757bn. Consequently, the budget deficit willwiden to SD102.6bn, which, at 2.2% of GDP, will slightly overshoot thegovernment’s target.

In 2005 continued growth in oil production will offset a further fall in prices.Combined with revisions to the corporate tax structure, revenue will rise by14%, to SD745bn. The growth in expenditure will be considerably greater thanthe expansion in revenue, however, as the costs of implementing the peace arefully felt, and total spending will rise to SD923bn, a jump of 22%. As a result, thebudget deficit will increase to SD177bn, which, at 3.3% of GDP, shows signs offiscal slippage, although the government may be able to finance some of theincreased expenditure through grant inflows resulting from peace.

The main aims of monetary policy are to reduce inflation and to maintain thestability of the dinar. To this end, the Bank of Sudan (the central bank) hasbeen promoting minimum reserve requirements and prudent capitaladequacy levels for banks, and has begun to expand its open marketoperations in order to better allocate resources and develop the interbankmarket. These moves have contributed to the reduction of inflation from thehigh rates experienced for much of the 1990s. The objective of increasingdomestic credit to the private sector is also being advanced, reflected in the76% rise in lending to the private sector in 2002. However, concerns over assetquality and uncontrolled credit expansion have led the central bank to curbexcess lending, resulting in an slight easing of this rate of growth—to 41%—overthe first 11 months of 2003.

Monetary policy

Fiscal policy

10 Sudan


Economic forecast

International assumptions summary(% unless otherwise indicated)

2002 2003 2004 2005Real GDP growthWorld 2.9 3.7 4.4 4.0OECD 1.6 2.0 2.9 2.5EU 1.0 0.7 1.9 2.1Exchange rates¥:US$ 125.3 115.9 104.8 106.5US$:€ 0.945 1.132 1.350 1.377SDR:US$ 0.772 0.714 0.649 0.644Financial indicators¥ 2-month private bill rate 0.10 0.03 0.03 0.10US$ 3-month commercial paper rate 1.70 1.10 1.18 3.13Commodity pricesOil (Brent; US$/b) 25.0 28.8 24.9 20.9Cotton (US cents/lb) 46.2 63.7 81.8 82.8Food, feedstuffs & beverages (% change in US$ terms) 12.7 5.8 3.4 7.1Industrial raw materials (% change in US$ terms) 2.2 12.3 11.4 -0.1

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

The global economy is growing rapidly, and we forecast that world GDP growth(on a purchasing power parity basis) will average 4.4% in 2004, before slowingto a still robust 4% in 2005.

Our oil price forecast has been revised upwards slightly, although benchmarkdated Brent Blend is still expected to decline sharply from the averageUS$28.8/barrel recorded in 2003. Last year's performance—a 20-year high—wasdriven in large part by the ongoing security concerns caused by the US-ledinvasion of Iraq. We expect these factors to ease during 2004, allowing thefundamentals of what remains an oversupplied market to come to the fore.OPEC's attempted constraining of production should partly offset downwardpressure on prices, although we expect Brent to decline to a revised average ofUS$24.9/b, easing further in 2005 to around US$21/b.

With the likelihood of a peace deal, the prospects for economic growth haveimproved, with greater confidence leading to sustained high levels ofconsumption and investment. Real GDP growth will continue to accelerateover the forecast period. This will be driven largely by significant foreigninvestment inflows into large capital projects and by increased export volumeson the back of expanded capacity in the oil sector. These positive trends areexpected to more than offset the growth in import demand, which willaccelerate by a rate of 11% in 2004. Consequently, real GDP growth will rise to6% in 2004, restrained slightly by the impact of lower oil prices onconsumption. Public consumption in particular will also suffer from aslowdown in government expenditure growth. However, demand and,consequently, overall growth will pick up in 2005, with the latter reaching 6.7%as a peace deal bolsters private-sector confidence.

Economic growth

International assumptions

Sudan 11


Consumer price inflation data showed that price growth up to the end ofSeptember 2003 slowed slightly from the average rate of 8.1% recorded in thefirst nine months of 2002, to an average of 7.8%. Price increases over theforecast period, though still significant, will be contained, with averageconsumer price growth rising to 9% in 2004, edging up to 10.5% in 2005.Although the discrepancy between these rates and the government’s target of5% will remain marked, the inflationary environment is a vast improvement onthat of the 1990s.

The central bank operates a tightly managed float of the dinar against the USdollar, as is evident by the minimal movement of the currency over the pastfew years. In mid-1999 the dinar was set at SD257:US$1, and by mid-March2004 the currency had only slipped 1% in nominal terms to SD259:US$1. Thegovernment is expected to persist with this policy in order to maintain pricestability. We anticipate that the dinar will hover around its present levelthroughout the forecast period, with the currency likely to appreciate slightly innominal terms in 2004 as the dollar weakens. This scenario will reverse in2005, and the dinar is expected to end the forecast period at SD265:US$1.

The recent revision to our oil price assumptions has had a positive impact onforecast oil export earnings in 2004, further boosting gains in non-oilcommodity receipts. Total export revenue will grow by 2%. With importspending growing at 11%, the small trade surplus that Sudan is estimated tohave recorded in 2003—on account of a tail-off in import spending towards theend of the year—will revert to a deficit of around US$14om. In 2005 exportincome growth will accelerate, as oil output expansion more than offsets afurther decline in crude prices. Total revenue will therefore rise by 10%. Importspending growth will also increase, to 13%, causing a widening of the tradedeficit to US$231m.

A slight fall in oil operators’ profit repatriation in 2004—stemming from lowercrude prices—will fail to halt the continued rise in the services and incomedeficit, owing to Sudan’s virtually non-existent service sector and minimalstock of foreign assets. This will be offset by increased transfers as Sudan isable to secure greater aid flows. However, the current-account deficit willwiden in 2004 to US$643m (3.6% of GDP). In 2005, while the services andincome deficit will narrow slightly, the transfers surplus will continue to widen,resulting in a slightly reduced current-account deficit, which at US$593m willequate to 2.9% of GDP.

Forecast summary(% unless otherwise indicated)

2002a 2003 b 2004c 2005c

Real GDP growth 5.5 5.9 6.0 6.7

Oil production ('000 b/d) 245.0b 280.0 315.0 390.0Crude oil exports (US$ m) 1,510.9 2,036.9 2,064.1 2,257.5

Consumer price inflation (av) 8.4 8.8 9.0 10.5Government balance (% of GDP) -0.9b -0.9 -2.2 -3.3Exports of goods fob (US$ bn) 1.9 2.4 2.5 2.7

Imports of goods fob (US$ bn) 2.2 2.4 2.6 3.0

Exchange rates

External sector

Inflation

12 Sudan


Forecast summary(% unless otherwise indicated)

2002a 2003 b 2004c 2005c

Current-account balance (US$ bn) -1.0 -0.6 -0.6 -0.6Current-account balance (% of GDP) -7.1b -3.5 -3.6 -2.9

External debt (year-end; US$ bn) 15.8b 16.1 16.5 16.8Exchange rate SD:US$ (av) 263.3 261.1 a 259.7 262.0

Exchange rate SD:¥100 (av)d 210.1 225.2 a 247.9 246.0Exchange rate SD:€ (av) 248.8 295.6 a 350.6 360.9

Exchange rate SD:SDR (av) 341.1 365.7 a 400.2 407.0

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Seriesis implied exchange rate calculated from IMF staff report data on nominal GDP (lcu) and nominalGDP (US$) values. Rate of exchange is Sudanese Dinars to US$.

The political scene

Progress in ongoing peace talks in recent weeks between the government andthe main southern rebel group, the Sudan People's Liberation Army (SPLA), hasstrengthened expectations that a final deal bringing an end to more than 20years of civil conflict will soon be signed. The latest accord, signed in January,sets out the key aspects of a wealth-sharing arrangement between the twosides and includes an agreement on the contentious issues of Sudan'sburgeoning oil earnings generated by fields located in the south but currentlyoperated by the government in the north. It also exempts the largely non-Muslim south from Islamic monetary policy and banking laws, which willapply only in the north (see shaded box for details).

The agreement was signed in Kenya under talks sponsored by the Inter-Governmental Authority on Development (IGAD)—the East African regionalorganisation that has provided the support and guidance for peace efforts overthe past few years. Their mediation helped set in train the current process,which received its initial impetus in mid-2002 when the two sides signed anagreement that established a framework for a comprehensive peace settlement.Known as the Machakos Protocol, the agreement commits the two sides to

Peace talks make furtherprogress

Sudan 13


forming a power-sharing national government that will rule Sudan for a six-year period. At the end of this interim period, the south will hold a referendumon self-determination, which will provide them with the option of remainingpart of a united Sudan or seceding. Since the Machakos deal was signed, thetwo sides have pushed ahead with talks to agree the details of arrangementsfor the lengthy interim period. Despite periodic set backs and near-crises, thetwo sides signed an accord on security arrangements (including thedisengagement and redeployment of forces) in September 2003. Of equalimportance to the negotiations is a ceasefire that the two sides have managed—for the most part—to maintain for the duration of the talks.

As with the security accord, the wealth-sharing agreement cedes a considerabledegree of autonomy to the south for the interim period, an indication of theconsiderable compromises made by the government. The regime hadpreviously insisted, for example, that the central government should receivemost of the proceeds from Sudan's oil wealth, since it considers it a "nationalresource". Instead, the accord recognises that the location of much of thecountry's oil resources are in the south, giving the southern authorities a clearclaim on part of the proceeds. Accordingly, the deal allocates 50% of the netrevenue to the southern administration. The government of the south will alsobe able to raise its own taxes, claim half of non-oil revenue generated by thenational government in the south and manage aid and concessional debtgranted to it by outside parties. With the receipts from these resources, thesouth will acquire considerably more financial and political autonomy than theregime in Khartoum was initially prepared to concede. The existence ofseparate banking systems in the areas administered by the southern authoritiesand the national government will further emphasise the economic divisionbetween the two regions.

The government appears to have recognised that only a loose federal systemthat devolves considerable power to an SPLA-dominated regional governmentin the south will lead to a sustainable peace. The rebel movement has notfought for 20 years to end up as a junior partner in a national government runby northerners, and it will require—at the very least—a significant degree ofautonomy from the Arab-led government in Khartoum. Having said this, afinal accord is likely to ensure that the current regime remains in theascendancy within the national government, although the power-sharingagreement is expected to afford the southerners significant checks on the powerof the national government. Its powers will also be circumscribed by its needto gain the support of southern representatives when making policy onnational issues.

Wealth-sharing accord

Much of the discussion of the accord reached in January between the governmentand the Sudan People's Liberation Army (SPLA) focused on the agreement to shareoil revenue. However, the deal goes far beyond that, establishing the economicframework within which Sudan will operate during the six-year interim period. Asmight be expected given the lead role played in the development of the accord bythe IMF and the World Bank, it pays considerable attention to the need to maintain

Wealth-sharing deal grantssouth considerable autonomy

14 Sudan


monetary and fiscal stability through the continued pursuit of the IMF-led reformprogramme run by the northern government since 1997 (see Economic policy). Morespecifically, however, it lays down a number of specific rules and principles that willgovern economic policymaking in the post-war period. These include agreementsthat:• all Sudanese have the right to benefit from Sudan's national wealth, but that the

south faces acute economic needs that must be met as an immediate priority.The long-term goal will be to bring the south up to the basic living standardsprevalent in the north.

• Sudan's oil resources will be managed by a national petroleum commission thatwill be co-chaired by the national president and the government of southernSudan and that will make decisions only by consensus. The commission willreview, but not renegotiate, contracts already signed with foreign oil firms.

• after 3% of oil revenue (net of costs) has been allocated to the province in whichthe oil is produced, the remainder of the income from southern oilfields will bedivided evenly between the national government and the government of thesouth.

• all national non-oil revenue must be brought together in a central, audited pool.The government of the south will receive 50% of the non-oil revenue raised bythe national government in the south. All expenditure by the nationalgovernment will be made directly from the national revenue pool. Thegovernment of the south will also have the right to raise its own revenuethrough the imposition of a range of taxes and duties laid out in the accord.

• the country will have a single (new) currency to be phased in after an accord issigned. Sudan will also follow a single monetary policy but through a dualmonetary system that will follow Islamic principles in the north andconventional, interest-based principles in the south. There will be a singlecentral bank, but a branch of the bank will be established in the south.

• two funds will be established to receive and manage aid and concessional loansfrom the international community. One, the Southern Sudan Reconstruction andDevelopment Fund, will be managed by the government of the south and willbe focused on capacity building and addressing "past imbalances in regionaldevelopment". The second, the National Reconstruction and Development Fund,will be managed by the national government and will focus on therehabilitation of the areas outside of the south most affected by the conflict.

The wealth-sharing accord was warmly welcomed by IGAD mediators and theother international parties—led by the US, the UK, and Norway—who played acentral role in the conclusion of the Machakos Protocol. Their continuedinterest—as well as pressure—has been a key ingredient in keeping the processmoving forward. The US secretary of state, Colin Powell, said that the currentround of talks, which began in February and are due to finish by the end ofMarch, should be the final round before a full accord is signed, claiming thatthe parties were close to reaching compromises on all of the remaining issues.The Sudanese president, Lieutenant-General Omar Hassan Ahmed al-Beshir,also said in early March that he believed a final agreement would be reachedby the end of the month—a belief echoed by his chief adversary, the SPLAleader, John Garang.

Negotiators hope foragreement by end-March

Sudan 15


Although there is a chance that the deadline may not be reached, theunderlying optimism over a final accord appears well-placed. Most reportsfrom the talks suggest that a deal over power sharing is close, with relativelylittle separating the two sides over the division of national offices betweengovernment and opposition representatives, or over the powers of the centralgovernment and provincial authorities. The issue of the capital appears a littlemore complicated, with the government continuing to insist that the nationalpolitical institutions be based in Khartoum and, as a result, subject to Islamiclaw. The rebels' claim that the capital of the new Sudan should reflect thecountry's religious, cultural and ethnic diversity has strong support fromexternal mediators, however. This is likely to result in the government acceptinga compromise that designates a "capital area" within Khartoum to be granted aspecial status and exemption from the Islamic laws that will apply elsewhere inthe city.

However, the third issue on the agenda of the current round of talks—the statusof three disputed areas (the Nuba Mountains, southern Blue Nile and Abyei)—may prove more difficult to reach an agreement on. These areas are part of thenorth, according to the provincial borders drawn by the British authoritiesshortly before their withdrawal and Sudan's establishment as a fullyindependent state in 1956. As such, the government claims that the areas shouldnot even be included as part of the negotiations with the SPLA. The rebels,however, insist that they have a strong degree of support within these areas—and indeed some of the rebel leaders come from these regions—which as aconsequence should be included as part of the south for the interim period.They also claim that the three areas should be allowed to participate in the self-determination ballot to be held at the end of the six-year period. The issue wasthe focus of the round of talks that ended in mid-January, and there were signsof a compromise agreement emerging that would grant the areas a degree ofautonomy, according them special status through direct administration bythe presidency.

However, by the time the current round of talks began in mid-February,optimism surrounding this approach had dimmed and it was unclear how thetwo sides were to move forward. In part, the difficulty in reaching a dealreflects the government's concern that if it allows an alteration of the borders,and autonomy for parts of the north opposed to the regime, then other areas ofthe country (such as Darfur) might also seek to break away. Negotiations areparticularly difficult over Abyei. The government appears to have excludedAbyei from earlier proposals that had originally offered the three areas a degreeof autonomy. This is in part because of the suspected presence of substantialquantities of oil in the area, over which both sides naturally want to establishauthority, in case the interim period ends in secession. Abyei is also the originalhome of large Dinka communities—the leading tribal group within the SPLA,which Mr Garang is under pressure not to abandon to northern control andIslamic law.

As well as dividing the two sides, the issue of the disputed territories appearsto have compounded the divisions within them. The two lead negotiators—MrGarang and the vice-president, Ali Uthman Mohammed Taha—are under

Disputed territories are keyremaining issue

16 Sudan


considerable pressure from internal opponents within their respective campsnot to cede further ground. Following several days of negotiations on the issue,Mr Taha left the talks to return to Khartoum for consultations, but returned inmid-March apparently without fresh proposals. At the same time, the foreignaffairs minister, Mustafa Uthman Ismail, was quoted as saying that "thegovernment cannot present more than it already has … the ball is now in thecourt of the other side". He added that in his view either there would be peacein Sudan in March "or there will be something else". Nevertheless, most ofthose close to the talks appear confident that the issue of the territories willeither be resolved or be set aside for "further study and negotiation", to ensurethat it does not prevent a final deal being signed.

The signing of a final deal will be a remarkable political achievement given thedecades of conflict and hostility between the two sides and the completeabsence of a credible peace process less than two years ago. Attention mustthen turn to implementation, which may prove to be even more difficult thannegotiation as the two sides attempt to turn verbal compromises into actualfact, by withdrawing troops from advantageous and hard-won positions,reducing their political power and—in the government's case at least—giving upabsolute control of the wealth associated with the oil industry.

To be truly effective, the peace process must also be turned from a bilateralaccord between the government and the SPLA to a national agreement thatcovers not only all other minorities in the north and south but also gains thesupport of official opposition groups in the country. Although the SPLA is theprimary armed rebel force, they are by no means the only group that must beincluded in the new political arrangement for it to be effective. Indeed, thesoutherners themselves are far from being a cohesive, united group. There are arange of armed groups loosely affiliated with either the SPLA or thegovernment, who have no role in the peace process but who have interests inthe region that they are determined to protect. For some, this is a matter fornegotiation—the Equitoria Defence Forces (until recently a government-alliedmilitia of former SPLA fighters) "remerged" with the SPLA in late March, forexample, in order to maximise their position in the post-war order. Similarinstances of defections by small militia groups back and forward between thegovernment and the SPLA are common. It will prove difficult to reconcile someof the groups to a new political order, with many having little to gain fromlaying down their arms and ending a conflict that has been the source of theirwealth and prestige for much, if not all, of their lives. In a warning of thedifficulties this could cause in the interim and pre-interim period, there wereseveral reports of violent clashes between the militias and SPLA forces in theoil-rich western Upper Nile province in January and February.

In the north, both the Umma Party, led by the former prime minister, Sadiq al-Mahdi, and the Democratic Unionist Party, led by Mohammed Mirghani, havesignalled that they broadly support the Machakos framework and the directionin which negotiations have subsequently progressed. However, they have alsoexpressed their frustration at being given no place at the negotiating table, andmade clear that they will not be bound by what the government and the SPLA

Peace accord is bilateral notnational

Northern opposition partiesgive mixed reaction

Sudan 17


agree. Sadiq al-Mahdi has also argued that there can be no peace in the countrywithout an equitable solution to the growing Darfur conflict. The BejaCongress, meanwhile, has threatened to resume the armed struggle against theregime in the east (and has reportedly carried out several raids) to protest itsexclusion from the peace process. The Islamist Popular National Congress, ledby the regime's former leading Islamist partner, Hassan al-Turabi, has also beencritical of the exclusiveness of the talks.

However, it is the situation in the western Darfur provinces, which hascontinued to deteriorate in recent weeks, that would most benefit from anational peace process. Fighting in the poor and isolated region began in early2003 when a group calling itself the Sudan Liberation Army (SLA) took up armsto demand economic and political rights for the region and an end to raids bygovernment-allied nomadic Arab militias (known as janjawid) on settled tribalfarmers in Darfur (the area cultivated by the nomadic Arab pastoralists israpidly being eroded by creeping desertification from the north). The conflictcontinued over the course of the year, with the SLA and the forces of a secondallied group, the Justice and Equality Movement (JEM), attacking governmentpositions across the region. The government has responded with its ownmilitary forces, which in addition to attacking SLA/JEM positions have beenaccused of bombing civilian areas from the air, similar to the tactics theyemployed in the south. The bloodiest aspect of the conflict, however, has beenthe intensifying raids by the janjawid on towns and villages in the region.These have accounted for many of the 3,000 deaths reported over the pastyear, and are directly blamed by aid agencies for much of the internaldislocation that is reckoned to have driven 800,000 people from their homes,including an estimated 100,000 who have escaped across the border into Chad.

Moves towards a political solution have been unsuccessful. Two ceasefires wereagreed in the final quarter of 2003, but they did not lead to any significant fallin the raids by the janjawid. The SLA have made clear that they are ready fortalks, but, after the failings of last year's ceasefires, they have insisted thatnegotiations must have neutral, foreign observers to confirm agreements made,and that international monitors must be deployed to ensure that ceasefires arehonoured. The SLA have also called for the government to rein in the janjawidas a precondition for talks, which would have to lead to their disarmament aspart of a final deal. These conditions have been refused absolutely by thegovernment, which declined to attend negotiations due to take place inFebruary in Geneva as they made clear they would not tolerate any attempt to'internationalise' the conflict. Periodically, some officials have even returned tothe position adopted in the first weeks of the conflict, stating that the fighterswere "armed robbers and criminals" who could only be dealt with by"reinforcing the armed forces and intensifying military pressure". Indeed,government officials have quite openly declared that the regime was initiallyseeking a military solution and that only after the area had been brought undergovernment control would negotiations with the rebels be re-opened. Fightingcontinued into February, when Mr Beshir claimed that the army had won theconflict and that he was offering an amnesty for rebels who surrendered. The

Situation in Darfurdeteriorates

18 Sudan


announcement simply prompted the SLA to step up their attacks over theensuing days to prove that the province was not under government control.

Above all, the government appears determined not to allow the conflict totake on a status analogous to that of the war in the south, and to ensure thatthere is no conflation of the separate regions' grievances. Instead, it is clearlyhoping that it will be able to turn its attention more fully to the situation inDarfur after it has made peace with the SPLA—a development that wouldallow it to deploy additional military resources, as well as increase its politicalsway. In a display of realpolitik, the international community has beenrelatively reticent about criticising developments in Darfur. Although it hasquietly expressed its growing concern over what one US official saidamounted to ethnic cleansing in the west, the international partners involvedin the peace process are perhaps more concerned that the still fragilenegotiations with the SPLA are not derailed by what are considered to be lesssignificant issues in the west of the country.

Of course, the timing of events in Darfur is no accident, with the SLA hoping togain currency from the progress in the government's peace negotiations withthe south. What initially started out as a minor local insurrection now lookslike assuming wider dimensions. The SLA, in an effort to strengthen its politicalinfluence by exerting greater pressure on the government at a difficult time, hasopened talks with other anti-regime groups currently excluded from the SPLA-government peace discussions. This has been most apparent in the SLA'sdialogue with the disgruntled Beja Congress—a relationship that opened theway for the SLA to join the Eritrean-based opposition coalition, the NationalDemocratic Alliance (NDA), in February. The government, who had been inseparate reconciliation talks with the NDA, responded by breaking off itsdiscussions, clearly alarmed at the first signs that the Darfur problem might beemerging from its relative isolation and into the political mainstream. Adding toits concern, there were also reports that the SLA and JEM had begun to raiseand deploy forces elsewhere in the west, including Northern and WesternKordofan, and evidence also points to involvement by the SPLA in training andarming the Darfur rebels. Although it is difficult to corroborate such evidence,certainly the SPLA view unrest in the west as helpful in pushing forward theirpeace agenda. Furthermore, Mr Garang has stated in the past that should thesouth and the government of Sudan sign a peace accord the SPLA will notsupport the regime in its struggle against the SLA.

It is clear that the situation in Darfur has deteriorated to such an extent that,even if a peace deal were signed with the south, the government would find itdifficult to convince outsiders—particularly investors—that the country wasfinally at peace. As the government well knows, and as has been proven in theconflict with the south, the situation is militarily insoluble and requires aproperly thought out political resolution. The need to extend to the rest of thecountry the principles of autonomy that that will arise from a peace agreementwith the south may prove to be the only realistic solution.

The link between the Darfur rebel movements and the Asmara-based NDA,together with the threat of renewed violence from the Beja Congress (also

Rebel link further strains tieswith Eritrea

Darfur rebels join mainopposition alliance

Sudan 19


based in Asmara), has added further strain to Sudan's already troubled tieswith Eritrea. The border between the two sides has been closed for over a year,as each government has accused the other of reneging on earlier commitmentsto end military support for opposition groups. In mid-January the Eritreangovernment accused Sudan of arresting and detaining large numbers ofSudanese nationals in Khartoum without charge or trial, and of closing downcommunity centres used by Eritreans in the city. Sudan, meanwhile, formalisedits series of meetings with Ethiopia and Yemen into a "tripartite alliance" tocombat terrorism and boost economic and cultural exchange. Although thethree heads of government denied that the group was "against" anyone whenthey held a summit meeting in December, the very fact that the grouping bringstogether three states in the region that have either been at—or close to—warwith Eritrea inevitably adds to Asmara's sense of alarm and isolation, leading itto brand the group the "axis of belligerence".

Economic policy

The IMF has given a broadly positive assessment of Sudan's economicperformance and policy implementation following its annual Article IVconsultations. The report, issued in December, "commends" the government forits actions over the course of the year, stating that Sudan had "strengthened" itsreform programme, ensuring that "all quantitative benchmarks were broadlymet". The Fund was encouraged by progress on the monetary and exchangesystems, although expressed concerns over uncertainties with the balance ofpayments and the likelihood of budgetary pressures arising. It also raised theissue of the Sudanese government having contracted considerable sums of non-concessional debt and stressed that external debt management needed to bestrengthened. However, the Fund believed that Sudan's macroeconomicobjectives for 2003 remained "achievable" and that an "understanding wasreached regarding broad macroeconomic and policy parameters for 2004".

The report included data for real economic growth, which the Fund estimatesto have remained robust at 5.5% in 2002—slightly above an estimate of 5% givenin a previous IMF report issued earlier in the year (December 2003, Thedomestic economy: Economic trends). The report expressed confidence thatSudan was on track to meet the target of 5.8% set for 2003 and real growth isexpected to rise modestly in 2004 to around 6%. The report notes that whileagriculture remains the largest single sector in the economy, the development ofthe oil industry has initiated a rapid restructuring of Sudan's economic baseover the past five years. According to the new data, the agricultural sector'sshare of the economy fell from 42% in 1996 to just 32% in 2002—a remarkabledecline in such a short space of time. In contrast, mining and quarryingincreased by more than seven percentage points following the start of oilproduction. The expansion of the other fastest growing sectors of theeconomy—manufacturing and transport—also appears to have been driven bythe development of the oil sector.

IMF issues broadly positiveannual report on Sudan

Real growth strengthens

20 Sudan


Changing composition of GDP(% of total; real terms)

1996 2002Agriculture 41.9 32.4Trade 18.2 18.3

Transport 11.6 14.8Other services 15.1 12.1

Manufacturing 7.9 9.1Mining & quarrying 0.4 7.6

Construction 4.4 4.0Electricity & water 0.7 1.5

Source: IMF, Article IV consultations.

The IMF is also broadly positive in its assessment of the government approachto public finances. The central government deficit has been kept at or below 1%of GDP every year since the reform programme began in 1996, indicating thegovernment's commitment to the IMF-imposed targets. These targets have, inthe main, been met by a marked improvement in the state's revenue position,which has allowed the government to almost double spending from around7.5% of GDP in 1997 to about 14% in 2002. Much of these gains have come froma much-improved tax take and growing oil receipts. In new data, the reportnotes that performance over the first half of 2003 was actually better thantargeted in the reform programme, with central government finances showing asurplus equivalent to around 1% of GDP. In contrast, the programme thegovernment agreed with the Fund had anticipated a deficit of around 0.1% ofGDP for the first six months of the year.

Central government operations, Jan-Jun 2003(% of GDP)

IMF programme OutturnRevenue 6.9 9.0 Oil 3.0 4.9 Non-oil 3.9 4.1

Expenditure 7.0 8.0 Current 5.4 6.2 Capital 1.6 1.8

Balance -0.1 1.0Oil savings account 0.6 0.8

Source: IMF, Article IV consultations.

The underlying position appears somewhat less positive than the headlinefigure suggests, however, with expenditure running more than the equivalentof 1% of GDP ahead of target. That this has not resulted in a deterioration in thefiscal position is almost entirely owing to significantly stronger government oilearnings than had been anticipated. Against a target of around 3% of GDP, oilrevenue actually stood at almost 5% as prices and production soared far abovethe conservative assumptions laid down in the budget. Without this windfallrevenue, according to IMF figures, the budget would have been left with adeficit of around 1% of GDP over the first half of the year, which thegovernment would have been poorly placed to manage given that the bulk ofits additional spending commitments had been made on a recurrent basis. This

Budget in surplus for first halfof year

Sudan 21


led the Fund to warn the government once again of the dangers of becomingover-reliant on oil earnings and to call on it to base its fiscal targets on non-oilitems rather than overall revenue.

The IMF's revised projections for the year as a whole show that it has altered itsoriginal forecast for 2003 from a fiscal deficit of SD35.8bn (around 1% of GDP)to a surplus of SD26.4bn (about 0.6% 0f GDP), as a result of sustained large oilreceipts stemming from the high oil price. However, the IMF's estimates for theyear as a whole are difficult to account for, as its projected government oilincome would be equal to around 80% of total oil revenue, a considerablejump from the 53% it received in 2002. Although the government's share of oilrevenue is due to rise, as the foreign oil companies recoup their originalinvestments, it is unlikely to rise either so far or so quickly. The EconomistIntelligence Unit's estimates for 2003 are therefore not as bullish as thosepublished by the IMF and the fiscal account is estimated to have remained indeficit, at 0.9% of GDP.

An increase in the government's share of oil income cannot come too quicklyfor the authorities in Khartoum. Although the signing of a peace accord willcertainly provide wider access to revenue streams, it will also prove expensive.In the short term, military spending will not decrease as the costs ofmaintaining three separate standing armies (including a joint force) will beconsiderable, although the government will not pay for the southern forces.The civil service will have to expand in order to incorporate southernbureaucrats, and an enlarged parliament will also have to be paid for. Theseexpenditure items will come on top of imminent increases in the salaries ofthe existing civil service. In early January 2004 the National Assembly(parliament) approved a 50% rise in civil servants' wages, raising the minimumwage from SD7,500 (US$29) to SD12,000 in order to level out pay differentialsbetween ministries.

In 2003 the government drew up, for the first time, a three-year budgetprojection that showed that the fiscal deficit would remain within thegovernment's target of 1% of GDP throughout the forecast period. However, theprojection was produced when peace still looked a distant prospect and eventshave now made the government's forecasts redundant. The Ministry of Financeand national Economy is in the process of drawing up a revised fiscal forecast,which is based on the assumption of peace and incorporates the south into itscalculations. Although the new forecast is yet to be released, the governmentbelieves that the deficit will expand considerably and has forewarned the IMF.Senior ministry officials have ruled out borrowing from the banks to financethis deficit, determined that they will pay for it with "real resources". What this,in effect, means is that they hope grant aid promised by the internationalcommunity materialises quickly.

Concerns over the exposure of public finances to volatile oil revenue are easedsomewhat, however, by the government's apparent commitment tostrengthening the oil savings account (OSA). This was set up in mid-2002 toabsorb additional oil revenue generated by oil prices above the level set inbudgets. (Windfall revenue resulting from higher production is not deposited in

Government bolsters OSA

Peace to add to expenditurepressures

22 Sudan


the OSA.) According to the Article IV report, deposits equivalent to 0.8% of GDPwere made into the OSA in the first half of 2003, lifting the total value of thefund to around SD42bn. This equates to slightly less than one month of forecastspending for the year—a small, but nonetheless, supportive cushion that hasalmost certainly increased in value, given the remarkable strength of oil pricesin the second half of the year.

Although revenue from direct taxes is on track, the Article IV report notes thatSudan failed to implement a number of promised measures to tighten the taxnet, including the reduction of the large number of exemptions to value-addedtax (VAT) that currently exist and the abolition of the generous tax privilegesgranted to foreign companies. The government claimed that the delays inimplementing the promised tax reforms were the result of "legal uncertainties",which it said it hoped would be resolved quickly, although measures wereintroduced in 2003 to raise excise tax on sugar and petroleum products. Thegovernment also committed itself to pushing ahead with the reform of theInvestment Encouragement Act to narrow the range of tax exemptions currentlyavailable and thus boost revenue. This act was devised to attract investors,offering them 5-10-year renewable tax holidays. Since corporate tax-payersgenerally provide governments with the richest source of tax, changes to thislaw are much-needed and will help the government's finances considerably.However, the authorities are wary of any further increases in direct taxes forfear of giving the public the impression that it is they who must pay for peace.Hence, the government has ruled out any rises in VAT, which currently standsat 10%, although it claims to have made gains through improvements to its VATadministration.

Despite sluggish government action in this area, its tax take was nonethelessboosted by the strong performance of non-tax revenue, which exceeded thetarget set out in the IMF staff monitored programme by 0.2% of estimated GDPduring the first half of 2003. The tax gains in this respect were owing in largepart to the unexpected surge in import spending (see Foreign trade andpayments), which, in turn, boosted earnings from duties considerably.

The IMF was more positive in its assessment of monetary policy developments,praising the Bank of Sudan (the central bank) for its success in shifting theemphasis of its monetary policy to broad money (M2) targeting from theprevious system, which was centred on the dinar's peg to the US dollar. Theshift is a result of the success the central bank believes it has achieved instabilising the exchange rate. As a result, M2 targeting gives the bank greaterleverage to steady the economy, as studies show a close correlation betweeneconomic stability and M2 growth. The Bank of Sudan's M2 targets are set toensure that GDP growth and inflation remain at pre-agreed levels. However,since starting its M2 targeting programme, the central bank has discovered that,in order to reach its GDP and inflation goals, it actually needs to overshoot itsM2 target, meaning that there is either a problem with data or there is a breakin transmission between money and prices. The pace of monetisation may be afactor; Sudan has traditionally had a large subsistence sector, but the structureof the economy is changing rapidly with significant levels of investment being

Monetary policy comes closeto target

Government pledges furthertax reforms

Sudan 23


fed into the oil sector and infrastructure programmes—investment that does notdirectly affect inflation. So, ironically, were the central bank to hit its M2 targets,it would actually fail to meet its growth target.

However, despite these anomalies, the central bank's M2 targeting programmehas been relatively successful. It has stepped up its intervention in the market,aided by the development of new sharia-compliant instruments to mop upexcess local-currency liquidity. Monitoring and data provision has also beenenhanced, as has policymaking through the formation of a new monetarypolicy committee, which brings together senior central bank and finance andnational economy ministry officials every two weeks. The implementation ofpolicy is effected by a new Monetary Operations Unit, which oversees openmarket operations. Co-staffed by finance ministry as well as central bankofficials, it is also well resourced and has been viewed as an initial success. Asa result, M2 growth—though volatile—has slowed to an average of around 20%over the first 11 months of 2003, significantly below the end-2002 rate of morethan 30% and slightly below the programme target of 24%.

Broad money growth(SD bn unless otherwise indicated; end period)

2002 20031 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Nov

M2 474.0 501.0 532.0 563.0 585.0 604.0 658.0 694.9 % change, year on year 29.9 21.9 25.8 30.3 23.4 20.6 16.6 23.1

Source: IMF, International Financial Statistics.

Tight monetary management has had a direct and positive impact on pricestability. Despite rapid economic growth and sustained strong domesticdemand, inflation stood at around 7.5% over the first nine months of 2003,easing on a monthly basis from a peak of more than 11% in July to 3.3% inSeptember. Although some way over the government's target range of 5-6%, theovershoot is modest, and the authorities will be encouraged by the relativestability of price growth, which has averaged around 7.5% every quarter.

Inflation, 2003(year-on-year growth unless otherwise indicated; period averages)

Jan Feb Mar Apr May Jun Jul Aug Sep Jan-SepCPI 8.7 7.8 7.0 7.1 8.2 7.1 11.6 7.0 3.3 7.5

Source: Bank of Sudan.

The dinar was trading at some SD260:US$1 at the end of February—virtuallyunchanged on its average value for the past three years, despite in theoryhaving its value determined (within a 2% margin) on a daily basis by the inter-bank market. In previous reports, the IMF has criticised the nominal stability ofthe currency against the dollar, warning that as this amounted to a significantand sustained appreciation in real terms the government risked damaging thecompetitiveness of its non-oil exports. In its most recent assessment, however,the Fund concedes that these fears have proved largely misplaced, with non-oilexport trends instead reflecting supply issues (notably climatic conditions andthe availability of agricultural commodities) rather than price factors. Overall,the report says that despite the appreciation there has been "no indication of

Inflation eases and dinarremains stable

24 Sudan


exchange-rate misalignment". The dinar's stability against the dollar has alsoadded a degree of predictability to government revenue, given the growingimportance of dollar-denominated oil earnings in the government's accounts,and has helped to reduce imported inflationary pressure.

Having moved, in theory, from a de facto peg to a managed float, the centralbank is now setting its sights on eventually allowing the dinar to float freelyand has stated that it hopes to be in such a position by the end of 2005.However, the Bank of Sudan would not consider such a move unless thecurrency was supported by ample international reserves—ideally an amountsufficient to cover up to 12 months of imports. With growth in reserves severelylimited at present, such a timeframe may prove over-optimistic.

The domestic economy

Oil and gas

International oil prices have remained very high, with the benchmark datedBrent Blend averaging just over US$31/barrel over the first ten weeks of 2004—some 25% above the five-year average of just under US$25/b and even higherthan the average of US$28.8/b generated in 2003, which was the strongest full-year performance in some 20 years. In part, the current strength of oil pricesreflects demand-side developments, with the pick-up in world economicgrowth boosting oil consumption and leading most market analysts to raisetheir projections for oil demand growth during 2004. There have also beensupply-side developments, with the oil exporters' cartel, OPEC, unexpectedlyannouncing new cuts in member-state oil production quotas at its Februarysummit, suggesting that the organisation is preparing to adopt a firmerapproach to supply-side management than had previously seemed to be thecase. It remains the Economist Intelligence Unit's view, however, that oil is stilloverpriced, with most data suggesting that the market is oversupplied and willcontinue to be so, despite the pick-up in world demand and OPEC's efforts tocut production. As a result, we continue to expect a sharp correction that willpush prices down markedly, probably before the middle of the year.

Oil prices remain very high

Sudan 25


There is little official price data released on Sudan's export crude, Nile Blend,although market reports on trades in recent months suggest that it hascontinued to track Minas—the middle-sweet Indonesian crude used as abenchmark in East Asia, where the bulk of Nile Blend is sold. The most recenttrade figures released by the Bank of Sudan (the central bank) cover only thefirst nine months of 2003, but suggest that the country exported 55.2m barrelsduring the period, for which it earned just under US$1.4bn. This would indicatean average (fob) price of around US$25/b—some 15% above that of the sameperiod the previous year. The same trade data also point to average crude oilexport volumes over the period of 203,000 barrels/day (b/d) during the firstnine months of 2003—a rise of more than 30,000 b/d, or 19%, on the first threequarters of 2002. Allowing for domestic consumption and the export ofpetroleum products, this would point to average overall output of around280,000 b/d.

Speaking in January, the energy and mining minister, Awad Ahmed al-Jaz,suggested that there had been further gains in output, with productionreportedly running at just under 300,000 b/d—an all-time high. Mr Jaz also saidthat he expected production to rise by a further 40,000 b/d by the end of 2004,with the Chinese National Petroleum Company (CNPC) apparently still onschedule to bring initial output from Block 6 on stream. More marked gains inoutput, however, should occur in 2005 when CNPC is due to bring blocks 3 and7 on stream. Mr Jaz repeated previous claims that this would boost output by200,000 b/d by the end of the year, lifting total capacity past the 500,000 b/dmark—a remarkable rate of growth given that Sudan only began to export oil inSeptember 1999. Before the new capacity can be brought on stream, however,CNPC will be required to complete construction of new pipelines linking thefields to the export terminal. An outline contract was agreed late last year(December 2003, The domestic economy: Oil and gas), but the timing androuting of the link remains unclear.

India only formally entered the Sudanese oil industry in early 2003 when theoverseas arm of the state-owned, Oil and Natural Gas Company (ONGC)purchased a 25% stake in the Greater Nile Petroleum Operating Company(GNPOC)—the foreign-led consortium that has developed Sudan's currentproducing fields. It subsequently bid for minority holdings in blocks 3 and 7,offering to buy out Qatar's Gulf Petroleum Company and the UAE's Al Thanigroup at a cost of US$125m, although ONGC has indicated that it was expectingto invest a further US$100m in the fields themselves. The bid was officiallyapproved by the Indian government in January, and now awaits final approvalfrom the Sudanese government and the other members of the consortiumdeveloping the blocks. As this includes CNPC, discussions may prove to beprotracted.

ONGC has also opened tendering for a products pipeline linking the main oilrefinery north of Khartoum with the export terminal near Port Sudan. ONGCwas only awarded the construction contract in the final months of last year, butthe company indicated that it hopes to award the main engineering,procurement and construction subcontract for the 12-inch pipe link in the

Sudanese production set torise sharply in 2005

Indian government approvesnew Sudanese purchase

26 Sudan


coming months. They hope to have it on stream, with first-phase capacity of18,000 b/d, by mid-2005. Capacity will eventually rise to around 55,000 b/d,and will be phased in to transport the additional output from the scheduledexpansion of the Khartoum refinery. That contract has been awarded to CNPC,but ONGC won a second contract to expand capacity at the Port Sudanrefinery from 25,000 b/d to 100,000 b/d. All together, the total value of theONGC's actual and planned investment in Sudan's oil industry over the pastyear is estimated at around US$1.75bn.

Although driven by its own strategic priorities, the urgency with which ONGCis pursuing opportunities in Sudan must in part reflect concerns over growingcompetition. With the conclusion of a peace agreement (see The politicalscene), international interest in the oil sector is set to rise, and competition fromWestern oil firms is likely to increase. At present, security concerns associatedwith the war, the threat of sanctions, and the high-profile disinvestmentcampaign mounted by campaign groups in the US and elsewhere opposed tothe Sudanese regime has kept Western companies out of the country (only onesmall Western firm, Lundin Petroleum, is currently active), leaving the fieldopen to the state-owned Asian firms that currently dominate the sector. Thegovernment is keen to draw large Western companies back into the oil industry,however, as it is aware of the political, commercial and technological benefitsassociated with their involvement.

In an early sign that change is on the way, the industry and investmentminister, Jalal Yousif al-Dagir, told journalists in January that a French major,Total, "will begin oil exploration activities during the first third of this year". Theannouncement came after meetings Mr Jaz held in France at the start of theyear, and a visit by the French foreign minister, Dominique de Villepin, toKhartoum. Total was one of the first companies to invest in Sudan when oilexploration first began in the late 1970s, and in 1980 bought a controlling stakein Block b (now known as Block 5), which covers some 120,000 sq kmstretching from south of Malakal to the Ethiopian border. Total pulled out in themid-1980s when a resumption of the civil war led to a sharp deterioration inthe security environment, but, unlike the other major firms, such as Chevron ofthe US, that had bought stakes in the country, it did not sell its holding—a clearsign that it remains keen to exploit opportunities in the country whencircumstances allow. However, although the flurry of French-Sudanese politicalactivity suggests that progress in the peace process has led to preparatory talks,Mr Dagir has almost certainly exaggerated the progress that has been made.This seemed to be confirmed by an official statement issued by Total that statedthat the firm wanted "to see … not just a peace accord but effective andsustainable peace" in Sudan before it made a decision to return.

Agriculture

Two UN agencies—the Food and Agricultural Organisation (FAO) and the WorldFood Programme (WFP)—issued a joint report in February, suggesting thatSudan's cereal production for the 2003/04 marketing year (November 2003-October 2004) was expected to reach just over 6.3m tonnes. This would mark a

Strong growth estimated incereal production

Minister claims Total willresume operations this year

Sudan 27


year-on-year increase of more than 60% on the 2002/03 harvest, and would besome 45% above the annual average for the previous five years.

Cereal production1998-2002

1998 1999 2000 2001 2002 2003 Average % change a

Total production ('000 tonnes) 5,670 3,147 3,592 5,306 3,876 6,328 4,318 46.5Area harvested ('000 ha) 9,215 7,109 6,762 8,950 7,549 9,821 7,917 24.0Yield (tonnes/ha) 0.62 0.44 0.53 0.59 0.51 0.64 0.54 19.5

a Between 2003 and 1998-2002 annual average.

Source: UN, Food and Agriculture Organisation/World Food Programme.

According the FAO-WFP assessment, the higher production reflects a sharp risein the area harvested and in average yields, both of which were at their highestlevels for more than five years. The agencies stated that in large part the strongperformance was the result of good rainfall patterns during the 2003 croppingseason, which had supported production on a greater proportion of Sudan'scultivatable land than had been the case in previous years. There had also beenno significant outbreaks of pests and crop disease during the year, boostingyields and output. The ceasefire between the government and the rebel SudanPeople's Liberation Army, which was observed over most of 2003, also boostedproduction, allowing farmers to cultivate without interference in areas ofsouthern Sudan that had been the focus of civil conflict over much of 2002.The marked downturn in the conflict in the south also permitted the improvedsupply of agricultural inputs, raising yields and production, although the impacton overall production was limited as output in the south constitutes onlyaround 15% of the national total.

Cereal production in southern Sudan1999 2000 2001 2002 2003

Total production ('000 tonnes) 468 650 658 629 757Area harvested ('000 ha) 370 477 528 422 635

Yield (tonnes/ha) 0.8 0.7 0.8 0.7 0.8


Although production of millet and wheat has generally trended upwards,sorghum remains the dominant cereal product, accounting for about 80% oftotal cereal output. The FAO-WFP report estimates that, despite record levels ofsorghum output, Sudan will overall still run a food deficit of around1.2m tonnes, which will be filled by imports of mostly wheat. Sorghumproduction for the 2003/04 marketing year is expected to rise by as much as77%, exceeding immediate local demand (including food, feed and seed) by asmuch 1.5m tonnes. Part of this surplus should be available for export, althoughthis will require the government (which has responsibility for marketing) tosecure agreements with neighbouring countries soon. Even if this is achieved,however, much of the surplus will remain in the country, boosting stocks anddriving down prices. Although this has positive implications for consumers, ifprices, which have already weakened substantially year on year, decline furtherproducers are likely to scale back cereal planting for the coming croppingseason, leading to shortfalls next year. This has happened on a number of

Sorghum surplus drives downprices

28 Sudan


occasions in the past, with a year of strong production being followed by aseason of markedly reduced planting areas. To smooth out the volatile pricetrends, the government has developed strategic grain reserves, which aredesigned to level out supply fluctuations. In practice, however, the performanceof the strategic reserve has been poor, reflecting a variety of factors, not leastthe limited funds available to it, mismanagement resulting from slow reactionby officials, and geographical constraints.

Cereal production by type1999 2000 2001 2002 2003

Sorghum 2,434 2,761 4,469 2,931 5,188

Millet 499 497 590 581 784Wheat 214 334 247 364 356Total 3,147 3,592 5,306 3,876 6,328


The UN agencies conclude that the overall food situation is "highly favourable",which they say should have "a beneficial impact on the food security of themajority of the population over the next 12 months". Nevertheless, the agencieswarn that despite the strong harvest, an estimated 3.6m people will requiresome 250,000 tonnes in emergency food aid during the year. In part this is areflection of the dislocations within the country, which mean that foodsupplies often do not move from areas of surplus to areas of deficit according tonormal market mechanisms, but instead require intervention from aid agencies.This is largely a result of the size of the country, as well as the dire state of itsinfrastructure, particularly in the south, where macadamised road surfaces arevirtually non-existent, leaving passage along much of southern Sudan's gradedroads subject to climactic conditions. It is also likely that a peace agreement willsee large numbers of internally displaced persons (IDPs) and refugees return totheir homes, a move that will inevitably place increased strain on emergencyfood supplies.

The most acute problems, however, are emerging in the three Darfur provinces,which have been the focus of intense fighting between government andgovernment-backed militias and rebels (see The political scene). Althoughestimates vary considerably, the leader of a US Agency for InternationalDevelopment (USAID) mission to Darfur, Roger Winter, said in late Februarythat as many as a million people were at "imminent risk of life and livelihood"in the region. Officials from Office of the UN High Commissioner for Refugees,meanwhile, suggested as early as January that the fighting had created up to700,000 IDPs in the region, while a further 100,000 had fled across the borderinto neighbouring Chad. Efforts to mount a relief programme in Darfur andChad have been hampered by the ongoing security problems, which haveprevented aid agencies delivering relief across much of the region. In January,for example, as few as 15% of the region's IDPs were said to be accessible torelief agencies, a figure that rose over subsequent weeks as a result of talks withthe government, but remained very low at just 30%. Similarly, the InternationalCommittee of the Red Cross complained this month that they had been able toaccess only the three main cities in the region and had only been able to travelperiodically along a tightly defined "humanitarian corridor". This, they said,

Despite strong harvest, aidneeds will remain high

Darfur faces acutehumanitarian needs

Sudan 29


had in effect excluded them from the region's other towns, villages and campswhere the humanitarian situation was believed to be at its most acute.

Foreign trade and payments

The Bank of Sudan (the central bank) has released new external account data inrecent weeks, providing comprehensive current- and capital-account data forthe first nine months of 2003. The figures show that Sudan generated a smalltrade surplus of some US$34m during the period—a US$100m improvement onthe modest trade deficit generated during the same period of 2002. Exportearnings strengthened considerably year on year, reaching just underUS$1.8bn—a gain of more than 20%. The upturn was driven by the oil sector,with sales of crude oil and oil products rising by more than 30% to almostUS$1.5bn. In part the gain reflects steady year-on-year growth in production,which, despite a pick-up in domestic demand, generated a significant rise inpetroleum and petroleum product export volumes. A more important factor,however, was the strength of international oil prices during the period, whichrose by 15-20% during the first nine months of the year, partly as a result of theUS-led invasion of Iraq. Prices remained very strong over the final quarter of2003, suggesting that when full-year figures are released they will show anequally robust year-on-year expansion.

Trade account, Jan-Sep(US$ m unless otherwise indicated)

2002 2003 % changeExports 1,452 1,767 21.7 Oil & oil products 1,101 1,453 32.0 Non-oil 351 314 -10.4

Imports 1,523 1,733 13.8Trade balance -71 34


Non-oil exports performed poorly, with revenue declining by more than 10%year on year. This was driven by a reported downturn in the volume and valueof most agricultural commodities, including gum Arabic and sesame, which asrecently as 1997 was the country's largest single source of export revenue. Theweakening appears to reflect a broad downturn in agricultural productionduring 2003, marking poor weather conditions and other cropping seasonproblems. The only exception to the general decline was cotton, which saw a15% rise in revenue and a 20% increase in volume. The non-oil sector nowaccounts for less than 20% of overall merchandise earnings, and as a resulteven a 10% decline has only a modest impact on total export revenue. Thisunderstates the sector's real impact on Sudan's overall external accountposition, however, as the majority of the state's oil export earnings are held bythe foreign firms involved in the development of the oil sector and thus flowout of the country on the non-merchandise side of the current account. On anet basis, the Economist Intelligence Unit estimates that non-oil earningscontinue to constitute at least 50% of the revenue generated by the oil sector.

High oil prices drive exportearning gains

30 Sudan


The US$315m gain in export earnings was largely offset by a US$210m rise inimport spending over the first three quarters of last year, which lifted the totalimport bill (cif) for the period to US$1.73bn—a year-on-year rise of 14%. Mostimport categories showed growth, with the largest proportion of the additionalspending directed towards manufactured goods. Spending on transportequipment and machinery also showed robust growth—a trend that is in linewith the development of Sudan's industrial base and the expansion of basicinfrastructure, particularly in the power sector. The significance of theindustrialisation programme in driving import growth is also likely to explainthe volatility in monthly import demand, with the purchase of expensivepieces of equipment leading to periodic surges in the import bill. Over the firsthalf of 2003, for example, import spending grew by more than 30% year onyear, but contracted by more than 10% year on year in the third quarter.

Import spending, Jan-Sep(US$ m unless otherwise indicated; cif)

2002 2003 % changeFoodstuffs 307.2 302.1 -1.7

Beverages & tobacco 17.8 17.2 -3.4Crude materials 134.2 179.1 33.5

Chemicals 149.4 164.6 10.2Manufactured goods 400.1 507.1 26.7Machinery & equipment 432.9 480.1 10.9

Transport equipment 183.6 252.1 37.3Textiles 103.7 65.9 -36.5

Total 1730.1 1969.2 13.8


There was no growth in the import of foodstuffs and beverages during the firstthree quarters, with spending on foodstuffs falling by slightly less than 2%. Thisis somewhat surprising given that the poor agricultural export figures point tolower production and thus higher import needs, although it may be that theunderlying strength of demand is disguised by the importance of food aid(which does not register in the trade account) and by the surge in foodstuffsspending registered in 2002. The sharp fall in textile expenditure is also difficultto account for given robust consumer demand, but may indicate that plans torehabilitate the domestic textile industry have begun to yield some increase inlocal production.

Partly as a result of the improvement in the trade position, the current-accountdeficit narrowed by just under 25% during the first three quarters of the year,although it remains substantial at US$480m—the equivalent on an annualisedbasis of just over 4% of GDP. Within the non-merchandise account, the mostnotable feature is the sharp decline in services debits, which fell to less thanUS$490m in the first nine months of the year compared with almost US$600min the same period of 2002. This drop is surprising given the dramatic increasein import spending during the period and the sharp rise in oil export volumes.However, the Bank of Sudan's data show that transport costs—which make uparound 80% of services debits—fell significantly throughout the year. Incomedebits were more predictable, rising by almost 30% year on year to just under

Import spending surges

Current-account deficitnarrows

Sudan 31


US$600m as oil revenue soared, boosting the profits of foreign firms leadingthe development of the oil sector.

Current account(US$ m unless otherwise indicated)

2002 2003Jan-Sep 1 Qtr 2 Qtr 3 Qtr Jan-Sep % change a

Exports 1,454.5 652.6 549.4 565.4 1,767.4 21.5Imports 1,522.5 536.9 639.5 556.6 1,733.0 13.8

Trade balance -68.0 115.7 -90.1 8.8 34.4 -150.6Services credits 37.3 3.4 8.0 15.4 26.8 -28.2Services debits 598.8 160.2 172.0 154.9 487.1 -18.7

Income credits 14.4 3.6 2.3 2.2 8.1 -43.8Income debits 463.3 223.6 181.5 191.0 596.1 28.7

Current transfers credits 785.6 280.9 268.3 356.5 905.7 15.3Current transfers debits 338.4 130.8 120.3 119.8 370.9 9.6

Non-merchandise balance -563.2 -226.7 -195.2 -91.6 -513.5 -8.8Current-account balance -631.2 -111.0 -285.3 -82.8 -479.1 -24.1

a Between Jan-Sep 2003 and Jan-Sep 2002.

Source: IMF, International Financial Statistics.

The only significant source of non-merchandise credits continued to be currenttransfers, which are dominated by the repatriation of earnings from the largenumber of Sudanese working abroad. In US dollar terms, these earnings roseby over 15% year on year, a trend that may in part reflect the strength of the oil-rich Gulf economies (where many Sudanese work) and the weakness of thedollar against the euro. It may also be, however, that increased confidence inthe banking system and in the official exchange rate is leading to a growingproportion of remittances being passed through official, rather than unofficial,channels, which results in them being captured in the published data. Thisincrease, coupled with the unexpected fall in services debits, was sufficient tomore than offset the rise in income outflows, and, as a result, the non-merchandise deficit fell by almost exactly US$50m.

The current-account shortfall was readily funded by strong capital inflowsduring the first three quarters of the year. Overall, central bank data suggest thatforeign direct investment (FDI) in Sudan stood at just under US$1bn during theperiod—the equivalent on an annualised basis of a little under 8.5% ofestimated GDP, and almost half of gross fixed investment. Both ratios are wellabove the average for the region. Although no breakdown is provided by theBank of Sudan, the IMF's December 2003 Article IV report on Sudan confirmsthe long-standing assumption that the overwhelming majority of FDI isdirected towards the oil sector. The report also suggests, however, that therehave been significant private capital inflows into real estate and other aspectsof the non-oil economy. In addition to FDI, Sudan also received aroundUS$35m in net portfolio flows, arising primarily from the sale of shares in themonopoly telecommunications provider, SudaTel, to foreign buyers on both thelocal market and through overseas listings.

The robust overall external account position allowed the central bank to add toits official reserves, which had risen by just over US$160m to US$600m during

Strong capital flows supportsrise in reserves

32 Sudan


the period to end-September. More recent data included in the IMF's monthlypublication, International Financial Statistics, show that the upward trendcontinued over the following weeks, with reserves reaching US$708m by theend of November. This is an all-time high, and (despite the sharp rise in importspending) equates to almost two and a half months of import cover—slightlybelow the minimum benchmark of three months of cover, but a markedimprovement on the average of less than a month over the previous decade. Aspart of its IMF staff monitored reform programme, the government has pledgedto boost reserves further over the coming years, aided in part by thedevelopment of the oil savings account for which the central bank purchasesabove-budget hard-currency oil revenue from the government.

Data in the Article IV report show that Sudan's debt stock has continued to rise,standing at US$23.5bn at the end of 2002 compared with US$20.1bn at the endof 2001. The Fund estimates that total borrowing was set to reach US$24.2bn bythe end of 2003. In part the rise reflects the release of new funds to Sudan,mostly on a concessional basis from Arab official bilateral and multilateralsources, as well as from some other official lenders. Improving political andcommercial ties have also boosted its access to new credit. Most recently, theExport-Import Bank of India extended a new US$50m long-term credit line toSudan—a recognition of the importance that the country plays in India's energydevelopment strategy (see The domestic economy: Oil and gas). Most of thegain, however, is the result of the continued rise in arrears as the governmentcontinues to miss both interest payments and scheduled principal repaymentson the overwhelming majority of its external debt.

Some payments are being made, however, with the Fund confirming thatSudan had met an agreed schedule of monthly payments of just underUS$2.5m—a level of payment that is sufficient to prevent a further accumulationof arrears and to lead to a small reduction in the outstanding stock. Sudan isalso reportedly making payments of some US$9m a year to the ArabDevelopment Bank, US$18m a year to the Arab Monetary Fund, US$7m a yearto the Word Bank and smaller amounts to the Islamic Development Bank andothers. For most of the lenders, the repayments are designed in large part tosupport the release of additional concessional funds, but meeting therepayment schedule to the Fund is essential if Sudan is to gain access to apoverty reduction and growth facility (an IMF-administered economic supportprogramme) after a peace deal is signed, as well as restructuring andrescheduling agreements through the highly indebted poor countries initiative.

Debt stock continues to rise

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