SOUTH SUDAN= ECONOMIC BRIEF- 3 IKEY MESSAGES 5 IGLOBAL AND REGIONAL OUTLOOK Contents 9 IRECENT DEVELOPMENTS 1 8ECONOMIC OUTLOOK AND RISKS 21 CONCLUSIONS � � �� �.::: � �4 � . � �, � �' ,_ i т � ' .:.. ��� _ � � � _ � � � г � 4 � �' � � т '� .�,.. � '� '`� _ �:: � � ' �; � �� � [ �� I . ��.� � .. �. �� �х..' � �Е � �. � .....�...�s....:� .���. �: . . .. � ' ч:��. KEY MESSAGES NONE The economy is estimated to have contracted by 3.5 percent during FY20118, but a modest recovery is projected for FY2019. Coupled with economic mismanagement, many years of conflict have eroded the productive capacity of South Sudan. Conflict persists across the country despite the peace agreement and is the major driver of the economic collapse. If the peace agreement is respected by all parties and conflict does not recur, the economy is projected to grow by 1.8 percent during FY2019. However, a less positive outlook could emerge if the peace agreement falters, with growth barely reaching 0.3 percent in the absence of progress in the non-oil sectors. Oil pro duction is expected to be the major driver of growth in the short and medium term. South Sudan remains in debt distress and the external position is weak, with depleted reserves estimated at less than one week of import cover. More than half of South Sudan's population is facing a food crisis. Conflict has not only affected food production, but also constrained trade, limited access to markets, and impeded the timely delivery of humanitarian and relief items in various remote locations across the country. The cumulative effects of years of conflict and violence have destroyed livelihoods and left more than seven million people, or about two-thirds of the population, in dire need of some form of humanitarian assistance in 2019. The number of people affected is expected to grow, and humani- tarian aid is urgently needed by those facing extreme hunger. A revitalized peace agreement was signed in September 2018, offering new opportunities for peace and recovery. The agreement was expected to reinforce a permanent ceasefire, create an enabling environment for the delivery of humanitarian assistance, and institute reforms leading to social and economic reconstruction and the creation of a new transitional government of national unity by May 2019. However, conflict persists in parts of the country, with widespread reports of grave human rights violations. Overal I, progress on key reforms has been slow. A priority for the government is to implement security and governance arrangements, putting more emphasis on the cessation of hostilities. Peace and reconciliation are required to achieve macroeconomic stability and support a return to positive economic growth. ... ......... . The global and regional outlook presents an opportunity for economic growth in South Sudan. Commodity prices have improved significantly in the first quarter of 2019, having faltered in the last quarter of 2018. If this momentum is ............. ... maintained, South Sudan is expected to receive higher net oil revenues. With the rebound in global and regional growth, )HP A particularly in Uganda and Kenya, and high growth projected for Ethiopia, inward investment might increase on the premise of peace, particularly in the real estate, construction, and oil sectors. These developments are expected to support economic recovery, reversing recent trends. However, to benefit more from regional and global economic developments, South Sudan's authorities must fast track the formalization of its membership in regional and international _4k trade treaties and institute reforms to improve the business environment. 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' . , ER�Ca A�R��„ � � ,.��, i• ►�ui ; ��F.R _ АМ � , �„ _- С'�.-_[ .. .. � �.... •г, . �я .� . �/ � ;,:г,,.... �. ' � .. г .* � ,,-+..���, .. , �. :... " � �... �. дгJ�... �, � .J ,,1� . 6 'r� ' Gг " � - _ ,� , ,:�... -.. �_ ; ; , , .,, GLOBAL AND REGIONAL OUTLOOK Global economic activity moderated in 2018, with output growth slowing marginally to 3 percent from 3.1 percent in 2017; it is expected to reduce further to 2.9 percent in 2019. Although global growth remains robust, it has weakened over the past year, as international trade and investment have softened, trade tensions remain elevated, and some large emerging markets and developing economies (EMDEs) have experienced substantial financial market pressures (figure 1). Industrial activity and trade decelerated in 2018, negatively impacting investor sentiment and equity prices. Although U.S. growth in 2018 is estimated to have picked up to 2.9 percent, mostly reflecting stronger than expected domestic demand, activity in advanced economies is expected to slow, as capacity constraints become more binding and policy accommodation is withdrawn. Meanwhile, recovery in EMDEs has stalled, and is predicted to remain at 4.2 percent in 2019, owing to softening external demand, tighter external financing conditions, and heightened policy uncertain- ties. The stalled growth in EMDEs reflects weaker than expected recovery in commodity exporters and faster than expected deceleration in commodity importers. In China, growth is estimated to have slowed to a still-robust 6.5 percent in 2018, supported by resilient consumption. Despite ongoing negotiations, trade policy uncertainty remains elevated and continues to weigh on confidence. Equity prices have fallen, borrowing costs have increased, and portfolio outflows have intensified in EMDEs. 1 1 4 1 , SOUTH SUDAN ECONOMIC BRIEF15 GLOBAL AND REGIONAL OUTLOOK I0l0 Figure 1. World Growth Has Moderated, (GDP growth, %) 5 5 06***00 4 .0 4 3 3 2 e* *** 2 1 2015 2016 2017 2018e 2019f 2020f 2021f World * * * * Advanced economies *.** EMDEs Source: Global Economic Prospects, World Bank, January 2019. Note: e = estimate; EMDEs = emerging markets and developing economies; f = forecast; GDP = gross domestic product. Oil prices have been rising since the beginning of the further supported by an announcement by the United States year,primarily reflecting planned production cuts by that it would impose sanctions on the Rep6blica Bolivariana Organization of the Petroleum Exporting Countries de Venezuela's state oil company, PDVSA. The Repiblica (OPEC) members. Oil prices continued to strengthen in the Bolivariana de Venezuela currently produces 1.3 million first half of 2018 but started to fall in the second half, declin- barrels/day, just over 1 percent of global supply. The prices ing to US$50/barrel by the end of December 2018. Since of most metals and, to a lesser extent, agricultural commod- then, oil prices have been rising, with Brent crude oil climb- ities weakened, largely due to concerns about the effects of ing above US$65/barrel in mid-February and expected to tariffs on global growth and trade. Trade tensions between average US$67 in 2019 (figure 2). The increase was driven the United States and China, including the imposition of tar- by a fall in the global oil supply of more than two million bar- iffs on a range of products, have had varying effects on rels per day, mainly due to planned production cuts by metals and agricultural commodities. The impact has de- OPEC members and their non-OPEC partners, with Saudi pended on whether tariffs were broad based or commodity Arabia contributing the most to the reduction. Prices were specific, such as in the cases of steel and soybeans. Figure 2. Oil Prices Have Been Rising Since the Beginning of the Year, (US$/barrel) 120 100 80 60 40 20 0 coo Lo Lo Lo ko Do oo oo a) o 0 0 0 0D 0 0 0 CD 0 0 C 0 0 0 0 QJ r C C C QJ C (C C 1' r C C 1 -2 V) - L - LA ',1 - A V) -WTI -Brent Source: World Bank commodities price data Note: WTI = West Texas Intermediate. 6 SOUTH SUDAN ECONOMIC BRIEF GLOBAL AND REGIONAL OUTLOOK Ifll The recovery in Sub-Saharan Africa continues, with Economic activity in Kenya is projected to remain robust accelerated growth expected in East Africa. Growth in over the medium term, with GDP growth projected at 5.8 Sub-Saharan Africa is expected to accelerate to 3.4 percent percent in 2019 and 6.0 percent in 2020. In Ethiopia, in 2019, predicated on diminished policy uncertainty and economic activity remained strong even as real GDP growth improved investment in large economies, together with decelerated to about 7.7 percent in 2018, driven by weaker continued robust growth in non-resource intensive growth in the construction, manufacturing, and agriculture countries.Economic growth is broadly expected to increase sectors. However, with the current reform agenda among the East African countries in 2019 (figure 3). In underway, annual real GDP growth is projected to rebound Uganda, South Sudan's most important trade partner, real to around 8.8 percent in 2019 and 8.9 percent in the gross domestic product (GDP) growth accelerated to 6.1 medium term. In Sudan, the economy is expected to remain percent in FY2018, following a stronger than expected weak despite the recent lifting of sanctions. Heightened rebound in food crop production and an unexpected and uncertainty resulting from currency devaluations, rising sudden pickup in private sector credit in the second half of inflation, and political unrest would undermine investor FY2018. In Kenya, growth rebounded, reflecting improved sentiment and private consumption rains, better business sentiment, and easing political uncertainty. Figure 3. Recovery in Sub-Saharan Africa Continues, (GDP growth, %) 11 0 * * 7 5 3 2015 2016 2017 2018e 2019f 2020f - Sub-Saharan Africa - Kenya * * * * Ethiopia * * * * Uganda Sources: Global Economic Prospects, World Bank, January 2019; World Bank country staff estimates. Note: e = estimate; f = forecast; GDP = Gross Domestic Product. SOUTH SUDAN ECONOMIC BRIEF 贷 RECENT DEVELOPMENTS NINO The economy of South Sudan continued to contract in FY20118, with real GDP growth of -3.5 percent, compared with -6.9 percent the previous year. Private consumption contracted by 7.5 percent, as inflation eroded purchasing power. Government consumption increased to 4 percent, from 3 percent the previous year, because of increased expenditure on defense and security. Although imports recovered (probably on government defense purchases), exports continued to decline. On the supply side, the agriculture sector was affected by unfavorable rpm._ .. rainfall patterns, conflict, and pests in major grain-producing regions, resulting in an overall contraction of 5 percent. The manufacturing sector declined by 1.5 percent, driven by developments in the oil sector, resulting in lower net revenues. The service sector registered zero growth. With these developments, oil-related investment and production provides the immediate source of growth in South Sudan in the short term. 3.1 Developments in the Oil Sector Oil revenues are expected to increase after rehabilita- tion of the oilfields. South Sudan officially re-launched oil production, and extraction resumed at Toma South in the Unity region. With the rehabilitation, oil production is S expected to increase in the second half of FY2019. Oil 'RECENT DEVELOPMENT production is jointly carded out by South Sudan's Ministry of Petroleum and the Greater Pioneer Operating Company, with the support of the 2B Operating Company of Sudan. It is estimated that South Sudan exported a total of total 2.8 million barrels of crude oil in August 2018; oil exports increased by 7.14 percent, to three million barrels in September. With the resumption of production in the Toma South (Ruweng State) and Unity oil fields, oil production is estimated to have increased from around 130,000 barrels per day at the end of FY2018 to 163,000 barrels per day in January 2019. With the resumption of oil production, authorities in South Sudan sought a new deal over oil transportation fees with Sudan. The Government of South Sudan sought 4 a new deal on transportation fees with Sudan, that would significantly improve the fiscal burden of transporting oil through Sudan. It was anticipated that the Khartoum government would agree to US$4 per barrel as a transit fee and US$1.60 per barrel as a processing fee to transport South Sudan's crude oil to terminals on the Red Sea. However, with Sudan dealing with a worsening economic an po itica crisis, progress on a new dea as een slow and it remains unclear whether negotiations would be con- cluded soon. According to the 2012 Cooperation Agreement, South Sudan is currently charged US$9.10 per barrel as a transit fee. With most of the oil revenues going to service debts to Sudan, South Sudan is trapped in a worsening cycle of debt. A new deal on oil transportation fees would help improve South Sudan's fiscal situation. SOUTH SUDAN ECONOMIC BRIEF 19 RECENT DEVELOPMENTS NINO The government seeks new investments in the oil The limited food availability in 2018 resulted in the sector. The Government of South Sudan is looking to sharp deterioration of an already alarming food enhance investment in the oil sector to help the economy insecurity situation. Nearly five years of conflict across the recover.The Minister of Petroleum and Mining recently country have eroded the capacity of many households to revealed that the government received pledges in excess of meet their basic food needs. In July, at the peak of the lean US$2 billion worth of new investment in the oil sector, with a season, the food insecure caseload was estimated at six South African government fund pledging to invest million people (about 60 percent of the total population), US$1 billion in oil exploration and building a refinery approximately 20 percent higher than one year Petroliam Nasional Berhad of Malaysia has promised to earlier. The increase was due to persistent conflict, invest a further US$300 million in its operations, and Oranto large-scale displacements, poor economic conditions, Petroleum International Ltd of Nigeria has wagered US$500 disrupted trade, and severe constraints to humanitarian million on developing an oil block. Local firm Trinity Energy access and assistance. The most recent assessments by has pledged US$350 million. The new investment in the oil the United Nations indicate that nearly seven million people sector is expected to lead to significant improvement in the (of a total population estimated at 13 million) could face government's fiscal position. The fiscal position deteriorated acute food insecurity at the height of the next lean season, significantly over the past years, due to a combination of the during May-July 2019. Accordingly, poverty levels are effects of conflict, shutdown of oil production, and lower oil expected to remain extremely high until the provision of prices, which resulted in a near collapse of the economy. basic services can be restored across the country. 3.2 Agricultural Production and Food Security Extreme levels of acute food insecurity existed across South Sudan in the second half of the year. According to Cropped land area increased, but crop production was the September 2018 Integrated Phase Classification (IPC) affected by sporadic dry spells and fall armyworm in analysis, an estimated 6.1 million people were in Crisis (IPC the early season. Information from the Food and Phase 3) or worse at the peak of the lean season, although Agriculture Organization indicates that the area planted with the need was likely slightly higher, as five counties were not crops was higher in 2018 than in 2017. This was possible included in the analysis. This estimate included 1.7 million due to better use of inputs and increased interest by people in Emergency (IPC Phase 4) and 47,000 people in households in producing more to meet their food Catastrophe (IPC Phase 5). However, these estimates were requirements. However, production was affected by in the presence of food assistance, and the total need was sporadic rainfall in major production areas. In addition, the likely higher. Food Security and Nutrition Monitoring System infestation of the fall armyworm has been one of the main data indicated that most households across the country had constraints to crop production. Widespread insecurity and poor food consumption and medium or low dietary diversity, violence continue to have a severe effect on agricultural and were experiencing moderate or severe hunger, indica- activities, constraining access to fields and causing tive of widespread Crisis (IPC Phase 3) and emergency large-scale and recurrent displacement of people, as well (IPC Phase 4). An analysis of the convergence of these as damage to households' productive assets. With these food consumption and livelihood coping outcomes at the constraints, food production is estimated to have fallen household level showed that 5 percent or more of the popu- short, and the food deficit in 2018 was estimated at nearly lation in 14 counties reported outcomes indicative of Ca- 500,000 metric tons. tastrophe (IPC Phase 5). It is expected that the risk of Ca- tastrophe (IPC Phase 5) will persist in South Sudan throughout the post-harvest period and start of the 2019 lean season. Figure 4. Extreme Levels of Acute Food Insecurity Have Persisted (% of population) 70% 60% 50% 40% 30% 20% 10% 0% 2015, 2015, 2016, 2016, 2017, Jan 2017, 2017, 2018, Jan 2018, April Sept April Sept May Sept Aug/Sept Crisis (IPC Phase 3) Emergency (IPC Phase 4) Catastrophe (IPC Phase 5) - Est.% receiving GFD Source: Famine Early warning Systems Network (FEWSNET) Note: GFD = general food distributions; IPC = Integrated Phase Classification. 10 SOUTH SUDAN ECONOMIC BRIEF RECENT DEVELOPMENTS I.i. Humanitarian food assistance continues to play a key groundnuts, after having continued their sustained upward role in reducing the occurrence of extreme food trend in the first half of 2018, decreased by 10 to 25 percent insecurity. However, in many parts of the country, the between June and October 2018 (figure 5). The price conflict has affected the movement of households and declines were mainly driven by a substantial appreciation of impeded humanitarian access. Planned assistance is the local currency on the parallel market, from SSP 300 per estimated to reach only between two million and three U.S. dollar in May to SSP 215 per U.S. dollar in mid-August. million people a month, far below the need. Emergency The strengthening of the local currency is likely due to (IPC Phase 4) and associated excess mortality are likely to renewed speculator and investor confidence because of be present in several areas in the absence of higher levels improved political stability and the resumption of oil of food assistance and unhindered access to deliver production following the signing of a peace agreement in assistance. In September, the IPC Technical Working Group late June. Additional downward pressure on food prices estimated that 6.1 million people (59 percent of the was exerted by increased crop availability and reduced population) were in Crisis (IPC Phase 3) or worse, of whom prices of imports from neighboring Uganda. In August, the 1.7 million people were in Emergency (IPC Phase 4) and prices of sorghum and maize were 5-10 percent lower than 47,000 were in Catastrophe (IPC Phase 5) (figure 4).The one year earlier, but still about twice their levels in August South Sudan IPC Technical Working Group estimated that 2016. In August, the prices of cassava, groundnuts, and between four million and five million people would be in wheat were 15-45 percent higher than 12 months earlier Crisis (IPC Phase 3) or worse through March 2019, and between two and three times their levels in August including 26,000-36,000 in Catastrophe (IPC Phase 5). 2016. Overall, the high price levels are due to widespread These estimates are also in the presence of planned insecurity disrupting transport and trade activities, a tight humanitarian food assistance. supply situation, hyperinflation, and a still significantly depreciated local currency. Food prices are declining, but they are still very high compared with pre-crisis levels. The prices of basic food crops, including maize, sorghum, wheat, cassava, and Figure 5. Selected Retail Food Prices, (SSP per kilolliter) 1,200 1,000 800 600 400 200 200~ ~ ~ ~~f ___0______0______0___0________ 0____ 0___ 75 0 > 75 0 > - J 0 ~ ) 0 L A Z CA" Z - Beans - Beef - Maize flour - Vegetable oil - Fish - Rice Source: Climis Database - http://Aww.climis-southsudan.org. 3.3 Inflation and Exchange Rate Developments health services increasing by 1.8 percent, and restaurants and hotels decreasing by 6.7 percent. Core inflation, which Inflation remains high, notwithstanding the sustained excludes fuel and unprocessed food prices, declined to downward trend. The overall rate of inflation declined to 20.3 percent in November, from 108 percent in July 2018 40.1 percent in December 2018, from 123 percent in July (figure 6). Food inflation declined from 128 percent in July 2018. The reduction was driven by lower inflation in food 2018 to 36 percent in November, but continues to be and nonalcoholic beverages; clothing and footwear; susceptible to occasional spikes, reflecting production- and housing, water, and electricity; as well as restaurants and trade-related volatilities. Overall, the continued depreciation hotels. The month-over-month rate of inflation was 4.6 of the local currency as well as limited domestic production percent in November 2018, with the prices of food and capacities pose risks to stronger inflation reductions. nonalcoholic beverages increasing by 5.7 percent, SOUTH SUDAN ECONOMIC BRIEF 11 RECENT DEVELOPMENTS INI Inflation has been falling on the back of a significant With this reduction, inflation has been falling, showing the decline in money growth. During 2016 and 2017, close link between the money supply and inflation. The monetization of the budget deficit led to strong money challenge facing the Bank of South Sudan in the conduct of growth, with the result that inflation accelerated. Before it monetary policy is the inadequate tools at its disposal. The started to decline, the rate of money growth had risen commercial banks are not buying T-bills, the central bank considerably, reaching a peak in June 2016, at 223 percent. does not get enough forex to auction, and so the central Since then, the government has eased the monetization of bank has no means of sterilizing money growth. the deficit, and growth in broad money has continued to decline, reaching a rate of 38 percent (year-over-year) in November 2018. Figure 6. Inflation Developments, (inflation rate, %) 900 soo 700 600 500 400 300 200 100 0 Headline -Energy, utilities, and fuel -Core -Food Source: National Bureau of Statistics The spread between the official and parallel market Recent developments, most notably the retum to relative exchange rates widened in the last quarter of 2018. The peace, higher oil prices, and renegotiation of the oil transit spread between the official and parallel exchange rates had costs through Sudan, may have played a part. However, the soared to 130 percent in May 2018, but has since spread started to widen in the last quarter of 2018, reaching consistently declined, reaching 38.7 percent in September 58.6 percent by November 2018, due to seasonal pressures 2018 (figure 7). on foreign currency demand. Figure 7. Exchange Rate Spread 350 140 300 120 250 100 .4200 80 150 60 100 40 0 0 0/0 0 -.~C; 00- - '. 'J 400 00 00 1Spread -Official -Parallel Source: Bank of South Sudan 12 SOUTH SUDAN ECONOMIC BRIEF RECENT DEVELOPMENTS 1e 3.4 Financial Sector Developments The real estate and trade and restaurants sectors ac- counted for the largest proportion in the distribution of Credit conditions are still dire, but they are private sector credit (figure 9).South Sudan's banking improving, and real private sector credit has sector continues to suffer from the consequences of started to show signs of recovery over the past years of war and financial mismanagement. Faced quarter. Private sector credit expansion slowed with a challenging macroeconomic environment, considerably during FY2017, with its rate of growth commercial banks had significantly scaled down declining to 48 percent, from 177 percent in FY2016. private sector lending, with a limited focus on In real terms, private sector credit growth declined short-term financing on a timeline of just weeks or from 11.7 percent in June 2016 to -61.2 percent in months. However, anecdotal evidence indicates that June 2017. However, it rebounded to positive business sentiment is gradually improving, and the territory during the quarter that ended in September financial sector is slowlyrecovering, with deposits and 2018, reaching a value 13.5 percent, having risen lending activity picking up in the second half of 2018. from -28 percent in the quarter that ended in June 2018 and -53.3 percent in the quarter that ended in March 2018 (figure 8). Figure 8. Real Private Sector Credit Growth 60 A 40 0 W I' 20 I ' '440 0 '40I -80 Source: Bank of South Sudan The pickup in private sector credit was supported by Although interest rates on credit payable within one to five declining average lending rates and improving investor years held steady, rates on long-termn loans of more than sentiment. Lending rates averaged 17.8 percent during the five years experienced a large reduction, from 17.4 percent three months to August 2018; thereafter, they started to in August 2018 to 10.11 percent in November. Anecdotal decline and averaged 16.8 percent during the three months evidence indicates that private sector investment sentiment to November 2018. With these reductions, short-term is improving, helped by the relative peace and prospects for interest rates on overdrafts and loan facilities payable in opportunities offered by the extractive sectors. less than one year averaged 8.7 percent during the three Consequently, banking and insurance activity has months to November 2018. improved, particularly s tarting in the second half of 2018. SOUTH SUDAN ECONOMIC BRIEF 13 RECENT DEVELOPMENTS Ie Figure 9. Private Sector Distribution, % of private sector credit Domestic trade & restaurants Foreign trade Household serices Building & construction Manufacturing Transport & communication Financial services Agriculture Mining & Quarrying Energy & mater to 20 30 40 SO Source: Bank of South Sudan South Sudan has moved to regulate mobile money 3.5 Fiscal Policy services. For the first time, South Sudan's National Communication Authority has granted two licenses to local The fiscal deficit was 3.1 percent of GDP in FY2018 and firms (Trinity Technologies, which will operate with the is projected to rise to 4.1 percent in FY2019, due to the name M-Gurush, and Lukiza, which will operate under the anticipated increased spending on the peace Nilepay brand) to offer mobile money and other electronic process. Expenditures continue to be concentrated in cash transfers. Several banks and telecom companies three sectors, namely, security, accountability, and public have also applied for licenses. Prior to the launch of administration, which account for close to three-quarters of licensed services, consumers in parts of the country were the total FY2019 budget (figure 10).By contrast, the able to transfer cash using platforms created by MTN combined expenditures on health, agriculture, education, Uganda and Safaricom's M-Pesa, which are foreign and provision of basic infrastructure were budgeted at 17 companies based in neighboring Uganda and Kenya, percent of total govemment spending for FY2019. respectively. With more than one million South Sudanese Consequently, South Sudan continues to underinvest in living in neighboring countries, having fled conflicts, these sectors that would have the largest knock-on effect on services were initially created to facilitate the flow of poverty reduction and building resilience. With this remittances between South Sudan and the region. expenditure layout, wages and salaries account for the Licensing the use of mobile money will significantly reduce largest share (29 percent), followed by interest payments the use of cash transactions, improving financial inclusion, (26 percent), transfers and grants (18 percent), and trade, risk sharing, and growth. In the absence of a procurement of goods and services (16 percent), while well-developed e-payment infrastructure, people have capital expenditures account for the lowest share been using airtime to send money to family and friends. The (11 percent). minutes of airtime are cashed out by the receiver at a merchant, at a discount of about 10-20 percent. Figure 10. Govemment Expenditures Are Skewed toward Security. Accountability, and Public Administration, % of govemment expenditure Accountability Security Public administration Education Rule of law Economic functions Infrastructure Health Natural resources and rural development Social and humanitariuan affairs 0% 5% 10% 15% 20% 25% 30% 35% 40% Source: Ministry of Finance and Economic Planning 14 SOUTH SUDAN ECONOMIC BRIEF RECENT DEVELOPMENTS 101a The approved budget for FY2019 has a significant With these revenue and expenditure outlays, the surplus, with projected revenues excluding grants government planned to have a surplus of about 2.5 percent exceeding expenditures. The government expects to of GDP (US$100 million), with this figure rising to 3.75 generate revenues amounting to 24.8 percent of GDP, percent of GDP (US$150 million) when the allocation of excluding grants, with expenditures expected to reach 22.3 US$50 million earmarked for the Oil Revenue Stabilization percent of GDP, a significant decline from the previous year Account is considered. If it is realized, the surplus, which is (table 1). mainly the result of higher oil prices in the current fiscal year, could make it possible for the country to repay some of its debt without renewed borrowing. Table 1. Selected Fiscal Indicators, (% of GDP) A Total government revenue 28.6 41.1 31.3 24.8 38.0 o/w Non-oil tax revenue 6.3 3.6 4.1 2.6 4.4 olw Grants 0.4 0.1 0.0 0.0 0.0 B Government expenditure 37.8 41.4 34.4 22.3 42.1 C Expense 32.5 40.6 34.0 21.1 40.6 o/w Wages and salaries 12.3 5.5 5.1 4.2 5.1 D o/w Interest 1.2 0.2 0.3 0.0 0.6 E Net acquisition of non-financial assets 5.3 0-8 0.4 1.1 1.5 Primary balance -8.0 -0.1 -2.8 2.5 -3.5 F Net lending/borrowing -9.2 -0.3 -3.1 2.5 -4.1 G Domestic 4.9 1.6 2.3 0.0 2.5 H External 2.5 -0.8 -1.4 -2.7 1.0 I Revenue from oil sector 21.7 36.9 26.8 21.9 33.4 Sources: Ministry of Finance and Economic Planning; International Monetary Fund; World Bank staff estimates. Limited budget discipline has contributed to the revitalized peace deal. The govemment has been building accumulation of arrears, significantly impacting arrears by defaulting on the timely payment of civil service budget execution. The FY2019 first quarter budget salaries and accepting advance oil payments. By execution report shows significant performance differences December, civil service salaries were in arrears of three to across sectors and agencies. The allocations toward five months, creating tensions among the civil service. payment of salaries were unspent, as the government focused on payment of arrears from the previous year, 58 The Cabinet approved a National Revenue Authority percent of which remained unpaid at the end of the first Policy, following efforts to increase non-oil revenue, quarter. By the end of the first quarter, the budget allocation which currently accounts for less than 10 percent of for the Office of the President was already overspent by 15 total revenue. This will enable implementation of the percent, security was overspent by 18 percent, and social measures already set out in the 2016 Taxation Amendment and humanitarian affairs was overspent by 200 percent. In Act and re-stated in the 2017/18 Financial Bill. It is comparison, budget execution in the health sector stood at expected that operationalization of the National Revenue 0.2 percent, while education and infrastructure were each Authority will bring customs and taxation operations into a at 2 percent. single, unified structure and align practices to the East African Community, as required for participation in the The authorities in South Sudan implemented several Customs Union. With these developments, the National reforms intended to improve revenue and expenditure Revenue Authority will be instrumental in diversifying the management. These reforms included reducing the fuel sources of government revenue, which suffered greatly in subsidy to Nilepet, formulation of the National Revenue recent years due to conflict-related oil production Authority, as well as implementation of the single treasury disruptions and price volatility. With these efforts, it was account for revenue collection. However, the fiscal reported that the government earned about US$4.2 million situation remains dire. Among the most urgent items, it is from non-oil revenues in November and December 2018. not clear how the government will fund the implementation The government expects to collect SSP 25,056 billion of the Revitalized Agreement on the Resolution of the during FY2019, while net oil revenues are expected to Conflict in South Sudan. Faced with financing challenges, contribute SSP 71,860 billion to the total resource envelop. the govemment has embarked on a drive to try to convince donors to contribute funds toward the implementation of the SOUTH SUDAN ECONOMIC BRIEF 15 RECENT DEVELOPMENTS I.NI 3.7 Private Sector Development and Governance The one indicator on which South Sudan performed well was "paying taxes." With a score of 76.75 on this indicator, South Sudan ranked 185th among 190 countries in the South Sudan was ranked 66th in the world and performed 2019 World Bank Doing Business indicators (table 2). better than all its regional peers. However, the country's Ravaged by conflict and with weak institutions to oversee performance across all the other indicators continues to be any immediately meaningful reforms, South Sudan is firmly poor. South Sudan therefore needs to undertake urgent placed among the worst performers globally. Although its reforms to improve its Doing Business scores and build rank has slightly improved, from 187th in 2018, with a score confidence in the economy. This is urgently needed to of 35.34, South Sudan performs worse than most countries attract capital and investment in the country. in the region and only better than Libya, the Republic of Yemen, the RepUblica Bolivariana de Venezuela, Eritrea, and Somalia, several of which are fragile and conflict-affected countries. Table 2. South Sudan's Doing Business Indicators Ease of doing business rank 186 187 186 187 185 Starting a business 186 181 181 181 177 Dealing with construction 167 177 178 178 169 permits Getting electricity 179 187 188 187 187 Registering property 180 180 181 181 179 Getting credit 171 174 175 177 178 Protecting minority 173 181 179 177 180 investors Paying taxes 98 104 68 66 66 Trading across borders 187 179 177 178 180 Enforcing contracts 94 76 73 81 85 Resolving insolvency 189 189 169 168 168 Source: Doing Business Reports, World Bank, 2015, 2016, 2017, 2018, 2019 Corruption in South Sudan is entrenched, widespread, South Sudan ranked among the lowest in the world in all di- and continues to undermine the development and mensions in 2017. These indicators suggest that there is stability of the state. The 2018 Corruption an urgent need to strengthen govemment institutions and Perceptions Index reported by Transparency International transparency, to improve the business climate and ranked South Sudan as the world's third most corrupt competitiveness. country, after Somalia and the Syrian Arab Republic. According to the World Bank Worldwide Governance indicators (which measure governance based on six dimensions: voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption), 16 SOUTH SUDAN ECONOMIC BRIEF �, �`'- ,� ; , ... � . -� �� _- �� и� � � +�:: � � � :-�; _ � � � � ��. �; !I чр. f 1 а` 1 1 ��� � f в `г � �� д • �'. � /� � Г � w ��.�У � �' � � _ _ . � � % j'" - � ьj � с � ' � � � L f ��� 3 �j � � р � ' vG,•� '�iy /'� � '�' ,,и .� `s.. 1 �" � •,'�•-а..+ � � ч � �� r' � '�'»�.�� . rд �� . ',i .. . � � '� �'� � в, � �s � � " �'��'�. � L, � .♦ ,� :� . �. r : ' �' � '' � , � � �_.� , ��� :� . � ���. � � ® �. � у ���,� �е � � . . .. � � г� � � !� �в .....�.-:''��� ---�в ECONOMIC OUTLOOK AND RISKS loin a A6L - 6 All 4.1 The Economic Outlook Is Positive, but Poverty Levels Are Expected to Remain High ... .. ..... ... The economy is projected to recover moderately, with ,Y]. a real GDP growth rate of 1.8 percent in FY2019, if all parties respect the peace agreement. Although private consumption is projected to continue contracting, albeit at a slower pace, a pickup in exports and increased government consumption are expected to lead economic recovery in FY2019 (table 3). Private investment could recover in the medium term, if the country pursues its current recovery and reconstruction path. On the supply side, the agriculture and service sectors are projected to recover marginally, while growth in the manufacturing sector will be supported by activity in the oil sector. Ir Overall, oil production is expected to be the major driver of growth in the short and medium term, with the rehabilitation of oil fields and resumption of oil production underway. However, a less positive outlook could emerge if the peace agreement falters, with growth barely reaching 0.3 percent in FY2019 in the absence of ECONOMIC OUTLOOK AND RISKS progress in the non-oil sectors. L Table 3. South Sudan: Key Economic Indicators (% change unless stated otherwise) 0 40 " 2015 2016 2017 2018e 2019f 2020f 2021f GDP, at constant market prices -10.8 -11.2 -6.9 -3.5 1.8 3.4 4.8 Private consumption -26.0 -16.0 -15.0 -7.5 -0.5 -0.5 3.9 Government consumption 1.4 3.0 3.0 4.0 5.0 7.5 5.0 Gross fixed capital investment 2.0 0.0 3.0 4.0 4.5 5.0 5.5 Change in inventories (% contribution) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Exports, goods and services -40.0 -44.0 -20.0 -10.0 5.0 7.5 10.0 Imports, goods and services -41.0 -17.0 -10.0 3.2 5.1 5.4 5.5 GDP, at constant factor prices -10.8 -11.2 -6.9 -3.5 1.8 3.4 4.8 Agriculture 2.5 -15.0 -10.0 -5.0 0.5 2.5 2.5 Manufacturing -23.3 -20.5 -7.0 -1.5 3.3 4.8 6.2 Services -6.1 -6.1 --6.1 0.0 1.5 6.0 6.0 Inflation (Consumer Price Index) (% change, average) 153.0 410.0 125.0 130.9 49.3 35.0 30.0 Current account balance (% of GDP) -3.8 -7.5 -12.5 -11.7 -9.1 -11.1 -6.6 Fiscal balance (% of GDP) -20.8 -8.5 -3.8 -3.1 -4.1 -10.4 -7.1 overly rate ($1.90 a day, PPP) 65.5 82.3 86.5 88.7 89.5 74.6 overly rate ($3.10 a day, PPP) 85.4 94.5 96.8 97.7 97.9 92.2 Poverty rate ($5.50 a day, PPP) 92.9 Sources: National Bureau of Statistics (2012-14); World Bank projections (2015-20); poverty: World Bank projections. Note: e = estimate; f = forecast; GDP = gross domestic product; PPP = purchasing power parity. 18 SOUTH SUDA ECONOMIC BRIEF ECONOMIC OUTLOOK AND RISKS isle With the recovery in oil exports, the current account Reliance on rainfed and subsistence agriculture deficit is projected to improve further in FY2019. The remains a downside risk to real GDP growth, the poor's current account balance is projected to improve to about 9.1 income, and non-oil export earnings. As recent events percent of GDP in FY2019, from 11.7 percent in FY2018. A highlight, households in South Sudan are particularly surge in oil and non-oil exports is expected to contribute to vulnerable to weather-related, pest, and other shocks. this improvement, allowing the country to start rebuilding the Thus, a renewed focus on building resilience-including depleted foreign exchange reserves, through better water management, climate-smart farming practices, and more resilient seed varieties-is needed. Food insecurity is expected to persist in many parts of With the security situation improving, the focus should also South Sudan, exacerbating an already alarming aim at triggering a year-round agricultural cycle that could humanitarian crisis in the country. The level of food improve household production and productivity. insecurity has been particularly severe in the counties most affected by conflict, where the local population has been Budget indiscipline, allocation priorities, and corrup- facing recurrent violence and displacement and cut off from tion compromise recovery in the short term and humanitarian assistance. The most recent assessments by sustained economic growth in the long term. Recent the United Nations indicate that nearly seven million people budget execution reports indicate large discrepancies (of a total population of an estimated 13 million) could face between budgets and outturns. Although this has often led acute food insecurity at the height of the next lean season, to the accumulation of arrears, expenditures continue to be during May-July 2019, with planned humanitarian concentrated in three sectors, namely, security, accountabil- assistance estimated to reach only two to three million ity, and public administration, with limited capital people a month. spending. Consequently, South Sudan continues to underinvest in the sectors that would have the largest Poverty levels are expected to remain extremely high knock-on effect on reducing poverty, building resilience, and on the back of severe food insecurity and limited building a stock of physical and human capital. access to basic services across the country. Based on the US$1.90 2011 purchasing power parity poverty line, 82 percent of the population in South Sudan was poor in 2017. The urban poverty rate stood at over 70 percent--a sharp increase from the level of 49 percent in 2015. Current efforts to reduce poverty will have to consider the impending return of refugees, many of whom fled to neighboring countries during the period of intense conflict. Available initial government estimates show that US$1.5 billion will be needed to accommodate retuming refugees in 2019. There is an urgent need to reprioritize the allocation of public expenditure, with increased focus on capital spending and poverty-targeted expenditure, such as on education, health, agriculture, natural resources, and provision of basic infrastructure, including in the transport and energy sectors. 4.2 Risks Remain Tilted to the Downside The major risk to the outlook is the sustainability of peace and security in the country. Although a revitalized peace agreement was signed in September 2018, offering new opportunities for peace and recovery, the situation in South Sudan continues to be fluid and conflict persists across the country. Peace and reconciliation are required to achieve macroeconomic stability and support a return to positive economic growth. The oil sector provides the immediate source of growth in South Sudan. However, the volatility in oil price move- ments represents another major risk and challenge. Oil prices had strengthened significantly over the past two years but started to fall in the second half of 2018.Although recent developments have led to strengthened oil prices in January and February, a sustained downturn in oil prices would have negative consequences for South Sudan's economy. SOUTH SUDAN ECONOMIC BRIEF 119 ;:,� �, . � i � . �й � г:. � �� , �� � � �. .�:'; �: Ег�: , � : '.. F ' F� �� i, CONCLUSIONS NONE After many years of conflict, the relative calm that followed the signing of the latest peace agreement has gone some way toward inspiring confidence in the economy. The optimism is anchored around expected investment in the oil sector, resumption of oil production, and spin-off activity in the oil supply sectors. The rehabilitation of oil fields and resumption of oil production are underway, but oil production is not expected to reach pre-crisis levels in the short term. With these developments, activity in the financial sector has improved, with anecdotal evidence showing increasing demand for credit and insurance services. While inflation has been failing on the back of a significant decline in money growth, the spread between the official and parallel market exchange rates widened in the last quarter of 2018. In the agriculture sector, cropped land area increased, but crop production was affected by sporadic dry spells and fall armyworm in the early season. Looking forward, the economy is expected to experience a modest recovery in FY2019, with real GDP growth improving to 1.8 percent, from a contraction of 3.5 percent in the previous year, provided the peace agreement signed in September 2018 is respected by all parties. Food insecurity is high, and it is projected to worsen in the first half of 2019. Although food security improved slightly with the harvest in September 2018, insecurity and economic collapse destroyed lives and livelihoods, leaving more than half of the population in need of humanitarian assistance to meet the minimum food requirements. Food availability has also been affected by disrupted markets, recurrent weather shocks, and declining sources of "complementary" food sources, including wild food and fish. Recent IPC projections show that close to 40,000 people will be in Phase 5 (Catastrophe), experiencing famine-like conditions in the period to June 2019. Despite the progress made, many challenges remain, CONCLUSIONS and the reform process has been slow. Although the Intergovernmental Authority on Development-brokered deal was signed in September 2018, progress in fulfilling key commitments and reforms has been slow. The macroeconomic and government finance positions remain in shambles, and the government is struggling to provide the necessary financing for the peace agreement. Among IV f the key issues, the Government of South Sudan should urgently undertake reforms to support recovery resilience, and growth, by focusing on the following areas: (i) macroeconomic management, (ii) oil revenue govern- ance, (iii) non-oil revenue mobilization and diversification, (iv) public investment management, (v) public finance management, and (vi) trade facilitation and regional integration. With these reforms, the economy will benefit from the expected windfall from oil revenues and opportunities offered in regional and international markets. 11 1-7 WE SOUTH SUDAN ECONOMIC BRIEF 21 "R CONCLUSIONS iNI Achieving economic and fiscal sustainability will require commitment to limit discretionary use of oil revenues. The Government of South Sudan loses substantial revenue in oil advance contracts that are usually opaque and disrupt the expected flow of resources into the budget. It is therefore important for the government to discontinue issuing oil advance contracts, with an understanding that oil proceeds should be deposited in the Treasury's oil account. 22 SOUTH SUDAN ECONOMIC BRIEF THE WORLD BANK IBRD -.IDA 1 wmRDBumw»wOU