How Sudan Wasted It’s Oil

2 Exploitation of oil resources has provided immense opportunity to Sudan With the advent of oil production in 1999, Sudan’s real wealth has subsequently increased, with economic growth over 10 percent and among the highest on the continent, and the country becoming the third largest oil producer in Sub-Saharan Africa, behind Nigeria and Angola. Revenue collections increased significantly – from a low base of 6 percent of GDP in 1997 to 20 percent in Public expenditures have grown sharply — from a low base of 7 percent of GDP in 1997 to 24 percent in 2006 (nearly four times) —using the fiscal space from oil revenues (rent-seeking behavior).

Sudan failed to maintain inclusive oil-led growth  Sudan’s oil-led growth process has fallen short to be sufficiently inclusive and balanced.  Despite the rising per capita income, the incidence of poverty is high in Sudan (46.6 percent) and varies significantly between urban and rural areas. 3

Sudan missed the opportunity to build the economic foundation for a diversified and sustainable economy  The discovery and exploitation of oil in Sudan has generally been associated with a shrinking of the non-oil tradable goods sector (real sectors).  All of Sudan’s fast growing sectors were either related to oil or non-tradable services, while the growth of agriculture and manufacturing has been slower than the growth rate of the overall economy. 4

Sudan missed the opportunity to prompt its non-oil exports  The shift in the composition of exports has shown some symptoms commonly exhibited by resource curse economies.  More than 95 percent of Sudan’s exports were coming from the oil sector, while the share of non-oil exports has fallen from nearly 5 percent of GDP in early 2000s to less than 2 percent in

Sudan missed the opportunity to prompt its import substitutes sector  Similar evidence of oil government failure has come from the shift in the composition of imports.  the share of consumption goods in total imports has increased recently from an already high base.  The flip side of increased imports of consumption goods is a decline in the manufacturing sector’s share in total output.  The appreciation of the real exchange (during the period) is likely to have played a role in making imports attractive and domestic manufacturing unattractive. 6

Sudan failed to build the foundation for private sector-led growth  Following the dominance of the oil sector, the public sector has become the principal contributor to the growth process, while private sector growth has been considerably weaker.  During the last ten years, the public sector’s share in GDP has increased from 6 percent to nearly 40 percent, which has become an impediment to the development of a robust private sector. 7

Sudan failed to increase states’ own resource mobilization capacity  The states’ revenue structure has rapidly changed over the past decade.  Increasing dependence on federal transfers.  Decreasing contributions of state’s own revenues to the resource envelope 8

What Sudan is doing Now? How painful is the adjustment cost now?  The adverse impact of the secession is heavily affecting vital economic activities, causing serious economic imbalances and increasing hardship for the population, in particular for the poor.  Current account. After a substantial surplus, the current account balance drastically turned into a large deficit due to the loss of oil exports.  Foreign exchange. The Sudanese pound has depreciated by around 50 percent in the parallel market since the secession further widening the gap with the official exchange rate.  Inflation. Inflation continued to accelerate (30.4% in May 2012), partly due to the rising import cost of basic goods that adds to economic duress for the poor and vulnerable.  The budget. The 2012 budget reflects the fiscal shock of the secession, but outstanding questions on the realism of key assumptions is likely to call for significant revision of the budget. 9

What Sudan is doing Now? How painful is the adjustment cost now?  Sudan has amended its budget for 2012 embracing a comprehensive austerity package of fiscal adjustment and depreciation of the currency to rescue the economic conditions from further deterioration. Fuel subsidies removal has been activated. Diesel was increased to SDG 8 per Gallon from SDG 6.5, while benzene was increased to SDG 12.5 per Gallon from SDG 8.5. The new economic measures are expected to add more pressure on the already high cost of living. The inflation rate remains very high (30.4% in May 2012) and is expected to further accelerate. No figure on inflation since the new measures is yet available, but it seems that market prices have already started to reflect the negative impact of fuel subsidy removal. Announcement of the austerity measures has triggered popular demonstrations initially by youth and students in and around universities in Khartoum. Protests have spread to districts, markets and many other states and are now calling for regime change. 10

Take away: the way forward Oil has provided immense opportunity for Sudan to become an emerging economy. Sudan has failed to effectively use oil resources to build an economic foundation for a diversified, inclusive and sustainable growth path. Oil has gone, and Sudan is left with immense fragile economic conditions. Its new strategy should focus on managing the transition period, while prompting private investment climate and building the economic foundation for a diversified and inclusive growth. 11