INCLUSIVE GROWTH: PRIVATE SECTOR-LED GROWTH AND ECONOMIC DIVERSIFICATION IN SUDAN African Development Bank Group Dr. Abdul B. Kamara Resident Representative Sudan Investment Forum, February Khartoum, Sudan

OUTLINE I.Potential of the Sudan Economy II.The need for Economic Diversification III.Proposal for Private Sector-led Diversification IV.Options for Accessing AfDB Private Sector Financing 2

THE POTENTIAL OF SUDAN’S ECONOMY IS LARGE  Economy Size: Sudan is a USD 70 bn economy, but GDP at PPP was about US$160 billion in 2014, making Sudan the 4 th largest in SSA (roughly that of Angola);  Land Area: Land area very vast, 1.88 million km 2 ; most important 62% (1.1 million km 2 ) is assessed as suitable for agriculture (cotton, alfala, gum Arabic, cane sugar, millet, wheat, sorghum)  the country has the largest remaining unutilized agric. potential in SSA (20%);  Young population – 40% of pop yrs; rapid urbanization;  Water Resource: Total annual renewable water resources estimated at 103 bn m 3. 3  Very solid basis for diversifying of the economy in the decades ahead!

Mineral Resources Potential Petroleum/Gas?  Proven reserves of crude oil estimated at 1.5 billion barrels; natural gas at about 3 trillion cubic feet;  Current low prices cost of production (US$ 45 per barrel) :  considerable uncertainty about the prospects for new exploration and oil discoveries;  utilization of gas is negligible; development of these gas reserves would provide an important source of energy for power generation and other uses. Non-oil Minerals?  The non-oil mineral deposits, includes substantial deposits of uranium, tin, silver, manganese, zinc, copper, iron, asbestos, gypsum, mica, cobalt, nickel and gold, as well as agricultural minerals (urea and phosphate).  There is limited development of these resources;  But … substantial additional research required to underpin development of a comprehensive program of private investment in extraction of mineral each of these minerals. 4

 The need for diversification has long been recognized  a decade of oil boom ( ) did not to lead to structural transformation;  Structure of the economy remains rigid; services continue dominate the economy (services accounted for more than 44% of Sudan’s GDP in 2014);  And South Sudan’s secession in 2011? Loss of 25% of pop; 20% land area;  oil revenue loss  shrinking of domestic market  fiscal imbalances  loss of growth momentum  sharp economic slowdown in Sudan (oil revenue loss wiped out 60% of fiscal revenue; ca. 90% of foreign exchange earnings);  Low fixed investment and national savings, not helping capital formation; 5 II. THE NEED FOR ECONOMIC DIVERSIFICATION  The economy still has a strong natural resource base that can provide the fundamentals for economic diversification. Sector Contribution to GDP

 Low levels of domestic savings and investment;  Low of productivity growth constrains efficiency and competitiveness;  Limited entrepreneurship and executive capacity;  Inadequate physical infrastructure, … though progress in telecom and power, … roads (country very vast);  Huge external debt, impeding access to cheap money; 6 Formidable Constraints Remain  Economic sanctions, escalates cost of doing business;  Continued internal conflicts, huge social & economic costs;  Volatility of macroeconomic environment.

 Proposal is based on a comprehensive report by the African Dev. Bank and the Govt of Sudan over two year ( );  The report calls for a major diversification program that is built on sustainable development of the Sudan’s land, water and mineral resources, led by increased domestic and international investments;  Successful diversification will need to be built on a four-pronged strategy that puts emphasis on:  Monetary and fiscal policies that ensure macroeconomic stability;  Emphasis on private sector development of Sudan’s agricultural potential, along with further development of its mineral resources;  Emphasis on substantial investment by the public and private sectors to ensure that Sudan’s physical infrastructure can support sustained strong economic growth.  Increased investment in development of skills in the labor force required for an increasingly diverse economy (5 year economic program; PRSP; agricultural revival program); 7 Proposal for a Successful Diversification Program that is Private Sector-Led

 Three possible scenarios for economic diversification during proposed in the report;  Each scenarios is distinguished by the aggregate level of fixed investment in the economy and the resulting economic growth rate during  Low Growth Scenario: Slow GDP growth throughout the entire period with weak progress on diversification (anchored on: GDP growth rate of 4%; fixed investment to GDP of 18%, till 2030).  High Growth Scenario: A transition to high GDP growth by 2020, with rapid progress on diversification in the 2020s (GDP growth of 7%; fixed investment to GDP of 23%).  Moderate Growth Scenario. Moderate progress on diversification during , followed by strong progress during the 2020s (GDP growth of 6%; fixed investment to GDP of 20%). 8 Possible Scenarios for Diversification Scenarios Scenarios Characteristics Status of HIPC Status of sanctions Private investment response International donor response Internal conflicts Low CaseNot achievedIn PlaceWeak Exist Moderate CaseAchievedIn PlaceModerate Low High CaseAchievedRemovedHigh None Source: Estimates by the African Development Bank Alternative Scenarios for the Decade Ahead

Investment Requirements for the Proposed Program 9  Under the Moderate Scenario, the program for private sector- led diversification would require fixed investment estimated in billions during the next 17 years ( );  Under the proposed program, gross investment in the economy would have to rise from current levels of about 17% of GDP to at least 25% of GDP by the mid-2020s.  By 2030, fixed investment by the private sector would need to be sustained at levels of at least 20% of GDP, compared with current levels of about 15%.  And fixed investment by the public sector would need to increase to about 4% of GDP by 2025, compared with the current 2%;  Such investments cannot be attained by the domestic private sector alone; a PPP between Govt. of Sudan and the private sector – domestic and international investors  AfDB is helping the Govt to build the basis for PPPs (TA, Capacity Building – health, education; PFM).

 Step 1: Early adoption by the Government of a framework agreement for economic diversification, based on further dialogue within government, with the domestic and international business community;  Step 2: Develop detailed strategies and programs for each sector, with activities that have a key role in the diversification program:  i) agriculture and livestock industries; (ii) industries that generate backward and forward linkages to agriculture and mining sectors; (iii) infrastructure and services sectors; and (iv) education and skills development programs, to augment and adapt existing labor force with labor market demand;  Early improvement of the operating environment for domestic and international private sector investors, including such issues as land use policy, access to finance / credit and other impediments;  Step 3: Translate these sector priorities into specific projects and programs; 10 Elements to be Considered in the Economic Diversification Implementation Roadmap

 Step 4: Prepare key private sector projects in each of the key sectors; and then launch a private sector investment promotion program within Sudan and with international investors to promote investor interest and raise funding for the projects;  Step 5: Early engagement with creditors on debt relief, and on conditions necessary for relief under a HIPCs; actions / dialogues for removal of economic sanctions;  Step 6: Put in place a comprehensive program for monitoring and evaluation of the diversification program at the National and State levels. 11 Elements to be Considered for Successful Diversification (contd)

12 THE ROLE OF THE AFRICAN DEVELOPMENT BANK IN FACILITATING PRIVATE SECTOR INVESTMENT IN SUDAN?

 Technical Assistance, Cap. Building, Targeted Support; Lending? AfDB LENDING WINDOWS  Sovereign Operations (public sector operations through Govts, at concessionary terms; grants)  Non-sovereign Operations - private sector loans at commercial terms)  Private Sector’s Lending comprise two categories:  Sovereign guaranteed and Non-sovereign guaranteed loans, in the area of financial intermediation, industries & services, PPPs & infrastructure, microfinance;  Non-lending activities including studies, initiatives & new programs. 13 Options for Accessing AfDB Private Sector Financing

 Client Company must be located and incorporated in Africa;  Majority of equity must be privately held (public owned enterprises may be eligible, subject to certain criteria: financial viability; operational and managerial autonomy; and must be run on a commercial basis).  Equity contribution must be at least 30% of total project cost;  Total project cost: minimum of USD 20 million  Maximum AfDB participation cannot exceed 40% of total project cost for green field investments; can be higher for expansion of existing investment;  Evidence of strong integrity, good reputation and adequate financial standing. 14 Options for Accessing AfDB Private Sector Financing

 Feasibility study required, including the following information: description of the project; sponsors track-record; project estimates;  Financing plan, indicating the amount of ADB financing required;  Market prospects, including proposed marketing arrangements; and implementation plan;  After this information is assessed, the Bank will convey its preliminary views to the applicant; may request further details;  Arrears status with the Bank: we are currently working with our legal department to assess how best private firms can access our PS window;  The Bank’s current portfolio in Sudan stands at about US$ 200 million, all grants, all public sector; and is examine the possibility of resuming the Private Sector operations in Sudan. 15 Options for Accessing AfDB Private Sector Financing

 THANK YOU 16