SUDAN Country Economic Memorandum Realizing the Potential for Diversified Development SUDAN COUNTRY ECONOMIC MEMORANDUM Realizing the Potential for Diversified Development Sudan Country Economic Memorandum September 30, 2015 TABLE OF CONTENTS Acknowledgements......................................................................................................................................... vii List of Abbreviations......................................................................................................................................... ix Summary of Findings and Policy Conclusions.................................................................................................. xi Chapter 1: What Kind of Growth and Diversification Suits Sudan? .................................................................1 A. Pathways to the Future: Economic and Sectoral Scenarios to 2030................................................................... 2 B.  Components of Inclusive Growth..................................................................................................................... 9 a.  Ingredients for growth.................................................................................................................................... 9 b.  Components of pro-poor growth..................................................................................................................... 14 C. Institutions are Critical to the Diversification of the Endowment Base of the Economy.................................. 16 a.  Ability to manage natural resource rents......................................................................................................... 17 b.  Ability to provide public services.................................................................................................................... 25 c.  Ability to regulate economic activity............................................................................................................... 35 D. Lessons for Sudan: Growing Endowments and the Production Base............................................................... 40 a. Macroeconomic management crucial for economic growth................................................................................ 41 b. Agriculture and livestock: important for inclusive growth................................................................................. 41 c. Goods and services trade to build endowments................................................................................................. 43 d. Extractive industries: still important, but less dominant................................................................................... 43 Chapter 2:  Structural Change and the Role of the Real Exchange Rate for Exports and Growth.....................45 A. Structural Change: Evidence from the Labor Market...................................................................................... 45 B. The Role of the Exchange Rate........................................................................................................................ 55 C. Volatile and High Inflation: Important Determinant of the Real Exchange Rate.............................................. 62 Chapter 3:  Agriculture and Livestock: Key for Economic Diversification........................................................67 A. Overview........................................................................................................................................................ 68 B. Production...................................................................................................................................................... 74 C.  Markets and Trade......................................................................................................................................... 83 D. Agricultural Support...................................................................................................................................... 91 Chapter 4:  Goods and Services Trade to Build Endowments .........................................................................95 A. Goods Trade................................................................................................................................................... 95 a. Overview.................................................................................................................................................... 96 b.  Export orientation and growth.................................................................................................................... 100 c.  Export diversification and survival.............................................................................................................. 105 iv COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT B. Services Trade............................................................................................................................................... 108 a. Overview.................................................................................................................................................. 108 b.  Trade-in-Services in Sudan......................................................................................................................... 109 c. Professional services matter for Sudan’s growth............................................................................................... 112 C. Potential for Future Trade Diversification: Goods and Services..................................................................... 116 Chapter 5:  Extractive Industries: Still Important but no Longer Dominant ..................................................125 A. Overview...................................................................................................................................................... 125 B. Sudan’s Oil Sector......................................................................................................................................... 126 C. Sudan’s Gold Sector..................................................................................................................................... 134 D. Combined Implications of Oil and Mining................................................................................................... 145 Annexes........................................................................................................................................................149 Annex 1: MAMS Model: Structure, Data and Assumptions................................................................................ 149 Annex 2: Determinants of Savings in Sudan....................................................................................................... 161 Annex 3: Timeline of U.S. Sanctions Against Sudan........................................................................................... 163 Annex 4: Additional Details on RER Calculations and Theoretical Considerations............................................. 165 Annex 5: Financial Soundness Indicators for the Banking Sector, 2006–13....................................................... 168 Annex 6: Additional Information for Export Performance Analysis.................................................................... 169 References.....................................................................................................................................................177 List of Figures Figure S.01: Base Simulation: Selected Macro Indicators (Index; 2012 = 100)...................................................... xviii Figure S.02: Base Simulation: Aggregated Sector GDP (Index; 2012 = 100).......................................................... xviii Figure S.03: Real Exchange Rate and Export Quantity (index Base = 100).............................................................. xix Figure S.04: Poverty Rate in 2012 and Various Scenarios......................................................................................... xx Figure S.05: Growth Decomposition of Production Factors in Sudan, 1989–2012.................................................. xxi Figure S.06: Employment by Sector....................................................................................................................... xxii Figure S.07: Average Annual Inflation in Sudan, 1999–2014................................................................................. xxii Figure S.08: Fiscal Revenues and Composition (SDG mn).................................................................................... xxiii Figure S.09: Overall Budget Deficit, 1991–2013................................................................................................... xxiv Figure S.10: Sudan’s RER Misalignment................................................................................................................. xxv Figure S.11: Sudan’s Official and Market Exchange Rate (SDG/USD)..................................................................... xxv Figure S.12: Sudan’s Wheat Yields in Perspective.................................................................................................. xxvi Figure S.13: Herfindahl-Hirschman Index at the Products Level, Sudan and Selected Countries.......................... xxvii Figure S.14: Sudan’s Wheat Import Price in Perspective (USD/ton)....................................................................... xxix Figure S.15: Livestock Export Value by Subsectors (USD mn)............................................................................... xxx Figure S.16: Sudanese Products with Larger World Market Shares, 2013.............................................................xxxiv Figure S.17: Doing Business 2014: Ranking by Component, Sudan and Selected Countries................................xxxvi Figure S.18: Trading Across Borders Indicator 2014, Sudan and Selected Countries............................................xxxvi Figure S.19: Projected Domestic Crude Oil Production, Bpd..............................................................................xxxvii Figure S.20: Contribution of Natural Resources to Sudan‘s Economy.................................................................xxxviii Figure S.21: Export Volumes of Gold Correlated with the Price (Index 2004 = 100)...........................................xxxix Table of Contents v Figure 1.1: Model Base Scenarios: Selected Indicators, 2012 to 2030....................................................................... 5 Figure 1.2: Model Alternative Scenarios: Selected Indicators, 2012 to 2030............................................................. 7 Figure 1.3: Fiscal Policy and Public Debt............................................................................................................... 19 Figure 1.4: Savings Rates in Sudan, 1991–2013..................................................................................................... 22 Figure 1.5: Savings and Investment Rates in Sudan and Selected Countries........................................................... 23 Figure 1.6: Economic Activity................................................................................................................................ 27 Figure 1.7: Health and Education Spending and Outcomes in Sudan..................................................................... 32 Figure 1.8: Business Enabling Environment........................................................................................................... 37 Figure 1.9: Two Approaches to Diversify an Economy........................................................................................... 40 Figure 2.1: Illustration of Structural Change in an Economy.................................................................................. 45 Figure 2.2: Structural Change through Sector Decomposition of GDP ................................................................... 46 Figure 2.3: Demographics and Education in Sudan................................................................................................ 48 Figure 2.4: Employment and Labor Force Participation in Sudan........................................................................... 50 Figure 2.5: Sudan’s RER Misalignment in Perspective of other African Oil Exporting Countries............................. 57 Figure 2.6: Undervaluation and Export Growth, Selected Countries...................................................................... 59 Figure 2.7: Inflation, Monetary and Financial Sector Developments....................................................................... 64 Figure 3.1: Overview of Agriculture in Sudan........................................................................................................ 72 Figure 3.2: Agriculture Yields in Sudan, Sorghum and Millet................................................................................. 76 Figure 3.3: Agriculture Yields in Sudan, Wheat, Oil Seeds, Gum Arabic, Cotton and Livestock............................. 78 Figure 3.4: Sudan’s Agriculture Exports: Livestock, Sesame, Gum Arabic, Wheat and Cotton................................ 85 Figure 3.5: Sudan’s Agriculture Imports: Wheat and Sugar.................................................................................... 91 Figure 3.6: Sudan’s Agriculture Input Imports....................................................................................................... 92 Figure 4.1: Exporter Base and Size, Sudan and Selected other Countries................................................................ 97 Figure 4.2: Sudan’s Export Performance Overview................................................................................................. 99 Figure 4.3: Export Growth and Orientation......................................................................................................... 104 Figure 4.4: Export Concentration and Survival.................................................................................................... 107 Figure 4.5: Trade-in-Services in Sudan................................................................................................................. 111 Figure 4.6: Professional Services in Sudan............................................................................................................ 114 Figure 4.7: (Export) Diversification – Past and Present......................................................................................... 119 Figure 5.1: Sudan’s Oil Sector: Production, Trade and Flows............................................................................... 128 Figure 5.2: Key Oil Infrastructure in Sudan (and South Sudan)........................................................................... 129 Figure 5.3: Sudan’s Mineral Sector: Production, Trade and Flows........................................................................ 136 Figure 5.4: Contribution of Oil and Minerals to Sudan’s Economy....................................................................... 146 Figure 0.1: Aggregate Payment Flows in MAMS................................................................................................... 149 Figure 0.2: The Labor Market in MAMS............................................................................................................... 151 Figure 0.3: Savings Rates in Sudan, 1991–2013................................................................................................... 162 List of Tables Table S.01: Sudan’s Performance Vis-à-Vis the Ingredients of Growth................................................................... xxi Table S.02: Summary of Main Findings and Recommendations............................................................................... xl Table 1.1: Major Ingredients to Growth and Sudan’s Record................................................................................ 12 Table 1.2: Simulations of Savings and Growth Rates for Turkey........................................................................... 24 Table 2.1: Age Composition of the Population in Sudan....................................................................................... 47 vi COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Table 2.2: Dependency Ratios in Sudan................................................................................................................ 47 Table 2.3:  Education and Employment Status, Percent of Total............................................................................ 52 Table 2.4: Education Breakdown of Employment by Economic Sector, Percent of Total....................................... 53 Table 2.5: Annual Value-Added (VA) Per Worker by Sector (US$)....................................................................... 54 Table 2.6: Distribution of Daily Wages by Industrial Sector (US$)........................................................................ 55 Table 2.7: Effects of Undervalued RERs on Export and Output Growth Sudanese Data........................................ 60 Table 2.8:  Structure of the Financial Sector in Sudan............................................................................................ 63 Table 3.1: Vaccination and Inspection Regime for Sheep Exports......................................................................... 84 Table 3.2: Modern Grain Storage in Sudan, 2013................................................................................................. 89 Table 4.1: Change in Sudan’s Shares of Exports by Broad Productive Sectors, 2007–2012................................. 100 Table 4.2: Sudan’s Total Exports Across Aggregate Destinations, 1996–2013..................................................... 101 Table 4.3: Destinations of Sudan’s Primary Non-Crude Oil Exports.................................................................... 103 Table 4.4: Manufactured Exports of Significance in the pre-Oil Period............................................................... 120 Table 5.1: Main Elements of the Mining Fiscal Regime for Industrial Mines........................................................ 142 Table 0.1: Disaggregation of Sudan MAMS......................................................................................................... 152 Table 0.2: Macro SAM for Sudan, 2012 (% of GDP)........................................................................................... 153 Table 0.3: Value-Added, Consumption, and Trade Elasticities............................................................................ 154 Table 0.4: Definitions of Non-Base Scenarios...................................................................................................... 155 Table 0.5: Real Macro Indicators by Simulation (%annual Growth 2013–2030)................................................. 156 Table 0.6: Macro Indicators in 2012 and by Simulation in 2013 (% of GDP)...................................................... 157 Table 0.7: Government Receipts and Spending in 2012 and by Simulation in 2030 (% of Nominal GDP).......... 157 Table 0.8: Balance of Payments in 2012 and by Simulation in 2030 (% of Nominal GDP).................................. 158 Table 0.9: Real GDP at Factor Cost in 2012 and Growth by Simulation (% Annual Growth).............................. 158 Table 0.10: Sector Structure in 2012 and by Simulation in 2013 (% of GDP)....................................................... 159 Table 0.11: Panel Estimation Effect on Exports Growth of Undervaluation........................................................... 166 Table 0.12: Undervalued RERs and Export Growth.............................................................................................. 167 Table 0.13: Undervalued RERs and Output Growth............................................................................................. 167 Table 0.14: Change in Sudan’s Shares of Exports, Main Export Products at HS-6 Level, 2007–2012.................... 169 Table 0.15: Joint Distribution of Sudan’s Exporters Across Products and Destinations.......................................... 169 Table 0.16: Sudan Exports in Product Space Framework, 1991–2011.................................................................. 173 List of Boxes Box 1.1: Sudan’s Experience with the Oil Revenue Stabilization Account (ORSA).............................................. 18 Box 3.1: Land Tenure and Land Policy............................................................................................................... 70 Box 3.2: Studying the Rehabilitation of the Gezira Scheme................................................................................ 73 Box 3.3: Recent Policy Changes in Gum Arabic and Their Impact...................................................................... 81 Box 3.4: Food Security, Wheat Self-Sufficiency, and State-Level Grain Storage.................................................. 89 Box 4.1: Main Findings of the Sudan DTIS Update............................................................................................ 98 Box 4.2: Tourism in Sudan: Great Potential, Great Challenges......................................................................... 110 Box 4.3: Domestic Regulation in Professional Services in Sudan....................................................................... 117 Box 4.4: Product Space: Classics, Emerging Champions, Disappearance, Marginals......................................... 118 Box 5.1: How Many Artisanal and Small Scale (ASM) Gold Miners are There?................................................. 138 Box 5.2: State-Sponsored Gold-Buying Programs............................................................................................. 140 ACKNOWLEDGEMENTS T he World Bank greatly appreciates the close (Economist, DECHD) on the Sudanese labor market; collaboration with the Government of Sudan Omar Lyasse (Sr. Agricultural Economist, GFADR), in the preparation of this Country Economic Imad Yousif (Consultant, GMFDR), and Joseph Memorandum. The team is grateful for the support Goldberg (Consultant, GMFDR) on agriculture sec- received, especially the Ministry of Finance and tor analysis; Michael Ferrantino (Lead Economist, National Economy, to carry out the analysis and GTCDR) and Gabriela Schmidt (Consultant, provide feedback and comments on preliminary GTCDR) on summary analysis of export performance; findings during the CEM Seminar in Khartoum Nora Dihel (Sr. Economist, GTCDR) on trade in ser- in December 2014 and the Annual Economic vices; Ana Fernandes (Sr. Economist, DECTI) and Conference in June 2015. Esteban Ferro (Consultant, DECTI) on exporter level Preparation took place in 2014/15 and included analysis; Bill Battaile (Sr. Economist, GMFDR) on several missions to Sudan for first-hand consultation product space brief; and Bryan Land on the contri- and stakeholder discussions with representatives bution of oil, gold and other mineral wealth. Mosllem in Khartoum and other parts of Sudan: (1) Mission Alamir (Sr. Economist, GMFDR) and Saef Ibrahim on Agriculture (March/April 20–14), (2) Mission (Consultant, GMFDR), both Khartoum-based, pro- on Gold and Mining (May 2014), (3) Mission on vided local advice, supported data gathering, and Industrialization and Trade Development (May 2014), helped in-country follow-up to various teams and and (4) Seminar on Preliminary Findings of Background missions. Papers (December 2014). The team is grateful to The report was prepared under the overall the Government of Sudan and the World Bank’s guidance of Albert Zeufack (Practice Manager, Khartoum office for excellent logistical support to GMFDR), Bella Bird (Country Director, AFCE4), make those missions happen. and Paolo Zacchia (Program Leader, AFCE4). Pablo The report was prepared by a team led by Fajnzylber (Practice Manager, GPVDR) provided Michael Geiger (Sr. Country Economist, GMFDR). guidance and support particularly at concept and The report benefitted from background papers and the early preparation phase. Kevin Carey (Lead inputs prepared by (in the order of the report’s Economist, GMFDR) commented at various stages outline): Hans Lofgren on alternative scenarios for and provided crucial guidance and advice. The peer Sudan to 2030 (Sr. Economist, DECPG); Jane Bogoev reviewers were: Andrew Goodland (Program leader, (Economist, GMFDR) on pro-poor growth and AFCE3), Taehyun Lee (Sr. Economist, GMFDR), recent macro-economic developments; Toru Nishiuchi Mombert Hoppe (Sr. Economist, GTCDR), Andres (Economist, GMFDR) on savings and investments; Ha Garcia (Sr. Economist, GTCDR), Nadia Belghith Nguyen (Economist, DECMG) on real exchange rate (Sr. Economist, GPVDR), and Susana Moreira (ET misalignment (Economist, DECMG); Robert Garlick Consultant, GEEDR).. LIST OF ABBREVIATIONS AAAID Arab Authority for Agricultural ha hectare Investment and Development HIPC Highly Indebted Poor Countries ARC Agriculture Research Corporation IFAD International Fund for Agricultural ARRC Animal Resources Research Development Corporation IMF International Monetary Fund ASM Artisanal and Small Scale Mining MAMS Maquette for MDG Simulations bn billion MDTF Multi Donor Trust Fund bpd barrels per day mn million CBOS Central Bank of Sudan NBHS National Benchmark Household CBS Central Bank of Sudan Survey CGE Computable General Equilibrium OFAC US Office for Foreign Asset Control COMESA Common Market for Eastern and RCA Revealed Comparative Advantage Southern Africa RER Real Exchange Rate CPC Cotton Public Corporation SAM Social Accounting Matrix DB Doing Business SCCL Sudan Cotton Company Ltd DSA Debt Sustainability Study SDG Sudanese Guinea a.k.a. Sudanese EIA US Energy Information Administration Pound EOR Enhanced Oil Recovery SDN Sudan FDI Foreign Direct Investment SSA Sub-Saharan Africa fed feddan SSD South Sudan GAB Gum Arabic Board SUD Sudan GAC Gum Arabic Company TFA Transitional Financing Agreement GAFTA Greater Arab Free Trade Area TFP Total Factor Productivity GDP Gross Domestic Product TTEA Technology Transfer and Extension GNDI Gross National Disposable Income Administration GOS Government of Sudan VA Value-added GRSS Government of the Republic of South VAT Value Added Tax Sudan WDI World Development Indicators SUMMARY OF FINDINGS AND POLICY CONCLUSIONS F rom 1999 to 2011 Sudan had a period resource rents have changed. The secession of where it benefited from extensive discov- South Sudan triggered a negative natural resource eries of natural wealth through oil. During shock that requires economic and fiscal adjust- the “oil economy” economic growth exceeded the ment. If the authorities were to allow a market- historical average of 4.9 and reached 6.1 percent based exchange rate adjustment this would lead on average per year. Likewise, oil revenues rapidly to a “reverse” Dutch Disease situation, where non- became the main source of public revenues and, at natural resource sectors such as agriculture could its peak, contributed more than 50 percent of total gain competitiveness. However, this “reverse” revenues. Relatively stable macroeconomic man- Dutch Disease scenario is being challenged by high agement during the oil economy led to a rise in the inflation rates, a key symptom of the post-secession savings rate, initially through increases in private Sudan, and to a lesser extent by the recent expan- savings, followed by an increase in public savings sion of gold production and exports. in the 2000s. But the oil economy had also clear symptoms Current Economic Context of Dutch Disease. Agriculture suffered from neglect, and there were urgent calls to invest Sudan is still suffering from the economic and natural resource rents into economic diversi- fiscal effects that were a result of the secession fication efforts. Given overreliance on oil and an of South Sudan in 2011. With the secession, the uncertain political situation vis-à-vis South Sudan, country lost about 75 percent of its revenues and the 2009 Sudan Country Economic Memorandum most of its predominant economic activity: crude oil encouraged private sector-led growth to drive a exports. But growth for 2014 was 3.1 percent and more diversified economy, particularly through a shows some continuation of a recovery that started revival of the agriculture sector. The 2009 CEM then in 2013. Growth in 2015 is expected to be around proposed a set of interdependent steps to overcome 3.5 percent. In the short-term, gold production and the single reliance on natural resources. The work exports along with an improving trade of agriculture called for developing and maintaining the neces- products, especially livestock, are driving this recov- sary enabling environment for growth, specifically ery, but the medium-term outlook remains uncertain. macroeconomic stability and effective fiscal man- Sudan’s post-secession adjustment was pri- agement. The report also highlighted the need to marily managed via the fiscal side. Rising deficits implement policies aimed at improving the invest- were countered through fiscal austerity and central ment climate. A key identified need was to increase bank financing. The latter had a significant impact returns in the agriculture sector, whose productivity on inflation, which was further fueled by significant levels had declined over the oil boom years. exchange rate adjustments in 2012 and 2013. Two The heyday of the oil economy ended subsequent rounds of nominal adjustments with abruptly in 2011, and economic diversification a combined nominal depreciation of 100 percent is at center stage again; the signs of natural pushed the exchange rate to 5.7 SDG/US$ in 2013 xii COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT thereby increasing the import bill and further fuel- agriculture productivity growth and/or a normaliza- ing inflation. tion of Sudan’s relations with the rest of the world. Sudan’s fiscal position has improved in 2014 The impact of falling global oil prices is likely reflecting fiscal reforms measures introduced in to be insignificant. Post-secession Sudan is no lon- 2013. This is important as it created fiscal space ger a large net exporter of crude oil. In fact, Sudan’s within which the government was able to cut down crude net oil exports fell from US$8 billion in 2011 central bank financing of the government (0.4 to as low as US$ 0.4 billion in 2013. Looking at oil percent of GDP in 2014 vs. 0.7 percent in 2013). and oil-related products together, Sudan is already Sudan’s overall deficit was lowered to 1.2 percent a net oil importer. of GDP in 2014 compared to 2.1 and 3.7 percent in Sudan’s economic outlook hinges signifi- 2013 and 2012, respectively. Key reforms to achieve cantly on improvements in domestic and regional this included a cut in oil subsidies in Sudan and political environments. The political environment efforts to increase tax revenue. with the rest of the world has improved somewhat One of the key symptoms of the 2011 seces- over the past year with progress on a national dia- sion shock, the Sudanese inflation rate has sig- logue to rein-in conflicts within Sudan. But uncer- nificantly increased since 2011. It has been over tainty associated with the conflict in neighboring 30 percent since 2012 (annual CPI rate, period South Sudan and about oil transit fees remains high. average). In 2014 it reached its preliminary annual More recently, Sudanese Banks have experienced a high at about 37 percent, though it declined from breakdown in their correspondence relations with a peak of 47 percent in July 2014 to 25 percent in foreign banks as a result of de facto tightened U.S December 2014. Declining food inflation is compen- sanctions against Sudan. As a result, Sudan’s trade sated for by an increase in core inflation, which indi- activities have been adversely affected and the short- cates the still-existing monetary impact on overall age of foreign exchange has worsened. inflation, as well as increased inflation expectations. The current account deficit was still large in Conflict, Governance, Poverty, and 2014. But it narrowed to 6.9 percent of GDP from Debt: Sudan’s Long-Term Challenges 8.7 percent in 2013 and 9.2 percent in 2012. The narrowing account is a reflection of a gold-driven Sudan has been in conflict for most of its history increase in exports and fiscal consolidation efforts since independence. This conflict arises out of that lower the import bill. Exports covered 65 percent non-inclusive institutions with limited effectiveness of imports in 2014 compared to 54 percent in 2013. and often-disputed legitimacy across Sudan, and The short-term growth outlook is set on has resulted in depressed development outcomes. recovery mode, albeit on a modest level. An While the defining conflict between the northern anticipated good agriculture harvest and further and southern regions was largely resolved by the increasing livestock exports contribute to positive secession of the latter to form the Republic of South growth, and robust gold exports will support the Sudan in July 2011, tensions still remain. Several continuing recovery with about 3.5 percent growth other conflicts with varied histories persist in dif- in 2015. But gold may be a temporary phenomenon ferent stages of intensity, stalemate, or resolution. only and, given its primarily artisanal nature, has Weak institutions at both national and subnational only limited effect on the economy at large. The levels are unable to resolve most conflicts, often analysis in this CEM argues that in a base scenario resulting in violence. Violent conflict, especially to 2030 growth will be around 4.1 percent, which rebellion against the center and armed response can be potentially driven higher through stronger by the state, is a direct contributor to the extreme Summary of Findings and Policy Conclusions xiii poverty in Sudan’s conflict-affected areas. Security bearing rocks with little or no reclamation of land concerns continue to inordinately shape economic as mining plays out. There appears to be little atten- and fiscal choices made by the government resulting tion to safety hazards, exemplified by the depth to in detrimental development outcomes and perpetu- which some excavations are dug and minimal use ating weak institutions for public goods provision. of support structures. Furthermore, rudimentary Sudan presents institutional discontinuities health precautions are taken at mining sites and across its various regions, which is reflected in processing centers, where water and hygiene con- its regional economic imbalances and its geog- ditions are poor and do not appear to be subject to raphy of conflict. At the center, Sudan has institu- routine monitoring and inspection. tions that enforce compliance and execute core state Yet, Sudan holds tremendous potential, functions of providing security, commanding fiscal much of it unrealized due to long-running con- mechanisms, and delivering services. However, flict and governance challenges. Some of this state presence and effectiveness diminishes further potential was realized in earlier decades, (including outside Khartoum and is out-rightly contested in during early industrialization) in large scale irriga- many peripheral areas. As with political power, the tion in support of food and export crop agriculture, economy is centered in Khartoum and proximate and in investments from recent natural resources riverine states giving rise to significant inequality discoveries. Once the largest country in Africa, between the center and periphery, and historically even in its diminished state Sudan holds the poten- between riverine and hinterland communities. tial to be an economic powerhouse. It sits at the Development and poverty indicators starkly crossroads of sub-Saharan Africa and the Middle mark the resulting inequality. While Sudan boasts a East, with fertile lands and abundant livestock, and GNI per capita of US$1693 (2013) its poverty rate is some remaining natural resources (oil and gold), 46.5 percent. In fact, poverty ranges from 26 percent which make it the third largest economy in North in Khartoum state to 62.7 percent in Darfur, based Africa (after Egypt and Morocco) and the largest on 2009 data. The incidence of poverty in urban economy in the greater eastern Africa region. The areas, particularly Khartoum, is significantly lower consolidation of peace in Sudan has the potential than that of the rural areas. Rural areas are more than to positively impact peace and development in the two and half times as poor as the capital and almost region, especially in the Nile River Basin, South twice as poor as the rest of the urban areas. While Sudan, and the Sahel. rural areas account for a little over 60 percent of the From an economic perspective, Sudan’s Sudanese population, they account for almost for 80 ongoing debt crisis that dates back to the 1980s percent of Sudan’s poor. For the rural population, any is truly unsustainable. Sudan’s debt crisis in the poverty reduction strategy needs to build on agricul- 1980s started with the Government’s inability to tural growth, while at the same time looking into the service its debt service obligations, which in turn creation of off-farm employment opportunities there. led to an unprecedented increase in arrears. This is The rapid expansion of gold mining has a key feature of Sudan’s striking debt burden up to generated a variety of harmful impacts that will the present, where 85 percent of Sudan’s debt is in further complicate development in rural areas. arrears. Both domestic and external causes for the Aerial images bear witness to the dramatic impacts debt crisis are widely recognized (Rahman 1995; of gold rushes with closely spaced excavations over and Ahmed 2008), including the global recessions extensive areas and shanty town-type development of the 1970s and 80s due to the oil price shocks, to support the influx of people. There is widespread an overvalued exchange rate and insufficient debt use of bulldozers to excavate topsoil to expose gold management capabilities within the government. xiv COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Sudan’s external debt stands at about US$45 Institutions Important for Growth and billion (79 percent of GDP) as of end-2013, of Diversification in Sudan which 85 percent was in arrears. The large major- ity of the debt is public and publicly guaranteed debt The CEM starts out with a series of simulations (valued at US$43.4 billion, of which 88 percent and a review of recent key literature on growth in arrears), mainly owed to bilateral creditors and and diversification with the aim of defining a almost equally divided between Paris Club and non- suitable approach for growth and diversification Paris Club creditors (37 vs. 36 percent of the total). for Sudan. Using projections to 2030, an analysis Only a small fraction is commercial debt owed to of economic scenarios sets the stage and highlights suppliers (US$1.6 billion). Sudan is also in arrears some key aspects of potential policy changes. The with multilateral creditors, including the WB, the analysis employs MAMS, a simulation model of IMF, and the AfDB. the CGE (Computable General Equilibrium) type As a result, current external public borrow- developed at the World Bank for medium- and ing is very limited mainly due to Sudan’s inabil- long-run policy analysis. The base scenario matches ity to access international financial means. Total economic developments anticipated by the Sudan contracting of external debt has remained below 1 Country Team of the World Bank and in recent percent of GDP per year since 2011. Given eco- reports from the IMF; it highlights the difficulties nomic and financial sanctions as well as the fact that of creating an economic structure without heavy Sudan is in arrears with most creditors, the country reliance on resource exports, including the need for has effectively been cut off from external financ- real exchange rate depreciation to induce expan- ing sources. The government currently can only sion of the production of tradables for exports and contract new debt with a limited number of still- replacement of imports, resulting in a slowdown in disbursing multilateral and non-Paris Club bilateral consumption and investment growth. creditors such as China. Some US$152 million of The sectoral structure of Sudan’s economy new debt (0.2 percent of GDP) was contracted in the shows the growing importance of agriculture, first half of 2014, of which $147 million is on non- less importance of extractives, and relative stabil- concessional terms (which is well within the annual ity of other sectors (manufacturing, services) by non-concessional borrowing limit of US$600 mil- 2030. The simulations also show that the strongest lion prescribed by the government’s Staff Monitored growth rates are from sectors that are capable of Program with the IMF: IMF 2014a). There has not producing internationally competitive tradables. been any new private external debt in decades. Simulations suggest that in the absence of dominant Relief to Sudan’s external debt crisis will be resource-based exports, growth must be centered on critical. Normalization with the rest of the world sectors producing tradables that are exported and/ and debt relief would not only mean that Sudan or replace imports. Therefore a sectoral focus of this could potentially access significant external assis- CEM is to examine agriculture and trade of goods tance resources, but also a bettering in Sudan’s terms and services as a means to grow the endowments of trade and potential to explore currently closed base of the country. external markets. But the envisioned HIPC debt relief The non-base scenarios point to the benefi- process is slow and requires renewed emphasis of the cial effects of agricultural productivity growth. In Government on reaching out to creditors, normal- addition, the role of agriculture would likely become izing relations with international financial institu- more prominent in a setting with a supportive, tions, and continuing to establish a track record of depreciated real exchange rate. Simulations of nor- cooperation with the IMF on policies and payments. malization (represented by improved terms of trade, Summary of Findings and Policy Conclusions xv debt forgiveness, and more foreign aid) suggest that revenues. Still, more effective volatility management it would have positive effects on macro indicators, within a fiscally sustainable framework requires a boosting Sudan’s integration with the world economy, medium-term outlook on natural resource revenues. improving household welfare, reducing poverty, and At its peak during the oil economy between facilitating Sudan’s structural transformation. 1999 and 2011, oil revenues contributed more The second part of the analysis attempts to than 50 percent of total fiscal revenues. This identify a suitable growth and diversification situation ended abruptly in 2011 and oil revenues strategy for Sudan and looks at the 2008 Growth are expected to fall to around 10 percent of total report (World Bank 2008a) in search of “ingredi- revenues over the next five years. In addition to ents for growth.” It finds that Sudan’s performance oil revenues from Sudanese domestic production, vis-à-vis the “ingredients of growth” is mixed and fees of South Sudanese oil flowing through Sudan’s between 2000 and 2011 and heavily dependent on oil infrastructure and time-bound proceeds of the the effects of the oil economy. The same section also transitional financing agreement (TFA) between explores the question on how to achieve “pro-poor” the two countries are expected. More effective growth. It finds that, given that poverty in Sudan is volatility management within a fiscally sustainable deep and largely a rural phenomenon, the agricul- framework requires a medium-term outlook on ture sector is crucial for efforts to reduce poverty. natural resource revenues. During the pre-secession Looking at other economies that were suc- period Sudan had some experience in utilizing an cessful in their diversification efforts shows that oil revenue stabilization account (ORSA)—a failed they were able to broaden their endowments base attempt to smooth expenditure. After two years of by maximizing a triad of institutions to deliver balanced budgets in 2010 and 2011, a significant services that ultimately increase productivity. deficit opened up in 2012. This triad includes the abilities to manage natural Financing the budget deficit is now one of resource rents, to provide public services, and to the key challenges in post-secession Sudan, but regulate economic activity and foster a business- options for foreign financing of the budget defi- enabling environment (World Bank 2014e). cit are limited. Given the constrained financing Looking at Sudan, there are important weaknesses in options for Sudan it will be important to mobilize all the three areas, often complicated by conflict and more domestic resources for productive use, most fragility, sometimes through uncertain assignments notably domestic savings to support investment. But of responsibilities in an ever more decentralizing Sudan’s national savings fell to a low of 8.5 percent public administration. Overall, this analysis finds of Gross National Disposable Income (GNDI) in there is much scope to improve the effectiveness of 2012, the lowest level since 1999. Stable macroeco- these institutions to lay the groundwork for a more nomic management in the late 1990s and 2000s, diverse endowment base, and ultimately, a more and the oil economy led to a rise in the savings rate. diversified economy. But with the secession Sudan’s private and public The ability to manage natural resource rents savings fell sharply. It is well-known that domestic refers to the ability to pursue overall stabilizing savings matter because they fund investment, which macroeconomic policies of which stable fiscal in turn lead to higher economic activity and growth. management is key, sometimes achieved with But it matters even more as tapping into foreign stabilization funds for natural resource rents. For savings is not a real option in today’s Sudan where Sudan, the CEM finds that the Government’s ability to FDI is scarce and portfolio investments are close to manage natural resource rents is limited; yet, natural being impossible given Sudan’s isolated status in resources have also declined in importance to fiscal the world financial system. xvi COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT The ability to provide public services relates responsibilities to the sub-national governments; to the ability of governments to invest into the particularly vis-à-vis publicly funded pro-poor human capital of the younger generation and activities. A sound revenue assignment system to build infrastructure that can be used for is an essential pre-condition for successful fiscal forward-looking economic activities in the long- decentralization. Since resource disparities exists term. Sudan’s ability to provide public services is across the states of Sudan, the primary component a constraint. Historically, GDP growth in Sudan of successful fiscal decentralization is a more equi- was rarely driven by enhancements in total factor table and transparent system of intergovernmental productivity, which would indicate a rising role of resource allocation across different levels of govern- human capital formation in the growth process. ment. Fiscal decentralization has brought consider- And human capital formation depends on the effec- able extra resources to the States and substantially tive provision of services. In that regard, Sudan increased overall per capita social spending over the has undergone a process of decentralization that past ten years. Yet, the observed increase in social assigned basic service provision to subnational lev- spending has not translated into a more balanced els. Since fiscal decentralization is lagging behind, distribution of resources by the government to however, states do not have the ability to live up to address inequality across states and reduce poverty their responsibilities and outcomes, for instance, for gaps. Ultimately, the weaknesses in public service education are both low and with a large variabil- provision in Sudan stem from poor prioritization of ity across states. Finally, conflict, governance, and spending and an inadequate focus on results. debt are all complicating factors for government to Conflict, governance, and debt are all com- effectively deliver services. plicating factors for government to effectively Sudan has had a period of one decade with deliver services. Sudan has been in conflict for most positive real economic growth rates driven by of its independence history. The secession of South oil GDP since the discovery in 1999. High pro- Sudan solved the key conflict in Sudan, but not all ductivity is crucial for sustaining high growth, yet conflict has been eliminated; tensions continue and in Sudan total factor productivity has been low or are expected to persist in the foreseeable future. In even negative in the majority of years since oil was most regions of Sudan, conflict over access to natu- discovered. The secession of South Sudan signifies ral resources between pastoralists, agro-pastoralists the latest structural break in the economy that is due and settled farmers is endemic and also contributes the loss of the majority of oil reserves and related to regional conflict, such as in the Sahel. Weak fiscal revenues. The sectoral decomposition of GDP governance and accountability have contributed to growth suggests that, historically, the major driver fragility and conflict, including between the center of growth in Sudan was and now still is the service and periphery. At the same time, conflict and fragility sector. From the expenditure side of GDP in Sudan contribute to the plethora of governance challenges it is clear that domestic consumption (public and in Sudan. Fragility and conflict in Sudan is also private) has been the major driver of GDP growth driven by corruption, further reinforcing barriers to over the past decade and the role of investment was investment and equitable growth that would provide rather modest. opportunities to citizens. Intrinsic to issues of allo- Sudan has undertaken political decentral- cation and management of resources and the need ization reforms since the early 1990s with the for greater transparency and accountability are the aim to transition the responsibility for basic broader issues of the transformation of the state by service delivery to the subnational, state level. providing for more participation of citizens and com- Decentralization has devolved a number of key munities in decisions. Sudan’s prospects for service Summary of Findings and Policy Conclusions xvii delivery and poverty reduction are also hampered a regime of export controls related to military or by its huge stock of external debt, most of which is dual-use goods. The largest, yet most difficult to in arrears, with the implication that Sudan is cut off assess impact of the sanctions regime on Sudan is from much needed official development assistance. transmitted through the financial system. Financial The ability to regulate economic activities sanctions create difficulties for non-US companies refers to the Government’s capabilities to estab- in trading with Sudan, partly due to the fact that lish and nurture a business-enabling environment. U.S. dollar transactions are routed through the U.S., Since 2008 Sudan has experienced a slight deteriora- and partly due to the fact that many non-U.S. banks tion in the business-enabling environment; the coun- have very significant dealings with the U.S. and want try lags behind the comparators in getting credit and to avoid the appearance of being involved in trade protecting investors, resulting in a lower rank for ease with Sudan. Sanctions have also a direct impact on of doing business. Sudan ranked at 170 for getting the real economy through restrictions on sourcing credit and 157 for protecting investors in the Doing of inputs and replacement parts. But the absolute Business indicators (2014). When it comes to start- level of real economy impact of sanctions remains ing a business, Sudan’s performance is similar to the unknown. For instance, Sudan’s non-oil exports comparator countries. Sudan ranked at 131 for start- are concentrated in a small number of markets, but ing business while Kenya was at 134 and Ethiopia at this is likely not solely a consequence of economic 166, respectively. The difficulties to run a business in sanctions against Sudan. In fact, it looks as if Sudan Sudan lie more in the lack of support to investors and is isolated even within Africa. However, sanctions business people than administrative procedure. The have exacerbated the isolation through increasing strength of investor protection index is relatively low the difficulty in settling cross-border payments, at 3.3 out of 10. For a country with sea access, Sudan which affects trade with all partners including their has a relatively low ranking on the trade facilitation African neighbors. Yet, there is reason and evidence component of the Doing Business indicators (Figures to believe that a normalization of relations with the S.17). The Doing Business (2014) ranking for Sudan rest of the world, including a lifting of economic (155th) on trading across borders is closer to the ones sanctions, could promote export diversification. for landlocked countries and slightly worse than the In sum, the CEM finds that there is a case regional average for Sub-Saharan Africa (SSA) (141). for Sudan to approach growth through diver- Landlocked countries, such as Uganda and Ethiopia sification from two angles: the production and in the comparators, often have more penalties than the endowment base, both of which rely on the non-landlocked ones in trading across borders (Alvis effective utilization of key institutions. Taken et al. 2010). Sudan, with relatively good port infra- together the direct and indirect approach define a structure, does not appear to be taking full advantage coherent way for Sudan to diversify that takes into of its geographic location. It is notable that the cost consideration the current and future sectoral struc- to import is close to the price for the neighboring ture of the economy, existing sectoral policies of the comparator landlocked countries. Government, as well as the need for long-term insti- Economic and financial sanctions imposed tution building as a foundation for diversification on Sudan since the late 1990s complicate the through broadening the national endowment base. Government’s ability to regulate economic activi- This analysis therefore uses a sectoral focus ties. The United States imposed economic sanc- and looks at agriculture as sources for diversi- tions on Sudan in 1997. Over the years, the trade fication, but also makes the case that trading sanctions have been relaxed. The United States of goods and services—especially of the higher now exports a variety of goods to Sudan subject to value-added kind—could be a means to grow xviii COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE S.01: Base Simulation: Selected Macro FIGURE S.02: Base Simulation: Aggregated Indicators (Index; 2012 = 100) Sector GDP (Index; 2012 = 100) 300 300 250 200 200 150 100 100 50 0 2012 2015 2018 2021 2024 2027 2030 2012 2015 2018 2021 2024 2027 2030 Absorption Exports Agriculture Gold Petroleum Manufacturing Imports GDP at factor cost Other industry Private Services Public Services Source: World Bank staff own calculations using the MAMS Sudan Model. Source: World Bank staff own calculations using the MAMS Sudan Model. the endowment base of the country. It is from The shares of exports and gross national this framework that the remainder of this CEM savings in GDP are projected to increase sig- unfolds with a detailed analysis of agriculture and nificantly from 2012 to 2030. In spite of moder- trade of goods and services, and concludes with ate import growth and low foreign borrowing, the an analysis of the extractive sectors (oil, gold) in import and foreign debt GDP shares both increase; search of fiscal support for the diversification this is due to expected exchange rate depreciation. agenda of the future. In the government budget, a comparison between GDP shares data for 2012 and 2030 indicates that Pathways to the Future: Economic and the receipt shares for taxes and domestic transfers Sectoral Scenarios to 2030 increase while both foreign and domestic borrowing decline; on the spending side, investment increases Looking forward, a base scenario simulation sug- strongly while subsidies (to petroleum prod- gests that the most likely growth outcome over ucts) decline, reflecting a projected policy change. the next 15 years is that Sudan’s economy will In the balance of payments, the GDP shares in 2030 grow at around 4 percent annually. GDP at factor compared to 2012 are boosted by exchange rate cost growth is above the growth rates for absorption depreciation; among outflows, the main change is (the sum of private and government consumption expected to be higher imports while, among inflows, and investment) and private final demands (private the main changes are increases for exports and pri- [or household] consumption and private invest- vate transfers while borrowing and FDI are lower. ment) due to export growth in excess of import The sectoral structure of Sudan’s economy growth, driven by real exchange rate depreciation shows a growing importance of agriculture, a (Figure S.01). Among macro items, only govern- decline in the importance of extractives, and ment investment grows more rapidly than GDP, a relative stability of other sectors (manufacturing, reflection of that it starts at a very low level. This services) by 2030 (Figure S.02). The main sectoral structural adjustment is needed to put an end to changes by 2030 include: unsustainable foreign government borrowing, par- ticularly at the backdrop of a projected decline in  Increased prominence for the agricultural sec- gold export prices. tor: its shares in exports, value-added, and Summary of Findings and Policy Conclusions xix employment all increase (most dramatically FIGURE S.03: Real Exchange Rate and Export for exports) while its share in total imports falls Quantity (index Base = 100) and imports meet a smaller share of domestic 160 demand for agricultural products; 150 Export quantity index  Reduced importance for extractives, especially in 140 exports but also in value added and employ- 130 ment, combined with increased reliance on 120 imports to meet domestic demands; and 110  Relatively small changes in other sectors, even 100 though manufacturing and private services 100 105 110 115 120 125 both become slightly more open, with increased RER index (SDG/Foreign currency) shares in total exports and imports, larger shares Agriculture Mining Manufacturing Total Private services of output going to exports, and imports meeting larger shares of domestic demand. Source: World Bank staff own calculations using the MAMS Sudan Model. Two main alternative scenarios are tested for Sudan’s economy, addressing (i) the poten- The simulation confirms the importance of tial role of agriculture as the economy enters the real exchange rate as a factor that works for an era in which oil only will play a marginal or against export growth, especially in agricul- role, with gold only partially making up for ture. Figure S.03 shows a positive and near-linear this loss; and (ii) the effects of a potential nor- relationship between the real exchange rate and malization of relations with the outside world. export quantities (both total and sectoral); in the Accordingly, the non-base scenarios are divided into background, the maximum depreciation, at almost two groups. (1) The first focuses on issues related to 22 percent, is associated with an addition to foreign the responses of the economy to policies leading to reserves corresponding to close to 6 percent of GDP. stronger TFP growth for crop agriculture and depre- According to the simulation results, the elasticities ciation of the real exchange rate. (2) The second of real exports with respect to the real exchange rate group addresses channels through which normal- are around 0.7 for manufacturing, private services, ized foreign relations may influence the economy: and total exports but much higher (around 2.1) for improved terms of trade (via higher export prices agriculture. These findings are consistent with the and lower import prices as Sudan’s access to markets observed downturn for the agricultural sector during improves), increased aid, and debt relief. the period of oil boom and suggest that real deprecia- During the oil boom, Sudan’s real exchange tion should facilitate stronger export performance. rate appreciated, penalizing production of Simulating an increase in agriculture produc- non-oil tradables, a phenomenon commonly tivity by 2 percent (Crop+) shows a very strong known as “Dutch disease,” but this is now being effect on economic growth and poverty reduction. reversed. Unless major new natural resources are An increase in agriculture productivity by 2 percent uncovered and exploited, Sudan will in the future per year would increase GDP growth by almost one reverse this trend, as indicated by the sector pattern percentage point from 4.1 in the base scenario to 5 of growth for the base scenario, including above- percent by year to 2030. In addition, Crop+ would average growth for agriculture. In this new external increase household consumption and reduce the head- environment, the prospects for high payoffs from count poverty rate to 29.4 percent in 2030 compared policies supporting agricultural growth are better. to 38.4 percent in the base scenario (Figure S.04). xx COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Another simulation of the “normalization” of 2011 heavily dependent on the effects of the oil relations with the rest of the world points to simi- economy. The advent of oil brought about signifi- lar, yet slightly lower positive economic effects cant changes in the economy mainly over the past than Crop+. Simulations capture effects via three 10 to 15 years, which were often reversed in the channels, initially introduced separately—improved most recent period since 2011 due to the secession terms of trade (the simulation TofT+), increased aid of South Sudan. Those changes are particularly pro- (Aid+), and foreign debt relief (Debt-)—and sub- nounced in the areas of investments and savings, sequently combined in one simulation (Normal). the export sector, FDI inflows, price stability, and, The welfare impact of normalization is positive and ultimately on GDP growth (Table S.01). increased household consumption would lower Yet, there are patterns of policies and eco- poverty by about 7 percentage points in 2030 com- nomic variables that explain some of the past pared to the base scenario. Normalization translates performance of the Sudanese economy. into a 16 percent increase in real household per- capita consumption in 2030, with the strongest No lasting structural change impact from improved terms of trade, followed by debt relief and increased aid. The increases in The long-term historical growth performance household consumption bring about a 7 percentage shows that Sudan has undergone three distinc- point reduction in poverty in 2030 compared to the tive economic periods since 1989, but lacks base scenario (Figure S.04). lasting structural change. The first period can be distinguished from 1989 to 1997 when the average Looking Back to Shape the Future GDP growth reached 4.9 percent and was driven mainly by labor and total factor productivity growth. To find promising areas of focus for Sudan, this This was a period of experimenting with economic analysis compares Sudan with successful other reforms and liberalization of the economy. The countries, which were analyzed and described in second period can be noted from 1998 to 2007. As the 2008 Growth Report (World Bank 2008a). a result of the advent of oil, the average economic Sudan’s performance vis-à-vis the “ingredi- growth increased by 1.2 percentage points, reaching ents of growth” is mixed and between 2000 and an average rate of growth of 6.1 percent. Typical for this period is that physical capital became the major FIGURE S.04: Poverty Rate in 2012 and driver of economic activity, whereas the contribu- Various Scenarios tion of labor and TFP significantly decreased. This is 48 a reflection of intensified capital investments in the 46.5 46 country fueled from the oil economy and satisfied 44 42 through both domestic sources and FDI. 40 38.4 37.4 The latest and third period in the economy 38 35.8 started in 2008 and is coined by negative TFP 36 34.2 34 growth. This period includes the 2011 secession 32 31.4 30 29.4 that is associated with the loss of the majority of 28 26 oil reserves and related fiscal revenues. Declining 24 growth rates of this period was driven by a decline 22 20 in physical capital and the negative contribution of 2012 Base Crop+ TofT+ Aid+ Debt– Normal the TFP growth (Figure S.05). This is not surprising Source: World Bank staff own calculations using the MAMS Sudan Model. as investment in oil-related activities fell with the Summary of Findings and Policy Conclusions xxi Table S.01: Sudan’s Performance Vis-à-Vis the Ingredients of Growth Growth “ingredients” from the Growth Report Sudan’s historical record High levels of investment ≥ 25% of GDP and savings between Average level of gross investment during the period 1980–2012 is 18.8% and during 20–25% of GDP the period 2000–2012 is 25.7% of GDP. Average gross fixed capital formation during the period 1980–2012 is 15.3% of GDP and average during the period 2000–2012 is 21.2% of GDP. Average level of gross savings for the period 1980–2012 is 13.4% of GDP and during the period 2000–2011 is 23.4%. Post-secession savings rates are in single digits and too low to drive and match investments. Technology, knowledge and know-how transfer (requires FDI) Average level of FDIs for the period 1980–2011 is 3.3% of GDP, for the period 2000–2012 is 7.8% of GDP. FDI in post-secession Sudan is negligible. Supporting competition and structural change The World Bank Investment Climate Assessment of 2009 suggests a poor functioning of markets to allocate resources in the economy. This is primarily due to tight controls through the state in procurement processes, financial markets, and land markets (World Bank 2009b). Labor market support The formal labor market is tightly controlled, preventing the efficient match of supply and demand, and giving rise to informal, unregulated labor markets (World Bank 2009b). Export promotion and exchange rate policy Average level of exports of goods and services for the period 1980–2011 is 10.5%, for the period 2000–2012 is 16.9%. Official nominal exchange rate depreciated sharply in 2012 and there is a parallel exchange rate market. Financial sector development and openness Private credit-to-GDP ratio average for the period 1980–2012 is 11.8%, for the period 2000–2012 is 12.9%. Macroeconomic stability Average annual inflation for the period 1980–2012 is 40.2%, for the period 2000–2012 is 12.3%. The inflation is volatile during the recent period 2008–2012. Budget deficit is narrowing from 7.1% of GDP in 2008 to 5% in 2012. External public debt is growing rapidly from 60.2% of GDP in 2008 to 79% of GDP in 2013. Source: World Bank (2008a); and World Bank staff own calculations, based on data from the WDI and IMF, and the analysis of World Bank 2009b. secession, FDI declined, and overall economic senti- FIGURE S.05: Growth Decomposition of ment declined. The severity of the contraction can be Production Factors in Sudan, explained by the importance of physical capital and 1989–2012 TFP in Sudan’s economic development prior to 2008. 15 Growth rate (percentage points) Successful economic development has typi- 10 cally been accompanied by structural transfor- 5 mation, in which manufacturing and industry’s share of output and employment rises at the 0 expense of agriculture (McMillan and Rodrik, –5 2011). Manufacturing and industry typically display –10 higher productivity, higher wages, and faster rates 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 of technology adoption, but Sudan’s challenge is to find ways to grow these sectors, and particularly to Total factor productivity Human capital per labor Labor Capital stock Real GDP growth shift younger and more educated workers into higher productivity jobs. Source: World Bank staff own calculations, based on data from World Bank World Development Indicators (WDI). However in Sudan the agriculture and services sectors yet account for the vast majority of employ- ment in Sudan, with manufacturing providing an are much higher in industry and manufacturing than almost negligible number of jobs (Figure S.06). in agriculture. The sector that employs most people This is even though both wages and labor productivity in the economy—agriculture—is also the sector that xxii COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE S.06: Employment by Sector 2006 period. The persistently high inflation was also 3,500,000 accompanied by high volatility. As one of the key 3,000,000 symptoms of the 2011 secession shock the Sudanese 2,500,000 inflation rate has significantly increased since 2011, 2,000,000 and has been over 30 percent since 2012 (annual 1,500,000 CPI rate, period average) (Figure S.07). Analyzed 1,000,000 with monthly frequency, inflation was even higher 500,000 over certain periods (exceeding 40 percent) such 0 as in the second half of 2012 and the first quarter Rural men Urban men Rural women Urban women Agriculture & Foresty Other industry of 2013 when inflation reached a monthly peak of Manufacturing Services 47.9 percent in March 2013, after which the price Source: World Bank staff own calculations, based on data from National level growth started to decelerate. There was another Benchmark Household Survey (2009). peak of inflation at 46.8 percent in July 2014, which relaxed to 25.7 percent in December 2014. employs most people without education. Almost two A major driver of the upsurge inflation since in three workers in this sector have no education and 2011 was the approach to monetize the budget less than one in fifty has post-secondary education. deficit by the Central Bank of Sudan through Workers in the remaining three sectors—manufac- granting direct loans to the government. This turing, non-manufacturing industry, and services— resulted in rapid monetary expansion that triggered have relatively similar levels of education. growth of prices. Another significant measure that contributed to an upsurge in inflation since June High and volatile inflation 2012 was the adoption of a reform package that resulted in steep devaluation of the official nominal Inflation in Sudan has had a history of high exchange rate, an increase in taxes, and the gradual rates and increased volatility since the 1980s. elimination of fuel subsidies. All of these measures Since the advent of the oil economy in 1999, aver- resulted in price increases, especially the announced age annual inflation in Sudan has been around or elimination of subsidies of petroleum products. above 10 percent with the exception of the 2003 to The latter affected expectations about higher prices FIGURE S.07: Average Annual Inflation in Sudan, 1999–2014 50% 40% 40% 30% 30% 20% 10% 20% 0% 10% –10% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Overall inflation Food inflation Core inflation Non-tradables/Tradables Tradables Non-tradables Source: World Bank staff own calculations, based on data from CBOS 2014; IMF 2013; and World Bank World Development Indicators (WDI). Summary of Findings and Policy Conclusions xxiii for petroleum products in the near future that had FIGURE S.08: Fiscal Revenues and spillover effects on the other prices in the economy. Composition (SDG mn) 35,000 Weak natural resource management, 30,000 budget deficits and low savings 25,000 20,000 During the oil economy in Sudan oil revenues 15,000 rapidly became the main source of public rev- 10,000 5,000 enues and contributed more than 50 percent total 0 revenues at its peak, but this situation ended 2008 2009 2010 2011 2012 2013 abruptly in 2011. With the secession of South Tax revenues Oil revenues Sudan came a substantial loss of oil revenues and the Other non-tax, non-oil revenues share of oil to total revenues declined from 59 per- Source: World Bank staff own calculations, based on data from IMF 2013; and World Bank World Development Indicators (WDI). cent in 2011 to 16 percent in 2012 (Figure 1.3.1). Even though they increased significantly, tax and non-tax-non-oil revenues could not compensate for this massive shock in the decline of oil revenues; Sudan is required to pay US$15.00 per barrel up overall revenues declined by 33.5 percent between to a maximum of US$3.028 billion as a Transitional 2011 and 2012. During the pre-secession period Financial Arrangement (TFA). The TFA period ends Sudan had some experience in utilizing a so-called in December 2016. In addition, the ongoing civil oil revenue stabilization account (ORSA), a failed conflict in South Sudan puts significant uncertainty attempt to smooth expenditure (Box 1.1). on the payment of the TFA obligations. Oil revenues are expected to fall to around More effective volatility management within 10 percent of total revenues over the next five a fiscally sustainable framework requires a years. At the same time, the ability of the govern- medium-term outlook on natural resource rev- ment to generate fiscal revenues from the gold sector enues. This observation was made in the 2009 will be rather limited, primarily due to the nature CEM; yet it is still an issue in today’s Sudan. The of gold mining that is first and foremost artisanal current practice of government is to include into in Sudan. Only if Sudan succeeds in establishing a their medium-term plans expectations that suc- modern industrial mining sector will there be the cessful exploration will add to production. This real possibility for relevant fiscal revenues from substantially increases the government’s forecast the gold sector. This is a medium- to long-term for oil revenues over the medium-term with a high endeavor however, and Chapter 5 will provide an risk of not being able to meet those targets. A simi- assessment of these prospects. lar issue is observable in the mining sector, where In addition to oil revenue from Sudanese production figures are unclear and may also reflect domestic production, fees of South Sudanese smuggled in and old gold. oil flowing through Sudan’s oil infrastructure Sudan’s budget has consistently been in defi- and time-bound proceeds of the transitional cit since 1991 and only occasionally reached sur- financing agreement (TFA) between the two plus during the oil economy (Figure S.09). During countries are expected. Chapter 5 will estimate the oil economy oil revenues rapidly became the main that those additional oil-related funds are in the source of public revenues and contributed more than order of 10 to 20 percent of total revenues until 50 percent total revenues at its peak, but this situa- 2016. Under the Bi-Lateral Agreements South tion ended abruptly in 2011. With the secession of xxiv COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE S.09: Overall Budget Deficit, in the aftermath of the secession. Given its serious 1991–2013 negative repercussions, however, monetization is not 5 sustainable in the long term; it leads to an upsurge in 0 inflation, an impairment of monetary transmission mechanisms, crowding out of credit to the private Percent of GDP –5 –10 sector, real exchange rate appreciation, and worsen- ing foreign trade competitiveness. At the same time, –15 the effects of the Sudanese debt crisis, paired with –20 the financial and economic sanctions imposed on –25 the country, have effectively cut Sudan off from the 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013p international financial system. Source: World Bank staff own calculations, based on data from World Given the constrained foreign financing Bank World Development Indicators (WDI). options for Sudan it would be important to mobi- lize more domestic resources for productive use, most notably domestic savings to support invest- South Sudan came a substantial loss of oil revenues ment. But Sudan’s savings rate is low. Sudan’s and the share of oil to total revenues declined from 59 national savings fell to a low of 8.5 percent of Gross percent in 2011 to 16 percent in 2012. Even though National Disposable Income (GNDI) in 2012, the they increased significantly, tax and non-tax-non- lowest level since 1999. Stable macroeconomic oil revenues could not compensate for this massive management in the late 1990s and 2000s, and the shock in decline of oil revenues, and overall revenues oil economy led to a rise in the savings rate. In the declined by 33.5 percent between 2011 and 2012. initial phase of this trend, private savings started to After two years of balanced budgets in 2010 rise towards the end of the 1990s, followed by an and 2011, a significant deficit opened up in 2012, increase in public savings in the 2000s. The exact but was narrowed again in 2013. Even though a opposite happened in 2011 with the loss of three- reduction of total expenditures was achieved 2012 quarters of oil revenue and the subsequent macro- the decline in expenditure could not keep pace with economic and fiscal crisis that hit the Sudanese the decline in revenues. The budget deficit shot economy after the secession. Against this backdrop, up from virtually zero (–0.2 percent of GDP) to Sudan’s private and public savings fell sharply. 3.8 percent deficit in 2012. Much more, in 2013 the Domestic savings matter for Sudan’s eco- expenditure side expanded again in real terms, but nomic transition from a largely oil-dependent with a recovery of GDP growth from negative to posi- towards a more diversified and sustained growth tive territory in 2013, expenditure as percent of GDP and development mode. There are two important decreased. As a result, the deficit narrowed from points related to domestic savings. First, there is 3.8 percent of GDP in 2012 to 2.3 percent in 2013. the well-known relationship between savings and The gradual elimination of oil subsidies starting in investment, where savings fund investment, which September 2013 manifested this consolidation effort in turn leads to higher economic activity and growth. and the 2014 deficit is expected to further decline. International evidence suggests this positive corre- Financing the budget deficit is one of the key lation. Second, Sudan is not interlinked with the challenges in post-secession Sudan, and options international financial system and hence economic for foreign financing of the budget deficit are lim- actors have very limited opportunities to finance ited given Sudan’s debt crisis. So far, the dominant investment through external sources. Together, the source of financing has been through monetization lack of access to foreign savings urges post-secession Summary of Findings and Policy Conclusions xxv Sudan to raise its savings rate beyond pre-secession FIGURE S.10: Sudan’s RER Misalignment levels to finance investment for growth. 0.2 0.1 0 Long history of overvalued real exchange –0.1 rate (RER) –0.2 –0.3 Sudan’s RER has been greatly overvalued over –0.4 –0.5 most of the past 40 years. From 1970 to the –0.6 present, there are only two years when the RER is –0.7 undervalued (Figure S.10). For the rest of years, the –0.8 1970 1976 1982 1988 1994 2000 2006 RER is greatly overvalued, by as much as 65 per- Misalignment cent in 2008. In 2010 and 2011 the overvaluation reduced to 50 percent and 40 percent—still very Source: World Bank staff own calculations, based on data from PENN World Tables. significant numbers. The overvaluation may have Note: Undervaluation zone is above 0. slightly eased in the years 2012 and 2013 where the nominal exchange rate devalued by almost 100 to other African oil exporting countries, most of percent (Figure S.11). But the positive RER effects which experience Dutch-disease-like symptoms. of this nominal depreciation, were again eaten up Empirical evidence presented in this analysis sug- by persistently high inflation rates of 35.1, 36.3 and gests that a 10 percent lower real exchange rate 37.4 percent in 2012, 2013, and 2014, respectively. could raise economic growth by 0.9 percentage The historical overvaluation is consistent points in Sudan. Given data constraints the rela- with the gaps observed between official nominal tionship between the exchange rate and export exchange rates and black market exchange rates. growth in Sudan cannot be confirmed with the same If one was to consider the black market exchange methodology, but an undervalued RER is expected rate as a de facto market-driven equilibrium value to contribute to export growth similar to what is of the nominal exchange rate, the official nominal observed across all countries considered (separate exchange rate was overvalued to the tune of 50 to 70 work on economic scenarios, presented later in this percent in 2010 and 2011. Given data constraints, summary, shows an elasticity of 0.7 between real there is no measure of RER Misalignment for Sudan after 2011. However, based on the gap between the FIGURE S.11: Sudan’s Official and Market official and the black market rates, and given the his- Exchange Rate (SDG/USD) torical relationship between the two that reflects the 10 RER Misalignment Index, it is likely that the extent of RER overvaluation remained at a similar level in 8 between 2012 and 2014. Such an overvaluation 6 pattern identified through the misalignment index 4 is consistent with other estimates. For instance, the IMF Article IV in 2014 estimated that the Sudan real 2 exchange rate was about 40 percent overvalued in 0 2014 (IMF 2014c). Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 A more competitive real exchange rate could support export and output growth. Sudan’s real Official exchange rate Market exchange rate exchange rate overvaluation of the 2000s is similar Source: CBOS; and World Bank World Development Indicators (WDI). xxvi COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE S.12: Sudan’s Wheat Yields in Wheat, (a crop not natural to Sudan, but produc- Perspective tion is encouraged by the government) has yields 8,000 that are among the lowest in the world, if not the 7,000 lowest (Figure S.12). Similar developments are seen 6,000 in the main oil seeds—groundnut and sesame. Two 5,000 4,000 notable exceptions to the decreasing production 3,000 and yield trends are gum arabic and cotton, which 2,000 has seen a renaissance over the past years with very 1,000 strong production particularly in 2013. 0 Livestock production is strong and rising, Sudan Ethiopia Egypt Libya Chad Kazakhstan Pavlodar Kzylorda but under pressure of losing land for pastoral land use. Livestock are raised in almost all parts of 2012 2013 Sudan, but mostly concentrated in western Sudan Source: World Bank staff own calculations, based on data from the Cen- (Kordofan and Darfur states) and owned primar- tral Bank of Sudan; the Sudan Ministry of Agriculture and Irrigation; and ily by nomadic tribes. Contrary to commonly held selected World Bank Agriculture Country Reports. belief, the rationale for pastoral livestock is less grounded in satisfying basic needs, such as search- exchange rate depreciation and export growth). ing for water to drink, and more due to the unique In fact, given that Sudan’s exports of non-natural economic benefits of engaging in pastoral produc- resource and agriculture products comprise mainly tion. The superiority of pastoral livestock in Sudan low-value, raw and unprocessed products, which appears to be that pastoralists consistently use natu- compete primarily on prices, the historic and cur- ral resources more intensively and hence are able to rent RER overvaluation was and is a major inhibiting produce more livestock products per unit of land factor for export development in the country. But area than any other form of livestock production. there are macro-economic trade-offs of devalua- tion, e.g., its tendency to increase import prices Very concentrated export markets and thus contribute to inflation, so any changes in the exchange rate may need to be accompanied The export basket of Sudan is very concentrated, by adjustments in the macroeconomic policy mix. as shown the large shares of its top three and five export products, but the degree of product Extremely low productivity in agriculture concentration decreases when looking at non-oil exports. Even though these measures have tended The story of agriculture in Sudan is, by and large, to decrease after the split of the country, especially a story of low productivity. Low crop yields are in the case of the top three products, the figures associated with low fertilizer usage in the country. still evidence a severe dependence of Sudan upon In 2009 the average fertilizer use per hectare of few commodities. However, the degree of product cropland was 7.3 kg, which ranked Sudan at 129 concentration decreases considerably when only among 155 countries, far behind Ethiopia, Sudan’s non-fuel products are considered. This implies that poorer neighbor. To illustrate, sorghum and millet after the loss of South Sudan, the country may have yields are low and generally on a downward trend, been forced into a path of higher product diversi- yet more so in the rain-fed production areas than fication that could work to its advantage in future. in irrigated regimes, where yields are more stable Even though the share of the top three and five non- or have slightly increased over the past decade. oil products have increased after the loss of South Summary of Findings and Policy Conclusions xxvii Sudan, they are still relatively low. However the Herfindahl-Hirschman Index at FIGURE S.13:  number of products, which always had been low, the Products Level, Sudan and had shown mild increase between 2006 and 2011, Selected Countries but fell again after the split of the country. 1.0 The lack of product diversification of Sudan also stands out when compared to peer countries, as evidenced by its comparatively 0.5 much higher Herfindahl-Hirschman index.1 Furthermore, the index has increased in recent years, while in many of its comparators it has actu- 0 ally decreased. This points out to a comparatively Average 2000–2006 Average 2007–2012 disadvantaged position, both static and dynamic. Egypt, Arab Rep. Ethiopia Ghana Indonesia Figure S.13 presents the index comparing Sudan Kenya Morocco Mongolia Uganda Sudan and some comparator countries. Source: World Bank staff own calculations, based on data used from UN Yet, Sudan has significant market power in Comtrade. global export markets for gum arabic and sesame seeds. Sudan’s power in global markets for gum arabic and sesame seeds allude to its role of being that effort, but so is the role of the exchange rate. a price setter in those areas globally. In regional Additionally, Sudan has a few agricultural export markets Sudan plays a similar role for sheep and products with global or regional market power, sheep meat, and on an emerging basis in waste and which could be used as basis for an agriculture scrap of primary cells. diversification strategy and to explore agro-pro- It is noteworthy that the role of sanctions in cessing as a next step towards light manufacturing. export concentration is not clearly evident. In But there are striking examples of policy fact, it looks like that Sudan is isolated even within inconsistencies in the agricultural sector that Africa. However, sanctions have exacerbated the prevent the sector from unfolding to its full isolation through increasing the difficulty in settling potential. Examples identified in the study include cross-border payments, which affects trade with all the policies to promote self-sufficiency in wheat; partners including their African neighbors. (World centralized marketing of agricultural products; Bank 2014e). livestock, land tenure, and land policies; and the inability to stop the decline of the Gezira scheme. Agriculture and Livestock are Key for Economic Diversification in Sudan Mistaken belief about food-security and wheat self-sufficiency All signs point to agriculture as the key sector for diversification in the medium- to long-term. Over much of the past decade, common discus- Agriculture is clearly underperforming and simula- sions about food security in Sudan have conflated tions show that growth in agricultural productivity the concept that wheat self-sufficiency adds to could have a very strong impact on raising economic food security. However, the reality is that the two growth and reducing poverty. At the same time, there is a clear opportunity to raise productivity 1 The Herfindahl-Hirschman index is calculated as the sum of the squared market shares for all products.Higher values indicate in- given the extremely low yields currently observed creasing concentration, with a maximum score of 1.0 when there is in Sudan. Fertilizer usage will be instrumental in a single product. xxviii COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT do not have much to do with each other. Other coun- limited. Still, these stores represent the equivalent of try examples are illustrative: First, Jordan produces over two months of current consumption. Compare virtually no grain at all, and yet has a high degree of this with the government’s stores of sorghum and food security, due to a substantial volume of modern millet, which only represent 20 days of consump- storage (silos) distributed around the country, and tion of those two commodities. Much more, they efficient and transparent procurement of grain from are all in the far eastern part of the country, whereas the cheapest sources on the world market. Second, consumption is mainly in the west. Box 3.4 devel- Indonesia has long considered itself food insecure, ops a proposal to establish state-level modern grain despite the fact that it is the third largest producer in storage in Sudan. the world of its staple grain (43 million tons of rice). Yet, the government encourages domestic Sudan consumers have changed their taste in production for wheat even though there is no grain and shifted emphasis to wheat, a process comparative advantage for its production in that will continue and grain consumption pat- Sudan, which needs more seasonality than most terns may be significantly different again over the of country provides. This is why Sudan’s average next decade. This gradual shift is taking place from yield is half of Chad’s, one quarter that of Ethiopia, the traditional dryland crops of sorghum and millet and 1/14 that of Egypt. Sugarcane is somewhat dif- to wheat. In 2001 grain consumption per capita was ferent, in that some areas of Sudan have achieved 140 kg: 90 kg of sorghum, 10 kg of millet, and 40 good yields in international terms. But sugarcane is kg of wheat. Now it is closer to 96 kg of sorghum the second highest water-consuming field crop in (plus about 10 percent for animal feed) and 54 kg the world, after rice. Meanwhile, Sudan’s irrigation of wheat. Consumers continue to change their taste schemes are deteriorating rapidly, and the largest, (and demand) and grain consumption patterns Gezira, is almost to the point of collapse in terms of may be significantly different again over the next delivering water. Sudanese farmers know this, and decade. Assuming that the change in preference of they have turned against sugar as decisively as they the population is permanent, changing the cropping have turned against wheat. As for government sup- pattern will be a long gradual process, and indeed port of wheat production, this study follows World may only be partial. So the shift in production will Bank (2015b) in its recommendation to first shift the not provide increased security for perhaps 10 years, focus of subsidies on domestically produced wheat and perhaps never in total. and then, second, to gradually reduce the extent of Sudan is today more secure in wheat than in subsidies on domestic production. sorghum and millet. So food security does not At the very same time that the government sub- reflect the fact that the wheat stocks are mainly sidizes wheat imports, Sudan also pays too high imported, and the sorghum and millet mainly a price for wheat imports; indeed, there are indi- produced in-country. The greater part of current cations that by changing the import sources the modern storage available now in Sudan is for wheat, government could significantly reduce the price not for sorghum and millet. In fact, current storage paid. Wheat imports are being carried out primarily is usually either attached to flour mills or owned through flourmill companies, for examples SAYGA, by flour millers at Port Sudan. As a consequence, Weita, and Seen. The main exporting countries of current wheat storage capabilities exceed millet and wheat to Sudan are now Australia, Canada, Germany, sorghum and are in the range of two months of and more recently India. The cost of wheat imports wheat consumption. Yet, since the wheat stores are could be significantly reduced if Sudan imports wheat fully private and are dedicated to the milling of flour from other cheaper sources such as Argentina, Russia, for the various companies whose strategic storage is Kazakhstan and the U.S. (Figure S.14). Summary of Findings and Policy Conclusions xxix Centralized marketing of agriculture FIGURE S.14: Sudan’s Wheat Import Price in products Perspective (USD/ton) 500 445 414 For decades export marketing of gum arabic was 372 397 400 under the sole responsibility of the monopolized 300 Gum Arabic Company. From 1969 to 2009 the Gum Arabic Company (GAC) had the sole conces- 200 sion to export raw gum arabic. The main role of the 100 GAC was to preserve and monitor the quality of raw 0 gum arabic exported and to support producers with 2010/2011 2011/2012 2012/2013 2013/2014 production and extension services. The GAC had Sudan import price All US grades implemented a floor price system for gum at buy- US (Kansas city) US (texas gulf) Argentina ing centers (auctions). However, the monopoly of Source: World Bank staff own calculations, based on data from the the GAC in gum arabic trade was widely regarded Sudan Ministry of Agriculture and Irrigation; and the United States Department of Agriculture (USDA). as the main reason behind the deterioration of gum arabic production and export in Sudan. Over many years, the low prices paid to producers (about 10–15 gum arabic have been abolished (about 13 out of percent of export price) accompanied by poor sup- the 18 taxes and charges) (World Bank, 2013c). port services led farmers to cultivate crops other Similar to the marketing of gum arabic, cot- than gum arabic. The GAC also faced administra- ton marketing was in the sole hands of one state- tive problems that led to inadequate international owned entity, the Cotton Public Corporation promotion and marketing of gum arabic. In addi- (CPC), for many decades. CPC was established tion there were other factors outside the company in 1970 to undertake marketing of all cotton pro- such as low involvement of banks in the gum arabic duced in Sudan. In 1986 CPC was closed and the trade, multiplied fees and taxes, and lack of strate- Sudan Cotton Company Ltd (SCCL) was formed. In gic stocks. 1993 the ownership structure of SCCL was changed In a bold move by the government a 2009 to let some private influence in, but the Government liberalized the gum arabic trade and removed the remained in charge. The then-new mixed sharehold- concession that granted monopolistic power to ers were made up of the Ministry of Finance, cotton the GAC, affecting the marketing and export of farmer groups from the Gezira, Rahadf, and New raw gum arabic. The floor price system was also Halfa irrigation schemes, the Sudan Pension Fund, suspended. Meanwhile, a decision was made to and the Farmers’ Commercial Bank. establish the Gum Arabic Board (GAB) to coordinate But the role of central marketing in cotton reform measures and support the revival efforts of exports is declining and the influence of market the gum arabic sector. The main objectives of the pricing has become stronger since 2011. Almost GAB were somewhat similar to the former GAC, all cotton grown under irrigation over the last 35 but without monopoly power or concession. Since years has been sold on the world market by the then, GAB is responsible for promotion of gum ara- SCCL or its predecessors. This marketing mecha- bic export, opening new markets, providing finance nism meant that prices received by cotton farmers services and quality control. The adopted reform in irrigated schemes were usually one uniform price measures have had positive impacts on improve- for each variety, after costs of handling, ginning, and ment of production, prices, and income of gum marketing had been subtracted. But pricing policies producers as many taxes and charges imposed on have now changed and cotton producers are paid xxx COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE S.15: Livestock Export Value by inability of Sudanese meat to compete with other Subsectors (USD mn) suppliers especially to the Gulf region, due to high 800 cost, lack of modern export facilities, quality con- siderations, and unsustainable supply.2 600 Contrary to commonly held belief, the rationale 400 for pastoral livestock is less grounded in satis- fying basic needs, such as searching for water 200 to drink, and more due to the unique economic benefits of engaging in pastoral production. The 0 2008 2009 2010 2011 2012 2013 superiority of pastoral livestock in Sudan appears to Sheep Goats Camels be that pastoralists consistently use natural resources Cattle Meat Hides and skins more intensively and hence are able to produce more Source: World Bank staff own calculations, based on data from the Cen- livestock products per unit of land area. Later stud- tral Bank of Sudan; and the Sudan Ministry of Livestock and Fisheries. ies replicated similar findings to the ones reported by Wilson and Clarke (1976) for Sudan and the rest of Africa. Superiority of pastoralists over sedentary on delivery at the “farm gate” according to grade farming may be due to the constant optimization by and type of cotton. There were two triggers for this experienced herders of the pasture forage their herds policy change: the deterioration of cotton produc- graze. Behnke (2012) found that fenced pastures tion and the changing environment of production south of Nyala (now in South Darfur) lost 75 percent relations especially in the Gezira Scheme. At the of their feed value (largely due to consumption by same time, the infrastructure of the cotton industry termites and loss of digestible protein due to volatil- is largely diminished, e.g., the number of spinning ization) if left ungrazed from September to the end factories is estimated to be 15 only five of which are of the dry season in May. Similar findings are avail- working, and there are 17 textile factories, only one able for Mali, Ethiopia, Kenya, Botswana, Zimbabwe, or two of them are working. and Uganda. As a result, pastoralists consistently use natural resources more intensively and produce more Livestock, land tenure and land policy livestock products per unit of land area than do sed- entary farmers, indeed even commercial ranchers. Livestock exports have rapidly become an impor- Given the unique performance of the live- tant part of Sudan’s foreign trade and reached a stock sector in Sudan and the fact that pastoral- total export volume in excess of US$670 million ism is so successful, there is surprisingly little per year in 2013. Figure S.15 summarizes Sudan’s policy attention on the sector. This is important recent export values of livestock products. There in part due to the interlinked issues of land tenure was more than a tenfold increase by 2013 compared and land policy (Box 3.1), which need to be solved with 2008 (which, however, was an outlier year due to sustain pastoral livestock production into the to an imposed export ban and quarantine measures). future. But there are also other issues, such as inher- Live sheep exports dominate the picture, represent- ent volatility of the sector and the real possibility for ing more than 70 percent of livestock export. Next in importance are the export of live camels and 2 No cold or frozen meat is exported from Sudan because of inad- hides and skins, which are about 14 and 10 per- equate abattoirs, and handling and transport facilities for chilled meat. Small assignments of whole carcasses of sheep and goats and quarter cent, respectively, of livestock export. Meat exports carcasses of beef are exported through special arrangement between fluctuate greatly, which is largely a reflection of the exporters and importers. Summary of Findings and Policy Conclusions xxxi it to be negatively affected by droughts and diseases. removal), and redesign of works to reduce mainte- Hence there is a need for more policy focus on a nance needs. Most of those needs have accumulated better, forward-looking management of the sector in recent years to the point of virtual collapse of the (World Bank, 2015b). scheme’s irrigation and drainage functions. In fact, the major problem of pastoralism In 2014 the head of Gezira’s Board of Directors today is the loss of rangeland to mechanized resigned, while the President of Sudan has pub- dryland and irrigated farming. A study in Gedaref licly declared the failure of the scheme. Almost all State (Babikir 2011) reported that grazing lands of the scheme’s staff, which once numbered 10,000, reduced from 78.5 percent of the State’s total area have been terminated and portable assets sold off. in 1941 (28,250 km2), to 18.6 percent in 2002 To turn around its fortune, and to avoid a major loss (6,700 km2). Meanwhile the mechanized farming to Sudan and its agriculture sector in particular, it sector in the State increased by 725 percent in the would seem wise to design and implement a techni- same period, from 3,150 km2 in 1941 to 26,000 cal feasibility study of rehabilitating Gezira, including km2 in 2002. In other areas, center pivot irrigated an initial benefit-cost analysis of rehabilitation of the farming is used. The old tradition of allowing herds scheme. Rehabilitating the scheme would no doubt to graze crop residues, while they simultaneously be a large project, since it would have to compensate fertilized the land, is now increasingly forgotten, in for decades of deferred maintenance. fact impossible. Instead, farmers sell their residues It may be too early to provide any details for cash and clashes between pastoralists and farm- of a rehabilitation program, there are a number ers are now much more common than ever before. of priorities emerging from the analysis in this study. On the engineering side, rehabilitation seems Inability to stop the decline of the Gezira to require mechanized or hydraulic silt exclusion scheme mechanisms at the inlets from the Nile. From an organizational perspective any rehabilitation would The Gezira Scheme is commonly regarded as the have to consider the following principles: (1) Land centerpiece of Sudan’s agriculture but it is at the tenure: Secure (and transferable) land tenure would verge of collapse. The Gezira scheme was once the have to be assured to all farmers in the scheme, with pride of Sudan, given the enormous size of the irri- no differentiation based on when ancestors joined gation system (900,000 ha), close to both the capital the scheme. (2) Allow farmers free choice of crops: (and metropolis) of an arid country (Khartoum), and Experience shows that farmers know best what crop its major port (Port Sudan). With its 90 years of his- to use to maximize yields and income. (3) Principle tory, three million inhabitants, and certain natural of cost recovery: Real cost recovery would have to be advantages (much of the scheme could be irrigated agreed by all farmers. Box 3.2 makes a case for the by gravity with proper infrastructure maintenance), rehabilitation of the Gezira scheme and suggests it is obviously the heart of Sudan’s agriculture. starting with an in-depth feasibility study. Over the years, Gezira’s natural advantages encouraged many unsustainable policy shortcuts Seize the Opportunity: Align Consistent that eventually only contributed to the scheme’s Policies for Economic Development decline. Some of those policies stretch back to the colonial days, in areas as diverse as repeated abro- Reconsider exchange rate policies gation of landholders’ rights, command cropping plans, exploitation of farmers’ interests, skimping This analysis finds that a more competitive real on spending both for routine maintenance (e.g., silt exchange rate could support export and output xxxii COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT growth and would have a particularly large effect exception to this. (3) A slightly undervalued and on the agriculture sector. Empirical evidence rather fixed exchange rate will help the govern- presented in this analysis suggests that a 10 per- ment to accumulate foreign reserves to bolster the cent lower real exchange rate could raise economic exchange rate regime and protect against economic growth by 0.9 percentage points in Sudan. Likewise, volatility. an undervalued RER is expected to contribute to Finally, a crawling peg arrangement may be export growth and this report found an elasticity the preferred choice for a pegged exchange rate of 0.7 between real exchange rate depreciation and regime as it combines the advantages of a peg but export growth. Also noteworthy is that the impact can also avoid real appreciation. A hard peg (i.e. of exchange rate adjustments is particularly pro- fixed exchange rate) runs the risk of real apprecia- nounced in the agriculture sector. tion if domestic inflation is high. When the nominal There are two approaches toward large exchange rate is fixed, an increasing domestic price exchange rate adjustments: big bang vs. gradual. level means that the dollar price of the domestic The first approach is to do a one-off devaluation. goods is more expensive compared to the foreign However, a problem of a large sudden devaluation goods—an RER appreciation. With a crawling peg, is that will bring about economic disruptions, for the nominal exchange rate is allowed to gradually instance to trade and debt services, and inflation. devalue if domestic inflation is high. Since Sudan’s And in a way Sudan already tried the approach inflation is rather high in the post-secession world, twice, in 2012 and 2013, with limited success thus a crawling peg may be the preferred arrangement. far. The second approach is to devalue gradually and credibly. The upside to this approach is that Facilitate a stable and low inflation rate the economy will only have to deal with incremen- tal changes. The downside is that the depreciation A major driver of recent high inflation is to be expectations would put pressure on the central bank found in the practice to monetize parts of the to devalue earlier than planned. For this reason, budget deficit through the central bank. Given credibility is key. Given the ever-changing black its serious negative repercussions, however, mon- market rate and the earlier attempts in 2012 and etization is not sustainable in the long term; it 2013, gradual but ongoing devaluation may be the leads to an upsurge in inflation, an impairment of approach of choice for Sudan. monetary transmission mechanisms, crowding out In the medium- to long-term, and after the of credit to the private sector, real exchange rate official and black market exchange rates have appreciation, and worsening foreign trade com- been successfully unified, the question arises petitiveness through appreciating the real exchange for what exchange rate regime may serve the rate. The monetization practice hence should be country best. The choices are between pegged and urgently reconsidered, especially as core inflation flexible exchange rates, and a case could be made for is on the rise, which signals increasing inflation the former for the following reasons: (1) A pegged expectations. exchange rate provides stability that is needed for the export sector. This is especially important if the Improve the management of natural country would like to promote exports. (2) A peg resource rents provides an inflation anchor. Developing coun- tries with low technical and institutional capability More effective volatility management within a fis- often choose to peg their exchange rate as a way to cally sustainable framework requires a medium- anchor inflation expectation. Sudan may not be an term outlook on natural resource revenues. The Summary of Findings and Policy Conclusions xxxiii current practice of government to include into In addition, the high youth dependency ratio their medium-term plans expectations that suc- has a negative influence on the savings rates in cessful exploration will add to production should Sudan. Reducing the effective youth dependency be rethought. This practice substantially increases ratio through job creation is an important support- the government’s forecast for oil revenues over the ive factor for higher savings rates. Since most of the medium-term with a high risk of not being able to young workers start their career in the informal sec- meet those targets. A similar issue is observable in tor, providing job opportunities in the informal sec- the mining sector, where production figures are tor is a key in reducing youth unemployment. As the unclear and may also reflect smuggled in and old youth dependency ratio is a critical determinant of gold. It is imperative for natural resource manage- private saving, reducing effective youth dependency ment to have a sound medium-term outlook on ratio through job creation in the informal sector natural resource revenues including those from holds tremendous potential for enhancing saving. domestic oil, fees, TFA, and gold mining. To provide job opportunities for the youth, labor Reviving agriculture and building an emerg- market policy would need to be specific to increase ing light manufacturing sector will require the capacity of the informal sector. investment—public and private—in infrastruc- ture. It is thus imperative for Sudan to raise its Increase agriculture productivity gross national savings rate beyond the pre-seces- sion levels. Low savings imply lower availability Agriculture inputs: Availability and access to of funds for productive investment which could agricultural inputs is largely considered one of transform the Sudanese economy from a highly oil- the main factors affecting productivity, prof- dependent one to a more diversified one. Given that itability, and competitiveness of agricultural the secession of South Sudan is a permanent shock production. The supply of agricultural inputs in to the Sudanese economy there is a real urgency to Sudan is organized mainly through the Agriculture support the transition to a more diversified economy Bank of Sudan (ABS) and the private sector. The through higher levels of national savings. import of fertilizers, tractors, and jute and sacks Stable macroeconomic management with constitute the major part of imported input value low inflation and positive real interest rates for agriculture inputs, but while increasing, lev- is crucial for raising both private and public els are too low to make a significant difference. savings rates. The loss of revenues from oil after Improved seed technology is essential for bridg- 2011 directly lowered public saving. At the same ing the gap between yields in demonstration trials time, the monetization of the budget deficit and and farmers’ fields. Agricultural research, which is a weakening local currency led to skyrocketing under the responsibility of the central government, inflation. Private savings immediately responded to has been underfunded for decades. The alloca- this situation and lowered their holdings. Because tion of resources across various lines of research international evidence suggests that the Ricardian is primarily a policy decision. The Agricultural equivalence holds only partially (public savings Research Corporation (ARC) is the principal only partially crowd out private saving), policy research arm of the government on agriculture, in makers could stimulate national savings by raising addition to the universities. Agricultural extension public saving. But not in the current fiscal situation services in Sudan are provided by the government where Sudan finds itself. Going forward efforts are through the Ministry of Agriculture and Irrigation needed to facilitate the build-up of private savings and the Ministry of Livestock and Fisheries. The rates through lower inflation. Technology Transfer and Extension Administration xxxiv COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT (TTEA) is the responsible technical body for agri- increased fertilizer usage yields of wheat and every culture extension services. But the government other crop will remain at unacceptable levels. delivery of Livestock and Fishery extension services Learning from successful reforms in agri- do not appear to be contributing to significant culture markets: gum arabic and cotton produc- increases in productivity. Looking forward, there tion and trade saw significant increases after is a need to better involve the private sector in the relaxation of centralized marketing. In each delivering extension services. case the Government had instituted monopolized One of the main inhibiting factors on the marketing structures in the past (monopsonies) in production side of crops is the very low level of the form of parastatal companies. As is often the fertilizer applications. In 2009 the average fertil- case with such companies, paying farmers less and izer use per hectare of cropland was 7.3 kg, which less for their products (independent of the world ranked Sudan at 129 among 155 countries. In the price) seems an easy path to profitability, until the same year, Ethiopia, Sudan’s poorer neighbor, used farmers stop harvesting or even planting their crops. 17 kg (ranking 115). Available statistics indicate that That this happened can be seen in low yields of not Sudan used as much as 80 kg/ha in the mid-1970s, only both gum arabic and cotton, but also many and 70 kg/ha in the 1980s. While it is not entirely other agriculture products. As the monopsonies clear how the low fertilizer usage came about, it is were eventually relaxed and competition provided, clear that the decline in agriculture is associated to prices received by farmers increased substantially, fertilizer usage. Raising the bar of agriculture again and with them so did areas cropped and especially in Sudan, hence, requires efforts to stimulate fertil- yields. Cotton yields tripled nation nationwide in izer usage. All hindrances to fertilizer import and one year (2010/11), and in three years increased by distribution, for whatever reasons, need to be lifted, 5 1/2 times—with no improvements in irrigation or and indeed current policy needs to be replaced by varieties. Such remarkable increases in agricultural government encouragement (and possible subsidi- yields show that poor agriculture performance is a zation at first) of fertilizer usage in order to restart product of low fertilizer usage, weak varieties due this basic ingredient of modern agriculture; without to often local breeds of seeds, but also, and pos- sibly most importantly a lack of incentives for the producers. Sudan has significant market power in global FIGURE S.16: Sudanese Products with Larger World Market Shares, 2013 export markets and regional markets in two product groups each. Sudan’s power in global 40% markets for gum arabic and sesame seeds allude to 30% its role of being a price setter in those areas globally. In regional markets Sudan plays a similar role for 20% sheep and sheep meat, and on an emerging basis 10% in waste and scrap of primary cells (Figure S.16). First steps towards agro-processing: gum 0% arabic could lead the way and show how to com- 1996 1998 2000 2002 2004 2006 2008 2010 2012 bine success in raw material trade with increas- Sheep Sesame seeds Gum arabic ing value-addition through the development of Other meat of sheep, Waste and scrap fresh or chilled of primary cells processing capabilities. In order to do so, there is Source: World Bank staff own calculations, based on data used from UN a need to understand current constraints to process- Comtrade. ing products, and how to maximize value addition Summary of Findings and Policy Conclusions xxxv through combining processing solutions with smart products and the basic value addition that they offer, variations in producing the raw materials. Since and provide a basis on which to build increased value addition would have to come through com- sales and value addition. Development of the sup- panies and activities carried out by the private sec- ply chain will also directly address the issues raised tor, it is also important to look at broader business by the overseas processors, and so help secure the environment constraints to facilitate a shift towards overall gum arabic trade and Sudan’s dominant more value addition. place in the trade (World Bank, 2015a). While Sudan is the largest producer of gum arabic in the world, it has no significant added Address broader business environment value processing, a phenomenon observable in constraints most producing countries (World Bank, 2015a). Hence, a core objective of the sector in Sudan is to Broader business environment constraints would increase the level of value addition at origin and have to be tackled to facilitate the development to increase the share of value-enhanced gum ara- of an agro-processing and light manufacturing bic products in the overall gum arabic trade from sector since the business environment in Sudan Sudan. This would lead to improved returns and remains challenging. The 2014 Doing Business hence increases in the price paid to producers for (DB) report ranks Sudan 149 out of 189 economies, the raw material. ranking it marginally lower in comparison with The goal for gum arabic value addition some of its regional neighbors (Kenya 129, Uganda, should be to reach a level in Sudan that can pro- 132, and Ethiopia at 125). Enabling Sudan to benefit duce spray dried material with high and defined more fully from the export and growth opportuni- levels of functionality, particularly in emulsions ties offered by both the regional and global economy and encapsulation (World Bank, 2015a). The pos- requires: improving the business environment; sibility to add functionality is important, as margins facilitating trade and regional integration within the are still not large for bulk sales of a standard pro- Common Market for Eastern and Southern Africa cessed spray dried gum arabic. Higher margins are (COMESA) and the Greater Arab Free Trade Area created through the production of spray dried mate- (GAFTA); making credit more available and afford- rial with high and defined levels of functionality, able, especially to smallholders’; and addressing the particularly in emulsions and encapsulation. World skills gap. Governance and accountability prob- Bank (2015a) argues that this requires management lems also need to be addressed. Enhancing policy and development of the raw material supply chain certainty and predictability requires the reduction to improve the quality of the crude gum related and removal of the legal and regulatory hurdles to to functionality, and to put in place a traceability business. system to allow maintenance of the identity and Since 2008 Sudan has experienced a slight integrity of batches of crude gum selected for, and deterioration in the business enabling environ- defined by, their particular quality attributes. ment; the country lags behind the comparators in A strategy to increase the level of value addi- getting credit and protecting investors, resulting tion through the development of spray drying in the lower rank for the ease of doing business capacity must therefore also address the devel- (Figure S.17). Sudan ranked at 170 for getting opment of raw material quality and the supply credit and 157 for protecting investors in the Doing chain. This will also address the perceived quality Business (World Bank 2014c). When it comes to problems with kibbled and powdered material that starting a business, Sudan’s performance is similar result in current low levels of demand for these to the comparator countries. Sudan ranked at 131 xxxvi COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Doing Business 2014: Ranking FIGURE S.17:  (Figure S.18). The Doing Business (2014) ranking by Component, Sudan and for Sudan (155th) on trading across borders is closer Selected Countries to the ones for landlocked countries and slightly Mongolia worse than the regional average for Sub-Saharan Africa (SSA) (141). Landlocked countries, such as Indonesia Uganda and Ethiopia in the comparators, often have Ghana more penalties than non-landlocked ones in trading Uganda across borders (Alvis et al. 2010). Sudan, with rela- Ethiopia tively good port infrastructure, does not appear to be taking full advantage of its geographic location. Kenya It is notable that the cost to import is close to the Sudan price for the neighboring comparator landlocked 0 25 50 75 100 125 150 175 countries. Paying tax (rank) Protecting investors (rank) Getting credit (rank) Build human capital and increase female Source: World Bank staff own calculations, based on data from Doing Business (various years). labor force participation to support structural change for starting business while Kenya was at 134 and There has not yet been a shift in employment Ethiopia at 166, respectively. The difficulties to from agriculture and services towards manufac- running a business in Sudan lie more in the lack turing, and there is a real lack of an educated of support to investors and business people than work force to allow for effective diversification administrative procedure. The strength of investor into new and higher value-added product areas. protection index is relatively low at 3.3 out of 10. Half of the population in Sudan has never attended For a country with sea access Sudan has a formal school and only a tiny portion has some a relatively low ranking on the trade facilita- post-secondary education. Only 15.8 percent of tion component of Doing Business indicators the population have at most secondary school education, and only 3.8 percent have some post- secondary education. Not surprisingly, education Trading Across Borders FIGURE S.18:  levels are substantially lower in rural than urban Indicator 2014, Sudan and areas and substantially lower for women than men Selected Countries (Chapter 2.A). Increasing education levels across MON all age levels would hence be an important long- IND term contribution to broaden the human capital GHA endowment in support of diversification of the UGA economy. ETH But higher education levels in younger KEN cohorts represent an opportunity for Sudan to SDN shift employment into more productive sectors. 0 25 50 75 100 125 150 175 Older parts of the population have lower education Rank than younger parts and the gender gap in educa- Source: World Bank staff own calculations, based on data from Doing tion is smaller in younger cohorts than in older Business (2014). ones. Individuals aged 20–29 have substantially Summary of Findings and Policy Conclusions xxxvii higher levels of education: one in ten has some post- non-participation by men and by women who are secondary education and a further one in three has not homemakers. The pattern is visible for both some secondary education. Yet, at present younger men and women and in both rural and urban workers are no more likely to work in industry, areas. Discouragement is concentrated amongst manufacturing, or services than their older compa- respondents below median age, in line with a triots, indicating that there is no capitalization on global phenomenon of falling youth labor market this opportunity (Chapter 2.A). By creating a more engagement. vibrant business environment the Government could build the basis for thriving businesses in Utilize remaining natural resource wealth higher value-added segments of the economy, which for agricultural revival then could increase demand for younger, better- educated members of the work force. Remaining natural resources in Sudan are likely Labor force non-participation is far higher to provide some limited time-bound support to for women than men. Many women are engaged the efforts for diversification, but to consider in home production and there appears to be some the transient character of natural resources in variance in whether they self-report this as work. the post-2011 Sudan is prudent. Looking at employment and labor force participa- The oil projections to 2030, for instance, pro- tion for five-year age cohorts shows that non-par- vide a good example (Figure S.19). Certainly the ticipation for females rises sharply across cohorts. level will lower over the next one or two decades, This pattern may reflect a life-cycle explanation in and more significantly in the base case considered which many women complete education and do in this analysis, which is significantly lower than not transition into the formal labor force. It may the Government’s own projections (equivalent to also reflect a cohort explanation in which younger the high case). In either case, it seems inevitable women are obtaining more education than their that oil production will decrease to below 100,000 predecessors and will go on to enter the labor force. bpd, but the question is whether this will happen These explanations cannot be separately tested now or in three, five or ten years until additional waves of household survey data The outlook for gold is slightly more opti- become available. But the same pattern is not visible mistic, and Sudan is projected to produce for men, most of whom are either in schooling or in the labor force. Younger men are slightly more likely than older men to be neither studying nor FIGURE S.19: Projected Domestic Crude Oil in the labor force Production, Bpd The overwhelming majority of women that 180,000 160,000 are labor force non-participating report that 140,000 they are full-time homemakers or housewives, 120,000 which is not an uncommon reporting. But there 100,000 80,000 is a high number of discouraged job seekers that 60,000 show labor force non-participation. This pool of 40,000 20,000 untapped potential workers represents both a chal- – lenge and opportunity for Sudan. Almost 750,000 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 working-age respondents are not employed, not Base High Low studying, and report that they perceive job search Source: World Bank staff own calculations, based on data from Sudan as useless. This accounts for a large majority of Ministry of Petroleum 2014; IMF 2014c; and Wood Mackenzie 2013. xxxviii COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Contribution of Natural FIGURE S.20:  spotlight on fees that the Government obtains for Resources to Sudan‘s Economy the handling of South Sudanese transit oil. The analysis shows that this now has become at least as, Gold’s contribution is growing if not more, important than the domestic oil sector but has been mainly to exports 1999–2010 in terms of exports (almost all South Sudanese oil Share of exports 2025? 2014 is presently exported) and government revenues. In 2014 Figure S.20 this manifests as the red-line circle that 2014 2025? is somewhat between the oil position of 1999/2010 2025? Oil’s contribution is declining and 2025. Under present arrangements, the GOS but transit fees lessen the impact 1999–2010 obtains fees from South Sudanese oil transportation Share of government revenue through Sudan at levels that yield a considerable Share of GDP: Oil Including transit fees Minerals fiscal surplus (after meeting tariffs charged by the Source: World Bank staff own visualization. operators of processing and transportation facilities in Sudan). Moreover, this source of fiscal revenues is not linked to oil prices, so it is largely protected between 18 to 28 tons annually over the next five from the present oil price uncertainties. years—worth about US$750–US$1,130 million Notwithstanding the fiscal benefits obtained annually. The traditional sector will continue to be from transit fees, these arrangements can only be the source of most gold produced in this period, expected to be transitory. The time-bound charac- although the ability to sustain this contribution ter is manifested in the fact that there are expiration beyond this five-year period is increasingly doubt- dates of relevant agreements. At the same time, there ful. A more likely pattern is that industrial mining are medium-term risks relating to i) an uncertain will become the main source of domestically mined outlook for South Sudan’s production rate (as well gold after 2020. It is unlikely that production after as uncertainty over TFA volumes if conflict in South 2020 would be significantly higher than 18 to 28 Sudan persists for another year); and ii) the incen- tones estimated for the next five years. tives created for South Sudan’s oil to be used either The diminishing effects of both oil and gold domestically or exported via an alternative route. As on Sudan over the next 10 to 15 years are obvi- a consequence, Figure S.20 shows the combined ous. Figure S.20 provides a summary of the natural contribution of the oil sector diminishing over the resource wealth analysis and shows how the contri- medium term (to 2015) both in terms of exports bution of the both oil and gold to Sudan’s economy and government revenues. might evolve in the medium term. The red large The Government’s emphasis on promoting circle shows the effects of the oil economy where alternatives to the oil sector is well founded, oil was both a driver for exports and Government and there have been early results in the form of revenues. This is likely to shift towards the lower left the boom in gold exports. A policy of encourag- side over the next 10 years. Even in the high case ing domestically produced gold to be exported offi- scenario for oil production this evolution is merely cially so that foreign exchange could accrue to the slowed rather than changed. The same would be Government seems to have had success, at least in true of a higher oil price environment, however, at the short term, even though a major driver of gold least in the short term the oil price is unlikely to activity has been the gold price (Figure S.21) and provide much support. the main supply response has been from the tradi- The constrained outlook for exports and rev- tional mining sector, not the industrial mining sec- enues from domestic oil production places the tor. The main policy concerns about this strategy is Summary of Findings and Policy Conclusions xxxix the length of time it will be sustainable in the face FIGURE S.21: Export Volumes of Gold of lower gold prices and/or diminishing scope for Correlated with the Price exploitation of gold by traditional methods. (Index 2004 = 100) Traditional mining may, with sufficient sup- 800 port, provide a source of livelihood in rural areas 700 600 that may have few other sources of economic sup- 500 port. Traditional mining can create direct, indirect, 400 and induced demand for labor, goods, and services 300 in areas where few alternatives exist. With sufficient 200 mapping and resource evaluation it is likely possible 100 0 to identify areas that are sufficiently rich in gold so 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 that traditional mining could be sustained for more 1H than a few years. Experience from around the world Gold price index Export volume index suggests that this planned approach is only likely Source: World Bank staff own calculations, based on data from CBOS 2014; and Ministry of Mining and Natural Resources 2014; to take place if traditional mining takes place on a formalized basis, since this provides a basis for min- ers to obtain legal title and hence finance. Industrial mining may take some time to very unlikely to rival that of the oil sector in its take off, however, such a development over the heyday and its fiscal impact may be substan- medium to long term would be more likely to tially lower. These considerations are reflected in provide a more balanced export and revenue con- Figure S.19 by the modest increase indicated in tribution to the economy than traditional mining. export contribution and low increase indicated in The Government has made promotion of industrial the contribution to government revenues. There are mining a priority and taken a number of measures numerous scenarios that could unfold, including to encourage investment in mineral exploration. much less positive ones, in which a lower gold price There are positive signs that the technical condi- environment coupled with continuing constraints tions on which industrial mining could develop are on financing of major mineral projects means that in place, backed by efforts of the Ministry of Mines the recent gold mining boom wanes. Any sustained to enhance the geological database. The mineral program of reforms to make the industrial mining rich Arabian Nubian Shield straddles Sudan and sector more competitive and to strengthen regula- several of its neighbors and has been host to min- tory institutions would require strong leadership ing activity over millennia owing to an abundance and probably external support to enhance institu- of accessible surface and near-surface deposits of tional capability and effectiveness. gold and other valuable minerals. Large-scale gold Any more thorough evaluation of the contri- and copper-gold mines developed in neighboring bution of the mining sector to economic develop- Egypt, Eritrea and Saudi Arabia provide reason for ment in Sudan would have to take into account optimism. However, the degree to which Sudan has negative externalities such as harmful environ- been explored using modern techniques to establish mental and social impacts. At this stage, impacts the viability of mechanized mining and to detect of this kind arise mainly in the context of traditional deeper lying deposits remains very limited. gold mining, though adequate regulatory care will Overall, the contribution of mining to be needed to ensure that further development of Sudan’s economy over the medium term could the industrial mining sector does not generate an be positive, however, the scale of the sector is excessive environmental and social burden. There xl COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT is already evidence that traditional gold mining of the state-level grain storage; and (3) efforts to places the environment, as well as the health and increase the education level of the population to safety of laborers and their dependents, at some risk, increase the human capital endowment to support given its very rapid and widespread proliferation. diversification. It will be important for such risks to be managed carefully to ensure that a good balance is achieved Summing it All Up between economic opportunity and environmental and social threat. The primary objective of this CEM is to support At the very least the remaining natural efforts by the Government of Sudan to transi- resource wealth available through oil and gold tion towards a more diversified and “pro-poor” could be used to finance three of the more economy. Table S.02 summarizes the main find- cost-intensive recommendations developed ings and argues that there is an opportunity to in this study. These were: (1) The rehabilita- better align more consistent policies for economic tion of the Gezira scheme; (2) the establishment development. Table S.02: Summary of Main Findings and Recommendations Findings Recommendations No lasting structural change Remove exchange restrictions and enhance policy consistency • Unify official with black-market rate and maintain a neutral real exchange rate through low inflation High and volatile inflation • Lower budget deficits and lessen reliance on domestic deficit finance • Allow more resilient investment financing through higher domestic savings Weak resource management, • Limit use of financial sector interventions for specific sector promotion budget deficits and low savings Improve the management of natural resource rents Long history of overvalued real • Establish a sound medium-term outlook on natural resource revenues exchange rate • More effective volatility management Extremely low productivity in Increase agriculture productivity through a set of key (policy) changes agriculture Agriculture policy changes • Rethink centralized marketing of agriculture products and learn from recent gum arabic and cotton experience, where centralized marketing channels were broken up. • Gradually decrease subsidy on domestic wheat production (capitalizing on the recent reform to abolish the preferential wheat exchange rate). • Diversify wheat imports to lower the wheat import bill. Agriculture investments • Promote fertilizer usage. • Establish modern state-level grain storage. • Prepare for rehabilitation of the Gezira scheme. • Strengthen agriculture extension services and better leverage the private sector. Pilot the move from agriculture to agro-processing • Pilot gum arabic spray-drying in combination with increasing the value of raw material. • Apply lessons from pilot for other successful raw exports such as sesame, cotton, and livestock. Highly concentrated export Address broader business constraints to create space for structural transformation markets • Facilitate access to credit • Strengthen investor protection • Reduce cost to import Build human capital to support skills-intensive modern services and reduce spatial disparities • Increase education levels across all age levels to broaden the human capital endowment for a diverse economy • Increase labor force participation for women, which is far lower than for men. Summary of Findings and Policy Conclusions xli To underpin the findings and recommenda- promote exports and growth. The inflation rate tions described in this summary, the CEM ana- is highlighted as a key variable to influence the lyzes Sudan’s economy and its challenges in five level of the real exchange rate. interlinked chapters. 3. Agriculture: key for economic diversification: This chapter reviews agricultural production and yield 1. What kind of growth and diversification suits trends, analysis how markets work in the sector Sudan? This presents the economic and sectoral and which products are traded most. It concludes scenarios to 2030 to identify a sectoral focus with a description of agriculture support services. for this analysis. It also contains a short base- 4. Building endowments through trade: goods and line in the form of other country experiences services. Here trade patterns and goods export in promoting growth and poverty reduction. performance are reviewed to identify Sudan’s The crucial role of institutions critical to diver- main trading products and markets. The role sifying the endowment base of an economy of business services is analyzed and highlighted will be highlighted. Finally, some lessons are as another key element for diversification. The drawn for Sudan’s way to grow and diversify chapter concludes with an outlook about the its economy. potential for future (export) diversification. 2. Structural change and the role of the real exchange 5. Natural resources: still important but not dominant rate for exports and growth. This chapter will first anymore: This chapter analysis both the oil and provide evidence from the labor market on the gold sectors in the country in two separate sub- lack of structural change in the economy. Then chapters. It concludes with a combined fiscal it will show the role of the real exchange rate to and economic outlook of both. WHAT KIND OF GROWTH AND DIVERSIFICATION SUITS SUDAN? 1 This beginning chapter of the CEM sets the stage for the analysis, and presents various approaches and lessons from other countries in relation to achieving economic growth through diversification. It starts out with presenting the results of a simulation model of the CGE (Computable General Equilibrium) type developed at the World Bank for medium- and long-term policy analysis. The model is used in two ways. First, to look at the sectoral structure of the economy now to 2030 to identify sectors of focus of the analysis. Simulations suggest that in the absence of dominant resource-based exports, growth must be centered on sectors producing tradables that are exported and/or that replace imports. Second, to present a series of alternative scenarios to show the impact of key changes in the economy such as increased TFP growth and the effects of normalization of Sudan’s relations with the rest of the world that would, for instance, lead to an increase in Sudan’s terms of trade and foreign aid. The non-base scenarios point to the beneficial effects of agricultural productivity growth, showing also that the role of agriculture would likely become more prominent in a setting with a supportive, depreciated real exchange rate The second part of the analysis in this chapter looks at the 2008 Growth report to identify the “ingredients for growth” from the countries analyzed in 2008 (World Bank 2008a). It finds that Sudan’s performance vis-à-vis the “ingredients of growth” is mixed, and between 2000 and 2011 was heavily dependent on the effects of the oil economy. The same section also explores the question on how to achieve “pro-poor” growth. It finds, given that poverty in Sudan is deep and largely a rural phenomenon, the agriculture sec- tor is crucial for efforts to reduce poverty. The third part of this first chapter looks at a recent report about “Diversified Development” (World Bank, 2014d), which argued that diversification of an economy should be perceived as the diversification of its endowments rather than the production base. The section then follows the analysis presented in World Bank (2014d) and looks, at the triad of institutions that was instrumental in other countries to diversify the endowment base. It finds that Sudan’s ability to manage natural resource rents is limited; yet, natural resources have also declined in importance to fiscal revenues. Still, more effective volatility management within a fiscally sustainable framework requires a medium-term outlook on natural resource revenues. The analysis also shows that Sudan’s ability to provide public services is a constraint. Historically, GDP growth in Sudan was rarely driven by enhancements in total factor productivity, which would indicate a rising role of human capital formation in the growth process. And human capital formation depends on the effective provision of services. In that regard, Sudan has undergone a process of decentralization that assigned basic service provision to subnational levels. Since fiscal decentralization is lagging behind, (continued on next page) 2 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT however, states do not have the ability to live up to their responsibilities and outcomes for instance for education are both low and with a large variability across states. In addition, conflict, governance and debt are all complicating factors for government to effectively deliver services. Finally, the government’s ability to regulate economic activity is being assessed by looking at the business-enabling environment. This environment has stagnated or even slightly deteriorated since 2008, which is a key factor that holds back private activities in support of the Government’s diversification agenda. The picture here is also being complicated by the economic and financial sanctions imposed on Sudan. The chapter concludes that there is a case for Sudan to follow an approach to growth and diversifica- tion that pursues both diversification of the production base and of the endowment base. Agriculture is important for “pro-poor” growth and has also great potential to realize quick wins due to its extremely low productivity at present. Trade in goods and services can be seen as an important vehicle to broaden the endowment base and to connect Sudan with international production networks. But lack of skills and skills mismatches indicate that diversifying the human capital base with advances in education is important to support trade in manufactured goods and higher-value added business services. Finally, extractives are still important in Sudan, although they are no longer dominant; still, a good assessment of the potential is a prerequisite for sound future natural resource management. Pathways to the Future: Economic A.  Looking forward: The base scenario to 2030 and Sectoral Scenarios to 2030 The base scenario assumes that, for the period This analysis develops a base scenario for 2013 to 2030, annual growth in GDP at factor cost Sudan designed to represent a central case for is at 4.1 percent. GDP at factor cost growth is above the evolution of Sudan’s economy up to 2030, the growth rates for absorption (the sum of private and compares this case to a set of alternative and government consumption and investment) and scenarios to show how development paths private final demands (private [or household] con- may differ under alternative assumptions. The sumption and private investment) due to export analysis is important because it highlights the pos- growth in excess of import growth, driven by real sible impact of key policy changes on the goal of exchange rate depreciation. Among macro items, only economic development in Sudan. By construction, government investment grows more rapidly than the base scenario matches the broad developments GDP, a reflection of the fact that it starts at a very low of the economy anticipated in recent World Bank level. A change in sector structure is needed to put and IMF reports (World Bank 2014a–g; and IMF an end to unsustainable foreign government borrow- 2014a–c). The non-base scenarios address domes- ing, particularly against the backdrop of a projected tic issues (agricultural productivity growth and the decline in gold export prices. Annex 1 has detailed real exchange rate) and the effects of normalized results for the base scenario and other scenarios sum- relations with the rest of the world. Apart from marized in Tables 0.5–0.9 and 1.1.1–1.1.5. standard macroeconomic indicators, the analysis Sudan switches from being a net exporter also highlights the impact of alternative scenarios to net importer of oil in 2018–2019. As a result, on sectoral developments. the recent oil price decline and projected low price What kind of growth and diversification suits Sudan? 3 level up to 2030 (compared to 2012) has a posi- growth for public investment (which starts at merely tive impact on Sudan’s economy. GDP growth is 1.5 percent of GDP) (Figures 2.1.3 and 2.1.4). primarily due to increased factor employment. In Within production sectors, annual growth per capita terms, projected growth rates are around rates are close to 4 percent except for stronger 2.2 percentage points lower (i.e. 1.9 percent), given growth for agriculture and negative growth projected annual population growth at this rate. The for the mining sector (petroleum and gold).3 growth rates for employment and private per-capita Agriculture growth benefits most strongly from consumption are still sufficient to reduce the unem- improved incentives due to exchange rate deprecia- ployment and poverty rates, respectively. tion. On the other hand, the two mining sectors, The shares of exports and gross national petroleum and gold, show negative growth due to savings in GDP will increase significantly from natural constraints of resource availability (Annex 2012 to 2030 (Annex 1, Table 0.6). In spite of 1, Table 0.9). Over time, growth is also quite stable, moderate import growth and low foreign borrow- initially relatively low for relatively non-traded ing, the import and foreign debt GDP shares both sectors (public services and other industry) since increase due to exchange rate depreciation. In the they do not benefit from the improved incentives government budget (Annex 1, Table 0.7), a com- due to exchange rate depreciation (Figures 2.1.5 parison between GDP shares data for 2012 and and 2.1.6). 2030 indicates that the receipt shares for taxes and The sectoral structure of Sudan’s economy domestic transfers increase while both foreign and shows growing importance of agriculture, less domestic borrowing decline; on the spending side, importance of extractives, and relative stability investment increases strongly while subsidies (for of other sectors (manufacturing, services) by petroleum products) decline, reflecting a projected 2030. Annex 1, Table 0.10 compares 2012 data to policy change. In the balance of payments (Annex 1, simulated base results for 2030 in terms of sector Table 0.8), the GDP shares in 2030 compared shares in exports, value-added, employment, and to 2012 are boosted by exchange rate deprecia- imports as well as, for each sector, the output share tion; among outflows, the main change is higher destined for exports and the demand share met by imports while, among inflows, the main changes imports. The main changes by 2030 include: are increases for exports and private transfers, while borrowing and FDI are lower.  Increased prominence for the agricultural sec- Looking at the components of domestic tor: its shares in exports, value-added, and demand, public investment is projected to have employment all increase (most dramatically the strongest initial and overall growth, albeit for exports) while its share in total imports falls starting from a very low level. Figures 2.1.2 to and imports meet a smaller share of domestic 2.1.5 show the evolution over time for the level of demand for agricultural products; real macro aggregates (at 2012 constant prices).  Reduced importance for extractives, especially in While expansion in GDP at factor cost is relatively exports but also in value added and employ- smooth, absorption initially declines when exports ment, combined with increased reliance on initially increase and imports contract to address imports to meet domestic demands; and external imbalances (Figures 2.1.2 and 2.1.3). All domestic final demands (private and public consumption and investment) decline in 2013 3 These relatively uniform growth rates across sectors are in part due to scenario assumptions, including relatively uniform rates of productiv- after which growth is positive during the rest of ity growth. The patterns of future deviations from these assumptions the period, with the strongest initial and over-all are difficult to predict. 4 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT  Relatively small changes in other sectors, even Looking forward: Alternative scenarios though manufacturing and private services both become slightly more open, with increased Two main alternatives scenarios are tested for shares in total exports and imports, larger shares Sudan’s economy, addressing (i) the potential of output going to exports and imports meeting role of agriculture as the economy enters an era larger shares of domestic demand. in which oil only will play a marginal role and only in part is replaced by gold; and (ii) the effects The simulations show the strongest growth of a potential normalization of relations with the rates for from sectors that are capable of pro- outside world. Accordingly, the non-base scenarios, ducing internationally competitive tradables. defined in Annex 1, Table 0.4, are divided into two While the simulations cannot provide an accurate groups. (1) The first focuses on issues related to and detailed picture of the future sector structure the responses of the economy to policies leading to of Sudan’s economy—such a picture would require stronger TFP growth for crop agriculture and depre- knowledge about too many unknowns—it can high- ciation of the real exchange rate. (2) The second light some of the main trends. Simulations suggest group addresses channels through which normal- that in the absence of dominant resource-based ized foreign relations may influence the economy: exports, growth must be centered on sectors pro- improved terms of trade (via higher export prices ducing tradables that are exported and/or replace and lower import prices as Sudan’s access to markets imports. It is therefore noteworthy that a sectoral improves); increased aid; and debt relief. focus of this CEM is to look at agriculture and trade During the oil boom, Sudan’s real exchange of goods and services as a means to grow the endow- rate appreciated, penalizing production of ments base of the country. non-oil tradables, a phenomenon commonly Assuming more optimistic extractive sector known as “Dutch disease,” but this is now being developments in the base scenario has only a reversed. Unless major new natural resources are marginal impact, further underlining the impor- uncovered and exploited, Sudan will in the future tance of the development of a non-extractive reverse this trend, as indicated by the pattern of sec- productive sector for tradables. In order to test toral growth for the base scenario, including above the sensitivity of the results to the assumptions for average growth for agriculture. In this new external the mining sector (including an early decline in oil environment, the prospects for high payoffs from production and declining gold export prices; see policies supporting agricultural growth are better. Figure 1.2.1), a more optimistic scenario (named Mining+) was tested. It is identical to the base except Simulating increased TFP growth for crop for that (i) gold export prices stay constant in real agriculture (Crop+), stagnant private terms up to 2030 (instead of declining during the transfers (Rem–), and these two simulations period 2016–2025 at an annual rate of 3 percent); combined (Crop+Rem–) and (ii) oil production follows the high case shown TFP growth has a strong positive impact and in Chapter 5. The results, which are summarized the decline in remittances a negative impact on in Figures 1.2.2, 1.2.3, and 1.2.4, suggest that GDP at factor cost, imports, and domestic final Mining+ would marginally raise the growth rates demands. The simulation combining the two pre- for GDP (+0.1 percent) and private consumption dictably has a more muted effect (Figure 1.2.5). (+0.2 percent) and mitigate the required change in For all three simulations, exports are boosted due sector structure. Nevertheless, the effects would be to stronger TFP growth for a major tradable sec- quite marginal. tor (Crop+), improved export incentives due to What kind of growth and diversification suits Sudan? 5 FIGURE 1.1: Model Base Scenarios: Selected Indicators, 2012 to 2030 1) Base: Selected macro indicators (2012 SDG mn) 2) Base: Selected macro indicators (Index; 2012 = 100) 700 80 300 Absorption and GDP at factor cost 250 500 60 Exports and imports 200 300 40 150 100 20 100 –100 0 50 2012 2015 2018 2021 2024 2027 2030 2012 2015 2018 2021 2024 2027 2030 Absorption GDP at factor cost Exports Imports 3) Base: Domestic final demands (2012 SDG mn) 4) Base: Domestic final demands (Index; 2012 = 100) 350 80 500 400 Private consumption Other final demands 250 60 300 150 40 200 50 20 100 –50 0 0 2012 2015 2018 2021 2024 2027 2030 2012 2015 2018 2021 2024 2027 2030 Private consumption Public consumption Private investment Public investment 5) Base: Aggregated sector GDP (2012 SDG mn) 6) Base: Aggregated sector GDP (Index; 2012 = 100) 350 40 300 Agriculture and private services 250 30 200 Other sectors 150 20 100 50 10 –50 0 0 2012 2015 2018 2021 2024 2027 2030 2012 2015 2018 2021 2024 2027 2030 Agriculture Private services Manufacturing Other industry Public services Gold Petroleum Source: World Bank staff own calculations using the MAMS Sudan Model. depreciation (Rem–), and both of these effects depreciation. The other sectors that are most combined (Crop+Rem–). GDP growth, total and strongly affected—manufacturing, other industry, for most sectors, is positively affected by higher TFP and private services—are influenced by domestic growth for crops, also when it is combined with demand developments. Gold is the only sector that lower remittances (Figure 1.2.6). shrinks when agricultural productivity is boosted, Among individual sectors, crop agriculture a reflection of its export orientation and the wors- gains most, not only when targeted but also ening of export incentives. Also in terms of export when a decline in remittances leads to real growth, the agricultural sector gains under all three 6 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT simulations (Figure 1.2.7). Other tradables with depreciation would be needed to facilitate stronger export flexibility (livestock and gold) respond to export performance. major changes in the real exchange rate, contracting exports under Crop+, expanding them under Rem–, Normalization of relations with the rest of and with only minor changes under Crop+Rem–. the world In sum, the simulation results suggest that The “normalization” simulations capture effects agricultural TFP growth has a generally positive via three channels, initially introduced sepa- impact on macro indicators and sectoral growth. rately—improved terms of trade (the simulation However, given that it leads to appreciation of the TofT+), increased aid (Aid+), and foreign debt real exchange rate, it may discourage other exports.4 relief (Debt-)—and subsequently combined in Export growth across all relevant sectors is boosted one simulation (Normal). Given that this quan- by smaller foreign exchange inflows from a non- tification at best is highly approximate, the results trade source (here with lower worker remittances should be viewed as input into thinking on these as an example), but in this case the impact on other issues as opposed to offering precise impacts. macro indicators and sector growth tends to be nega- Normalization simulations show that terms- tive, with the exception of strongly export-oriented of-trade improvements (TofT+), raise GDP sectors. In the context of lower remittances, higher growth by 0.2 percentage points. In fact it has a agricultural TFP growth mitigates or may even over- more positive impact on absorption (increase by come (depending on its strength) the negative macro 0.4 percentage points), reflected in higher private effects of the loss in remittances. Stronger agricul- consumption and investment; growth for gov- tural TFP growth also has significant positive effects ernment consumption and investment are kept on poverty reduction and employment. unchanged (Figures 2.2.9 and 2.2.10). The simulation also points to the importance Simulations also show that the 2030 unem- of the real exchange rate as a factor that works for ployment and poverty rates would be signifi- or against export growth. This is consistent with cantly lower in the normalization scenario than the analysis presented in section 2.B of this report. In for the base scenario. The government is able to order to further explore this aspect, MAMS was used reduce the tax rates and the tax intake (as share of to run a set of hypothetical simulations for 2013 GDP) given that higher growth generates higher which simultaneously had the real exchange rate revenues while two major spending items, govern- depreciate and additional foreign exchange reserves ment consumption and investment, are fixed in real put aside by the financial system. Figure 1.2.8 shows terms, reducing financing needs relative to GDP. a positive and near-linear relationship between the The effects of increased aid are positive but export quantities (both total and sectoral); in the modest. The effects of increased aid (Aid+) are background, the maximum depreciation, at almost positive but, at the envisaged levels additional 22 percent, is associated with an addition to foreign grants and borrowing, very modest, raise most reserves corresponding to close to 6 percent of GDP. According to the simulation results, the elasticities 4 As an aside, for Sudan and other countries, different sources of of real exports with respect to the real exchange rate foreign exchange earnings tend to compete for space in the basket of are around 0.7 for manufacturing, private services, foreign exchange sources. The fact that after 1999 the expansion of Sudan’s oil exports depressed exports from other sectors is an obvious and total exports but much higher (around 2.1) for example. However, this displacement effect is weaker if the expan- agriculture. These findings are consistent with the sion of exports for one sector is associated with expansion of foreign exchange outflows, for example due to the importation of intermediates observed downturn for the agricultural sector dur- or profit remittances (if the sector has significant foreign ownership) ing the period of oil boom and suggest that real or if foreign exchange is set aside to add to foreign reserves. What kind of growth and diversification suits Sudan? 7 FIGURE 1.2: Model Alternative Scenarios: Selected Indicators, 2012 to 2030 1) Oil and gold export prices (constant US$) 2) Base and alternative mining scenario: and production quantities GDP and private Consumption 1.2 210 1.1 200 190 1.0 180 Index 2012 = 100 Indiex: 2012 = 1 0.9 170 160 0.8 150 0.7 140 130 0.6 120 0.5 110 100 0.4 90 2012 2015 2018 2021 2024 2027 2030 2012 2015 2018 2021 2024 2027 2030 Gold (production) Oil (production) Private consumption (Base) GDP (Base) Gold (export price) Oil (export price) Private consumption (Mining+) GDP (Mining+) 3) Base and alternative mining scenario: 4) Base and alternative mining scenario: Sector export shares Sector value-added shares 80 45 70 40 60 35 50 30 25 40 % % 20 30 15 20 10 10 5 0 0 Agriculture Mining Manufacturing Private Agriculture Mining Manufacturing Other industry Private services Gov't services services 2012 2030 (Base) 2030 (Mining+) 5) Export simulations: 6) Export simulations: Macro growth (devation from base) (%-age points) Macro growth (devation from base) (%-age points) Absorption Crop Livestock Private consumption Gold Private Petroleum investment Manufacturing Exports Other industry Imports Private services Government services GDP at factor cost Total –1.5 –1.0 –0.5 0 0.5 1.0 1.5 2.0 2.5 –1.0 –0.5 0 0.5 1.0 1.5 2.0 2.5 Crop+ Rem– Crop+rem– (continued on next page) macro growth rates, including private demands are used to raise the trade deficit and to pay addi- (consumption and investment) and imports, by tional interest. 0.1–0.2 percentage points (Figure 1.2.9). In the Foreign debt relief has a strong impact, lead- balance of payments, increased government inflows ing to declining export growth and accelerating 8 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 1.2: Model Alternative Scenarios: Selected Indicators, 2012 to 2030 (continued) 7) Export simulations: Sectoral export growth 8) Real exchange rate and (devation from base) (%-age points) export quantity (index base = 100) Crop 160 Livestock 150 Export quantity index Gold 140 130 Petroleum 120 Manufacturing 110 Private services 100 Total 100 105 110 115 120 125 RER index (SDG/Foreign currency) –3 –2 –1 0 1 2 3 4 5 6 Agriculture Mining Manufacturing Crop+ Rem– Crop+rem– Private services Total 9) Normalization simulations: 10) Normalization simulations: Macro growth (deviation from base) (%-age points) Sector growth (deviation from base) (%-age points) Absorption Agriculture Private consumption Private Petroleum investment Exports Other industry Imports GDP at factor cost Public services –2.0 0 0.2 0.4 0.6 0.8 1.0 1.2 –0.2 0 0.2 0.4 0.6 0.8 Toft+ Aid+ Debt– Normal 11) Normalization simulations: Real household consumption 12) Normalization simulations: per capita, 2012–2030 (% deviation from base in same year) Poverty rate in 2012 and 2030 (%) 18 48 16 46 44 14 42 12 40 38 10 36 8 34 6 32 30 4 28 2 26 0 24 2012 2015 2018 2021 2024 2027 2030 22 20 Toft+ Aid+ Debt– Normal 2012 Base TofT+ Aid+ Debt– Normal Source: World Bank staff calculations using the MAMS Sudan Model. import growth. Foreign debt relief (Debt-) has increases by 0.3–0.4 percentage points for absorp- a stronger impact—GDP growth increases by tion, private consumption, and private investment 0.2 percentage points while export growth declines (Figure 1.2.9). The driving force and the main and import growth accelerates, permitting growth change in the balance of payments is a decline in net What kind of growth and diversification suits Sudan? 9 interest payments on foreign debt. By 2030, the total of about 7 percentage points in 2030 compared foreign debt would be 37 percent of GDP, compared to the base scenario. Figure 1.2.11 summarizes to above 114 percent for the base scenario. For the the simulated welfare impact of normalization, government, lower foreign interest payments make which translates into a 16 percent increase in real it possible to reduce taxes (Table 2.3). Alternatively, household per-capita consumption in 2030, with the government could raise spending. Whether this the strongest impact from improved terms of trade, would lead to better social and economic outcomes followed by debt relief and increased aid. The depends on the relative marginal efficiencies of gov- increases in household consumption bring about ernment vs. private spending in terms of contribut- a 7 percentage point reduction in poverty in 2030 ing to Sudanese development objectives; it is beyond compared to the base scenario (Figure 1.2.12). At the scope of this analysis to address this issue the very least, normalization would significantly Combining all normalization changes under soften the challenge of adapting Sudan’s economic one simulation shows cumulative gains in many structure so that it can thrive in the post-oil era, macro indicators compared to the base scenario most importantly via a revival of agriculture and (Figure 1.2.9). The combined result of debt relief other tradable sectors. and higher foreign borrowing would lead to a 2030 foreign debt at 46 percent of GDP, compared to B.  Components of Inclusive Growth 37 percent when debt relief is introduced without an increase in foreign borrowing (Debt-). For the a.  Ingredients for growth government, the increases in receipts from foreign sources is used to reduce taxation, which in 2030 is International experience merely 6.9 percent of GDP (compared to 10.3 per- Economic growth is a necessary condition for cent for base), other things being equal permit- economic and social development of any country ting higher private consumption and investment. and key for poverty reduction (Dollar and Kraay, Alternatively, the government could raise spending. 2002). But one of the key issues of a majority of the At the sector level, normalization leads to low-income countries is how to boost economic a diverse set of responses with the strongest growth and how to maintain it for a longer period gains for sectors that primarily meet domes- of time in order to catch up with the middle- and tic demands. Among the production sectors high-income countries. One of the most influential (Figure 1.2.10), the real growth is unchanged for analyses in this field is the Growth Report of 2008 mining (which are constrained by the availability (World Bank 2008), which underlies this section of natural resources). The gains are relatively weak of the report. for government services (due to the fact that they Looking at a set of high-growth economies primarily meet government demands, which are of the past, the Growth Report 2008 identified unchanged in real terms) and agriculture (which is common characteristics of successfully applied negatively influenced by real exchange rate appre- growth models—the “ingredients of growth”— ciation, compared to the base). The growth gains to inform policy formulation around the world. are stronger for the relatively non-traded private The Growth Report analyzed the experiences of the service and other industry sectors, which primarily thirteen fastest growing economies5 in the world are driven by domestic demand. In sum, the welfare impact of normalization 5 Botswana, Brazil, China, Hong Kong – China, Indonesia, Japan, is largely positive, with increased household con- the Republic of Korea, Malaysia, Malta, Oman, Singapore, Taiwan – sumption leading to a decline in the poverty rate China, and Thailand. 10 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT that managed to sustain their growth rates of at is identified as key for the growth process in any least 7 percent in the last 25 years (or sometimes economy. And the single most important govern- longer). Six of these thirteen economies even man- ment support for having competitive markets is to aged to reach the per-capita income level of indus- keep entry and exit barriers of markets low. This trialized economies.6 There are seven “ingredients allows progressive and innovative firms to more of growth” that could be particularly relevant for easily enter markets, which contributes to bring- post-secession Sudan. ing about new technology, products, and services. For an economy to grow there is a need More importantly, easy entrance of new and effi- for high levels of investment and savings. This cient firms has a spillover on incumbent firms in “ingredient” of growth is related to the need for an that it increases the need to raise the levels of their initial accumulation of resources that can be used efficiency to stay in the market. later on in the production of goods and services. Policies that allow flexible labor markets to Typical for the high growth economies is that form and match supply and demand have been their overall investments (public and private) are growth enhancing in other countries. The Growth around 25 percent of GDP. Within this envelope Report argues that governments should support and especially shown by some of the successful labor market flexibility in a view that this supports Asian countries (China, Thailand, and Vietnam), the goal of structural change in the economy. It is the public investment in the infrastructure sector further argued that policy measures that enable was between 5 and 7 percent of GDP. The Growth workers and employers to more easily match each Report 2008 emphasizes the importance of domestic other are particularly important. Sudan’s experience savings as a counterpart of investments. Attracting in pursuing structural change from the perspective FDI is important in that regard, but the Growth of labor markets is analyzed Chapter 2.A; it shows Report argues that an economy should not only rely that Sudan’s record in furthering structural change on foreign savings to avoid vulnerability to fluctua- and moving employment from low to higher value- tions in inflows, especially in downturn periods. The added activities is very limited. importance of domestic savings is their stability and Export-led growth is associated with high- relative predictability. Sudan’s experience in match- growth countries, especially if it is of a diversi- ing savings and investments is analyzed in Chapter fied nature. The export sector played a critical role 1.C; it will show that Sudan’s savings rate is low and in the thirteen high growth countries, especially the savings-investments gap is large. in the initial period of their growth process. Much To foster structural change and growth an more, policies to facilitate exports are most effec- economy needs access to technology and knowl- tive if they support export diversification. Designing edge through an active transfer of know-how. policies for non-natural resource exports is particu- Technology transfer and inflow of know-how is larly important in resource rich countries. usually associated with FDI inflows. In success- An active exchange rate policy can support ful countries domestically owned companies are export development. In the early stages of export able to absorb technologies and know-how from growth, experience shows that a low (depreci- advanced countries, thereby compensating for the ated) exchange rate can support nurturing an export relatively low capacity and resources for research sector. Keeping the exchange rate low initially also and development. prevents the need of an economy to rely overly on Successful countries in the past have sup- ported competition and structural change. Public 6 Hong Kong – China, Japan, the Republic of Korea, Malta, Singapore policy that clearly supports competition on markets and Taiwan – China. What kind of growth and diversification suits Sudan? 11 capital inflows (foreign savings), which are notori- growth countries show that policies that avoid run- ously unstable and unpredictable thereby increasing ning high budget deficits over long periods of time the vulnerability to shocks. On the negative side, and efforts to keep debt-to-GDP ratios at sustainable however, an exchange rate policy that pursues a levels pay off positively over time. In addition, in depreciated path for export promotion tends to order to maintain macroeconomic stability an effec- encourage mainly labor-intensive export sectors tive and committed government, clearly focused on rather than higher-valued more technology inten- the long-term growth objectives, is needed. sive sectors that are critical for long-term structural The Growth Report recommends support change. The role of the exchange rate in Sudan’s to productivity enhancements in the agricul- development experience over the past four decades tural sector as particular important for growth is analyzed in Chapter 2.A; it shows that Sudan’s real in resource-rich African countries. Looking at exchange rate was overvalued for most of the past sub-Saharan and resource-rich African countries 40 years and that the nominal devaluations after the the report identifies several key areas where the secession of South Sudan were not able to devalue policy makers could place greater priority in order the exchange rate in real terms due to simultaneous for growth strategies to “work.” For example, gov- very high inflation rates. ernments should aim to provide greater support Developed financial sectors that are open and to the agricultural sector in direction of increasing connected with international financial markets the productivity. The majority of the labor force are conducive to economic growth. Development employed in Africa (formally and informally) is of the financial sector is particularly relevant because engaged in agricultural production. Hence, increas- of its ability to support the goal of high savings for ing productivity may be important for raising the high investments. A more developed financial sys- output per-worker and the overall value added. This tem increases the level of financial inclusion, thereby would also reduce the unemployment rate and aid helping the economy to better mobilize savings and the process of poverty reduction. to allocate them more easily to investment needs. While the “ingredients of growth” generally Consequently, the Growth Report 2008 encour- refer to domestic policies, those policies can be ages policies that aid the development of financial leveraged through fostering an open interna- systems. Another complementary determinant of tional environment and trade integration. The growth is the financial openness of a country that, in Growth Report explicitly argues that all of the ana- the long run, aids the goals of financial development lyzed high growth economies benefited from the and deepening. Sudan’s international connectivity changing global environment, i.e. the process of is significantly limited due to the role of economic rapid openness and integration of the world econ- and financial sector sanctions imposed on Sudan omy after the 1950s. This process is still ongoing successively since 1997. and is characterized by greater openness of local Macroeconomic stability is one of the main and global markets, an increase of the volume of pre-conditions for ensuring long-term growth of global trade, and increased financial integration that an economy. Yet, the Growth Report does not offer stimulated the financial flows from one part of the a unified definition of “macroeconomic stability.” world to the other, including capital movements But it points to the fact that monetary and fiscal such as foreign direct investments (FDI). policy makers hold the keys for macroeconomic sta- There are two main channels through which bility in their hands. To this end, the Growth Report global integration of trade and capital flows can emphasizes the need for independent central banks. leverage domestic policies for growth. First, In terms of fiscal policy, the lessons from the high capital mobility and related FDI flows contribute 12 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT substantially to technology and know-how shar- by the trade integration in the world’s markets, ing. To a large extent, FDI inflows in the thirteen provides an opportunity to local producers to high growth countries of the Growth Report origi- specialize in areas where they have a comparative nated from international corporations, which thus advantage. This process incentivizes local produc- helped the countries to import new technology, ers to raise productivity and expand their output knowledge and know-how from the rest of the globally, especially those from the manufacturing world. The result of the spread of new technol- sector where spillover effects to other sectors in the ogy and know-how in the domestic economies is economy are greatest. that it substantially reduces the cost of acquiring new technology and know-how. This in turn helps Situation in Sudan recipient countries to develop their own competitive Sudan’s performance vis-à-vis the “ingredients technologies and products, which supports the goal of growth” is mixed, and between 2000 and of product diversification and structural change in 2011 heavily dependent on the effects of the the economy. oil economy. Time-series data shows that there Second, global integration leads to more were fundamental changes in the structure if the competition on trade markets. More competition economy over the past 10 to 15 years mainly due means more products on domestic markets and to the advent of oil in 1999 and in the most recent tends to lower prices for inputs and end-consump- period since 2011, due to the secession of South tion. It also provides an opportunity for domestic Sudan. Those changes are particularly pronounced producers to face global demand and expand sales in the areas of investments and savings, the export on international markets. At the same time, imports sector, FDI inflows, price stability, and, ultimately of new technology and know-how, accompanied on GDP growth (Table 1.1). Some highlights are: Table 1.1: Major Ingredients to Growth and Sudan’s Record Growth “ingredients” identified by the Growth Report 2008 Sudan’s historical record High levels of investment ≥ 25% of GDP and Average level of gross investment during the period 1980–2012 is 18.8% and during the period 2000– savings between 20–25% of GDP 2012 is 25.7% of GDP. Average gross fixed capital formation during the period 1980–2012 is 15.3% of GDP and average during the period 2000–2012 is 21.2% of GDP. Average level of gross savings for the period 1980–2012 is 13.4% of GDP and during the period 2000–2011 is 23.4%. Post-secession savings rates are in single digits and too low to drive and match investments. Technology, knowledge and know-how transfer Average level of FDIs for the period 1980–2011 is 3.3% of GDP, for the period 2000–2012 is 7.8% of (requires FDI) GDP. Supporting competition and structural change The World Bank Investment Climate Assessment of 2009 suggests a poor functioning of markets to allocate resources in the economy. This is primarily due to tight controls through the state in procure- ment processes, financial markets, and land markets (World Bank 2009b). Labor market support The formal labor market is tightly controlled, preventing the efficient match of supply and demand, and giving rise to informal, unregulated labor markets (World Bank 2009b). Export promotion and exchange rate policy Average level of exports of goods and services for the period 1980–2011 is 10.5%, for the period 2000–2012 is 16.9%. Official nominal exchange rate depreciated sharply in 2012 and there is a parallel exchange rate market. Financial sector development and openness Private credit-to-GDP ratio average for the period 1980–2012 is 11.8%, for the period 2000–2012 is 12.9%. Macroeconomic stability Average annual inflation for the period 1980–2012 is 40.2%, for the period 2000–2012 is 12.3%. The inflation is volatile during the recent period 2008–2012. Budget deficit is narrowing from 7.1% of GDP in 2008 to 5% in 2012. External public debt is growing rapidly from 60.2% of GDP in 2008 to 82.2% of GDP in 2012. Source: Growth Report (2008); and World Bank staff own calculations, based on data from the WDI and IMF, and the analysis of World Bank 2009b. What kind of growth and diversification suits Sudan? 13  Investment and savings: Sudan’s average level effect of oil discoveries. Oil accounted for of investment to GDP ratio was been below nearly 90 percent of Sudanese exports dur- 20 percent before 2000. Since then, mainly ing the 2000–2009 period showing a virtually due to the oil discovery, the average level of non-diversified economy. This trend has only investment has increased and was just above slightly relaxed after the secession with gold, the 25 percent threshold level suggested by sesame, and livestock being the only significant the Growth Report.7 Similar conclusions hold non-oil exports. for the gross savings in the country, which had  Exchange rate policy: Sudan’s real exchange increased during the oil economy, reaching the rate showed substantial overvaluation dur- lower bound of the suggested threshold level. ing the oil economy reminiscent of the classic This indicates that the levels of savings and Dutch Disease symptoms. A theory-based real gross investment were relatively high during exchange rate (RER) Misalignment Index estab- the oil period. Nevertheless, investments were lished by the World Bank for countries around concentrated on the oil-related economy and the world from 1950–2011 shows that Sudan’s hence its contribution to diversify the economy RER was overvalued as much as 65 percent in as such was rather modest. However, looking 2008. Several successive nominal depreciations at the post-secession period shows that gross in 2012 and 2013 to the tune of 100 percent national savings fell to a low of 8.5 percent of were not able to reverse this real overvalu- GDP, the lowest level since 1999. Raising the ation trend because there was a simultaneous savings rate to match and drive investments prevalence of high inflation in the years after is an immediate need for Sudan’s economy to the secession. The real exchange rate thus is master the transition. probably still overvalued, likely to the tune of  Technology and know-how transfer: As men- 50 percent (see Chapter 2.B). tioned earlier, FDI is critical for technology  Financial sector development and openness: The and knowledge transfer. And indeed, FDI has financial sector in Sudan is clearly underdevel- increased in Sudan from 2000 forward; an even oped as noticed from the relatively low level of more rapid inflow can be seen over the 2003 credit-to-GDP ratio of 11–12 percent of GDP. to 2010 period. This was again related to the The financial sector is also much closed with low oil economy. Data from fDi Markets, which levels of interconnectivity to the international records Greenfield projects in Africa, shows financial system. The economic and financial that between 2003 and 2010, two-thirds of sanctions implemented since 1997 play a role recorded Greenfield projects went into the natu- in this, and in fact have recently even tightened ral resource sector (coal, oil, and natural gas); due the BNP Paribas court ruling in 2014 (see much more, it records a virtual standstill of FDI Chapter 1.C). in Sudan since the secession of South Sudan in  Macroeconomic stability: While GDP growth 2011, confirming the dominance of the natural intensified starting in 2000 due to the oil dis- resource sector in the previous period. It also covery, rates of growth stalled since 2008, highlights the fact that in present day Sudan even before the secession of South Sudan. FDI-induced technology and know-how trans- fer is minimal and negligible. 7 Similarly, the average fixed capital formation was low before 2000  Export promotion and diversification: Sudan’s but has increases since yet was still below the Growth Report threshold of 25 percent over the 2000 to 2012 period. The difference between exports-to-GDP ratio expanded significantly the gross and fixed capital formation is due to inventories that were starting in 2000, which was undoubtedly the increasing over time in Sudan. 14 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT To some extend the prediction of the 2009 pitfalls of implementation of some of those “ingredi- Country Economic Memorandum (World Bank ents” of growth that might have contributed to epi- 2009) (that argued in the medium- to long-run sodes of economic and/or financial downturns. The Sudanese growth is not sustainable) became Growth Report also does not analyze the examples true. This was mainly related to the extreme of other economies that have implemented many dependency oil in the economy while there was a of the growth “ingredients” but nevertheless, the clear neglect of the non-oil sectors. Similarly, the ingredients have not provided such straightforward inflation rate has increased substantially since benefits for economic growth. 2008 and since then is quite volatile. In addition, A different strand of literature analyzes the the budget deficit, although somewhat narrow- caveats of rapid implementation of some of the ing, has been continuously above 5 percent of growth policies in an environment of not fully GDP even during the oil economy with all its credible institutional capacity and governmental windfall fiscal revenues. This stubbornly high policies and slow structural transformation of budget deficit is reflected in the indebtedness the system for which more dynamic transforma- of the country where the stock of public debt to tion is required. A starting argument of this type GDP has further increased over the past decade. of literature is that it is unquestionable that mac- roeconomic stability, trade openness, and financial Sudan’s agriculture productivity has not suf- liberalization are core requisites for the growth pro- ficiently increased over the years of the oil econ- cess (World Bank 2005). However, the combination omy to support agriculture-led diversification of of their implementation, the extent to which they the economy. While the agricultural share of GDP should be implemented, and what dynamics should was around or above 40 percent before 2000, the be considered depends on various specific internal share dropped precipitously to below 30 percent in and external factors of a country. Some of the coun- 2007. Likewise, the annual growth of agricultural try’s internal factors for example are: initial condi- productivity dropped from almost 6 percent between tions, quality and diversity of existing institutions, 1988 and 1992 to 1–1.5 percent between 2000 and credibility of the policy makers and their historical 2008. Low productivity is witnessed across many policy paths and actions, the commitment to pur- products compared to many countries. In sesame, for sue and implement the policy targets. The external instance, productivity of Sudan compared to other conditions of a country are related to the economic major producing countries is very low as it is equiva- and financial developments of the major trading lent to 18, 27, 58 and 51 percent of productivity in and financial partners, specificity of the region as China, Ethiopia, India, and Nigeria, respectively. well as the systemic shocks in the global economy. Wheat productivity tells a similar story, with more It is in this spirit of not only knowing the details provided in Chapter 3 of this CEM. “ingredients for growth” but also the domestic While this analysis does not suggest that limitations in Sudan that this report will aim to Sudan’s growth record would have necessarily analyze and recommend policy options that can been substantially different from the historical be both successful and implementable. actuals if followed the prescriptions of other country experiences, it does indicates the policy b.  Components of pro-poor growth areas that could be tried to better the growth prospects of the economy. In fact, the Growth While economic growth is a necessary condi- Report is focused mainly on analyzing the experi- tion for poverty reduction in a country, it is ences of the successful stories, without analyzing the not a sufficient condition for reducing poverty What kind of growth and diversification suits Sudan? 15 and income inequality in all economic areas and income inequality leads to a lower pace of and regions equally (Loayza and Raddatz 2010; poverty reduction and the distributional pattern of Warner 2011). In fact, economic growth can be growth will be less beneficial for the poor people uneven across production sectors, income groups (Cord 2007). This indicates that higher rates of eco- and regions in a country (World Bank 2009a). In nomic growth for longer periods of time are needed order for any growth process to have wider ben- in order to get significant reduction of poverty and eficial effects for the whole society of a country, income inequality. Furthermore, according to the it needs to be inclusive and have an impact on all empirical findings of Easterly (2007), a high struc- income groups and regions. tural inequality in income distribution may even be There are two broad approaches of measur- an obstacle to economic growth. This is due to its ing what is “pro-poor,” referring to absolute and negative effect on the growth elasticity of poverty, relative declines of poverty. First, according to indicating the relationship between the economic the “absolute” approach, “pro-poor” is defined as growth and the poverty rate.9 some agreed measure of poverty (defined in abso- The actual impact of economic growth lute terms) to fall over time (Ravallion 2004 and on poverty reduction and income inequality Khandker and Koolwal 2006). This absolute measure depends on the sectoral composition of growth. of poverty could be set in terms of a threshold value Supporting growth in certain labor intensive sectors of purchasing power of commodities and can be of the economy like agriculture, construction and defined such as the number of people that live on less manufacturing can have greater effect on reducing than US$1.25 a day measured in PPP. Consequently, the poverty compared to other less labor intensive the “absolute” approach suggests that the economic sector like mining, utilities and services (Loayza growth is pro-poor if and only if the number of and Raddatz, 2010 and Warner, 2011). Promoting people that live less than US$1.25 a day declines.8 growth in agricultural sector can be particularly The second approach defining the “pro- important for economies like Sudan where a great poor” growth—the “relative” measure—consid- extent of the labor force is engaged. ers income inequality changes in the process of growth. According to the “relative” approach, the 8 The major weakness of this approach is that it defines the pro-poor growth in absolute terms, without considering the equality of income economic growth is considered to be “pro-poor” if distribution. For example, during a growth process, it may appear the poor people (the low income group) benefit pro- that the absolute number of poor people may fall, but the poor or the low-income group may benefit disproportionately less than the portionately more than the higher income groups high- or middle-income groups. In this case the distribution of the (Ravallion, 2004 and Khandker and Koolwal, income generated by the growth process may still be concentrated in the higher income groups that may result in greater increase of the 2006). In other words, growth is “pro-poor” if the income inequality, although the “absolute” poverty indicator may sug- incomes of the low income group increase propor- gest that the poverty in the country has declined. The proponents of the “absolute” approach of pro-poor growth argue that, although this tionally more than the incomes of the higher income measure undermines the income inequality, if there is some benefit groups. Contrary to the “absolute” approach of from the growth process for the poor people then it still can, however, be considered as beneficial. “pro-poor” growth, the “relative” approach would 9 Another factor that affects the effectiveness of “pro-poor” growth argue that if the poor people benefit less than higher policies is the geographic concentration of the poor people. A greater concentration of poor people in certain geographical areas impedes the income groups—although in absolute terms the effectiveness of pro-poor growth policies; this is since in these areas poverty has declined—then the process cannot be it is more difficult and more time is needed for the growth process to have any impact on poverty reduction. Related, the geographical considered “pro-poor”. proximity of the areas where poverty is concentrated to the more Poverty reduction depends crucially on the developed urban centers plays an important role. A greater proxim- ity of these areas to the more developed urban areas leads to greater initial level of poverty and inequality. According beneficial effects of the pro-poor growth policies on poverty reduction to Ravallion (2004) a higher initial level of poverty and income inequality (World Bank 2009a). 16 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Economic growth in the agricultural sector greater income in the future and thus, improve is particularly powerful to alleviate poverty and their welfare. Greater access to education will also works in two ways: First, through a reduction empower gender equality where more opportunities of unemployment and greater engagement of the will be created for rural female youth. And, finally, labor force; and second, by raising the incomes in greater financial inclusion may lead to better solu- agriculture that may reduce the income inequal- tions for farmers to finance and purchase fertilizers. ity. Two examples where the growth of agricultural production was the major driving force of poverty C. Institutions are Critical to the reduction are Rwanda and China. An analysis Diversification of the Endowment conducted by Xinshen (2013) for Rwanda for the Base of the Economy period 2005–2011 indicates that development of the primary sector had the most significant impact The 2009 Country Economic Memorandum on poverty alleviation. This is in contrast to second- developed a clear agenda for reforms to over- ary and tertiary sectors, which were driving GDP come the single reliance on oil and its associated growth during that period, but both had relatively Dutch Disease symptoms in Sudan. The report small effect on poverty reduction. Similar conclu- urged for private-sector-led growth to drive a more sions can be drawn from the case China. Growth diversified economy, particularly through a revival of agricultural production since the 1980s has been of the agriculture sector. The CEM then proposed a the major factor for poverty alleviation in China’s set of interdependent steps to overcome the single rural provinces where most of the poor people are reliance on natural resources. The work called for concentrated (Montalvo and Ravallion 2010). But in developing and maintaining the necessary enabling China the pace of poverty reduction has also been environment for growth, specifically macroeco- highly unequal among its provinces. nomic stability and effective fiscal management. The There are a number of supporting policies for report also highlighted the need to implement poli- the agriculture to thrive and increase the poverty cies aimed at improving the investment climate. The reduction impact of growth in the rural sector. need to increase returns in the agriculture sector, Greater access to electricity, for instance, brings whose productivity levels have declined over the oil about more efficiency of agricultural production boom years, was identified as a key effort. Finally, and also provides opportunities for farm workers the CEM emphasized that technocratic reforms need to engage in food processing activities that may to be paired with good governance. additionally increase their income (Khandker and Progress on the 2009 reform agenda has Koolwal 2006). Likewise, infrastructural develop- been limited, but some key reforms may serve ment, in particular building paved roads that con- as a model for further change. This new CEM nect rural with urban areas, provides easier access to will argue that the agriculture sector is still suffer- markets for farm and non-farm rural workers, which ing from very low productivity, the export basket is also important for technology transfer between continues to be very concentrated, yet less so given regions (Datt and Ravallion 2009). Improved access the declining relative importance of oil. Fiscal man- to water and irrigation will increase the agricultural agement of recent years was dominated by coping production and the living standards of agricultural with the effects of the secession of South Sudan, workers. Greater access to education in rural areas which meant an unprecedented fall in revenues increases the opportunities for the youth in continu- for the country. While a number of fiscal reforms ing their education and also in finding higher skilled were implemented the budget deficit increased sig- work in the urban areas by which they may generate nificantly after the secession and expenditures had What kind of growth and diversification suits Sudan? 17 to be cut substantially. A large part of the deficit a more diverse endowment base, and ultimately, a was financed through monetization by the central more diversified economy. bank, which in turn led to strong post-secession inflation. There was no real improvement in the a.  Ability to manage natural resource rents business environment with most indicators either stagnating or falling. The ability to manage natural resource rents Comparing the situation in today’s Sudan refers to the ability to pursue overall stabilizing with the reform areas identified in the 2009 CEM macroeconomic policies of which stable fiscal suggests that there is still a need to tackle the management is key, sometimes achieved with underlying issue of furthering structural trans- stabilization funds for natural resource rents. formation and economic diversification. There are For Sudan, this section finds that the Government’s basically two approaches to do this, by either diver- ability to manage natural resource rents is limited; sifying the production base of a country, through yet, natural resources have also declined in impor- for instance advances in agriculture or manufac- tance to fiscal revenues. Still, more effective volatility turing; or alternatively, a country can diversify its management within a fiscally sustainable framework endowment base. World Bank (2014d) developed requires a medium-term outlook on natural resource and discussed the latter approach, which argues revenues. that diversification should be pursued as a result of policies that diversify national asset portfolios; such Fiscal policy and public debt portfolios include natural resources, built capital, During the oil economy in Sudan oil revenues and public institutions. World Bank (2014d) thus rapidly became the main source of public rev- argues that governments should “try to create the enues and contributed more than 50 percent conditions for accumulating a balanced portfolio of total revenues at its peak, but this situation of national assets, by exploiting natural resources ended abruptly in 2011. With the secession of responsibly, building infrastructure and human cap- South Sudan came a substantial loss of oil reve- ital, and instituting mechanisms to manage resource nues and the share of oil to total revenues declined rents, provide public services, and regulate private from 59 percent in 2011 to 16 percent in 2012 enterprise” (World Bank 2014d: 31). (Figure 1.3.1). This massive shock in decline of oil World Bank (2014d) argues that economies revenues could not be compensated for by increased successful in their diversification efforts are able tax and non-tax-non-oil revenues, even though to broaden their endowments base by maximiz- they increased significantly—and overall revenues ing a triad of institutions to deliver services declined by 33.5 percent between 2011 and 2012. that ultimately increase productivity. This triad During the pre-secession period Sudan had some includes the abilities to manage natural resource experience in utilizing an oil revenue stabilization rents, to provide public services, and to regulate account (ORSA)—a failed attempt to smooth expen- economic activity (and foster a business enabling diture (Box 1.1). environment). Looking at Sudan, there are impor- Oil revenues are expected to fall to around tant weaknesses in all the three areas, often compli- 10 percent of total revenues over the next five cated by conflict and fragility, sometimes through years. At the same time, the ability of the govern- uncertain assignments of responsibilities in an ever ment to generate fiscal revenues from the gold sector more decentralizing public administration. Overall, will be rather limited, primarily due to the nature it finds there is much scope to improve the effective- of gold mining that is first and foremost artisanal ness of these institutions to lay the groundwork for in Sudan. Only if Sudan succeeds in establishing a 18 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT BOX 1.1: Sudan’s Experience with the Oil Revenue Stabilization Account (ORSA) The 2009 CEM argued that while Sudan had the foresight of creating an Oil Revenue Stabilization Account (ORSA) to help smooth expenditure during the oil economy, the account failed to deliver to its promise due to poor management. Withdrawals from the account had been highly volatile and nearly equal to deposits on net—highlighting its mismanagement and lack of effectiveness in stabilizing expenditure. More importantly, there were heavy withdrawals when oil revenue was well above budgeted levels. ORSA was a locked sub-account for the Government at the Bank of Sudan, the central bank. The Ministry of Finance and National Economy had sole access to it. At the start of each fiscal year, a benchmark production figure and the Government of National Unity and the Government of South Sudan agreed upon the price of the oil used. The account was to receive any revenues accruing from production or price above the benchmark are, and withdrawals were to be distributed to both governments in proportion to their share of total oil revenue. At its peak, ORSA accumulated more than US$300 million in early 2006, but was depleted by time of the secession of South Sudan. Substantial drawdowns from the account in 2006 to finance government expenditures in light of shortfalls from then delayed new fields let to a near-depletion by end-December 2006. While ORSA was built up again over most of 2007 and early 2008, it was again depleted in the wake of the global crisis and collapse of oil prices in late 2008 and 2009. It was not built up since that time and with the secession of South Sudan disappeared from the scene. Source: World Bank (2009b). modern, industrial mining sector will there be a real expectations that successful exploration will add to possibility for relevant fiscal revenues from the gold production. This substantially increases the govern- sector. This is a medium- to long-term endeavor, ment’s forecast for oil revenues over the medium- however, and Chapter 5 will provide an assessment term with a high risk of not being able to meet those of these prospects. targets. The differences in assessment will be shown In addition to oil revenue from Sudanese in Chapter 5 where the CEM base scenario is sub- domestic production, fees are also expected from stantially lower than the Government medium-term South Sudanese oil flowing through Sudan’s oil oil outlook. A similar issue is observable in the min- infrastructure and time-bound proceeds of the ing sector, where production figures are unclear and transitional financing agreement (TFA) between may also reflect smuggled in and old gold. the two countries. Chapter 5 will estimate that those After two years of balanced budgets in 2010 additional oil-related funds are in the order of 10 to and 2011, a significant deficit opened up in 2012, 20 percent of total revenues until 2016. Under the but was narrowed again in 2013. Even though a Bi-Lateral Agreements South Sudan is required to pay reduction of total expenditures was achieved 2012 US$15.00 per barrel up to a maximum of US$3.028 the decline in expenditure could not keep pace with billion as a Transitional Financial Arrangement the decline in revenues. The budget deficit shot (TFA). The TFA period ends in December 2016. In up from virtually zero (–0.2 percent of GDP) to addition, the ongoing civil conflict in South Sudan 3.8 percent deficit in 2012 (Figure 1.3.2). Moreover, puts the TFA payments in an uncertain light. in 2013 the expenditure side expanded again in More effective volatility management within real terms (Figure 1.3.3), but with a recovery of a fiscally sustainable framework requires a GDP growth from negative to positive territory in medium-term outlook on natural resource rev- 2013 (Figure 2.1.1), expenditure as percent of GDP enues. This claim was already made in the 2009 decreased. As a result, the deficit narrowed from CEM; yet it is found that this is still an issue in 3.8 percent of GDP in 2012 to 2.3 percent in 2013. today’s Sudan. Chapter 5 will analyze this in detail, The gradual elimination of oil subsidies starting in but it is clear that the current practice of govern- September 2013 continues this effort and the 2014 ment is to include in their medium-term plans deficit is expected to further decline. What kind of growth and diversification suits Sudan? 19 FIGURE 1.3: Fiscal Policy and Public Debt 1) Fiscal revenues and composition (SDG mn) 2) Revenues and expenditures (% of GDP) 35,000 30 30,000 25 25,000 20 20,000 15 15,000 10 10,000 5,000 5 0 0 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 Tax revenues Oil revenues Other non-tax, non-oil revenues Revenues Expenditure 3) Fiscal expenditure and composition (SDG mn) 4) Structure of Sudan‘s external debt in 2013 40,000 35,000 30,000 14% 36% 25,000 20,000 15,000 13% 10,000 37% 5,000 0 2008 2009 2010 2011 2012 2013 Current Capital Commercial Multilateral Paris Club Non-Paris Club 5) Sudan‘s stock of external debt, 2001 to 2013 600 60 500 50 400 40 300 30 200 20 100 10 0 0 2001 2003 2005 2007 2009 2011 2013 Total external debt (US$ bn, RHS) Percent of GDP Percent of revenues Source: World Bank staff own calculations, based on data from IMF 2012; IMF 2013; IMF 2014a; IMF 2014b; IMF 2014c; and World Bank World Develop- ment Indicators (WDI). Financing the budget deficit is one of the is not sustainable in the long term; it leads to an key challenges in post-secession Sudan. In the upsurge in inflation, an impairment of monetary aftermath of the secession the dominant source of transmission mechanisms, the crowding out of credit financing was through monetization. Given its seri- to the private sector, real exchange rate appreciation, ous negative repercussions, however, monetization and worsening foreign trade competitiveness. 20 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Options for foreign financing of the budget within the annual non-concessional borrowing limit deficit are limited as Sudan’s external debt stood of US$600 million prescribed by the government’s at about US$45 billion (79 percent of GDP) at Staff Monitored Program with the IMF. There has the end of 2013 (Figure 1.3.5). Of this, about 85 not been any new private external debt in decades. percent was in arrears. The large majority of Sudan’s However, it will be important for Sudan to minimize external debt is public and publicly guaranteed non-concessional borrowing and avoid selective debt (valued US$43.4 billion, of which 88 percent debt servicing to bilateral creditors, as these may in arrears), mainly owed to bilateral creditors and complicate reaching agreement with creditors on a almost equally divided between Paris Club and debt resolution strategy. non-Paris Club creditors (37 vs. 36 percent of the Given the constrained foreign financing total). Only a small fraction is commercial debt options for Sudan it will be important to mobi- owed to suppliers (US$1.6 billion). Sudan is also lize more domestic resources for productive in arrears with multilateral creditors, including the use, most notably domestic savings to support World Bank, the IMF, and the AfDB (Figure 1.3.4). investment. The next section in this chapter will The most recent joint World Bank and IMF Debt look at Sudan’s savings rate and identify the main Sustainability Study (DSA) classifies Sudan being in determinants in a view to derive policy conclusions debt distress (IMF 2014c). on how to increase savings in Sudan to support the Sudan’s ongoing debt crisis dates back the transition to a non-oil economy. 1980s. It started with the Government’s inability to service its debt service obligations that in turn Savings and investment: trends and led to an unprecedented increase in arrears. This is determinants a key feature of Sudan’s striking debt burden up to National savings in Sudan, which is the sum of the present time, where 85 percent of Sudan’s debt public and private saving, fell sharply in 2012 is in arrears. There are widely recognized domes- to 8.5 percent of GNDI, after being double-digit tic and external causes for the debt crisis (Rahman during the last decade (Figure 1.4.1). The ini- 1995; and Ahmed 2008), including the global reces- tial increase in the savings rate in the late 1990s sions of the 1970s and 80s due to oil price shocks, was driven by the private sector after the col- an overvalued exchange rate, and insufficient debt lapse in savings caused by a combination of poor management capabilities within the government.10 Total contracting of external debt remained 10 An unfavorable external environment contributed to the debt crisis below 1 percent of GDP per year since 2011, some three decades back. Sudan was vulnerable to the oil shocks of the 1970s and 80s as it was a net oil importer that faced rapidly rising but abstinence from non-concessional borrow- commodity prices, coupled with high interest rates and recessions in ing will be important for debt relief. Given eco- most parts of the then western world (Rahman 1995). An overvalued exchange rate during that time added to the problem as it further nomic and financial sanctions as well as the fact eroded the export competitiveness of the country and ultimately led that Sudan is in arrears with most creditors, the to a high degree of import reliance (Ahmed 2008). But there was also a strong domestic element contributing to the debt crisis. A very country has effectively been cut off from external concentrated export basket, comprised of primarily agriculture exports financing sources. The government currently can such as cotton, sesame, groundnuts, livestock, sugar, oils seeds, and gum arabic meant a real exposure risks related to volatile demand and only contract new debt with a limited number of prices, both of which then unfolded (Ahmed 2008). Moreso, around still-disbursing multilateral and non-Paris Club this same time a crisis developed in cotton, Sudan’s then principal export crop, and exports and production dropped sharply. Addition- bilateral creditors such as China. Some US$152 ally, economic adjustments programs were only partially implemented million of new debt (0.2 percent of GDP) was con- due to the political economy of that times; the consequence was to revert to external borrowing to stem the crisis. Finally, the absence of tracted in the first half of 2014, of which US$$147 effective debt management capabilities in the government meant that million is on non-concessional terms, which is well there was, de facto, no limit to external borrowing (Rahman 1995). What kind of growth and diversification suits Sudan? 21 macroeconomic performance, external disturbances, GDS = GDP – (C + G) and structural weakness. Public savings followed the GNS = GNDI – (C + G) = GDS + Yf + Tf trend in the early 2000s when oil revenue started to contribute to public investment and the budget. Hence, Gross Domestic Savings (GDS) and Gross Private savings increased from –0.1 percent in 1995 National Savings (GNS) differ substantially if a to 17.5 percent in 2000, whereas public savings country has large current transfers in the form of increased from 0.4 percent in 1999 to 5.8 percent public (e.g., official aid) and private transfers (e.g., in 2004 (Figure 1.4.2). remittances) from abroad. In the case of Sudan, The July 2011 secession of South Sudan had however, transfers in the form of aid are negligible negative impacts on Sudan’s savings through and GDS and GNS are rather similar (Figures 1.4.4 a buildup of large economic imbalances. As a and 1.4.5). It is for this reason that the analysis in result of the secession, Sudan lost almost three- this section uses GNS as underlying measure. quarters of its oil revenues, and two-thirds of its Sudan’s national and private savings rates are foreign exchange earnings. The budget balance comparable to those of neighboring Sub-Sahara deteriorated considerably, registering a deficit African countries, but relatively low for an oil- of 3.8 percent of GDP in 2012 from a surplus of producing country. In the 1990s, Sudan’s savings 0.3 percent in 2010 (Figure 1.4.3). Monetization rates were the lowest among peer countries. Thanks of the budget deficit and weakening local currency to the improved macroeconomic performance and in the parallel market led to skyrocketing inflation the oil revenues, Sudan’s national savings rates from 15.4 percent in 2010 to 44.4 percent in 2012 rose from –0.7 percent in the 1990s to 16.4 per- (end of year inflation). Against this backdrop, pri- cent in the 2000s, reaching the regional average vate savings fell from 13.8 percent in 2010 to 10.1 (Figure 1.5.1). A similar development pattern percent in 2012, whereas public savings dropped can be observed for Sudan’s private savings rates further from 5.1 percent in 2010 to –1.6 percent (Figure 1.5.2). But then Sudan’s national savings in 2004. rates fell to 14.0 percent in the early 2010s. A similar The two most common definitions for sav- pattern in the national savings rate is observed for ings refer to Gross Domestic Savings (GDS) and oil-producing Algeria, whose savings rates sharply Gross National Savings (GNS). These concepts are rose in the 2000s, but declined in the early 2010s derived from the national accounts. Gross Domestic when oil prices moderated. Product (GDP) and Gross National Disposable The decline in savings in Sudan was led by Income (GNDI) can be expressed as: public savings rates in the 2010s (Figure 1.5.3). In oil producing countries, including Sudan, public GDP = C + I + G + (X – M) savings rates rose in the late 2000s when oil prices GDNI = GDP + Yf + Tf had a sharp uptick, but fell significantly in the early 2010s when oil prices were moderated. In contrast, Where C is private consumption, I is investment non-oil producing countries, such as Tanzania and (gross capital formation), G is government con- Ethiopia, steadily increased public saving, attributed sumption, X is exports, M is imports; Yf is net factor to sound fiscal management. income from abroad, and, Tf is net foreign private Savings rates are highly correlated with and official transfers. investment and economic growth. This is con- The relationship between Gross Domestic firmed in the literature Loayza et al. (2010) and Savings (GDS) and Gross National Savings through a cross-country analysis shown in Figures (GNS) can then be written as: 1.5.4 and 1.5.5. Although there has been 22 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 1.4: Savings Rates in Sudan, 1991–2013 1) National Savings in Sudan, 1991–2013 2) Private and Public Savings, 1991–2013 30 40 20 30 10 20 Percent of GNDI Percent of GNDI 10 0 0 –10 –10 –20 –20 –30 –30 –40 –40 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013p 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013p Gross public savings Gross private savings 3) Overall Budget Deficit, 1991–2013 4) Sudan‘s National Income 5 900 0 Constant 2005 US$ 800 Percent of GDP –5 700 –10 600 –15 500 –20 400 –25 300 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013p GDP per capita GNI per capita GNDI per capita (real) 5) Different Measures of Savings in Sudan 35 30 25 Percent of GDP 20 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Gross domestic saving Gross national saving Source: World Bank staff own calculations, based on data from World Bank World Development Indicators; and IMF World Economic Outlook. Note: (1) “p” denotes preliminary. controversy on causality between savings and however, close connection between the two is growth, the causality that runs from savings to observed, especially in the long run. growth plays a critical role through the capital 11 Aghion et al. (2006) developed a theory that domestic savings af- accumulation process.11 In theory, it does not fects economic growth in developing countries that are far from the matter how investment is financed. In practice, technological frontier. What kind of growth and diversification suits Sudan? 23 FIGURE 1.5: Savings and Investment Rates in Sudan and Selected Countries 1) National Savings Rates 2) Private Savings Rates 70 45 60 40 50 35 Percent of GNDI Percent of GNDI 30 40 25 30 20 20 15 10 10 0 5 –10 0 Kenya Uganda Egypt Sudan Tanzania Ethiopia Morocco Indonesia Algeria Kenya Tanzania Uganda Sudan Ethiopia Egypt Morocco Indonesia Algeria Average '91–99 Average '00–'09 Average '10–'13 3) Public Savings Rates 4) Savings and Investment Around the World 20 40 35 Investment rate (% of GDP) 15 30 Percent of GNDI 10 25 5 20 0 15 10 Sudan –5 5 –10 0 0 10 20 30 40 Egypt Morocco Uganda Sudan Kenya Indonesia Ethiopia Tanzania Algeria Savings rate (% of GNDI) Average '91–99 Average '00–'09 Average '10–'13 5) Savings and Growth Around the World 6) Savings and Investment in Sudan 10 30 8 20 GDP per capita growth 10 6 Percent of GNDI 0 4 –10 Sudan 2 –20 –30 0 –40 –2 –50 –4 –60 0 10 20 30 40 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013p Savings rate (% of GNDI) S-I gap Saving Investment Source: World Bank staff own calculations, based on data from World Bank World Development Indicators; and IMF World Economic Outlook. Note: (5) and (6): Analysis based on average data for the period 1990–2009. Thus, low national savings jeopardize invest- (Figure 1.5.6). The increased saving-investment ments and growth in post-secession Sudan. gap, in turn, has been financed by a deteriorat- Initially, and despite the sharp decline in savings ing current account balance. The current account rate, investment remained stable after the secession deficit was at 9.4 percent of GNDI in 2013, the 24 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Table 1.2: Simulations of Savings and Growth Rates for Turkey a. Savings Rate under TFP Growth Scenarios (GDP per Worker Growth Rate = 4%) Moderate High (TFP Growth=1%) (TFP Growth=2%) Initial 24.9 19.5 5 Years 26.0 18.3 10 Years 27.2 17.2 25 Years 31.1 14.2 b. GDP per Worker Growth under TFP Growth Scenarios (Savings Rate = 20%) Moderate High (TFP Growth=1%) (TFP Growth=2%) Initial 3.00 4.10 5 Years 3.03 4.33 10 Years 3.05 4.51 25 Years 3.09 4.88 Source: Hevia (2010). highest rate since 1996. It is true that investment For instance, macroeconomic stability determines does not necessarily have to be financed by national the real rate of return for investment but contract savings if a country has access to external sources. enforcement affects the smooth implementation of But Sudan does not have good access to external investments. sources due to its unique and isolated status in the Turning from the past to the future, it is world. Moreover, a country cannot rely indefinitely imperative for Sudan to raise its gross national on external financing since large current account savings rate beyond pre-secession levels. The deficits tend to be not sustainable in the long term. analysis so far has illustrated that post-secession However, due to diminishing returns, capi- Sudan’s national savings is low, creating chal- tal accumulation through investment is not suf- lenges to economic diversification and sustained ficient in the long term to sustain high growth. economic growth. Low savings imply the avail- International evidence suggests that sustainable ability of fewer funds for productive investment growth needs productivity growth through human that could transform the Sudanese economy from capital enhancements and technological improve- a highly oil-dependent one to a more diversified ments. A country case study about Turkey (Hevia one. Given that the secession of South Sudan is a 2010), for instance, shows that the link between permanent shock to the Sudanese economy there national savings and economic growth critically is a real urgency to support the transition to a depends on productivity growth (Table 1.2). In more diversified economy through higher levels of addition, the channel from savings to productive national savings. To this end, the recent decline in investment plays a critical role for economic growth. both private and public savings of particular con- An efficient financial system is a necessary condi- cern for post-secession Sudan. tion through which savings is effectively allocated to investment.12 Likewise, the institutional capac- ity and the rule of law affect investment decision. 12 Levin (2005). What kind of growth and diversification suits Sudan? 25 Looking at the key determinants of savings, productivity, which would indicate a rising role of stable macroeconomic management with low human capital formation in the growth process. inflation and positive real interest rates is crucial And human capital formation depends on the effec- for raising both private and public savings rates tive provision of services. In that regard, Sudan (Annex 2). After 2011 loss of revenues from oil has undergone a process of decentralization that directly lowered public saving. At the same time, the assigned basic service provision to subnational lev- monetization of the budget deficit and a weakening els. Since fiscal decentralization is lagging behind, local currency led to skyrocketing inflation. Private however, states do not have the ability to live up to savings immediately responded to this situation and their responsibilities and outcomes, for instance, for lowered their holdings. Because international evi- education are both low and with a large variabil- dence suggests that the Ricardian equivalence holds ity across states. Finally, conflict, governance, and only partially (public savings only partially crowds debt are all complicating factors for government to out private saving), policy makers could stimulate effectively deliver services. national savings by raising public saving, but not in the current fiscal situation. Therefore, going for- Effective public institutions increase ward, efforts are needed to facilitate the build-up of productivity private savings rates through lower inflation. Sudan has had a period of more than one decade In addition, the high youth dependency ratio with positive real economic growth rates driven has a negative influence on the savings rates in by oil GDP since its discovery in 1999, end- Sudan. Reducing the effective youth dependency ing abruptly in 2011. The secession of South ratio through job creation is an important support- Sudan strongly affected economic activity, result- ive factor for higher savings rates. Since most of the ing in contraction of GDP by 2.2 percent in 2012 young workers start their career in the informal sec- (Figure 1.6.1). The sharp drop of oil GDP and the tor, providing job opportunities in the informal sec- slow-down of non-oil GDP in the country as a con- tor is a key in reducing youth unemployment. As the sequence of the secession mainly drove this contrac- youth dependency ratio is a critical determinant of tion of economic activity. One of the fast growing private saving, reducing effective youth dependency non-oil sectors in Sudan after the secession became ratio through job creation in the informal sector gold mining, which accounted for 2.8 percent of holds tremendous potential for enhancing saving. non-oil GDP in 2012, and expanded by 64.7 per- To provide job opportunities for the youth, labor cent in 2012 compared to 10.4 in the previous year. market policy would need to be specific to increase Consequently, the non-oil GDP became one of the the capacity of the informal sector. major driving forces of overall economic activity in Sudan since 2011, registering growth rates between b.  Ability to provide public services 4.5 and 6.8 percent in the 2010–2012 period. But the signing of the implementation matrix of the The ability to provide public services relates agreement between Sudan and South Sudan in to the ability of governments to invest into the March 2013 was one of the stimuli for the economic human capital of the younger generation and recovery in 2013 when the Sudanese economy grew to build infrastructure that can be used for by 2.7 percent. The signing of the agreement less- forward-looking economic activities in the long- ened the tensions with South Sudan and enabled term. Sudan’s ability to provide public services is resumption of oil production and flows from South a constraint. Historically, GDP growth in Sudan Sudan, enabling a growth of oil GDP by 28 percent was rarely driven by enhancements in total factor in 2013. Consequently, the economic recovery in 26 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT 2013 was driven again mainly by oil GDP growth, capital investments in the country fueled by the oil which outweighed a slow-down of non-oil GDP economy and satisfied through both domestic sources growth. In 2014, non-oil GDP grew stronger than and FDI. Investment reached its peak over the 2003 oil GDP, probably reflecting the new normal for to 2006 period at about 24 percent of GDP, which Sudan but also the disruption of oil extraction in was mainly achieved through expanding public South Sudan due to internal conflict there. investment, although private investment did retain While positive, Sudan’s growth was rather its dominant position in the economy (Figure 1.6.5). volatile and its rate of expansion below the aver- The latest and third period in the economy age for SSA, despite the positive effects of the oil started in 2008 and is coined by negative TFP economy. The variability of GDP growth in Sudan growth. This period includes the 2011 secession during the past decade (caused by the advent of oil that is associated with the loss of the majority of and the secession of South Sudan) was quite high oil reserves and related fiscal revenues. Declining and is the highest compared to a selection of com- growth rates of this period was driven by a decline parator economies and SSA (Figure 1.6.2). Despite in physical capital and the negative contribution of the extensive exploitation of natural resources, the the TFP growth (Figure S.05). This is not surprising average GDP growth rate during the past decade as investment in oil-related activities fell with the was in the lower half of its comparator countries secession, FDI declined, and overall economic senti- (Figure 1.6.3). The level of GDP per capita in Sudan ment declined. The severity of the contraction can be is also lower than the average for SSA, urging the explained by the importance of physical capital and need for economic restructuring and diversifying TFP in Sudan’s economic development prior to 2008. production structure and increase in productivity. The sectoral decomposition of GDP growth High productivity is crucial for sustaining suggests that, historically, the major driver of high growth, yet in Sudan total factor productiv- growth in Sudan was and now still is the service ity has been low or even negative in the majority sector. In fact, the services sector contributed on of years since oil was discovered in 1999. There average 64.3 percent to overall value added dur- are three distinct period of the economy since 1989, ing the sample period between 2003 and 2013. In based on an assessment of the contributions of the contrast, the contribution of the industrial sector production factors by decomposing GDP growth was much lower with an average of 21.7 percent. according to the Cobb-Douglas production function (Figure 1.6.7). A more disaggregated analysis of the (Figure 1.6.4). The first period can be distinguished contributions of the value added of different produc- from 1989 till 1997 when the average GDP growth tion sectors in the economy to overall GDP indicates reached 4.9 percent and was driven mainly by labor that the shares of certain services such as trade, res- and total factor productivity growth. This was a taurants and hotels, and transport and communica- period of experimenting with economic reforms and tion has been increasing continually since 2005. This liberalization of the economy. The second period of is not surprising as those services were important economic development of Sudan can be noted from during the oil economy. Encouragingly, the share of 1998 to 2007. As a result of the advent of oil, the the manufacturing sector has increased since 2011, average economic growth increased by 1.2 percent- albeit from a very low base (Figure 1.6.8). age points, reaching an average rate of growth of 6.1 The importance of the service sector in Sudan percent. Typical for this period is that the physical is similar to most of its comparator countries, capital became the major driver of economic activ- but both the contributions of the industry and ity, whereas the contribution of labor and TFP sig- agriculture sectors are relatively low. The aver- nificantly decreased. This is a reflection of increased age contribution of the services sector in Sudan is What kind of growth and diversification suits Sudan? 27 FIGURE 1.6: Economic Activity 1) GDP growth in Sudan, 2001–2014 2) Variation of GDP growth, percentage points 10% 100% 0.9 8% 80% 0.8 6% 60% 0.7 0.6 4% 40% 0.5 2% 20% 0.4 0% 0% 0.3 –2% –20% 0.2 –4% –40% 0.1 –6% –60% 0 Sudan Algeria Ethiopia Egypt Kenya SSA Morocco Uganda Indonesia Tanzania 1999 2001 2003 2005 2007 2009 2011 2013 GDP Non-oil GDP Oil GDP (right axis) 3) GDP and GDP per capita growth, 4) Growth decomposition of production factors in selected countries, 2003–2013 Sudan, 1989–2012 10 15 Growth rate (percentage points) 9 8 10 7 6 5 5 4 0 3 2 –5 1 0 –10 Ethiopia Uganda Tanzania Indonesia Sudan Egypt Kenya Morocco Algeria 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 SSA Total factor productivity Human capital per labor GDP growth GDP per capita growth Labor Capital stock Real GDP growth 6) Growth decomposition of production factors, 5) Public and private gross investment, 1999–2013 2003–2012, percentage points 30% 11 9 25% 7 20% 5 15% 3 1 10% –1 5% –3 Ethiopia Uganda Tanzania Indonesia Kenya Egypt Sudan Morocco Algeria* 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total factor productivity Human capital per labor GDP growth GDP per capita growth Labor Capital stock (continued on next page) within the average contribution of the whole group added of the industrial sector to overall growth in of comparator economies estimated at 58.3 percent Sudan is lagging behind the comparison countries (Figure 1.6.9). But the average contribution of value whose average contribution equals 27.5 percent. 28 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 1.6: Economic Activity (continued) 7) Growth by production sectors, 2003–2012 8) Gross value added by sector, 2003–2012 10 100% 8 90% 80% 6 Percentage points 70% 4 60% 2 50% 0 40% 30% –2 20% –4 10% –6 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2005 2006 2007 2008 2009 2010 2011 2012 2013 Not defined Services Industry Agriculture Mining Manufacturing Construction Agriculture Value added growth Electricity and water Trade, restaurants and hotels Transport and communications Other services 9) Average value added growth by production 10) Expenditure side of GDP growth in Sudan, sectors, selected economies, 2003–2012 2003–2012 11 14 12 Growth rate (percentage points) 9 10 8 6 7 4 2 5 0 –2 3 –4 –6 –8 1 –10 –12 –1 –14 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Ethiopia Tanzania Uganda Indonesia Egypt Morocco Kenya Sudan Algeria Not defined Net exports Investment Agriculture Industry Services Not defined Consumption GDP growth 11) Expenditure side of GDP growth, selected economies, 2003-2012 15 11 7 3 –1 –5 Ethiopia Tanzania Uganda Indonesia Kenya Egypt Morocco Sudan Algeria Consumption Investment Net exports Not defined Source: World Bank staff own calculations, based on data from World Bank World Development Indicators; and IMF World Economic Outlook. Note: (5) and (6): Analysis based on average data for the period 1990–2009. What kind of growth and diversification suits Sudan? 29 Likewise, although Sudan is a country with a great towards decentralization and enshrined it in an agricultural potential this was undermined during institutionalized system, especially for fiscal decen- the period of oil discovery. Although the average tralization. Both documents commit to fiscal decen- contribution of agricultural production to overall tralization, to empower sub-national governments to value added in Sudan is—relatively speaking—not align the use of resources more effectively with the as low as that of industry, there seems much scope need to address wide regional disparities and trace for an expansion of the agriculture sector as an the root causes of conflict. important factor for poverty alleviation over the The INC provides the legal framework for short and medium term. state and local legislative assemblies to oversee From the expenditure side of GDP in Sudan the functioning of the various levels of sub- it is clear that domestic consumption (public and national government. The CPA established that private) has been the major driver of GDP growth decentralization and empowerment of all levels of over the past decade and the role of investment government are cardinal principles of effective and was rather modest. The average contribution of fair administration of the country. At the same time, consumption to GDP growth in Sudan is estimated the CPA provided for a major reform to fiscal decen- at 92.8 percent (Figure 1.6.10). The relative impor- tralization by the creation of the Fiscal and Financial tance of domestic consumption in the economy was Allocation and Monitoring Commission (FFAMC) to in fact the highest in Sudan relative to its compara- ensure a formula-based intergovernmental transfers tor countries (Figure 1.6.11). This is not surprising system, though it remains unclear how this system given the closed character of the economy that is is used in practice (World Bank 2013d). also subject to a series of economic and financial Decentralization has devolved a number of sector sanctions since 1997. On the other hand, the key responsibilities to the sub-national govern- contribution of investment on GDP growth in Sudan ments; particularly vis-à-vis publicly funded pro- is quite low and in fact the lowest among the com- poor activities. According to the INC of 2005 Article parator economies despite the increase of domestic 24-B, obligatory responsibilities for sub-national and foreign direct investments after the oil discov- governments include the provision of social services ery. This suggests that the growth in investment (e.g., education, health, and registration of persons); was below the potential of the Sudanese economy. regulation of businesses; and management of land. At the top of that system is the National Government, Fiscal decentralization and devolution of which has overall responsibility over functions such basic service delivery as foreign policy, defense, security, immigration, Sudan has undertaken political decentralization monetary affairs, and others (World Bank 2013d). reforms since the early 1990s with the aim to tran- In reality, however, sometimes the division sition the responsibility for basic service delivery of responsibilities is less clear-cut. In health and to the subnational, state level. Sudan’s government education, for instance, the National Government administration has three tiers: federal, state, and local, is involved in funding service delivery in specific with elected legislatures at each level and elected state geographic areas (hard-to-reach) or to specific popu- governors. At the sub-national level there are now 18 lation groups (e.g., mothers, under five children). states each with several localities. Sudan’s decentral- Therefore, equally important is building an under- ization is governed by a plethora of laws and agree- standing of respective responsibilities within a fed- ments. The Interim National Constitution (INC) and eral system (World Bank 2013d). While the Federal the Comprehensive Peace Agreement (CPA) of 2005 Ministry has a revenue generation and financing represented critical milestones for Sudan’s efforts mandate, it also has coordinating, monitoring and 30 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT support (for poor performing states) functions, well as horizontal (inter-state) imbalances due to which it seems to have largely relinquished to lower differing own-revenue potential and differing needs. levels of government for service delivery. The result Several recent studies on Sudan have shown that the is that no one is held accountable for results and effects of fiscal transfers to equalize social spending ultimately the burden of service provision falls on and social outcomes patterns have been very limited, the intended beneficiary. mostly due to weaknesses in the design of the inter- A sound revenue assignment system is an governmental fiscal transfer systems (World Bank essential pre-condition for successful fiscal 2007; World Bank 2011; and World Bank 2013d). decentralization. In certain fragile states, such as Fiscal decentralization has brought consider- Sudan, the soundness of the sub-national revenue able extra resources to the States and substan- stream is a factor of the share of revenues collected tially increased overall per capita social spending by sub-national entities, given the poor reliability over the past ten years. Federal spending in health of the transfers from the central to sub-national and education at the state level has substantially governments (World Bank PER 2013). In addition increased over the past decade, particularly since the to raising revenues, local revenue mobilization also establishment of the Interim Constitution (INC) in has the potential to foster political and administra- 2005. In real terms, and after adjusting for popula- tive accountability by empowering communities. tion growth, education spending as per school-age Further, communities are likely to be willing to population has grown by an average of 22 per per- pay local taxes if the proceeds are used to provide cent per year, from SDG697 in 2000 to SDG2,242 local services. in 2010. This suggests the government has put sub- In addition, sub-national entities are empow- stantial efforts into expanding public education and ered by the INC to collect “own revenue.” Own increasing enrollment among school-age children revenue is one of the three sources of funding for (Figure 1.7.1, left-hand panel). Per capita health states and localities, in addition to federal transfers spending by the federal government at the state and shared revenues. Article 195 of the Interim level has also followed a very similar trend. In real National Constitution empowers states to collect terms, and after adjusting for population growth, per own revenue from ten specific sources, and also capita health spending has grown by an average of allows them to introduce “any other tax as may be 26 per percent per year, from SDG229 in 2000 to determined by law” (Interim Constitution 2005). SDG829 in 2010 (Figure 1.7.1, right-hand panel). The states have the highest degree of autonomy Yet, the observed increase in social spending in defining own revenues, including authority to has not translated into a more balanced distribu- determine rates (World Bank 2013d). tion of resources by the government to address Since resource disparities exists across the inequality across states and reduce poverty gaps. states of Sudan, the primary component of suc- Public spending on social investments, as measured cessful fiscal decentralization is a more equitable by per capita federal spending in health and educa- and transparent system of intergovernmental tion, is disproportionately allocated across states, resource allocation across different levels of largely favoring states with low incidence of poverty government. The specific objective of a sound inter- as measured by census data. Yet, annual per capita governmental transfer system is to address vertical social expenditure in these three states was on imbalances between the center and sub-national average only a third of that reported for the richest levels of government with respect to revenues and state in the country, Khartoum Figure 1.7.2, panels responsibilities (as expenditure responsibility for (a) and (b). It also appears that fiscal decentraliza- basic services shifted to state and local levels), as tion has not had any observable effect in the way What kind of growth and diversification suits Sudan? 31 in which federal resources are allocated towards and southern regions was largely resolved by the social investments by the states. Figure 1.7.2, panels secession of the latter to form the Republic of South (c) and (d) show the average real per capita spend- Sudan in July 2011, tensions still remain. Several ing in health and education before and after fiscal other conflicts with varied histories persist in dif- decentralization, with allocation patterns seeming ferent stages of intensity, stalemate, or resolution. to have remained largely unchanged. Weak institutions at both national and subnational Ultimately, the weaknesses in public service levels are unable to resolve most conflicts, often provision in Sudan stem from poor prioritiza- resulting in violence. Violent conflict, especially tion of spending and an inadequate focus on rebellion against the center and armed response results. Regional imbalances are consistently robust by the state, is a direct contributor to the extreme and clearly evident when looking at the state and poverty in Sudan’s conflict-affected areas. Security local-level education outcomes for different states concerns continue to inordinately shape economic (Figure 1.7.3). In education, measured by state and fiscal choices made by the government resulting education spending per school-age population, in detrimental development outcomes and perpetu- federal government investments across states are ating weak institutions for public goods provision. strikingly different, particularly favoring the expan- Sudan presents institutional discontinui- sion of basic education in relatively richer states. In ties across its various regions, reflected in its 2009, state spending in education per school-age regional economic imbalances and its geography population in South Darfur (SDG64), West Darfur of conflict. At the center, Sudan has institutions (SDG96), and North Darfur (SDG115) was on aver- that enforce compliance and execute core state age half of that in Khartoum (SDG216), and a fourth functions of providing security, commanding fis- of that in Northern state (SDG429). State education cal mechanisms, and delivering services. However, spending per student, which measures the govern- state presence and effectiveness diminishes further ment effort to improve the quality and access to edu- outside Khartoum and is outright contested in cation among children already enrolled in school, many peripheral areas. As with political power, the shows similar patterns. Exceptions are the Red Sea economy is centered in Khartoum and proximate and Kassala states, where the government seems to riverine states, giving rise to significant inequality be investing disproportionately more on improving between the center and periphery, and historically quality and access to education among students, as between riverine and hinterland communities. compared with other states that have similar levels Development indicators starkly mark the resulting of poverty. Similar outcome trends are observable inequality: while Sudan boasts a GNI per capita of in health and water and sanitation and the World US$1490 (i.e., lower middle-income) its poverty Bank (2013d) provides in-depth analysis of this. rate is 46.5 percent. In fact, poverty ranges from 26 percent in Khartoum state to 62.7 percent in Conflict, governance and debt: Darfur, based on 2009 data. Complicating factors for government to The secession of South Sudan solved the effectively deliver services13 key conflict in Sudan, but not all conflict has Sudan has been in conflict for most of its inde- been eliminated; tensions continue and are pendence history. This conflict arises out of non- expected to persist in the foreseeable future. inclusive institutions with limited effectiveness The most potentially disruptive conflict remains and often-disputed legitimacy across Sudan, and has resulted in depressed development outcomes. 13 This section is largely based on analysis presented in World Bank While the defining conflict between the northern (2013e): World Bank’s Interim Strategy Note for FY14 and 15. 32 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 1.7: Health and Education Spending and Outcomes in Sudan 1) Federal health and education spending a) State education spending per school-age population b) State per capital health spending 3000 1000 2500 800 2000 In SDG In SDG 600 1500 1000 400 500 200 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2) Poverty rates and per capita federal expenditure in health and education a) Poverty rates by State b) Per capital federal social spending % SDG 3–16 13–18 16–40 18–22 40–60 22–33 60–74 33–50 74–82 50–80 c) Real per capital federal social spending d) Real per capital federal social spending before fiscal decentralizing after fiscal decentralizing % SDG 2–4 6–9 4–6 9–14 6–8 14–18 8–11 18–25 11–15 25–29 (continued on next page) in the “Three Protocol Areas” (Blue Nile and South most from insecurity due to the conflict between Kordofan states and Abyei area) where previous the Misseriya and the Dinka-Ngok over natural peace protocols have not yet been fully imple- resources (water and pasture) in the borderlands mented. Abyei is one of the areas that suffered of Sudan and South Sudan. What kind of growth and diversification suits Sudan? 33 FIGURE 1.7: Health and Education Spending and Outcomes in Sudan (continued) 3) Poverty rates and education outcomes a) Poverty rates by State b) State spending in education per school-age population % in SDG 3–16 64–108 16–40 108–139 40–60 139–177 60–74 177–244 74–82 244–429 c) State spending per student in basic education d) Number of teachers per school-age population in SDG 124–178 Per 10,000 178–208 1–11 208–276 11–20 276–305 20–35 305–542 35–58 58–136 No data Source: World Bank (2013d). In most regions of Sudan, conflict over access as well as displacement from internal and regional to natural resources between pastoralists, agro- conflicts, and lack of well-regulated resource sharing pastoralists, and settled farmers is endemic and among different groups, including across borders. also contributes to regional conflict, such as in Weak governance and accountability have the Sahel. Such conflict often leads to violence contributed to fragility and conflict, including due to weak institutions for conflict management between the center and periphery. While some and especially weak natural resources management progress in government openness and pro-poor regimes. Climate change is likely to put further policy has been made, particularly since the sign- pressure on already fragile ecosystems and the ing of the CPA and the enactment of the Interim livelihoods dependent on them, which may lead National Constitution in 2005, there remains a to further conflicts. In the western part of Sudan, substantial governance agenda ahead. Progress in especially in Darfur, conflict is exacerbated by the delivery of basic services has been uneven and porous borders that allow easy movement of rebels an acute challenge in peripheral areas. Governance and arms, population shifts due to climatic changes institutions necessary to effect sound public financial 34 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT management—define and execute sectoral strategies; for example with regard to irrigation, which has and ensure transparent, efficient, and equitable inter- involved a shift from directly using technical spe- governmental transfers—remain weak. As shown in cialist skills toward being an attempt to play more various governance indicators, Sudan’s capacity to of a policy role (World Bank, 2015b). maintain peace and security, promote rule of law, Corruption drives fragility and conflict in control corruption, and effectively manage public Sudan, reinforcing barriers to investment and finance for delivery of services to the population equitable growth that would provide opportuni- remains very low in absolute and in comparative ties to citizens. Institutional and governance weak- terms, and has hardly changed since 1996. nesses are further exacerbated by internal conflict, At the same time, conflict and fragility con- regional tensions, and international isolation, all of tribute to the plethora of governance challenges which conspire to divert attention away from the in Sudan. In fact, Sudan’s governance quality has governance agenda. A weak civil society is unable been stagnating or declining over the past decade. to mount effective demands for improved corrup- In particular, government effectiveness has declined, tion prevention and oversight systems or for greater and control of corruption deteriorated, according to transparency that help reduce the opportunities for the Worldwide Governance Indicators and reported corruption and misuse of resources. in World Bank (2015b). In addition, Government Intrinsic to issues of allocation and man- effectiveness has suffered due to an extended period agement of resources and the need for greater of deciding appointments and promotions based on transparency and accountability are the broader loyalty rather than merit, as well as relative interna- issues of the transformation of the state by pro- tional isolation. The relative quality of staff in line viding for more participation of citizens and ministries in Sudan has tended to decline over time communities in decisions. The government indi- due to a confluence of several factors. Since 1989, a cation of its willingness to engage in an inclusive shift in hiring preferences from meritocratic criteria process towards a new constitution might mitigate to considerations about political loyalty was put in the lack of political reforms following the end of place under the slogan of “empowerment.” This was the CPA. As the World Development Report 2011 compounded by more limited access to international points out (World Bank 2011c), inclusive com- education and knowledge exchanges over the past pacts are crucial to reducing the exclusion that 20 years compared to earlier periods. often drives conflict and participatory governance In addition, coordination challenges have is necessary to restore confidence in public gov- been increased by the practice of establishing ernance at national and local levels. For Sudan, various additional councils and by the process heeding calls by civil society and political parties of decentralization (Word Bank, 2015b). High- for fair elections and an all-inclusive and partici- level councils are often appointed ad hoc, mostly patory constitution-making process may represent without a clear link to implementing agencies. the best opportunity to ground the needed insti- Sector ministries have been requested to second tutional changes in a sustainable political process. staff to such councils, including particularly moti- The Bank’s previous analytical and technical assis- vated or well-qualified staff. In addition, the more tance work with the supreme audit institution and decentralized system of governance means that parliamentary oversight committees (e.g., budget state-level ministries have assumed a larger role and public finance committees) has also produced in implementation. As a result, national minis- modest results in transparency in the management tries have struggled with adjusting from a role of and use of revenue and follow up of reports of the “doing things” to “organizing how things are done,” audit institution. What kind of growth and diversification suits Sudan? 35 Sudan’s prospects for service delivery and and addressing the skills gap. Governance and poverty reduction are also hampered by its accountability problems also need to be addressed. huge stock of external debt, most of which is Enhancing policy certainty and predictability in arrears, with the implication that Sudan is requires the reduction and removal of the legal and cut off from much needed official development regulatory hurdles to business. assistance. Sudan is also in arrears with multilat- Since 2008 Sudan has experienced a slight eral creditors, including the World Bank, the IMF, deterioration in the business-enabling environ- and the AfDB. The clearance of arrears would allow ment. All of the DB indicators experienced a relative Sudan to access significant levels of concessional decline in their rankings,14 with “Getting Credit” financing. Resolving Sudan’s debt crisis would make and “Starting a Business” indicators experiencing available significant resources for its development, significant drops in comparison with other indica- providing an opportunity to have a transformative tors. The secession of South Sudan in 2011 and impact on poverty and inequality in the country. the cross-border tension resulting in the disrup- Sanctions imposed on Sudan since 1997 are a major tion of oil flows certainly influenced the changes to stumbling block for the country to reach HIPC debt the business environment in Sudan (Figures 1.8.1 relief (see next section on the impact of sanctions and 1.8.2). on economic activity). Sudan lags behind the comparators in get- ting credit and protecting investors, resulting c.  Ability to regulate economic activity in a lower rank for the ease of doing business. Sudan ranked at 170 for getting credit and 157 for Finally, the ability to regulate economic activi- protecting investors in the Doing Business indica- ties refers to the Government’s capabilities to tors (2014). When it comes to starting a business, establish and nurture a business-enabling envi- Sudan’s performance is similar to the compara- ronment. The Sudanese business environment has tor countries. Sudan ranked at 131 for starting a stagnated or is even slightly deteriorated since 2008, business while Kenya was at 134 and Ethiopia at a key factor holding back private activities in sup- 166, respectively (Figure 1.8.3). The difficulties of port of the Government’s diversification agenda. The running a business in Sudan lie more in the lack picture here is also being complicated by the eco- of support to investors and business people than nomic and financial sanctions imposed on Sudan. administrative procedure. The strength of the inves- tor protection index is relatively low at 3.3 out of Business enabling environment 10 (Figure 1.8.4). The business environment in Sudan remains Compared to other indicators of doing busi- challenging. The 2014 Doing Business (DB) report ness, the tax regime in Sudan is relatively favor- ranks Sudan 149 out of 189 economies; it is ranked able to enterprises. A new tax law since 2009 has marginally lower in comparison with some of its reduced the tax burden on business by reducing regional neighbors (Kenya at 129, Uganda at 132, the corporate tax rate by an average of 15 percent, and Ethiopia at 125). Enabling Sudan to benefit and the capital gains tax by an average of 5 per- more fully from the export and growth opportuni- cent. Moreover, the tax on labor has been abol- ties offered by both the regional and global econ- ished (Doing Business, 2014). Corporate tax rates omy requires improving the business environment, facilitating trade and regional integration within 14 The number of economies for DB reports varies from year to year; COMESA and the GAFTA, making credit more therefore, this drop in ranking cannot be explained assertively due to available and affordable, especially to smallholders’, the deterioration of the Sudanese business environment. 36 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT in Sudan differ, depending on the business activi- businesses may be registered as a sole trader, partner- ties of the company,15 which effectively discrimi- ship, a limited liability company (private or public), nates against the sectors with the relatively higher special concession, or branch of a foreign registered tax rates and distorts the allocation of investment company (U.S. State Department 2013). (Figure 1.8.5). Under the 2013 law all service sectors are, in The standard Value Added Tax (VAT) is also principle, open to foreign ownership. However, comparable with the neighboring countries. The existing government monopolies and other licensing standard VAT rate is 17 percent in Sudan, with a requirements effectively limit the opportunities for special 30 percent rate imposed on telecommunica- private investment in the transportation, media, and tion services. The VAT rate is similar to its neigh- communications sectors. More precisely, railway bors; in Uganda, the standard rate is 18 percent and freight transportation, airport operation, television in Kenya 16 percent (COMESA 2009) respectively. broadcasting, and newspaper publishing continue to A wide range of activities and services are be effectively closed to foreign capital participation. exempt from VAT. Activities related to agriculture New legislation aims to reduce red tape for (agricultural products, seeds, and fertilizer), medi- investors, both domestic and foreign. The High cines, bread and locally produced wheat flour, ani- Council for Investment was established 2011 with a mals, meat, fish, chicken and chicken products, and mandate to facilitate investment procedures and fol- milk and dairy products are all exempt. Financial, low up on implementing the incentives (Africa Legal insurance, education, and medical services as well Network 2013). In addition, a new National Agency as the rental and sale of real estate for residential for Investment is to be established with financial and purpose are also exempt from VAT (Africa Legal administrative independence under the new law in Network 2013). 2013. It will act as the administrator for licensing, Sudan has encouraged private sector invest- granting investment projects, and the preparation of ments, aiming at diversifying its economy with investment plans. This Agency will also manage the foreign direct investment. Sudan had attracted “investment single window” with the membership substantial amounts of foreign direct investment of the commissioners of the ministries and other (FDI) after the signing of the CPA in 2005, but agencies concerned with investment.18 most of the investment was probably destined for Sudan has succeeded in reducing the number the oil and petroleum sector. Therefore, following of days to import and export with the introduc- the secession of the South Sudan, the amount of tion of automation; however, the operational FDI has dropped.16 The government has established procedures to import and export have not incentives to encourage investment. The president changed much (Figure 1.8.6). The beginning of signed the new National Investment Promotion Law (provisional decree) on March 2013. This law pro- hibits discrimination against foreigners and allows 15 Zero percent for agricultural activities; 10 percent for industrial activities; 15 percent for commercial and service activities, real es- both domestic and foreign investors to have access to tate rental companies, and banks, insurance and fund management incentives described in the law and the regulation,17 companies; 30 percent for cigarette and tobacco companies; and 35 percent for companies engaged in the exploration, extraction and such as licensing, tax exemption, and land access. distribution of oil and gas, and their subcontractors (Deloitte 2013). Foreign private entities can establish and own busi- 16 FDI inflows to Sudan were US$2,894 million in 2010 and US$2,692 million in 2011 (COMESA 2012). ness enterprises, and repatriate capital and profits, 17 The earlier Investment regulation 2000 (amended in 2003) is avail- on the condition that investors open an investment able at http://www.sudanembassy.ca/Docs/Investment%20regulations. pdf (Sudanese Embassy for Canada). account at the Central Bank of Sudan (CBS) before 18 National Investment Promotion Law of 2013, National Agency for entering into business. Foreign and domestic private Investment (English Translation) What kind of growth and diversification suits Sudan? 37 FIGURE 1.8: Business Enabling Environment 2) Doing Business 2012 and 2014: 1) Doing Business ranking for Sudan Ease of Doing Business Ranking Enforcing contracts Mongolia Trading across borders Indonesia Paying taxes Ghana Protecting investors Uganda Getting credit Ethiopia Registering property Starting a business Kenya Ease of doing business rank Sudan 0 25 50 75 100 125 150 175 0 25 50 75 100 125 150 175 DB2014 (out of 189 economies) Ease of DB ranking 2012 DB2011 (out of 183 economies) Ease of DB ranking 2014 DB2008 (out of 178 economies) 3) Starting a business in Sudan and comparators in Doing Business 2014 4) Doing Business 2014: Ranking by component 60 180 Mongolia 50 130 Indonesia 40 Ghana Days 30 80 Uganda 20 Ethiopia 30 Kenya 10 Sudan 0 –20 SDN KEN ETH UGA GHA IND MON 0 25 50 75 100 125 150 175 Procedure (No.) Time (days) Starting a businesss (rank) Paying tax (rank) Protecting investors (rank) Getting credit (rank) 5) Profit tax (%) in Doing Business 2014 6) Trading Across Borders indicator for Sudan 28.2 26 25.2 Time to import (days) 22 Documents to 18.1 18.4 import (number) 16.1 13.8 Time to export (days) 10.2 Documents to export (number) 0 10 20 30 40 50 60 ETH GHA IND KEN MON SDN UGA SSA OECD DB2014 DB2011 DB2008 (continued on next page) the introduction of ASYCUDA World coincided with documents remained largely unchanged. The with the reduction of time to import and export. relatively long time required for importing and While cooperation between the related agencies exporting are indicative of high trade costs. Indeed has improved through the ASYCUDA system, the the time taken for clearances may be converted into Doing Business indicators imply the procedure an ad valorem equivalent (Nathan 2007). 38 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 1.8: Business Enabling Environment (continued) 7) Trading Across Borders indicator, 8) Cost to Import and Export (US$ per containers), Sudan and selected countries Sudan and selected countries MON SDN IND UGA GHA MON UGA KEN ETH IND KEN GHA SDN ETH 0 25 50 75 100 125 150 175 $0 $750 $1,500 $2,250 $3,000 Rank Cost to export (US$) Cost to import (US$) Source: World Bank staff own calculations, based on data from Doing Business various years. For a country with sea access Sudan has a a variety of goods to Sudan subject to a regime relatively low ranking on the trade facilitation of export controls related to military or dual-use component of the Doing Business indicators goods. In 2004, the United Nations imposed an (Figures 1.8.7). The Doing Business (2014) rank- arms embargo on non-governmental actors in the ing for Sudan (155th) on trading across borders is three provinces of Darfur, including the Janjaweed. closer to the ones for landlocked countries and In 2005, under UNSCR 1556, the United Nations slightly worse than the regional average for SSA imposed a travel ban and asset freezes on specified (141). Landlocked countries, such as Uganda and individuals, “those impeding the peace process in Ethiopia in the comparators, often have more pen- Darfur.” From 2005 onwards, specific sanctions have alties than non-landlocked ones in trading across been imposed by the European Union, including borders (Alvis et al. 2010). Sudan, with relatively individual sanctions by the Netherlands and United good port infrastructure, does not appear to be tak- Kingdom; Switzerland, Canada, Australia, New ing full advantage of its geographic location. It is Zealand, and Singapore. These sanctions may have notable that the cost to import is close to the price constrained the supply of foreign exchange to Sudan. for the neighboring comparator landlocked coun- But there are also examples of sanction tries (Figures 1.8.8). related easing and tightening—in the area of gum arabic trade and financial sector transactions— Impact of sanctions regime on Sudan that do not arise from Executive Orders. To The United States imposed economic sanc- illustrate, gum arabic is not exempt from sanctions, tions on Sudan in 1997 through a United States but trade is permitted with traders that hold spe- Executive Order. This order, taking the form of a cial licenses. In November 2000, the U.S. Congress national emergency and originally consisting of a adopted legislation to require the Secretary of the comprehensive ban on bilateral trade, as well as spe- Treasury to consider approving licenses for the cific sanctions relating to the arms trade and certain import of gum arabic from Sudan. As a result, gum financial transactions, has been relaxed over time. arabic became an exception to the comprehensive Annex 3 provides a timeline of sanctions between trade restrictions imposed by the Executive Branch 1997 and 2014. Over the years, the trade sanctions (World Bank, 2015a). On the other hand, a multi- have been relaxed. The United States now exports billion ruling against BNP Paribas in June 2014 for What kind of growth and diversification suits Sudan? 39 facilitating foreign exchange transactions between fleet, which requires spare parts from western Sudan (and other countries under sanctions) with countries. the rest of the World led to a de facto and significant  At the Customs Authority there are indica- tightening in financial sector restrictions. In effect, tions that important technical infrastructure and that led to a breakdown in the foreign corresponding resources (e.g., scanners) are not being used to bank network of Sudanese banks and brought for- their full potential because of on-going support eign exchange transactions with Sudan to a virtual and maintenance issues. The investment in such standstill for much of 2014 (IMF 2014b). technical infrastructure needs to be accompa- The largest, yet most difficult to assess nied by on-going support and maintenance impact of the sanctions regime on Sudan is trans- contracts, which are sometime not possible due mitted through the financial system. Financial to the sanctions. sanctions create difficulties for non-U.S. companies  The national airline, Sudan Airways is not in trading with Sudan, partly due to the fact that able to maintain its whole fleet; some aircraft US$ transactions are routed through the U.S., and are grounded due to lack of spare parts. Some partly due to the fact that many non-U.S. banks have international airlines are also not able to repa- very significant dealings with the U.S. and want to triate their profits due to the non-availability avoid the appearance of being involved in trade with of foreign currency through official channels. Sudan (World Bank, 2015a). To illustrate: although The latter is one of the reasons given for the Sudan quotes gum arabic prices in US$, all purchase January 2014 withdrawal of Lufthansa from the transactions have to be made in Euros; but despite Sudanese market. this many banks refuse to be involved in the trade,  The Tourism Sector is restricted by the lim- especially after the BNP Paribas ruling. In Germany, ited technology available and the inability to it was reported that Commerzbank was one of the use credit cards in Sudan. The U.S. embargo few that would still accept transactions involving has had a negative impact on tourism to the Sudan. In the UK, it was reported that Barclays country, both in terms of creating a much more had refused to accept transactions with Sudan. In challenging business environment for operators a similar way, it was also reported that the Gum as well as creating a major inconvenience for Arabic Board (GAB) of Sudan had not been able to tourists. Tourism businesses face major chal- take a stall at the 2013 Food Ingredients Europe lenges when trying to obtain essential equip- trade show, the major European trade show for the ment such as commonly used front desk and food ingredients business, as it is organized by an restaurant management systems. Without the American company. ability to use credit cards, they must spend time Sanctions have also a direct impact on the and money to obtain licenses in order to make real economy through restrictions on sourcing international transfers of funds. The embargo of inputs and replacement parts. Over the years, also results in high transaction costs for tour a great deal of anecdotal evidence of the negative operators and hotel owners to receive funds impact has emerged, much of which are men- sent by international tour operators via non- tioned in discussions with representatives of the commercial banking systems such as Western Government of Sudan. Specific examples include Union or wired through third-party accounts (World Bank 2014e): in neighboring countries.  Sudan Railway Corporation has explicit The absolute level of real economy impact problems in maintaining their locomotive of sanctions remains unknown. For instance, 40 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Sudan’s non-oil exports are concentrated in a small reduces export sales to the U.S. market directly. Both number of markets, but this is likely not solely a foreign exchange shortages and U.S. export controls consequence of economic sanctions against Sudan on specific goods could prevent Sudan from import- (World Bank 2014e). In fact, it appears that Sudan ing intermediate goods used either for production is isolated even within Africa. However, sanctions in the domestic economy, or for export. have exacerbated the isolation through increasing the difficulty in settling cross-border payments, Lessons for Sudan: Growing D.  which affects trade with all partners including their Endowments and the Production Base African neighbors. The United Arab Emirates has always been a key trading partner for Sudan; Canada This initial chapter reviewed recent key litera- was a particularly important partner in 2009 but has ture on growth and diversification with a view of declined; and since 2010 Saudi Arabia has steadily defining a suitable approach for Sudan. Looking become an important market for Sudanese exports. into the future to 2030, the sectoral structure of Yet, there is reason and evidence to believe Sudan’s economy shows a growing importance of that a normalization of relations with the rest of agriculture, less importance of extractives, and rela- the world, including a lifting of economic sanc- tive stability of other sectors (manufacturing, ser- tions, could promote export diversification. The vices). The simulation presented also shows that the simulations presented in chapter 1.A confirm this strongest growth rates are coming from sectors that view. Over the years since 1997 the trade sanctions are capable of producing internationally competi- have been relaxed. But sanctions on financial trans- tive tradables. Simulations thus suggest that in the actions limit the ability of Sudan to engage in inter- absence of dominant resource-based exports, growth national trade, both its ability to finance imports in in the future must be centered on sectors producing general and to engage in some export transactions tradables that are exported and/or replace imports. that require the intermediary of a foreign bank. There appears to be a case for Sudan to While all systems of government foreign exchange approach growth through diversification from allocation are likely to impose inefficiencies, these two angles: the production and the endowment inefficiencies are likely to be greater when sanctions base. Figure 1.9 distinguishes both approaches into make foreign exchange particularly scarce. The U.S. a direct and an indirect one and provides illustra- embargo on all Sudanese exports except gum arabic tive examples. Taken together the direct and indi- rect approach define a coherent way for Sudan to FIGURE 1.9: Two Approaches to Diversify an diversify that takes into consideration the current Economy and future sectoral structure of the economy, exist- ing sectoral policies of the Government, as well as Goal Structural Transformation / Diversification the need for long-term institution building as a foundation for diversification through broadening ‘Direct Approach’ ‘Indirect Approach’ the national endowment base. Approach Interventions in Foundation for any economic The CEM therefore uses a sectoral focus and economic sectors activity to flourish looks at agriculture as sources for diversification, but also makes the case that trading of goods and Export Macroeconomic Human capital Tax holidays services—especially of the higher value-added Examples promotion policies and infrastructure Fertilizer Targeted import Business kind—could be a means to grow the endowment subsidies substitution enabling environment base of the country. It is from this framework that Source: World Bank staff own visualization, based on World Bank (2014d). the remainder of this CEM unfolds with a detailed What kind of growth and diversification suits Sudan? 41 analysis of agriculture and trade of goods and ser- the population would be instrumental for devel- vices, and concludes with an analysis of the extrac- opment in Sudan. This is not only important for tive sectors (oil, gold) in search of fiscal support for the productive sector as in important input, but the diversification agenda of the future. also for financing trade activities where foreign currency is needed. The economic and financial a.  Macroeconomic management crucial for sanctions implemented since 1997 play a role economic growth in this, and in fact have recently even tightened due the BNP Paribas court ruling, bringing trade From the Growth Report come a number of clear financing activities to a virtual standstill. macroeconomic policies that were underlying  Macroeconomic stability: The macro economy economic growth periods in other countries that was stabilized as part of the oil economy in the are of relevance for Sudan (World Bank 2008a). 2000s, but had started to show vulnerabili- Reviewing Sudan’s record vis-à-vis those policies ties even before the secession of South Sudan. indicated a number of important policy areas where Inflation has been (and remains) high and vola- Sudan has scope to improve its emphasis: tile since 2008. Budget deficits have always been high, which is reflected in the high indebtedness  Investment and savings: High rates of invest- of the country. ment and savings were driven by the oil econ- omy of the past. In the post-secession Sudan, Careful management of the real exchange efforts are needed to increase the investment rate will be particularly important for Sudan’s rate to past levels supported by domestic sav- economy in the future for an overall low infla- ings. Key will be to rely less on public resources, tion environment. Sudan’s real exchange rate of the which were much driven by the oil economy, past decades was significantly overvalued and still is and encourage private investment and a combi- so today, despite several rounds of nominal depre- nation of domestic and foreign savings. ciations that took place in 2012 and 2013. Those  Technology and know-how transfer: FDI into depreciations were consumed by similarly high Sudan was high during the oil economy, but inflation rates, and, as a result the overvalued real focused on the natural resource sector. Going exchange rate of the past is much a thing of the pres- forward, a new kind of FDI—that brings in ent. But a more competitive exchange rate would be technology and know-how for a diversified instrumental for boosting agriculture exports, which economy—is needed. are currently largely unprocessed in nature. Chapter  Export promotion and diversification: Driven 2 will analyze this in detail, preceded by empirical by oil discoveries Sudan’s exports-to-GDP ratio evidence on the extents of structural transformation expanded significantly starting in 2000 with oil being visible in Sudan’s labor market. constituting around 90 percent of exports at that time. The challenge ahead will be to find Agriculture and livestock: important for b.  new export sources and export markets, prob- inclusive growth ably in agriculture, initially for raw materials, but then also for processed agricultural goods Given that poverty in Sudan is deep and largely to pave the way for a higher value-added activi- a rural phenomenon the agriculture sector is cru- ties in the future. cial for efforts to reduce poverty. About one in two  Financial sector development and openness: Sudanese, close to 14 million people, lived in pov- A more open and accessible financial sector for erty in 2009, each consuming less than the national 42 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT poverty line (consumption of the poor is about 65 Both products have shown a remarkable recovery, percent of the national poverty line). The incidence which will be described in detail in Chapter 3. In of poverty in urban areas, particularly Khartoum, is each case the Government had, in the past, insti- significantly lower than that of the rural areas. Rural tuted monopolized marketing structures (monop- areas are more than two and half times as poor as sonies) in the form of parastatal companies. As is the capital and almost twice as poor as the rest of often the case with such companies, paying farmers the urban areas. While rural areas account for a less and less for their products (independent of the little over 60 percent of the Sudanese population, world price) seems an easy path to profitability, until they account for almost for 80 percent of Sudan’s the farmers stop harvesting or even planting their poor. For the rural population, any poverty reduc- crops. That this happened can be seen in low yields tion strategy needs to build on agricultural growth, in both gum arabic and cotton, as well as many while at the same time looking into the creation of other agriculture products. As the monopsonies off-farm employment opportunities there. were eventually relaxed and competition provided, In addition, agriculture in Sudan is by-and- prices received by farmers increased substantially, large a story of low productivity, which indicates and with them so did areas cropped and especially the potential to realize quick wins. Chapter 3 will yields. Cotton yields tripled nation nationwide in show that low crop yields are associated with low one year (2010/11), and in three years increased fertilizer usage in the country. In 2009 the average by five and a half times, with no improvements in fertilizer use per hectare of cropland was 7.3 kg, irrigation or varieties. Such remarkable increases which ranked Sudan at 129 among 155 countries, in agricultural yields show that poor agriculture far behind Ethiopia, Sudan’s poorer neighbor. To performance is not only a product of low fertilizer illustrate, sorghum and millet yields are low and usage or weak varieties due to often local breeds of generally on a downward trend, yet more so in the seeds, but also, and possibly most importantly, a rain-fed production areas than in irrigated regimes, lack of incentives for the producers. where yields are more stable or slightly increased over Livestock production and exports are a the past decade. Wheat, of which the government remarkable success story of agriculture in post- encourages production even though it is not a crop secession Sudan. Livestock showed a fantastic native to Sudan, has yields that are among the lowest recovery after virtually no exports in 2008 due to an in the world, if not the lowest. Similar developments imposed export ban and quarantine measures, and are seen in the main oil seeds, groundnut and sesame. which grew to a multi-million business and earned Two notable exceptions to the decreasing production more than US$670 million in 2013. The backbone and yield trends are gum arabic and cotton, which of this success is pastoral livestock production, currently realize a renaissance of production over which is superior to any other form in Sudan. But the past years with particularly strong production in pastoralism is under pressure due to uncertain land 2013. Low yields in Sudan indicate that by adjust- tenure and land rights that effectively diminish the ing key levers in agriculture in Sudan there could be historical grazing grounds of pastoral farmers. potential to quickly realize large productivity gains. Given the unique performance of the livestock Low productivity is not only related to input sector in Sudan and the fact that pastoralism is usage, but also distortive centralized market- so successful, there is surprisingly little policy ing and distribution arrangements that eroded attention on the sector. More attention on the sec- producer incentives. This is now starting to tor will be important in part due to the interlinked change, and the experiences of gum arabic and issues of land tenure and land policy, which need to cotton could pave the way for more such reforms. be solved to sustain pastoral livestock production into What kind of growth and diversification suits Sudan? 43 the future. But there are also other issues, such as the to enhance productivity and increase technology inherent volatility of the sector and the risk due to and skills transfers through significant positive droughts and diseases and the negative affects they spillover effects throughout the economy. Services entail. Hence there is a need for more policy focus sectors can help Sudan diversify its economy and on a better, forward-looking management of the sec- reduce poverty. For example, while the agricultural tor. Chapter 3 will provide an in-depth analysis of sector is viewed as an important engine of growth, it livestock to inform such a new policy focus. has remained far below its potential and the country has stayed a net importer of agricultural products. c.  Goods and services trade to build The productivity of farms will have to improve to endowments increase agriculture production. That means better transport infrastructure, agricultural technology, To support growth and diversification in the and support services including financing. longer-term, trade can be used as a vehicle to build a broader endowment base in the Sudanese Extractive industries: still important, but d.  economy. World Bank (2014) argues that global less dominant and regional integration are key to leverage trade effects for a country. Trade will not only build on a The natural resource sector is still significant in broader endowment base, which would both change Sudan and recently had new impetus from the the composition of trade and the profile of produc- discovery of gold, but it is likely to be temporary. tion World Bank (2014d), but trade can also be used Lessons from other countries show that growth in as driver to build endowments through its network the natural resource sectors is not necessarily “pro- effects and the ability to connect the Sudanese poor” due to if there are insufficient spillovers to the economy with the world. Chapter 4 provides an rest of the economy. The sector, however, could pos- analysis of goods and services trade. sibly provide—through its power to generate fiscal Advancing trade also means to putting due revenues—financial means to advance policies for emphasis on the necessary groundwork for “pro-poor” growth in other sectors. Chapter 5 pro- higher value added activities through manu- vides an in-depth analysis of the extractive sector. facturing. Such groundwork will be especially The diminishing effects of both oil and important so that the rural population, as it devel- gold on Sudan over the next 10 to 15 years are ops through improved agriculture productivity, obvious. Yet, revenues are still important and a has an opportunity to move to the non-agriculture source for financing capital-intensive diversifica- sector. Currently Sudan is primarily exporting tion activities. Examining oil projections to 2030 raw agriculture materials and livestock. Through shows that the level will decrease over the next one a process of basic value addition on agriculture or two decades; this finding is important especially products (for example such as machine flaying of as the base case considered in this analysis applies animal skins) existing exports can be increased in oil projections that are significantly lower than the value and basic structures for light manufacturing Government’s own projections). In either case, it can be established. However, the current imposition seems inevitable that oil production will decrease of sanctions on Sudan plays a constraining role for to below 100,000 bpd, but the question is whether export diversification (see also Section 1.C). this will happen now or in three, five, or ten years. Services and trade-in-services have an impor- Hence, direct domestic oil-related revenues will tant role in economic diversification. Services are likely be around 10 percent of total revenues, and essential intermediate inputs and have the potential if fees and TFA are included around 20–30 percent. 44 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT These could be used to finance capital-intensive The contribution of mining to Sudan’s econ- diversification activities such as investment in edu- omy over the medium term could be positive, cation and building of infrastructure. however, the scale of the sector is very unlikely The outlook for gold is slightly more opti- to rival that of the oil sector in its heyday and its mistic, and Sudan is projected to produce fiscal impact may be substantially lower. These between 18 to 28 tons annually over the next considerations will be elaborated on in Chapter 5. five years—worth about US$750 million to There are numerous scenarios that could unfold US$1,130 million annually. But the fiscal contri- regarding gold mining in Sudan, including much bution of gold mining is minimal. The traditional less positive ones, in which a lower gold price envi- sector will continue to be the source of most gold ronment coupled with continuing constraints on produced in this period, although the ability to sus- financing of major mineral projects means that the tain this contribution beyond this five-year period is recent gold mining boom will wane. Any sustained increasingly doubtful. A more likely pattern is that program of reforms to make the industrial mining industrial mining will become the main source of sector more competitive and to strengthen regula- domestic mined gold after 2020. It is unlikely that tory institutions would require strong leadership production after 2020 would be significantly higher and probably external support to enhance institu- than 18 to 28 tones estimates for the next 5 years. tional capability and effectiveness. STRUCTURAL CHANGE AND THE ROLE OF THE REAL EXCHANGE RATE FOR EXPORTS AND GROWTH Successful economic development has typically been accompanied by structural transformation in which manufacturing and industry’s share of output and employment rises at the expense of agriculture. At pres- ent, however, the agriculture and services sectors account for the vast majority of employment in Sudan, 2 with manufacturing providing an almost negligible number of jobs. A more competitive real exchange rate could support export and output growth and hence help attract much-needed FDI. Sudan’s real exchange rate is overvalued, which is similar to other African oil exporting countries, most of which experience Dutch disease symptoms. Empirical evidence presented here sug- gests that a 10 percent lower real exchange rate (RER) could raise economic growth by 0.9 percentage points in Sudan. Given that Sudan’s exports of non-natural resource and agriculture products comprise mainly low-value, raw, and unprocessed products, which compete primarily on prices, the historic and current RER overvaluation was and is a major inhibiting factor for export development in the country. A major determinant of the RER is the level of inflation. And since 1999 inflation in Sudan has a history of high rates and increased volatility. But inflation became also a key symptom of the post-secession economy with rates above 40 percent in 2012 and 2013. A major driver of the upsurge was the approach to mon- etize the budget deficit by the Central Bank of Sudan through granting direct loans to the government. A. Structural Change: Evidence from Illustration of Structural Change FIGURE 2.1:  the Labor Market in an Economy Structural change in Sudan Low High Goal productivity Structural Change productivity activities activitiesy Structural change shifts economic activities and employment from low to high productivity Traditional Non-Traditional Process activities. Figure 2.1 illustrates the process and Agriculture → Agriculture → Within sectors Firm → Firm distinguishes a traditional and a non-traditional Manufacturing Services Informal → Formal definition of structural change. In the traditional East Asian Model India, Bangladesh, Example definition of structural change manufacturing and (Korea, China, Mozambique, Most countries Hong Kong, industry’s share of output and employment rises Rwanda Vietnam) at the expense of agriculture. This is the type of Source: World Bank staff own visualitzation, based on McMillian et al. development model often associated with East Asia (2014); Zeufack et al. (2015); and Ghani & O’Connell (2014). 46 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT where there was a strong rise in manufacturing sec- lack of structural transformation in Sudan from the tor shares in the economies of China, Korea and perspective of the labor market. Vietnam, to name a few. The non-traditional view of structural change increasingly also acknowledges Demographics and education the role of the services sector for structural trans- formation and productivity increases within sectors Sudan has a very young, relatively rural popula- and within firms. Given Sudan’s early days in struc- tion, with a low level of education attainment. tural transformation, and the illustrative character Table 2.1 shows a simple breakdown of the Sudanese of the traditional definition of structural change, population by gender and rural/urban location. the focus in this chapter is primarily on the (lack The total population of 29.2 million is largely rural of) shift from agriculture to manufacturing activities (64.3 percent) and approximately gender-balanced in the economy. (49.3 percent female). Rural areas are considerably But Sudan still stands at the beginning younger on average than urban areas: 49 percent of of structural transformation, while others the urban population is younger than 20 compared advanced. Looking at the sector decomposition of to 55.7 percent of the rural population. The gender GDP, Figures 2.2.1 and 2.2.2 show Sudan’s situa- ratio also differs across cohorts: women constitute tion in 1980 and 2013. With the exception of a rise 48.4 percent of the population younger than 20 in industry that is related to the oil economy and and 50.4 percent of the population aged 20 or older extractives, the sector shares are rather constant (Figures 2.3.1 and 2.3.2). This partly reflects the leg- in the period covered. This is in stark contrast to acy of the civil war, which led to disproportionately Vietnam, where the importance of agriculture has high male mortality, and may also be a reflection of decreased from 40 to 18 percent both on account of male migrant workers to the Gulf states. rising shares for services and industry (incl. manu- The age distribution of the population leads facturing). Kenya’s structural transformation over to a dependency ratio that is very high by global the same period was less pronounced, and driven standards but comparable to some other African primarily by the services sector. The remainder of countries. The dependency ratio is the ratio of this section will provide further evidence of the young and elderly to working-age people. The exact FIGURE 2.2: Structural Change through Sector Decomposition of GDP 1) Sudan from 1980 to 2013 2) Sudan and selected other countries 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% Sudan Sudan Kenya Kenya Vietnam Vietnam 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 (1990) (2013) (1980) (2013) (1980) (2013) Agriculture Industry Manufacturing Services Agriculture Industry Manufacturing Services Source: World Bank staff own calculations, based on data from World Development Indicators (2015). Note: (2)Industry’s rise in Sudan (2013) is associated to extractives and not indicative of structural change. Structural change and the role of the real exchange rate for exports and growth 47 Table 2.1: Age Composition of the Table 2.2: Dependency Ratios in Sudan Population in Sudan Working age group Rural Urban Both Total Rural Urban 10–59 years 0.61 0.47 0.56 Total 29,154,357 18,775,152 10,379,205 10–65 years 0.56 0.43 0.51 Female 14,380,529 9,302,234 5,078,295 15–59 years 1.04 0.78 0.94 Male 14,773,828 9,472,918 5,300,909 15–64 years 0.96 0.72 0.87 Source: World Bank staff own calculations, based on data from National 20–59 years 1.61 1.23 1.46 Benchmark Household Survey (2009). 20–64 years 148 1.13 1.34 Note: Calculated using NBHS household weights. Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009). Note: Calculated using NBHS household weights. value depends on the definition of “working age” and Table 2.2 shows dependency ratios for several possible definitions. Using a standard definition of substantially higher levels of education: one in ten working age, there are approximately six people has some post-secondary education and a further aged 15–64 for every five people aged younger one in three has some secondary education.21 The than 15 or older than 64. An alternative defini- gender gap in education is smaller in young cohorts tion includes youths aged 10–14 in the potentially than older cohorts but this is driven almost entirely working-age population (see following paragraphs), by urban areas. In rural areas, the gender gap in in which case there are approximately two working- education is approximately stable over cohorts and age people for each young or elderly person. The may in fact be widening slightly. Secondary school dependency ratio is consistently considerably higher access appears to have increased more for younger in rural than urban areas, reflecting the relatively men than younger women (relative to older men young rural population.19 and older women respectively). Half of the population in Sudan has never attended a formal school and only a tiny portion Employment and labor force participation has some post-secondary education. Only 15.8 percent of the population has at most secondary Sudan’s labor force participation rate is relatively school education, and only 3.8 percent have some high and formal unemployment is moderate. post-secondary education shows the distribution of Figure 2.4.1 shows the labor force status for all indi- education attainment for the Sudanese population.20 viduals aged 10 or older, the youngest age at which Education levels are substantially lower in rural than the NBHS work module is administered. Across urban areas and substantially lower for women than the entire population, 36 percent are employed men. The gender gap in schooling is slightly smaller in urban than rural areas. Older parts of the population have lower edu- 19 This comparison should be interpreted with some degree of cau- tion, as rural areas may face a much lower effective dependency ratio cation than younger parts and the gender gap in if households are supported by remittances from urban migrants. education is smaller in younger cohorts than in 20 This report omits Islamic khalwa schooling from the analysis, which cannot be easily classified into a conventional primary, secondary, older ones. Figure 2.3.4 shows the percentage of tertiary division. Approximately 2 percent of the population report the population with each level of education attain- attending khalwa schools and this fraction is higher for men, in rural areas, and for older cohorts. ment for five-year age brackets. Older cohorts have 21 This cohort difference in years of completed education reflects ris- substantially lower education attainment: fewer than ing education enrollment and spending through time, documented in World Bank (2012). Despite the recent rise in education spend- 30 percent of individuals aged 60 or older have ing, Sudan still spends a substantially smaller fraction of its GDP on any formal schooling. Individuals aged 20–29 have education than most North African countries. 48 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 2.3: Demographics and Education in Sudan 1) Rural population pyramid (female on left-hand) 2) Urban population pyramid (female on left-hand) 75+ 75+ 70–74 70–74 65–69 65–69 60–64 60–64 55–59 55–59 50–54 50–54 45–49 45–49 40–44 40–44 35–39 35–39 30–34 30–34 25–29 25–29 20–24 20–24 15–19 15–19 10–14 10–14 5–9 5–9 0–4 0–4 2,000,000 1,500,000 1,000,000 500,000 0 500,000 1,000,000 1,500,000 2,000,000 800,000 600,000 400,000 200,000 0 200,000 400,000 600,000 800,000 3) Education levels by gender and location 4) Education levels by cohort 10,000,000 100% 9,000,000 8,000,000 80% 7,000,000 6,000,000 60% 5,000,000 4,000,000 40% 3,000,000 2,000,000 20% 1,000,000 0 0% Rural Urban Rural Urban 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 65+ men men women women No education At most primary At most secondary Post-secondary Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009). and 6 percent are unemployed.22 Of the remaining this as work. Figure 2.4.7 shows employment and 58 percent of the population, approximately half labor force participation for five-year age cohorts.23 report attending school and the other half are clas- Non-participation for females rises sharply across sified as neither studying nor participating in the labor force. Both unemployment and labor force 22 Respondents are defined as employed if (1) they worked at least one hour in the past week for pay, profit-share, in-kind payment, non-participation are higher in rural than urban or without pay; or (2) they did not work in the past week but have areas. Non-participation is far higher for women some form of job in which they normally work. This definition of employment is quite inclusive. A substantial fraction of respondents, than men, a pattern discussed in more detail below. particularly women, are classified as working under this definition While both wage work and self-employment but are not paid. Respondents are defined as unemployed if they are not currently working but report that they are available for work. are common, labor force non-participation is far 23 The remainder of the analysis focuses on individuals aged 10–64. higher for women than men. Many women are Sudanese life expectancy is only 61 and labor force participation is low for older individuals, so omitting the older tail of the distribution has engaged in home production and there appears little effect on the analysis. Respondents aged younger than 10 are not to be some variance in whether they self-report asked questions about work and so must be omitted from the analysis. Structural change and the role of the real exchange rate for exports and growth 49 cohorts. This pattern may reflect a life-cycle expla- Sudan. Almost 750,000 working-age respondents nation in which many women complete education are not employed, not studying, and report that they and do not transition into the formal labor force. perceive job search as useless. This accounts for a It may also reflect a cohort explanation in which large majority of non-participation by men and by younger women are obtaining more education women who are not homemakers. The pattern is than their predecessors and will go on to enter the visible for both men and women and in both rural labor force. These explanations cannot be separately and urban areas. Discouragement is concentrated tested until additional waves of household survey amongst respondents below median age, in line data become available. The same pattern is not vis- with a global phenomenon of falling youth labor ible for men, most of whom are either in schooling market engagement. or in the labor force. Younger men are slightly more The majority of men in both rural and likely than older men to be neither studying nor in urban areas are paid employees or own account the labor force workers, while this is not the case for women. Child labor is not uncommon in Sudan but Figures 2.4.4 and 2.4.5 show the type of employ- most working children are concurrently enrolled ment for different population groups. A relatively so this does not represent completely foregone small fraction are employers and most of these are educational opportunities. One in ten youths in older cohorts.24 Unpaid employment within the aged 10–16 is employed and another one in thirty household is relatively common in rural areas and is available to work but not currently working. The concentrated in the agricultural sector. The pattern rate of child employment is considerably higher is very different for women. Unpaid work within in rural than urban areas (13.5 and 4.3 percent, the family is the most common type of employment respectively) and slightly higher for men than in rural areas, particularly for younger women. women (12.9 and 7.7 percent, respectively). The Own account workers are slightly more common gender gap may, however, be considerably smaller if than paid employees and very few women are female youths are engaged in time-consuming home employers.25 production but do not report this as work. Most The regularity of employment differs across working children are concurrently enrolled (67.8 gender and location. 12.4 percent of workers percent), so much of this child labor does not repre- report working less than five days in the past week, sent completely foregone educational opportunities. but this is higher for women than men (11.6 and The overwhelming majority of women that 16.7 percent, respectively) and in rural than urban are labor force non-participating report that they areas (15.3 and 8.2 percent, respectively). This is are full-time homemakers or housewives, which a crude measure of underemployment but sug- is not an uncommon reporting Figures 2.4.2 and gests that the extensive margin employment data 2.4.3 show the reasons given for not participating in the labor force by respondents who are not studying. 24 The NBHS survey defines an employer as anyone whose main em- ployment status is operating their own business, profession or trade Reporting by women reflects a common phenom- and who employs at least one employee, who presumably need not enon in which formal labor force participation rates work for them fulltime. This differs from an own account worker who does not employ anyone. substantially understate female economic activity 25 The employment analysis by gender suggests a complex picture of because they do not measure home production. female labor force participation and home production. More than 4 million women report that they did not work because they are fulltime But there is a high number of discouraged homemakers or housewives, while another 700,000 report that they job seekers that show labor force non-partici- worked without pay in the family. This may reflect heterogeneity in respondents’ understanding of work. But it is also important to realize pation. This pool of untapped potential workers these dimensions to try to understand whether non-participating women represents both a challenge and opportunity for do or do not represent a pool of potential workers outside the home. 50 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 2.4: Employment and Labor Force Participation in Sudan 1) Employment and labor force participation 2) Reasons for labor force non-participation by gender and location by female non-students 7,000,000 1,800,000 6,000,000 1,600,000 1,400,000 5,000,000 1,200,000 4,000,000 1,000,000 3,000,000 800,000 600,000 2,000,000 400,000 1,000,000 200,000 0 0 Rural men Urban men Rural men Urban men Young Young Older Older rural women urban women rural women urban women Employed Unemployed Discouraged job seekers Other income source Studying Not studying or in labor force Retired / too old Disabled / too sick Homemaker 3) Reasons for labor force non-participation by male non-students 4) Type of female employment 350,000 900,000 300,000 800,000 700,000 250,000 600,000 200,000 500,000 150,000 400,000 300,000 100,000 200,000 50,000 100,000 0 0 Young Young Older Older Young Young Older Older rural men urban men rural men urban men rural women urban women rural women urban women Discouraged job seekers Other income source Paid employee Employer Own account worker Retired / too old Disabled / too sick Homemaker Unpaid within family Unpaid outside family 5) Type of male employment 6) Employment by sector 2,000,000 350,000 1,800,000 300,000 1,600,000 1,400,000 250,000 1,200,000 200,000 1,000,000 800,000 150,000 600,000 100,000 400,000 50,000 200,000 0 0 Young Young Older Older Rural men Urban men Rural women Urban women rural men urban men rural men urban men Paid employee Employer Own account worker Agriculture & Foresty Other industry Unpaid within family Unpaid outside family Manufacturing Services Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009). Notes: (6) Sector classifications are based on the jobs held by survey respondents, rather than the sector in which their employer is located. This measures the distribution of workers across sectors rather than the distribution of firms across sectors. (continued on next page) Structural change and the role of the real exchange rate for exports and growth 51 FIGURE 2.4: Employment and Labor Force Participation in Sudan (continued) 7) Employment and labor force participation by cohort A: Rural men B: Urban Men 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 A: Rural Women B: Urban Women 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 Employed Unemployed Studying Not studying or in LF Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009). (continued on next page) discussed above may understate the total female- significant. The education gap in labor force par- male and rural-urban employment differences.26 ticipation is considerably larger than the education In sum, and perhaps not surprisingly, gap in unemployment. These patterns are visible employment and labor force participation differs for men and women and in rural and urban areas. by education level. Table 2.3 shows that respon- dents with no education are least likely to participate Employment by economic sectors in the labor force and, conditional on participation, are more likely to be unemployed. Respondents Employment is dominated by agriculture in with post-secondary education are at the opposite rural areas and by services in urban areas. extreme, with the highest rates of participation and lowest rates of employment. People with primary and secondary education fall in between these 26 The comparison should be interpreted with particular caution be- cause 34 percent of respondents report that they worked more than two extremes but the differences between these seven days in the past week. This suggests that many respondents two groups are not themselves large or statistically misunderstood this question. 52 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 2.4: Employment and Labor Force Participation in Sudan (continued) 8) Employment by sector cohort A: Rural men B: Urban Men 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 A: Rural Women B: Urban Women 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 Agriculture & Foresty Manufacturing Other industry Services Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009). Education and Employment Status, Percent of Total Table 2.3:  Employed Unemployed Not in labor force No education 41.2 50.9 7.9 At most primary 56.1 35.9 7.9 At most secondary 54.9 38.2 6.9 Post-secondary 63.4 25.5 11.0 Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009). Note: Calculated using NBHS household weights. Includes all respondents aged 10–64 years who are not currently enrolled in school. Excludes respon- dents with khalwa education. Figure 2.4.6 shows the breakdown of employ- 34.3 and 51.7 percent of employment, respectively. ment across sectors for men and women in rural Manufacturing provides only 1.8 percent of employ- and urban areas. Agriculture and services almost ment and other industries account for the remaining completely dominate employment, accounting for 12.2 percent. Structural change and the role of the real exchange rate for exports and growth 53 Employment patterns differ significantly post-secondary education. Workers in the remain- between rural and urban areas. In particular, ing three sectors—manufacturing, non-manufactur- agriculture accounts for 50 percent of rural employ- ing industry, and services—have relatively similar ment and 5.5 percent of urban employment. Services levels of education. account for most urban jobs (74.6 percent) but are There is a substantial skill differential and also important in rural areas (39.1 percent). Both gap across sectors, which are slightly decreas- manufacturing and industry are more common in ing in the younger population. The ratio of urban areas (3.1 and 16.8 percent, respectively) but workers with secondary or post-secondary edu- still present in rural areas (1.1 and 9.8 percent, cation to workers with no or primary education respectively). Overall, however, manufacturing and is highest in manufacturing (0.94), followed by mining account for extremely small shares of employ- services (0.96) and non-manufacturing industry ment in both young and old cohorts (Figure 2.4.8). (0.73), with agriculture scoring far lower (0.12). Prime-age cohorts are more likely to work This has clear implications for economic trans- in services and industry than younger and older formation. Raising employment in the manufac- cohorts. There is limited evidence that employment turing and non-manufacturing industry sectors sectors vary by cohort. The only clear pattern is that is likely to require substantial increases in aggre- prime-age cohorts are more likely to work in services gate education levels. While education levels and, to a much lesser extent, industry than younger are indeed higher in younger than older cohorts and older cohorts. There is no trend toward greater (Figure 2.4.7) but this is not (yet) reflected in employment in manufacturing or industry amongst higher youth employment in industry and manu- younger cohorts, which is sometimes an indica- facturing (Figure 2.4.8). tion of an economy’s movement toward structural transformation. But there is no evidence for such a Labor productivity and wages across demographic structural change happening. sectors The sector that employs most people in the economy—agriculture—is also the sector Both productivity and wages differ sharply that employs most people without education. across sectors: Workers in the agricultural sec- Table 2.4 shows the distribution of education levels tor have low productivity and earn low wages; across sectors. Agriculture is a clear low-education workers in manufacturing and industry have outlier. Almost two in three workers in this sector high productivity and earn high wages; workers have no education and less than one in fifty has in services have low productivity and earn high Table 2.4: Education Breakdown of Employment by Economic Sector, Percent of Total No education At most primary At most secondary Post-secondary Agriculture 64.1 25.0 9.6 1.3 Manufacturing 30.2 21.5 36.3 12.1 Industry (non-manufacturing) 23.9 33.9 33.1 9.1 Services 29.6 27.3 30.0 13.2 Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009). Notes: Calculated using NBHS household-level weights representative at the state level. Includes all respondents aged 10–64 years who report working recently or having a job. Sectors are based on “main activity of work [during] the last 7 days.” Excludes respondents with missing values for work activity and hence sector of employment (1.6 percent) or highest level of education (1.8 percent). Non-manufacturing industry includes: mining, electricity, water, construction, transport, and communications. 54 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Table 2.5: Annual Value-Added (VA) Per Worker by Sector (US$) 2009 2010 2012 VA Labor VA Labor VA Labor Employment (US$ mn) productivity (US$ mn) productivity (US$ mn) productivity Agriculture 3,114,411 8,473 2,721 8,374 2,689 12,343 3,963 Manufacturing 931,005 8,307 8,923 8,486 9,115 8,107 8,708 Industry 132,440 2,241 16,921 2,643 19,956 2,711 20,470 (non-manufacturing) Services 3,949,954 14,668 3,713 15,374 3,892 7,242 1,833 Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009); and World Development Development Indicators (WDI). Notes: Employment totals use household-level population weights representative at the state level. Employment totals are drawn from all respondents aged 10 or older at the time of the survey who reported a sector employment. Sectors are based on “main activity of work [during] the last 7 days”, which may differ from employer’s main activity. Value-added data for 2009 and 2010 include South Sudan, but exclude for 2012. Non-manufacturing industry includes: mining, electricity, water, construction, transport, and communications. wages.27 Table 2.5 reports labor productivity by higher 75th percentile. However, the difference is sector.28 Two patterns are clear. First, labor pro- small and not statistically significantly different ductivity is highest in manufacturing (>$16,000). from zero. This is consistent with nearly universal international Wages by sector have a direct implication for trends and highlights the importance of the manu- poverty rates by sector and a wage gender gap facturing sector in driving the upgrade of skills. is present in all sectors, but at varying degrees. Second, labor productivity in non-manufacturing In the agricultural sector, 34.8 percent of workers industry (which includes mining, electricity, water, earn less than the monthly poverty line of SDG114. construction, transport, and communications) is This rate drops to 15.3, 12.9, and 12.7 percent in somewhat lower than manufacturing but still con- the service, industry, and manufacturing sectors, siderably higher than either agriculture or services. respectively. Shifting employment away from agri- Hence, labor productivity is inversely proportional culture may thus play an important role in alle- to employment, with the most productive sectors viating poverty, provided these wage differentials employing the fewest people. This is partly a natural consequence of higher capital-labor ratios in these sectors but also highlights the importance of grow- 27 There are important data limitations in Sudan that may affect the ing these sectors. accuracy of this analysis, particularly the detailed productivity num- bers. But reported trends should be unaffected and be a good guide Daily wages in agriculture are considerably in the analysis. Limitations are that the employment data are drawn lower than in any other sector, while wages in from a survey of Sudanese households in 2009 while the value-added data for 2011 and earlier years aggregate Sudan and South Sudan. The industry, manufacturing, and services are rela- table therefore reports productivity in 2009, which uses value-added tively similar. Table 2.6 reports summary mea- data for the appropriate time period and incorrect region, and 2012, which uses data for the appropriate region and incorrect time period. sures of the distribution of daily wages by industrial Productivity in 2010 is also reported as a mid-point measure. This sector. Agriculture is a clear outlier, with workers mismatch means that the total value-added in 2009 is generated by Sudanese and South Sudanese workers, so the average labor productiv- earning considerably lower wages than in any other ity will be upward biased. Furthermore, employment in manufacturing sector. Wages in industry, manufacturing, and ser- in the survey is small (237 people, equal to 1.6 percent of the sample) so results may also reflect some sampling error. vices are relatively similar to one another. There is 28 Labor productivity is defined as the ratio of total value-added (from some evidence that wages may be more dispersed the World Development Indicators) to total employment in each sector. It provides a measure of the average worker’s contribution in manufacturing, with a lower 25th percentile and to total output. Structural change and the role of the real exchange rate for exports and growth 55 Table 2.6: Distribution of Daily Wages by Industrial Sector (US$) 25th percentile 50th percentile 75th percentile % missing wages Agriculture 3.2 5.7 10.0 48.7% Manufacturing 6.8 10.4 17.5 6.8% Industry (non-manufacturing) 4.3 10.0 18.3 7.0% Services 5.7 10.0 15.5 10.2% Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009). Notes: Calculated using NBHS household-level weights representative at the state level. Includes all respondents aged 10–64 years who report working recently or having a job. Sectors are based on “main activity of work [during] the last 7 days.” Excludes respondents with missing values for work activity and hence sector of employment (6.9 percent) or highest level of education (1.8 percent). Weekly wages are missing for 25 percent of the sample, primar- ily in the agriculture sector. Non-manufacturing industry includes: mining, electricity, water, construction, transport, and communications. remain stable as employment composition shifts. Overvaluation was as much as 65 percent in 2008, However, sectoral shifts alone will alleviate neither during the heyday of the oil economy. The section poverty-level earnings nor gender differentials in shows that an undervalued RER is associated with earnings. For example, 35.1 percent of women earn higher real export and output growth, especially for less than the monthly poverty line, compared to only developing countries today and developed countries 16.5 percent of men. This gender gap is present in the earlier decades. Across all countries and time, across all four sectors, though to varying degrees.29 on average, for each additional 10 percent RER Comparing daily wages with the labor pro- undervaluation, the country’s export growth goes ductivity analysis shows that agriculture is lag- up by 0.6 percentage points and its output growth ging behind, but also that the services sector goes up by 0.88 percentage points a year. offers scope for well-paid employment without Empirical results are used to explore the the capital intensity of manufacturing. On the one question of whether an undervalued exchange hand, productivity is highest in manufacturing, fol- rate can help boost export and therefore also lowed by non-manufacturing industry, agriculture, output growth. The issue needs to be addressed and services. But wages are highest in non-manu- from an empirical perspective since the theoretical facturing industry, manufacturing, and services, relationship between the real exchange rate and and lowest in agriculture. Both measures point to exports/outputs is not clear-cut (Annex 4). The anal- agriculture as the lagging sector (Tables 2.5 and ysis in this report utilizes a cross-country RER mis- 2.6) but they provide mixed evidence on the rela- alignment index. A country’s RER is defined as the tionship between the other three sectors. Services relative price of the domestic consumption basket lags industry and manufacturing on productivity and the foreign consumption basket. The domestic but not wages, which suggests that this sector offers consumption basket includes domestic non-tradable scope for well-paid employment without the same goods, domestic tradable goods, and some foreign capital intensity. tradable goods; the foreign consumption basket B. The Role of the Exchange Rate 29 The analysis of wage distributions has three caveats important enough to be mentioned: First, the small number of survey respon- This section utilizes a simple theory-based real dents working in manufacturing means that the wage distribution exchange rate (RER) Misalignment Index for in this sector reflects substantial sampling error. Second, wages are missing for a large fraction of the respondents. Third, there are some countries around the world from 1950–2011, and outliers who report extremely high daily wages, which motivates the shows that Sudan’s RER has been overvalued. focus on percentiles of the distribution instead of means. 56 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT includes foreign non-tradable goods, foreign trad- may have slightly eased in the years 2012 and 2013 able goods, and some domestic tradable goods. where the nominal exchange rate devalued by The analysis uses a simple theory-based almost 100 percent (Figure 2.5.2). But the positive approach first developed by Rodrik (2008) to cal- RER effects of this nominal depreciation, were also culate the RER misalignment. In his work, Rodrik eaten up again by persistently high inflation rates has shown that undervalued real exchange rates are of 35.1, 36.3 and 37.4 percent in 2012, 2013, and associated with higher output growth. Since the origi- 2014, respectively. nal work does not include export growth this report The historical overvaluation is consistent will slightly modify Rodrik’s approach to measure with the gaps observed between official nominal RER misalignment and will present evidence about exchange rates and black market exchange rates the relationship between undervaluation and export (Figure 2.5.2). If one was to consider the black growth. Annex 4 provides the details on how the market exchange rate as a de facto market-driven study measures the RER misalignment index. The key equilibrium value of the nominal exchange rate, is to establish the RER misalignment index through the official nominal exchange rate was overvalued controlling for the Balassa-Samuelson effect. Balassa- to the tune of 50 to 70 percent in 2010 and 2011. Samuelson captures the effect of an economy’s Given data constraints, there is no measure of RER productivity on its non-tradable goods’ prices. The Misalignment for Sudan after 2011. However, based empirical results show that the Balassa-Samuelson on the gap between the official and the black market effect is highly significant with a negative sign. rates, and given the historical relationship between There are other approaches to calculating the two that reflects the RER Misalignment Index, RERs and to determine any undervaluation. it is likely that the extent of RER overvaluation Currently, the most popular one is to regress a remained at a similar level for 2012 and 2014. Such country’s real exchange rate against a large set of the an overvaluation pattern identified through the mis- country’s fundamentals to establish a real exchange alignment index is consistent with other estimates. rate norm.30 The gap between a country’s actual For instance, the IMF Article IV in 2014 estimated real exchange rate and its norm (i.e. the residual in that the Sudan real exchange rate was about 40 per- the regression) is considered the “misaligned” part. cent overvalued in 2014 (IMF 2014c). The most well-known research using this approach Sudan’s RER overvaluation is somewhat is from the IMF (Lee et al. 2006), which forms the consistent with the experience of other African basis for the IMF’s work on assessing countries’ RER misalignment in its Article IV papers. This report does not rely on the methodology given the com- 30 In the “kitchen sink” approach, researchers throw believed-to-be plexity of the approach and the difficulty to identify fundamental variables to the right hand side of the regression—often without a clear theoretical rationale to why they are fundamental—and “fundamentals.” Instead, Rodrik’s amended meth- hope to find some significance. There are two problems with this. odology is found to be more intuitive. First, there may be neglected fundamentals that also affect the real exchange rate, but are not included. Negligence may come from the Sudan’s RER has been greatly overvalued fact that it is virtually impossible to come up with an exhaustive list over most of the past 40 years. From 1970 to of factors affecting productivity and consumption and savings deci- sions. Second, variables considered “fundamentals” might actually the present, there were only two years when the contain elements that distort the real exchange rate. For example, RER was undervalued (Figure 2.5.1). For the rest government consumption is considered a “fundamental.” However, government consumption could be directly affected by an incentive of years, the RER is greatly overvalued, as much as to lower the real exchange rate. Eden and Nguyen (2012) offer more 65 percent in 2008. In 2010 and 2011 the over- detailed criticism of the current approaches. 31 The data underlying the RER Misalignment Index—Penn World valuation lessened to 50 percent and 40 percent, Table 8.0—does not have RER data for 2012 and 2013 at the time still very significant numbers.31 The overvaluation of this analysis. Structural change and the role of the real exchange rate for exports and growth 57 FIGURE 2.5: Sudan’s RER Misalignment in Perspective of other African Oil Exporting Countries 1) Sudan‘s RER misalignment 2) Sudan's Official and Market Exchange Rate (SDG/US$) 0.2 10 0.1 0 8 –0.1 –0.2 6 –0.3 –0.4 4 –0.5 –0.6 2 –0.7 –0.8 0 1970 1976 1982 1988 1994 2000 2006 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Misalignment Official Exchange Rate Market Exchange Rate 3) Nigeria 4) Angola 1.5 1.0 1.2 0.8 0.9 0.6 0.6 0.3 0.4 0 0.2 –0.3 0 –0.6 –0.9 –0.2 –1.2 –0.4 –1.5 –0.6 –1.8 –2.1 –0.8 –2.4 –1.0 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 1970 1975 1980 1985 1990 1995 2000 2005 2010 Misalignment Export growth 5) Congo 6) Gabon 0.8 1.0 0.6 0.8 0.4 0.6 0.2 0.4 0 0.2 –0.2 0 –0.4 –0.6 –0.2 –0.8 –0.4 –1.0 –0.6 –1.2 –0.8 1962 1966 1970 1974 1978 1987 1982 1986 1990 1994 1998 2002 2006 2010 1962 1966 1970 1974 1978 1987 1982 1986 1990 1994 1998 2002 2006 2010 Misalignment Export growth Source: World Bank staff own calculations, based on data from PENN World Tables; CBOS; and World Bank World Development Indicators (WDI). Note: Undervaluation zone is above 0. oil exporters. Figures 2.5.3 to 2.5.6 show that observed in Sudan. The range is from 30 percent the magnitudes of overvaluation in other African in Nigeria to 90 percent in Congo. Overall, this is a oil exporters are somewhat similar to the levels clear evidence of Dutch disease symptoms among 58 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT African oil exporters. But Sudan is not a huge crude enough and its firms already operate at the tech- oil exporter anymore, and its RER management nological frontier, an undervalued RER might not needs to be compared to other, more diversified matter anymore for the country’s export. Rather, at economies. the frontier the country’s firms need to rely on bet- Comparing Sudan to more diversified econ- ter technology and innovation. omies, the RER overvaluation is in contrast On average, across all countries and the to Asian experiences, but in line with Latin full time period considered (1950–2011), for American experiences. Sudan’s overvaluation each additional 10 percent RER undervaluation experience is in stark contrast to the experiences a country’s export growth will rise by 0.6 per- in Asian countries. Figures 2.6.2, 2.6.3 and 2.6.4 centage points per year. Among high-income show China, India, and Korea. All of them had countries between 1950 and 1980, an additional undervalued exchange rates during their catching- 10 percent undervaluation boosted export growth up periods: China between 1981 and 2009, India by 1.26 percentage points. Among low-income since 1999 until the present, and South Korea dur- countries between 1981 and 2011, that figure is ing much of the 1960s and 70s. With regard to RER 0.7 percent. A similar exercise for countries’ real undervaluation, Sudan’s neighbor Egypt followed output growth shows a significant positive impact the Asian experience (Figure 2.6.1). On the other of an undervalued exchanged rate on real output hand, Latin American countries adopted a rather growth. The positive impact holds for both high- different strategy, where RERs were overvalued income and low-income countries: on average during most of the past decades (see Figures 2.6.5 across all countries and all time, if a country’s RER and 2.6.6 for Argentina and Brazil). is 10 percent undervalued its real output growth A regression analysis more definitely con- goes up by 0.88 percentage points per year. firms the graphical observations of the under- In the case of Sudan, each additional 10 per- valuation index and export growth plotted in cent RER undervaluation is associated with Figures 2.5 and 2.6. Annex 4 provides details higher output growth of 0.9 percentage points about the regression and its results, which are very and a positive relationship is expected also for intuitive. Overall, undervaluation is associated with undervaluation and export growth. A positive higher export growth; this phenomenon is true relationship between RER undervaluation and for both high-income and low-income countries export growth is likely and at least in the order of (defined as having an annual GDP per capita below 0.7 percentage points as witnessed by the cross- $6,000 in 2000). Interestingly, the coefficients are country analysis above. But in the case of Sudan’s significant for high-income countries in the earlier RER Misalignment Index, due to the small sample decades (1950–1980) and for low-income countries size used for the analysis that is carried out with in the latter decades (1981–2011). This implies that Sudanese data, no significant relationship between countries need to be at a certain level of income the two is found (Table 2.7). to be able to take advantage of the undervalued In turn, RER overvaluation is an important RER strategy. This is likely to be when a country inhibiting factor for Sudan’s export sector, since is at the stage of exporting relatively simple, light its non-natural resource and agriculture exports manufacturing products. In turn, this means that comprise mainly of low-value, often raw and if a country’s economy is dominated by agriculture unprocessed products, that compete primarily production and/or only exports commodities, an on prices. In theory, the overvalued real exchange undervalued RER may not help the exporting firms. rate hurts exports because Sudanese products are On the other hand, when a country is already rich less competitively priced than identical products Structural change and the role of the real exchange rate for exports and growth 59 FIGURE 2.6: Undervaluation and Export Growth, Selected Countries 1) Egypt 2) China 0.9 0.6 0.6 0.4 0.3 0.2 0 –0.3 0 –0.6 –0.2 –0.9 –0.4 –1.2 –1.5 –0.6 –1.8 –0.8 1962 1966 1970 1974 1978 1987 1982 1986 1990 1994 1998 2002 2006 2010 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 Misalignment Export growth 3) India 4) Republic of Korea 0.3 0.8 0.2 0.6 0.1 0.4 0 0.2 –0.1 0 –0.2 –0.2 –0.3 –0.4 –0.4 –0.5 –0.6 –0.6 –0.8 –0.7 –1.0 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 Misalignment Export growth 5) Argentina 6) Brazil 1.0 0.6 0.4 0.5 0.2 0 0 –0.2 –0.4 –0.5 –0.6 –1.0 –0.8 –1.0 –1.5 –1.2 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 Misalignment Export growth Source: World Bank staff own calculations, based on data from PENN World Tables. Note: Undervaluation zone is above 0. from other countries, all else being equal. In prac- straightforward. The latter can appreciate as a result tice, the relationship between competitiveness of an improvement in competitiveness when there and movements in the real exchange rate is not are gains in productivity of tradable goods relative to 60 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Table 2.7: Effects of Undervalued RERs on Export and Output Growth Sudanese Data ΔIn (real exports) ΔIn (real exports ex-oil) ΔIn (real GDP) (1) (2) (3) In (Initial Real Exports) 0.014 (0.040) In (Initial Real Exports ex-Oil) –0.27433 (0.201) In (Initial Real GDP per capita) 0.032 (0.044) Undervaluation 0.367 –0.673 0.0954** (0.315) (0.619) (0.045) Constant 0.067 5.536 –0.175 (0.310) (4.109) (0.316) R-squared 0.05 0.13 0.06 Adjusted R-squared 0.0 0.05 0.02 S.E. of regression 0.320 0.553 0.07 Note: Newey-West HAC Standard Errors in parenthesis. *** p<0.01, ** p<0.05, * p<0.1. that of non-tradable goods. Competitiveness is lost countries are not optimal. If every country deval- when there is a misalignment from the equilibrium ues to take advantage of the lower RER, countries RER. In particular, the agricultural commodities that might undercut each other’s export (i.e., a race to are primarily behind Sudanese non-natural resource the bottom), and the end result might be that no exports tend to be affected by real appreciation exporting country will benefit from their exchange because import content in these sectors is generally rate devaluations. In other words, from the point lower than in manufacturing. of view of a specific country such as Sudan, main- Potential changes in the exchange rate would taining an undervalued exchange rate is beneficial need to be considered in the context of the for its export and growth. However from the point overall macroeconomic policy mix, which may of view of the developing world as a whole, com- also need adjustment. There are macro-economic petitive devaluation (recently dubbed as currency trade-offs to consider. Nominal currency deprecia- wars) from many developing countries may not be tion increases import prices and thus contributes optimal. An international exchange rate coordina- to inflation, especially if imported food inflation is tion system could play a role in this regard, but this already a problem as it is in Sudan. There are also is beyond the scope of this paper. In the long run balance sheet effects through a rise in external pub- what really matters is that exports strive for produc- lic debt when expressed in local currency. Some of tivity and product quality. these trade-offs can be addressed by adjusting other But how to change the RER? In a situation policies. A tighter monetary and/or fiscal policy can where the RER is off the equilibrium rate and help contain the inflationary impact, for instance, there is a gap between the official nominal which is needed more than ever with core inflation exchange rate and the black market rate, nominal at its historic high in 2014 (Figure 2.6.1). devaluation can lead to RER devaluation. Sudan The analysis is silent on the equilibrium is off the equilibrium rate since its official nominal effect and notes that, from an international per- exchange rate is below the black market rate and spective, competitive devaluations from many the Misalignment Index showed an overvaluation Structural change and the role of the real exchange rate for exports and growth 61 of the RER over the past. In this situation a devalu- In Sudan, in the short term it is important ation of the nominal exchange rate to bring about to bring the official exchange rate back to closer RER devaluation is likely indicated. to the black market exchange rate. The authori- When a country’s exchange rate is in equi- ties had only limited success thus far, even though librium, depreciating the RER is more challeng- two large nominal depreciations brought about a ing. In such a situation, changes to the nominal nominal depreciation of about 100 percent in 2012 exchange rate will potentially create disequilibrium and 2013. In December 2014 the gap between the transitional problems, and then nominal changes two rates was just below 30 percent. So the case are not effective in the long run. So in this case, for further devaluating the currency is convincing, any devaluation strategy would need to focus on based on the black market exchange rate data and factors that affect real fundamentals. The follow- the RER Misalignment Index. ing examples show some potential channels that There are two approaches toward large deval- affect the RER: uations: big bang vs. gradual. The first approach is to do a one-off devaluation. However, a problem  Reduce import restrictions: Reducing import of a large sudden devaluation is that it will bring restrictions (tariff for example) would increase about economic disruptions, for instance to trade spending on import and therefore reduce the and debt services, and inflation. And in a way Sudan demand on domestically produced goods. This already tried the approach twice in 2012 and 2013, would help lower wages. Export would be more with limited success thus far. The second approach competitive due to lower imported input and is to devalue gradually and credibly (see for instance lower wages. In fact, Sudan suffers from high Sutela, 2010). The upside to this approach is that tariff and non-tariff barriers as shown in the the economy will only have to deal with incremen- 2014 Update to the Diagnostic Trade Integration tal changes. The downside is that the depreciation Study (DTIS). Sudan’s simple average tariff and expectations would put pressure on the central bank trade weighted tariff rates of 20 and 22 per- to devalue earlier than planned. For this reason, cent, respectively, are among the highest in the credibility is key. Given the ever-changing black world and are substantially higher than most market rate and the earlier attempts in 2012 and countries in Africa and the Middle East (World 2013, gradual but ongoing devaluation may be the Bank, 2014e). approach of choice for Sudan.  Increase domestic savings: a reduction in domes- In the medium to long term, and after the tic demand would lower both the RER and the official and market exchange rates have been price of export. The reasoning is as follows: successfully unified, the question arises for what reduced domestic demand would lower the exchange rate regime may serve the country prices of both the domestic non-tradable and best. The choices are between pegged and flex- tradable goods. This implies that wages are ible exchange rates, and a case could be made for lower and the domestic tradable goods become the former for the following reasons: (1) A pegged relatively cheaper compared to the foreign trad- exchange rate provides stability that is needed for able goods, which implies cheaper exports. the export sector. This is especially important if the Reducing domestic demand also enables the country would like to promote exports. (2) A peg government to spare the scare resources for provides an inflation anchor. Developing coun- importing foreign technology and know-how. tries with low technical and institutional capability Sudan’s savings rate is rather low as was shown often choose to peg their exchange rate as a way to in the preceding section 2.C. anchor inflation expectation. Sudan may not be an 62 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT exception to this. (3) A slightly undervalued, rather A major driver of the upsurge in inflation fixed exchange rate, will help the government to since 2011 was the approach to monetize the accumulate foreign reserves to bolster the exchange budget deficit by the Central Bank of Sudan rate regime and protect against economic volatility. through granting direct loans to the government. Finally, a crawling peg arrangement may This resulted in rapid monetary expansion that be the preferred choice for a pegged exchange triggered the growth of prices. Another significant rate regime as it combines the advantages of a measure that contributed to the upsurge in inflation peg but can also avoid real appreciation. A hard since June 2012 was the adoption of a reform pack- peg (i.e. fixed exchange rate) runs the risk of real age that resulted in steep devaluation of the official appreciation if the domestic inflation is high. When nominal exchange rate, an increase in taxes, and a the nominal exchange rate is fixed, an increasing gradual elimination of fuel subsidies. All of these domestic price level means that the dollar price of measures resulted in prices increases, especially the the domestic goods is more expensive compared announced elimination of subsidies of petroleum to the foreign goods, an RER appreciation. With a products. The latter affected the expectations for the crawling peg, the nominal exchange rate is allowed economic agents about higher prices for petroleum to gradually devalue if domestic inflation is high. products in near future that had spillover effects on Since Sudan’s inflation is rather high in the post- other prices in the economy. secession world, a crawling peg may be the preferred The structural components of the CPI show arrangement. that since 2011, inflation in Sudan was driven by food prices and services such as prices of trans- C. Volatile and High Inflation: Important port, recreation and culture, and health services. determinant of the Real Exchange What is most striking in Sudan is that core inflation Rate follows closely the movement of overall inflation; this is more pronounced since 2010. The rise in Inflation in Sudan has a history of high rates and core inflation actually suggests that price pressures increased volatility for decades. Since the advent are persistent, requiring strong, long lasting, and of oil, the average annual inflation in Sudan has credible policy actions for reducing the core infla- been around or above 10 percent with the exception tion because it is tied with inflationary expectations of the 2003 to 2006 period. The persistently high of the economic agents in the country. inflation was also accompanied by high volatility. The monetization policy by the Central Bank As one of the key symptoms of the 2011 secession of Sudan32 resulted in a substantial increase in shock the Sudanese inflation rate has significantly the volume of money in the economy (an upsurge increased since 2011, and has been beyond 30 per- of the currency in circulation). The significant cent since 2012 (annual CPI rate, period average). upsurge affected the broad money aggregate (M2), (Figure 2.7.1). Analyzed with monthly frequency, which increased by 40 percent in 2012 compared inflation was even higher over certain periods to 17.7 percent in the previous year (Figure 2.7.2). (exceeding 40 percent) such as in the second half An additional contribution for the sharp rise of the of 2012 and the first quarter of 2013 when inflation broad money was that the nominal value of foreign reached a monthly peak of 47.9 percent in March 2013, after which the price level growth started to 32 The monetization of the budget deficit was done mostly through decelerate. There was another peak of inflation with long-term loans to the government whose nominal value more than doubled for the period December 2011–December 2013 and tempo- 46.8 percent in July 2014, which relaxed to 25.7 rary advances to the government whose nominal value tripled during percent in December 2014. the same period. Structural change and the role of the real exchange rate for exports and growth 63 currency deposits more than doubled for a period Structure of the Financial Sector Table 2.8:  of one year from 2011 to 2012. Consequently, the in Sudan share of the foreign currency deposits in M2 aggre- Number of Percent of gate also rose from 12 percent in 2011 to 19.1 per-     institutions total assets cent in 2012. The significant increase of the foreign Banks     currency deposits in Sudan is a result of a loss of   Government-owned 4 13% confidence in the Sudanese currency that was trig-   Joint venture 25 77% gered by the unstable macroeconomic environment   Foreign-owned 6 8% such as high inflation, unstable nominal exchange Insurers n/a 1% rate and non-credible central bank authorities. Source: IMF 2013. Note: Does not include the small finance houses that operate. The level of broad money in the economy, measured as share of GDP, is low in Sudan. Broad money was only 21.0 percent of GDP in 2013, by the Central Bank of Sudan (CBOS)/government compared to 48 percent on average for low-income and the private sector, and six foreign-owned banks. countries, and the share of currency in broad money Ninety percent of banking system assets are those of is high (Figure 2.7.3). This indicates that Sudan is a banks owned fully or jointly by the CBOS/govern- low monetized economy that relies more on tradi- ment. The dominance of state-owned banks presents tional real currency transactions compared to other apparent conflicts of interest with the supervisory countries with more modern financial systems. role by the CBOS. Solid but volatile credit growth to the private Sudan’s banking system is characterized by a sector in the past decade resulted in the continual lack of financial instruments and excess liquid- increase of credit-to-GDP-ratio, but financial inter- ity. The Islamic principle does not allow short- mediation remains low. The credit-to-GDP-ratio term liquidity products, resulting in the absence increased by 11.9 percentage points as share of GDP of an active interbank market. The absence of an from 2000 to 2006 and since then it has remained interbank market, as well as a cap on commercial stable around that level. However, looking at growth bank holding of government and central bank rates of private sector credit, one can see large vola- securities, have led to persistent excess reserves tility. At times credit growth to the private sector is (Figure 2.7.7) and budget financing by the Central high (in nominal terms), which is both a symptom Bank of Sudan (CBOS).33 of high inflation rates and also a reinforcing factor Although still weaker than its SSA peers, (Figure 2.7.4). Growth of credit to the private sector Sudan’s banking system showed a sign of reached its maximum of 12.8 percent in 2012 and improvement in 2013. The capital adequacy ratio went down to 10.5 percent in 2013 (Figure 2.7.5). increased to 16.6 percent in December 2013, above However, despite the growth of private sector credits the required adequacy ratio of 12 percent (Figures the level of financial intermediation in Sudan is still 2.7.8 and 2.7.9). The ratio of liquid assets to total very low (Figure 2.7.6). This suggests that there is assets increased to 39.5 percent. Bank profitabil- significant space for future development of the finan- ity, measured by return on assets and equity, has cial sector as one of the key ingredients for growth. gradually recovered since the lows reached in 2008, Sudan’s banking sector is based on Islamic although it is still well below the inflation rate. finance principles, and is currently composed of 35 banks (Table 2.8). As of 2013, the sector 33 Banks can only invest up to 20 percent of their investable funds in consisted of four government-owned banks, twenty government securities, short-term murabaha investments, and central five domestic mixed-ownership banks jointly owned bank certificates. 64 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 2.7: Inflation, Monetary and Financial Sector Developments 1) Average annual inflation in Sudan, 1999–2014 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% –10% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Overall inflation Food inflation Core inflation Non-tradables/Tradables Tradables Non-tradables 2) Broad money, base money, and money multiplier 3) Broad money in Sudan and selected countries, 2013 50% 2.5 90 80 40% 2.0 70 Percent of GDP 30% 1.5 60 50 20% 1.0 40 10% 0.5 30 20 0% 0 10 –10% –0.5 0 2008 2009 2010 2011 2012 2013 Egypt Kenya Botswana Malawi Nigeria Tanzania Ghana Ethiopia Zambia Uganda Sudan Money multiplier (right axis) Base money (left axis) Broad money (left axis) 4) Annual credit growth to private sector 5) Private sector credit to GDP in Sudan, 2001–2013 40% 14 12 30% 10 Percent of GDP 8 20% 6 10% 4 2 0% 0 2008 2009 2010 2011 2012 2013 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: World Bank staff own calculations, based on data from CBOS 2014; IMF 2012; IMF 2013; IMF 2014a; IMF 2014b; IMF 2014c; and World Bank World Development Indicators (WDI). (continued on next page) Nonperforming loans continued to fall to 8.4 per- percent in 2012 to 53.6 percent in 2013 (Figures cent in December 2013 from 11.8 percent in 2012, 2.7.10 and Figures 2.7.11). Annex 5 contains a full leading to provision ratio increasing from 33.5 set of financial soundness indicators. Structural change and the role of the real exchange rate for exports and growth 65 FIGURE 2.7: Inflation, Monetary and Financial Sector Developments (continued) 6) Private sector credit to GDP selected countries, 2013 7) Reserve ratios in Sudan, 2008–2013 35 Congo, D.R. 30 Chad 25 Percent of GDP Sudan 20 15 Uganda 10 Egypt 5 Kenya 0 2008 2009 2010 2011 2012 2013 0 10 20 30 40 50 Required reserve to deposit ratio Percent of GDP Excess reserves to deposit ratio 8) Capital adequacy ratio in Sudan 9) Capital adequacy ratios, selected countries, 2013 25 Seychelles Rwanda 20 Zambia Swaziland Required ratio Kenya 15 Burundi Percent Nigeria Tanzania 10 Mauritius South Africa Namibia 5 Congo, Rep. of Sudan 0 Cameroon 2006 2007 2008 2009 2010 2011 2012 2013 0 5 10 15 20 25 30 Percent 10) Non-performing loans in Sudan 11) Non-performing loans, selected countries, 2013 30 Cameroon Sudan 25 Swaziland Seychelles Percent of gross loans 20 Burundi Zambia 15 Tanzania Rwanda Kenya 10 South Africa Mauritius 5 Nigeria Congo, Rep. of 0 Namibia 2006 2007 2008 2009 2010 2011 2012 2013 0 2 4 6 8 10 12 14 Provisioned Unprovisioned Percent Source: World Bank staff own calculations, based on data from IMF 2012; IMF 2013; IMF 2014a; IMF 2014b; IMF 2014c; and World Bank World Develop- ment Indicators (WDI). AGRICULTURE AND LIVESTOCK: KEY FOR ECONOMIC DIVERSIFICATION 3 Rising agriculture trade since 2008 is the visible testament to a starting recovery in Sudan’s agriculture economy, albeit from a low level. The rising trend is also only driven by a small number of products, most notably livestock, gum arabic, and cotton. Livestock may be the most remarkable of these with a remark- able recovery after virtually no exports in 2008 due to an imposed export ban and quarantine measures, which grew to a multi-million business and earned more than US$670 million in 2013. The backbone of this success is pastoral livestock production, which is superior to any other form in Sudan. But pastoral- ism is under pressure due to uncertain land tenure and land rights that effectively diminish the historical grazing grounds of pastoral farmers. Gum arabic and cotton have shown a remarkable recovery. In each case the Government had instituted monopolized marketing structures in the past (monopsonies) in the form of parastatal companies. As is often the case with such companies, paying farmers less and less for their products (independent of the world price) seems an easy path to profitability, until the farmers stop harvesting or even planting their crops. That this happened can be seen in low yields in both gum arabic and cotton, but also many other agriculture products. As the monopsonies were eventually relaxed and competition provided, prices received by farmers increased substantially, and with them so did areas cropped and especially yields. Cotton yields tripled nation nationwide in one year (2010/11), and in three years increased by five and a half times—with no improvements in irrigation or varieties. Such remarkable increases in agricultural yields show that poor agriculture performance is not only a product of low fertilizer usage, weak variet- ies due to often-local breeds of seeds, but also, and possibly most importantly a lack of incentives for the producers. There is no comparative advantage for wheat production in Sudan, which needs more seasonality than most of Sudan provides. This is why Sudan’s average yield is half of Chad’s, one quarter that of Ethiopia, and 1/14 that of Egypt. Sugarcane is somewhat different, in that areas of Sudan have achieved good yields in international terms. But sugarcane is the second highest water-consuming field crop in the world, after rice. Meanwhile, Sudan’s irrigation schemes are deteriorating rapidly, and the largest, Gezira, is almost to the point of collapse in terms of delivering water. Sudanese farmers know this, and they have turned against sugar as decisively as they have turned against wheat. As for government sup- port of wheat production, this study follows World Bank (2015b) in its recommendation to first shift the focus of subsidies to domestically produced wheat and then, second, to gradually reduce the extent of subsidies on domestic production. (continued on next page) 68 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Some critical public goods must be provided by public investment. Two such encountered by the study team are the rehabilitation of the Gezira Scheme, and establishment of a system of regional grain stores. The Gezira Scheme, the centerpiece of Sudan’s crop agriculture for the past 90 years, is now approaching total collapse in terms of water delivery, though long ago its drainage systems became hopelessly clogged. Sudan’s President has declared the Scheme a failure in 2014. Yet the natural advantages which led to its construction and expansion still exist: slopes permitting gravity irrigation, decent soils, good climate, and now a knowledgeable workforce from among the three million residents of the area. A thorough yet quick feasibility study would be needed to determine if rehabilitation of the scheme is economically beneficial and what needs to be done differently to again make it a success. Food security in the modern world has more to do with efficient storage capacity than with attempted self-sufficiency in production, whether of wheat or anything else. As Sudan produces very little wheat and imports most of its needs, there is considerable modern storage capacity on the Red Sea around Port Sudan, both to buffer incoming shipments and as a working reserve for flour mills. These represent around two months of wheat consumption—not a comfortable reserve but tolerable with good management of procurement and the silos themselves. Aside from traditional peasant reserves of the sorghum and mil- let they produce (mainly in the west), there are only 20 days of those two commodities in government stores, and this is probably inadequate, especially given that the consumers of these grains are far from the port. In event of crop failure, a serious humanitarian emergency may arise. Thus the study proposes an innovative approach to a series of modern silos. A. Overview is, in principle, suitable for agricultural production. Reliable statistics about how much of the arable land Agriculture is a key sector of the Sudanese is currently used are not available, but staff esti- economy contributing about one-third to mates are that about 30 percent of that area is under GDP and value added creation every year (see exploitation.35 Approximately 52 million feddan Figure 2.18). Agriculture provides a livelihood to are forestland and 118 million feddan rangeland. about 65 percent of total population, employment This section will show that the agricultural sector in to about 35 percent of the labor force in the coun- Sudan operates below its true productive potential, try, 50 percent in rural areas (NBHS 2009), and is even though a great potential for further develop- responsible for the supply of basic staple foods and ment exists through vertical (productivity) and animal products, in addition to the supply of raw horizontal (land area) expansion. Agriculture in material to the food industry. Agricultural exports Sudan is paramount for sustained future national are returning to prominence as ab important source economic growth, poverty reduction, food security, of foreign exchange earnings after the decline of oil and foreign exchange earnings. At present, Sudan’s exports. Their share rose from 8 percent in 2011 to about 23 percent of total export earnings in 2012, with livestock alone reaching 19 percent. 34 1 hectare = 2.4 feddan 35 This does not mean that the other 70 percent of the 134 million About one-third of Sudan’s area is suitable feddan of land are readily arable land that is basically wasted. In fact, for agriculture production. The total land area of anecdotal evidence points to the facts that there is often significant soil degradation, that semi-mechanized farming has displaced pastoralism, Sudan after secession of South Sudan is estimated at and then when soils are exhausted, the area cannot be used either for 446.4 million feddan34 of which 134 million feddan further crops or for grazing. Agriculture and livestock: key for economic diversification 69 main agricultural products are sorghum, cotton, the year. Aside from being suited to Sudan’s resource groundnuts, sesame, millet, wheat, sugar cane, gum base, this mode of production is attractive to Sudan’s arabic, and livestock, particularly live sheep and major importer, Saudi Arabia, as reminiscent of how camels, and hides and skins. meat used to be produced there. There are three main agriculture sub-sectors The major problem of pastoralism today, active in Sudan: pastoral livestock, cropping, and which has been building for decades, is the loss fish production.36 Figure 3.1.1 shows the aver- of rangeland to mechanized dryland and irri- age share of these agriculture sub-sectors in GDP gated farming. A study in Gedaref State (Babikir between 2006 and 2009.37 Animal husbandry and 2011) reported that grazing lands reduced from cropping are similar in relative importance, both 78.5 percent of the State’s total area in 1941 with shares just below 50 percent of GDP (Animal (28,250 km2), to 18.6 percent in 2002 (6,700 km2). husbandry: 46.9 percent; cropping: 46.4 percent). Meanwhile the mechanized farming sector in the This is followed at a long distance by forestry/fish- State increased by 725 percent in the same period: ery, which accounts for 6.3 percent of GDP. In terms from 3,150 km2 in 1941 to 26,000 km2 in 2002. In of employment, cropping accounts for 25.9 percent other areas, center pivot irrigated farming is used. of total employment, followed by animal husbandry The old tradition of allowing herds to graze crop with 6 percent and forest/fishery with 2.4 percent residues, while they simultaneously fertilize the (NBHS 2009). land, is now increasingly forgotten. Instead, farm- ers sell their residues for cash and clashes between Pastoral livestock production pastoralists and farmers are now much more com- mon than ever before. Box 3.1 provides for a short The pastoral livestock system has evolved in accor- analysis of land policies and land tenure. dance with Sudan’s harsh climate. Sudan’s climate makes movement of herds a necessity to optimize Cropping volatile and adverse weather conditions. In addition, pastoral livestock has a relatively higher economic Cropping in Sudan is just short of livestock’s potential than any other form of livestock production importance in GDP, but employs more people. in this climate. Much more, it shows good prospects It is generally broken down into three main sys- for resilience in response to climate change, largely tems, differentiated by the ways rain and irrigation due to real-time, informed decision-making by a large are used in the sector: 1) the irrigated system; 2) a corps of herders who move herds around the country traditional rain-fed approach; and 3) a mechanized in response to real-time weather (mainly precipita- rain-fed one. Figure 3.1.2 shows the relative impor- tion) conditions and resulting available forage. tance of the three different systems, where the irri- Sudan’s livestock sector is fairly unique in the gated one is by far the most important one, and the world, but perhaps comparable to Mongolia’s. It mechanized rain-fed is almost insignificant. is not a sector based on feed brought to animals in The traditional rain-fed sector occupies the sedentary settings, but rather one where seasonality majority of farmland in Sudan and employs demands movement of the herds to places where about two-thirds of the agriculture population rain is present, and with it grass and other vegeta- tion. Feed is used in feedlots, at markets and transit 36 Fish production is of small scale and is almost totally focused on depots, where grazing is an impossibility. Even sed- local markets. Important fishing sites in Sudan are either suffering from overfishing (e.g., Jebal Awlia Reservoir) or nearly unexploited entary producers must have members of the family (e.g., Lake Nuba and Red Sea). or trusted hands move the flocks at various times of 37 Later data is not available. 70 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT BOX 3.1: Land Tenure and Land Policy Competition over land and natural resources has long been a source of tension among pastoralists and between pastoralists and farmers in Sudan. The expanding investments in mechanized farming, oil industry-related development, and other land-based investments under conditions of the rapid transition to market economy, along with the increasing tendency towards climatic change, and large-scale environmental degradation have become new sources of tensions through appropriation of customary land rights, creation of landless rural groups, and blocking of stock routes. Scarcity of resources has also contributed to the increase in intra-community competition and conflict over land and natural resources. The social landscape of present-day Sudan is littered with land-related and resource-based conflicts that have become a major cause of poverty, food insecurity, population instability, and a general rupture of the rural economy. Land issues are also widely regarded as being at the heart of conflicts in Eastern Sudan, Nuba Mountains, Blue Nile, and Darfur. Of the six recognized and agreed upon “root causes” of the war in Darfur mentioned in the 2011 peace accord between the government and one set of the Darfur rebel factions, three deal explicitly with land rights issues. Land tenure in Sudan is either traditional (historically derived tribal territorial rights initially constituted during the successive indigenous kingdoms of pre-colonial Sudan) or modern under which land is registered. Young et al. (2013) argue: “Aspects of the traditional model remain in place and continue to function, although there is a consensus in the literature that the Native Administration has been weakened, in part because of the development of a local civil government framework and administration, which was first introduced in 1932.” Since independence of Sudan in 1956 a whole series of legislative changes were introduced that affected the authority and responsibilities of the tribal administration. The most pertinent elements of those reforms include: (1) De facto abolition of customary land use rights: This was the outcome of the shift to a property regime in 1971 with the Unregistered Land Act, which placed all unregistered land as “property of the government.” (2) Strengthening of subnational government: The 1971 Local Government Act started the process of a shift in power to state authorities, which replaced the Native Administration and abolished the jurisdiction and administrative authority of the tribal leaders. The Native Administration was revived with the Native Administration Bill in 1987 (but with a more limited role) and strengthened further with the 1998 Local Government Act. (3) Further shift in authority from customary land use rights to authorizations by the state: The Civil Transaction Act of 1984 allowed the state authorities to impose restrictions on grazing as to time and place, and also allocate land for grazing. Still, the tribal administration maintains a strong presence throughout the Darfur and Kordofan regions. It particularly maintains its role and importance as the principal local-level governance mechanism, connected through a hierarchical leadership structure which interfaces with systems of state-level government at all levels; hence the tribal leadership continues to wield considerable power and influence. The legal framework for land tenure is perhaps the most complex natural resource legislation and governance in Sudan. The 1971 Unregistered Land Act, a de facto nationalization by the state, denies any formal legitimacy or juridical status to customary property rights. In effect, this implies the cancellation of all rights relating to land, water, and grazing as well as the suppression of any future income related to such rights (Egemi 2006). The Act was implemented indiscriminately over all the rain-fed agricultural lands of the country, even in places that had no previous system of land registration such as Darfur, Kordofan, and the East. The 1984 Act legalizes elements of Sharia (Islamic) Law while confirming the role of the state as landowner and manager. According to the Act “No court of law is competent to receive a complaint that goes against the interest of the state.” in the country. Traditional rain-fed agriculture is fed crop residues in the field. Farmers involved in mostly subsistence farming, which occupies more this sub-sector usually have Acacia Senegal for gum than 60 percent of the total cultivated land (about arabic production in their fields. 22 million feddan) and employs about 65 percent Traditional rain-fed methods are primarily of the agricultural population. Private small-scale utilized in the Western areas of Sudan (Kordofan farms dominate the sector with access to consider- and Darfur states) as well as White and Blue Nile able communal grazing areas that support extensive states. Primary crops are sorghum, sesame, millet, livestock production. Crop residues are used as ani- and pasture species. The sector is characterized by mal feed, and the animals are taken to grazing areas low crop productivity, in particular due to one of when the land is cropped. Farming methods include the lowest usage rates of chemical fertilizers in the animal traction, and use of animal manure for the world: The overall average fertilizer usage for Sudan fields through animals grazing stubble and being is half of Ethiopia’s, where the peasant community Agriculture and livestock: key for economic diversification 71 BOX 3.1: Land Tenure and Land Policy (continued) Other pieces of legislation impacting land governance are the Local Government act (1990), Forest and Renewable Natural Resources bill (2002), and the Investment Encouragement act (1999) and its amended version of 2007. (1) The Sudan Interim Constitution 2005 includes provisions that relate directly to land and natural resource management, and stipulates that: The regulation of land tenure, usage and exercise of rights thereon shall be a concurrent competence, exercised at the appropriate level of government. (2) All levels of government shall institute a process to progressively develop and amend the relevant laws to incorporate customary laws, practices, local heritage, and international trends and practices. (3) Persons enjoying rights in land are entitled to equitable compensation on just terms arising from acquisition or development of land for the extraction of subterranean natural resources. (4) The communities in whose areas development of subterranean natural resources occurs have the right to participate, through their respective states, in the negotiation of contracts for the development of those resources; and (5) The entitlement of the states for raising revenue or collecting taxes from different sources including state land. Still, the present legal framework for land tenure is not able to overcome the apparent dichotomy between the statutory and customary rights. Specifically, it is not clear at all whether statutory or customary rights have legal status in terms of who owns, who controls, and how access to land can be made, remade, legitimated, and contested. As a consequence there is an apparent legislative gap to sanction the right of entitlement of pastoralists and small farmers to land and natural resources. In its present form and practice customary law is manifestly discriminative with apparent violation of the rights of large populations who have been for centuries living within the domains of the existing tribes without recognizable or legitimate rights to land. The migrants in Blue Nile and Gadarif States and the many Arab camel herders in Darfur provide typical examples. The rights of such groups seem to depend on the generosity of Native Administration leaders and their will. Despite the importance of land to women, they are still largely discriminated against in customary and statutory laws in regard to their land rights. In addition, lack of title to land has denied traditional farmers and pastoralists the right to access public resources, namely formal credit, creating them as highly disadvantaged and marginalized groups. Women are particularly vulnerable within this group. Much more, the Investment Encouragement Act of 1990 and its amended version of 2007 do not cover the social dimensions and conflict sensitivity in relation to land. Finally, the land-related legal framework created during the past century has been rendered manifestly inadequate by the tremendous changes in the social, political, economic, and cultural circumstances of the country since then. In sum, the existing land law and land policies have the following drawbacks for agricultural development. First, they limit access to credit especially for small farmers and women; second, they constrain sustainable and efficient agriculture and pastoral development, with no incentive for capital and land development, resulting in severe environmental degradation and low yields; third, they deprive a large number of small traditional farmers from access to their land as a result of government policies of leasing large holdings to investors in semi-mechanized agriculture, and (most recently) long term leases for foreign investors; and fourth, they create a source of tension and civil conflict between settled farmers and pastoralists. In turn, there is an urgent need for clear-cut land tenure and policy reforms with the objectives of providing secured tenure for farmers, reducing civil tensions, and protecting small farmers and foreign investor rights. While reforms in land tenure would benefit all sub-sectors of agriculture it is important to note that reform in land tenure are difficult to manage. This study therefore follows the recommendations in World Bank (2015b), which proposes a gradual approach to reform in this area and to start in a few, easier to reform areas first. This is important since land tenure is a well-known and multi- dimensional policy issue that is also closely interlinked with conflict. Tensions over land polices are one driver of conflict, and it is very difficult to solve land issues in the midst of conflict (World Bank 2015b). is much poorer than in Sudan. This is reflected in for most crops. The pastoralists and small farmers the low average contribution of this sector to GDP in the traditional sector are the most vulnerable to of only 14 percent during the 2006 to 2009 period poverty. (Figure 3.1.1). Still, the per ha yield for crops in this The mechanized rain-fed sector coverings sector is slightly higher than in mechanized dryland large parts of the former grazing land of Sudan farming; on the other hand, there is a declining and cover about 14 million feddan. The sector was trend in productivity due to loss of soil fertility. originally promoted by the former colonial power, The traditional rain-fed sector receives few support similar to, for instance, groundnut schemes in the services such as credit, research, and extension. Gambia and Tanzania to supply Great Britain with Public investments in basic infrastructure for rural oil seeds and grain during the Second World War. and agricultural development are also negligible. Large-scale semi-mechanized rain-fed farming sys- The result is low and declining or stagnating yields tems cover an area of about 14 million feddan in the 72 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 3.1: Overview of Agriculture in Sudan 1) Agriculture subsectors in Sudan 2) Three different types of cropping 6.3 14.3 46.4 29.3 46.9 2.8 Cropping Livestock Forestry/Fisheries Irrigated Mechanized rain-fed Traditional rain-fed 4) Percentage of population living in households 3) Main household livelihood by poverty quintile whose main livelihood is agriculture by state 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Population in 0% agriculture Poorest Second Third Fourth Wealthiest 1 26 50 Agriculture Wage and salaries Others 74 5) Main household livelihood by urban, rural and nomad Urban Rural Nomad Subsistence crop farming Subsistence animal husbandry Wage and salaries Others Source: World Bank staff own calculations, based on data from Sudan Ministry of Livestock and Fisheries; Sudan Ministry of Finance and National Economy; Central Bank of Sudan, the Sudan Population and Household Census (2008), and the National Benchmark Household Survey (2009). states of El Gadaref, Blue Nile, White Nile, Sennar, during the 2006 to 2009 period (Figure 3.1.2). Its and South Kordofan. Crops such as sorghum, ses- share is declining because of low yields resulting ame, and recently sunflower are produced in this from levels of input usage. Regular plowing has farming system. The semi-mechanized farming sys- made the fragile sandy soils in the Savannah belt tem accounted for only about 2.8 percent of GDP even more prone to wind erosion, and has changed Agriculture and livestock: key for economic diversification 73 BOX 3.2: Studying the Rehabilitation of the Gezira Scheme The Gezira Scheme is commonly regarded as the centerpiece of Sudan’s agriculture but it is at the verge of collapse. The Gezira scheme was once the pride of Sudanese given the enormous size of the irrigation system (900,000 ha), close to both the capital (and metropolis) of an arid country (Khartoum), and its major port (Port Sudan). With its 90 years of history, three million inhabitants, and certain natural advantages (much of the scheme could be irrigated by gravity with proper infrastructure maintenance), it is obviously the heart of Sudan’s agriculture. But over time its natural advantages encouraged many unsustainable shortcuts stretching back to the colonial days, in areas as diverse as repeated abrogation of landholders’ rights, command cropping plans, exploitation of farmers’ interests, skimping on spending both for routine maintenance (e.g., silt removal), and redesign of works to reduce maintenance needs. Most of those needs have accumulated in recent years to the point of virtual collapse of the Scheme’s irrigation and drainage functions. In 2014 the head of Gezira’s Board of Directors resigned, while the President of Sudan has publicly declared the failure of the scheme. Almost all of the scheme staff, which once numbered 10,000, have been terminated and portable assets sold off. To turnaround its fortune, and to avoid a major loss to Sudan and its agriculture sector in particular, it would seem wise to design and implement a technical feasibility study of rehabilitating Gezira, including an initial benefit-cost analysis of rehabilitation of the scheme. Rehabilitating the scheme would no doubt be a large project, since it would have to compensate for decades of deferred maintenance. While it is too early to provide any details of a rehabilitation program, there are a number of priorities emerging from the analysis in this study. On the engineering side, rehabilitation seems to require mechanized or hydraulic silt exclusion mechanisms at the inlets from the Nile. This may be less difficult than in the past, as, due to construction of the Renaissance Dam on the Blue Nile in Ethiopia, that reservoir will act as a giant upstream silt trap for decades, thus markedly facilitating silt exclusion at Gezira. From an organizational perspective any rehabilitation would have to consider the following principles: • Land tenure: Secure (and transferable) land tenure would have to be assured to all farmers in the scheme, with no differentiation based on when ancestors joined the scheme. The past allocation of land (8 ha equivalent to each family) was too large for intensive irrigated agriculture by peasant families. Under intensive conditions, a much smaller farm would produce good incomes to any family, as evidenced by experiences in countries like Indonesia, Thailand, Malaysia, where farm allocations are much smaller. This reduction in farm size would permit all existing residents (many of whom have been landless laborers for generations) to have their own farms. • Allow farmers free choice of crops: Experience shows that farmers know best what crop to use to maximize yields and income. Thus rehabilitation should be built on a complete abandonment of coercion in cropping patterns. On the other hand, the scheme management would have to have the ability to schedule water deliveries internally to suit river flows and the needs of most farmers. Farmers would then simply have to plan cropping patterns to fit pre-announced water delivery schedules. • Principle of cost recovery: Real cost recovery would have to be agreed upon by all farmers. The recovery rate could be based on accounted operation and maintenance costs. Collection of charges and distribution of water at field levels should be handled by to-be-established Water User Associations (WUAs). Areas where farmers do not form WUAs would receive water last. Such mechanisms have proven very effective in managing water in a sustainable way. vast former rangelands into basically a stand of irrigated land within the Nile basin—in River Nile, weeds and some crop residues. The latter is only of Khartoum, Gezira, Sennar, Blue Nile, and White little use for livestock production. Also, the seces- Nile States. The Gezira Scheme (2.1 million fed- sion of South Sudan and gold mining has had a seri- dan), Rahad, Suki and New Halfa are historically ous impact on availability of seasonal labor that led managed by the Central Government, but currently to a decline in the semi-mechanized farming areas, some effort toward privatization has taken place, especially for sesame. The sector does not include especially in the Gezira scheme. But overall the substantial livestock production. Gezira scheme is in urgent need for comprehen- The irrigated farming system is the dominant sive rehabilitation to reach similar successes as in force of agricultures’ share in GDP. Irrigated the past. Box 3.2 provides a short analysis of the farming is practiced along the river Nile and its possibility for rehabilitation of the Gezira scheme. tributaries and is considered one of the pillars In total, the irrigated sector accounted for about of Sudan’s strategy for agricultural development. 29 percent of agricultural GDP over the 2006 to There are between four and five million feddan of 2009 period. 74 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Irrigation schemes started in the colonial Nomads rely almost exclusively on agriculture with time for smallholders (such as Gezira) and some 19 percent involved in crop farming and 76 percent large sugar cane plantations set up by govern- engaging in animal husbandry. ment. The number and size of sugarcane plantations A renewed growth of the agricultural sector are now rapidly increasing in the form of joint ven- can lift many households out of poverty. As most tures between government and foreign investors. In poor households engage in agriculture, policies the last 10 years large concessions have been given supporting higher productivity will also improve out to yet another group of foreign investors for the livelihoods of the poor. In addition, increased pro- establishment of forage production farms. These duction will reduce food imports improving Sudan’s cover now large areas of the Nile and Ak Bara val- trade balance. In the medium-term, a flourishing leys. Wheat, cotton, sorghum, and groundnuts were agricultural sector can regain market shares in the the most important crops in irrigation areas during regional and global market. Thus, tapping into the the 1990s. More recently, reductions in the areas of agricultural potential of Sudan can lead to shared the traditional crops have led to opportunities for prosperity and sustainable growth. production of other crops such as vegetables, and a substantial increase in the production of livestock. B. Production In the irrigated schemes agricultural services are provided and supported by the government through Cropping facilitation of credit, input supply, and extension services. Irrigation schemes often suffer from man- The story of cropping in Sudan is by and large agement inefficiencies especially related to water a story of low productivity. This section will supply, low productivity, and large debt burdens. highlight some facts on various types of cropping, including cereals, oil seeds, gum arabic, and cotton. Poverty in the agriculture sector Cereal grains are the most important calorie source in Sudanese diets. Sorghum, millet, and wheat are Sudan’s poor are predominantly active in the agri- the main cereals in Sudan. This section shows that cultural sector. More than 60 percent of households yields are low in Sudan, particularly if compared to in the poorest quintile rely on agriculture as their other countries with harsh climates. main livelihood in contrast to only 20 percent of Low crop yields are associated with low fer- households in the wealthiest quintile (Figure 3.1.3). tilizer usage in the country. In 2009 the average This disparity is linked with a geographical concen- fertilizer use per hectare of cropland was 7.3 kg, tration of agricultural livelihoods in the rural south- which ranked Sudan at 129 among 155 countries. ern parts of Sudan (Figure 3.1.4). In the same year, Ethiopia, Sudan’s poorer neigh- Most rural households rely on agriculture. bor, used 17 kg (ranking 115). Available statistics About 58 percent of the population in Sudan lives indicate that Sudan used as much as 80 kg/ha in the in rural areas (excluding nomads). And more than mid-1970s, and 70 kg/ha in the 1980s. While it is every second rural household (58 percent) lives not entirely clear how the low fertilizer usage came below the poverty line compared to only one in four about, it is clear that the decline in agriculture is urban households (27 percent). Thus, three out of associated to fertilizer usage. Raising the bar of agri- four poor people live in rural areas. At the same culture again in Sudan, therefore, requires efforts to time, rural areas rely predominantly on agriculture stimulate fertilizer usage. All hindrances to fertilizer as the main livelihood with almost 65 percent com- import and distribution, for whatever reasons, need pared to 8 percent in urban areas (Figure 3.1.5). to be lifted, and indeed current policy needs to be Agriculture and livestock: key for economic diversification 75 replaced by government encouragement, and pos- The declining productivity under rain-fed sibly even subsidization at first, of fertilizer usage, farming systems is attributed mainly to low and to restart the basic ingredient of modern agriculture; fluctuating rainfall (Figure 3.2.5). Natural resource without this, yields of wheat and every other crop mismanagement problems without a counteracting will remain at unacceptable levels. action on crop management practices such as the use of drought-tolerant varieties, water-harvesting Cereals techniques, or appropriate crop rotations add to the problem. There is also some impact from land and Sorghum is the main staple crop grown in Sudan, soil fertility degradation. This is to be expected due covering about 40 percent of the whole cultivated to the expansion of the cultivated area at the expense area of the country. The average area under sor- of natural vegetation cover and mono-cropping ghum cultivation was 21.2 million feddan between practices, especially under mechanized farming in 2008 and 2014, occupying about 40 percent of the Eastern Sudan. total cultivated area. The average annual production Millet is the main staple food in Western between 2008 and 2014 was around 3.4 million Sudan and has an average area under production tons with an average yield of 160 kilograms per of about 8 million feddan located mostly in the feddan (Figure 3.2.1). The irrigated farming system lighter soils of Western Sudan. Millet production produced 20 percent of total output of sorghum in in 2014 is estimated at 359 thousand tones, which Sudan, while the mechanized rain-fed system and is very low compared to previous seasons, primarily traditional farming systems produced 45 and 35 per- due to low rainfall (Figure 3.2.6). Around 93 per- cent respectively. The production of the sorghum cent of the millet crop is produced by the traditional crop experienced continued fluctuations in area and rain-fed sector, of which 66 percent comes from yields due to dependence on unpredictable rains, Darfur states and 24 percent come from Kordofan. recurrent occurrences of droughts, pest infestation, These states have large sandy areas that are classi- and the general lack of application of fertilizer and fied as marginal lands with low rainfall creating an other inputs (Figure 3.2.1). environment unsuitable and unfavorable for the Sorghum yields are generally on a downward cultivation of crops other than millet. trend, however, farmers were able to slightly Millet production is particularly low yielding increase the yields for irrigated sorghum between in Sudan. The main problem related to millet is low 2002 and 2014. Irrigated sorghum has had some productivity, which is averaging less than 100 Kg/ improvement in productivity from 887 to 918 kg/ feddan per year. Low productivity is a result of low fed (+3.5 percent; Figure 3.2.2), but mechanized inputs, which is not only a practice in Sudan but the rain-fed sorghum yields decreased from 195 to 166 entire Sahel region. Usually, there are no purchased kg/feddan (–15 percent; Figure 3.2.3). Traditionally inputs used (such as fertilizers) and also labor inputs produced sorghum yields decreased also from for millet production are limited. The main determi- 256 to 151 kg/feddan (–41 percent; Figure 3.2.4). nant for production in such an opportunistic system Productivity of sorghum in the irrigated sector is far is rain. Millet is one of the few crops that can thrive better than in mechanized and traditional systems with such low levels of inputs, hence the practice due to use of improved varieties and plant nutrition has developed. However, under a program called technologies developed by the Agricultural Research “millet genetic sources,” the ARC has developed new Corporation (ARC) and fertilizer supply by produc- improved varieties of millet characterized by higher tion schemes, obviously in addition to the effects of yields; extending them to farmers could improve water availability. yields significantly. 76 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 3.2: Agriculture Yields in Sudan, Sorghum and Millet 1) Sorghum area, production and yields 2) Sorghum yields (kg/fed) by irrigated production 30,000 250 1,000 25,000 200 950 20,000 900 150 15,000 850 100 10,000 800 5,000 50 750 0 0 700 2008 2009 2010 2011 2012 2013 2014 Gezira Rahad New Halfa River Nile Average Area ('000 fed) Production ('000 tons) Av. 2002–2008 Av. 2009–2014 Yield (kg/fed) (right-hand axis) 3) Sorghum yields (kg/fed) by mechanized rain-fed production 4) Sorghum yields (kg/fed) by traditional rain-fed production 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0 Sennar W. Nile B. Nile Gadarefe S. Kordofan Average Sennar Gezira W. Nile N. Kordofan S. Kordofan N. Darfur S. Darfur W. Darfur Average Av. 2002–2008 Av. 2009–2014 Av. 2002–2008 Av. 2009–2014 5) Rainfall rate and sorghum and millet yields 6) Millet area, production and yields 500 10,000 150 400 8,000 150 300 6,000 100 200 4,000 100 50 2,000 0 0 0 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 2014 Average rainfall (mm) Sorghum yield (Kg/fed) Area ('000 fed) Production ('000 tons) Millet yield (Kg/fed) Yield (kg/fed) (right-hand axis) Source: World Bank staff own calculations, based on data from the Central Bank of Sudan; and the Sudan Ministry of Agriculture and Irrigation Notes: (2), (3), and (4): Average 2008–2014 does not include 2011 and 2012 due to a lack of data. Agriculture and livestock: key for economic diversification 77 Wheat is a crop that is not native to Sudan, in nominally irrigated areas like Gezira are indica- but the government encourages its production tive of serious deficiencies in irrigation effective- to reduce imports and reliance on foreign sup- ness. Groundnuts were exported in large quantities pliers. The wheat production area is small (with in the past but their relative importance in export only 440,000 feddan), as is production and yields trade has declined substantially due to increase of (Figure 3.3.1). In fact, it is clear that Sudanese wheat local consumption and demand. In addition there yields are among the lowest in the world, if not the are strict quality standards required by importing lowest (Figure 3.3.2). Pavlodar in Kazakhstan is countries because of the Aflatoxin problem.38 Any on the Siberian border with winter temperatures inability to meet those standards damages Sudan’s below –40 Centigrade and a very short growing sea- reputation in the international market. son. Farmers there use almost no fertilizer, like the Sesame is produced under both mechanized Sudanese, but their yields exceed Sudan’s. Kyzlorda and traditional production systems, but yields in southern Kazakhstan is a desert province, with are low and fluctuating in both systems. The vast irrigation; wheat is nominally irrigated in Sudan majority of sesame fields (about 80 percent) are as well. The problem behind low yields for wheat about 5 feddan in area. In these fields, sesame is in Sudan is most likely lack of day-length varia- grown under the traditional farming system with tion. Given those constraints to wheat production little or no use of machinery or modern inputs. in Sudan, the government may want to rethink its Figure 3.3.4 shows that mechanized sesame yields policy emphasis on the crop. varied from 86 to 121 kg/fed compared with 80 to 112 kg/fed for traditionally produced sesame Oil seeds during the period 2002 to 2014. While yields of mechanized rain-fed sesame production are declin- The major oil seed crops in Sudan are sesame, ing in most areas, overall mechanized production groundnuts, and sunflower, which are produced has still an average of 107 kg/feddan as compared under irrigated and rain-fed conditions. Sesame with an average of 96 kg/feddan for the tradition- production and exports are very important for ally produced crop. Very low and fluctuating yields Sudan’s economy. Other oil seed crops, namely, under both systems are largely due to lack of water groundnuts and sunflower are important for local and fertilizer. consumption and processing; groundnuts share in Sesame yields in Sudan compared to other total export in recent years is negligible, and most major producing countries are very low. of the production is consumed domestically. The Productivity is equivalent to 18, 27, 58, and 51 per- same is true for sunflower. Oil seeds are produced cent of productivity in China, Ethiopia, India, and under irrigated and rain-fed conditions but the bulk Nigeria, respectively. Enhancement and stabiliza- of production is rain-fed. tion of yields in both production systems would Groundnut is grown under irrigated and rain- significantly improve the welfare of rural Sudanese. fed systems and its yield patterns are indicative Sesame is a relatively high value crop, with a stable of the significant differences between irrigated world market in which Sudan plays a relatively and rain-fed productivity. The average yield under strong role. It is thus important that yields be lifted, irrigation was 1,072 kg/fed compared with 187 kg/ first through higher fertilizer applications, then fed through rain-fed in 2014. However, productiv- through supplemental irrigation where possible. ity is fluctuating, and during the period 2002 to 2014 evidenced a declining tendency under both 38 Naturally occurring mycotoxins that are produced by Aspergillus farming systems. Indeed the wide swings in yield flavus and Aspergillus parasiticus, species of fungi. 78 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 3.3: Agriculture Yields in Sudan, Wheat, Oil Seeds, Gum Arabic, Cotton and Livestock 1) Wheat area, production and yields 2) Sorghum yields (kg/fed) by irrigated production 1,200 1.0 8,000 7,000 1,000 0.8 6,000 800 5,000 0.6 4,000 600 3,000 0.4 2,000 400 1,000 200 0.2 0 Sudan Ethiopia Egypt Libya Chad Kazakhstan Pavlodar Kzylorda 0 0.0 2008 2009 2010 2011 2012 2013 Area ('000 fed) Production ('000 tons) Yield (kg/fed) (right-hand axis) 2012 2013 3) Ground nut yields (kg/fed) irrigated vs. rain-fed 4) Sesame yields (kg/fed) mechanized vs. rain-fed 1,600 140 1,400 120 1,200 100 1,000 80 800 60 600 400 40 200 20 0 0 Irrigated Rain-fed Mechanized Rain-fed Av. 2002–2008 2009 2010 2013 2014 Av. 2002–2008 2009 2010 2013 2014 5) Gum arabic production (’000 tons) 6) Cotton yields (kg/fed) by irrigated production 80 10,000 70 8,000 60 50 6,000 40 30 4,000 20 2,000 10 0 0 2008 2009 2010 2011 2012 2013 Gezira Rahad New Halfa Suki Tokar Average Hashab Talha Total Av. 2002–2008 Av. 2009–2014 Source: World Bank staff own calculations, based on data from the Central Bank of Sudan; the Sudan Ministry of Agriculture and Irrigation; and selected World Bank Agriculture Country Reports. Notes: (6): Average 2009 – does not include 2011 and 2012 due to a lack of data. (continued on next page) Gum arabic borders with Chad and Central Africa, covering an area of 500 thousand square kilometers. Gum ara- The gum arabic belt extends from the eastern bic extends over 12 states in Sudan, with some areas borders of Sudan with Ethiopia to the Western more productive than others, namely the traditional Agriculture and livestock: key for economic diversification 79 FIGURE 3.3: Agriculture Yields in Sudan, Wheat, Oil Seeds, Gum Arabic, Cotton and Livestock (continued) 7) Cotton yields (kg/fed) by traditional rain-fed production 8) Population and exports of animal species, 2012 600 40 39.5 500 35 500 30.8 400 30 29.8 400 25 300 300 20 15 200 200 10 100 100 5 4.8 0 0 0 Sennar Blue Nile S. Kordofan Average Sheep Cattle Camel Goats Hides/skins Meat Av. 2002–2008 Av. 2009–2014 Population (mn) (left axis) Exports (USD mn) (right axis) 9) Livestock production, 2011–2012 (’000 tons) 1,500 1,427 1,456 4,350 4,318 1,000 4,300 500 4,273 40 38 78 45 40 80 0 4,250 2011 2012 Meat Poultry Eggs Hide and skins Milk (right-hand axis) Source: World Bank staff own calculations, based on data from the Central Bank of Sudan; the Sudan Ministry of Agriculture and Irrigation; and the Sudan Ministry of Livestock and Fisheries. Notes: (7): Average 2009–014 does not include 2011 and 2012 due to a lack of data. farming areas in Northern and Western Kordofan, and to 50,000 tons per year, providing 80 percent of parts of the Blue Nile state. There are an estimated five global supply. Back then, the remainder was sup- million people directly involved in forestry activities plied by Nigeria and French West Africa each pro- such as gum picking, gum collection, and charcoal viding around 5 to 10 percent of supply (3,000 to and firewood collection. Sudan produces high qual- 6,000 tons). Sudanese gum arabic supply declined ity (hashab) which comes from Acacia Senegal, and a from the 1970s to the 1990s, falling into the range lower grade (Talha) harvested from Acacia seyal but of 15–25,000 tons, with parallel increases in sup- with the same unique properties as an emulsifier. ply from West African origins, primarily Nigeria Sudan is the world’s largest producer of gum and Chad, which increased their export capacity to arabic, but its domination has declined from once 10,000 tons (World Bank 2015a). In the mid-2000s, more than 80 percent of world production in the annual production of Sudan started to recover, bring- 1960s to about 50 percent now. In the 1960s and ing it closer to the averages of the 1960s and 70s. 70s production and supply was dominated by Sudan Estimated production of Sudanese gum arabic with annual production typically in the range of 40 has seen a renaissance since 2008. Staff estimates 80 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT suggest that production exceeded the 30 thousand Sudan, and in the Nuba Mountains area of Western ton mark in 2008, and further increased to 50 thou- Sudan. The bulk of Sudan’s cotton production is in sand tons and beyond between 2009 and 2012 the irrigation schemes, especially the Gezira Scheme. (Figure 3.3.5). Latest estimates available for 2013 After a number of years with declining yields suggest that production reached 75 thousand tons. and production of cotton, cotton production has And this is probably still far below potential output been on the rise again since 2010. In the years of gum arabic in Sudan: The production potential 2006–2010 area, yields, and production of cotton with current gum arabic trees (hashab and talha), sharply declined (Figure 3.3.6). There has been as speculated by Abdel Gadir39 in 2013, can reach a remarkable recovery of cotton yields, area, and about 200 thousand tons, so there is considerable production in the years 2010 to 2014, which coin- scope to expand production. cides with the break-up of the monopolized (and There is considerable scope to increase pro- extortionate) marketing of cotton by the Sudan ductivity in gum arabic, and potentially to move Cotton Company. There is reason to believe that towards a higher level of processing within the the recovery was triggered by the break-up of the country. Farm research results have shown that pro- monopoly, particularly since there were no other ductivity per tree can be considerably increased by noticeable improvements in irrigation performance, 47–60 percent, while quality can also be improved for instance, or agricultural credit, extension, and through better tapping methods. Improving the research/breeding. Still, national average yields productivity of other crops will also be conducive to doubled from 500 kg/fed in 2009 to 1,014 kg/fed in boosting gum arabic production due to the poten- 2014. Both the experiences of cotton and gum arabic tial for longer rotations and expanded areas. With suggest that no technical improvements will make better technology and marketing policies, gum ara- a difference until incentives to farmers are right. bic production and export supply can be raised to its former levels in a sustainable manner. Box 3.3 Livestock production provides some lessons from recent experiences in policy changes in Sudan on gum arabic production. Livestock are raised in almost all parts of Sudan, In addition, gum arabic is one of the few current but mostly concentrated in western Sudan agriculture products that potentially could be used (Kordofan and Darfur states) and owned by to advance agriculture processing for higher value nomadic tribes. There are three systems of livestock addition (World Bank 2015a). Chapter 4 of this production in Sudan; 1) animal production under report will look into this in more detail. natural range systems; 2) animal production in the irrigation schemes and riverine farms; and 3) animal Cotton production under commercial systems, e.g., ranches, dairy and poultry farms, and feedlots. However, most The commercial cotton industry in Sudan dates of the livestock population in Sudan is raised on the back to the colonial period, where cotton was natural range, which is hence the focus of this section. grown to provide ginned cotton to the British There are three main livestock species raised textile industry. Cotton is grown under various and marketed in Sudan with a total of over topographical and environmental conditions, uti- 100 million heads. The pastoral system of animal lizing various methods of irrigation and using dif- production is no longer a quaint residual of the dis- ferent applications of chemical inputs. The major tant past, but a serious economic business well worth producing areas in Sudan are Gezira, Rahad, New Halfa, Suki, Blue Nile, White Nile, Tokar of Eastern 39 Secretary General of the Gum Arabic Council Agriculture and livestock: key for economic diversification 81 BOX 3.3: Recent Policy Changes in Gum Arabic and Their Impact Over the past decade gum arabic trade was successfully liberalized. The gum arabic trade was liberalized with the removal of the Gum Arabic Company (GAC) concessions on the marketing and export of raw gum arabic and the suspension of the floor price system. The Gum Arabic Board (GAB) was established to coordinate reform measures and support the regeneration of the sector. The main objectives of the GAB are similar to the former GAC, without monopoly power or concessions. GAB is responsible for promoting gum arabic exports, opening new markets, and providing finance services and quality control. Further reform measures have eliminated 13 taxes and charges that had been levied on gum arabic (World Bank 2014e). Following these reforms there is a sign of production recovery with production estimated to have reached 75 thousand tons in 2013 (Figure 3.3.5). The key incentive for the farmers was their ability to get a more significant share of the final FOB export price when selling at central market auctions. This said, there is still a concern that profitability is reduced through individual States levying taxes and other charges without providing a service. A Government project to provide microfinance and technical assistance to the poorest gum arabic producers was established in 2010. The Government in 2010 established the Gum Arabic Project, known as “Revitalizing the Sudan Gum Arabic Production & Marketing Project.”a This project aims to improve the earning capacity of the poorest gum producers through providing microfinance and technical assistance. The main purpose of the Project is to support members of Gum Arabic Producers Associations (GAPAs) in five states (South Kordofan, North Kordofan, White Nile, Sennar, and Blue Nile). The project adopted the strategy of building up GAPA members’ technical, managerial, and financial capabilities to increase production through access to new markets, micro-finance, and more opportunities for up-to-date knowledge via exchange visits and cross fertilization of ideas. About 130 associations in five states are participating in the project, with a membership of 11,346 farmers, 25 percent of whom are women. Preliminary results of the project show that it has been very successful and the income levels of beneficiary households have increased by 65 percent. The percentage of the gum price received by small gum producers has increased from 15 to 50 percent due to the exclusion of middlemen from the chain. Other positive impacts include higher production levels and better gum prices. The project also enhances the knowledge and skills of gum producers, resulting in well-organized GAPAs with active members. All of this is leading to a noticeable improvement in the living conditions of producers and their families, as well as the crucial reforestation of the gum belt. The question now is how to replicate the activities of the 2010 project in other states in order to reach the highest possible number of potential gum arabic producers. In 2014, the government signed for a new agreement with the French development agency to finance activities similar to the projects. But more is needed to maximize impact across states. Another avenue of support also comes through the Gum Arabic Council, which has many programs and efforts to develop gum arabic production and trade. Support includes: the formation of export finance portfolios (export finance increased from SDG50 million in 2009 to SDG250 million in 2013); promotion of quality assurance through symposia, local media and printed materials; promotion of the use of gum arabic in local industry (local consumption increased from 500 tons in 2008 to 10 thousand tons in 2013); opening-up of new international markets such as China and Malaysia; and support of gum arabic research. The Gum Arabic Council has also followed-up the implementation of a presidential decree of planting 10 percent area in each rain-fed agricultural project with gum arabic trees. The program is progressing in Gedaref state as 50 thousand feddan was covered, and another 50 thousand feddan is expected to be covered in 2014. The council is working to promote the implementation of the decree in other states. a The project is financially supported by World Bank (Multi Donor Trust Fund (MDTF)) and International Fund for Agricultural Development (IFAD). being preserved and nurtured. Figure 3.3.8 shows Contrary to commonly held belief the ratio- the three main species sheep, cattle, and camels and nale for pastoral livestock is less grounded in sat- Figure 3.3.9 shows the associated output from them. isfying basic needs, such as searching for water Together with the smallest and easiest to manage to drink, and more due to the unique economic small ruminants (goats), the total population is over benefits of engaging in pastoral production. The 100 million head of live animals. A few unique trends basic reason for the existence of pastoralism that emerge from Figure 3.3.8: First, there is an enormous drives herders to take their herds to different regions export of live sheep with an export value of almost is less absolute necessity, in terms of water to drink US$500 million in 2012. Somewhat lower, but still and vegetation to eat, simply to keep them alive. The impressive are the exports of camels and hides and reality is more complex than that, at least according skins, together worth almost US$175 million. to a study several decades ago (Wilson and Clarke 82 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT 1976), but in the same Darfur region which still pastoralism is so successful there is surpris- figures as one of the heartlands of Sudanese pastoral- ingly little policy attention on the sector. This is ism. These results, reported by the Tufts University important in part due to the interlinked issues of team in 2013, include the following (Tufts, 2013): land tenure and land policy (Box 3.1), which need to be solved to sustain pastoral livestock production a. The animal calving rate was 65 percent in migra- into the future. But there are also other issues, such tory herds and 40 percent in sedentary herds; as inherent volatility of the sector and the possibil- b. Sixty-five percent of all migratory heifers calved ity that it could be negatively affected by droughts at under four years of age, while only 29 percent and diseases. Hence there is a need for more policy of sedentary heifers did so; focus on a better, forward-looking management of c. Total mortality was 15 percent per annum in the sector (World Bank 2015b). migratory herds and 35 percent in sedentary A large source of value-added from pastoral- herds, while calf mortality was 11 percent in ists, which is generally unaccounted for, is the migratory and 49 percent in sedentary herds; and usage and trade of surplus milk. Surplus milk d. Meat production per kg of migratory breed- arises from the fact that there is milk that is beyond ing females was about twice that of sedentary the needs of the calves of the herds. Anecdotal evi- breeding females. dence suggests that this milk is carried out primarily by women and used not only for family subsistence. In other words, pastoralism is an effort to It is also sold, or exchanged with farmers, often for maximize, rather than merely survive, and in grain. Informal estimates of the economic value of this it appears to be successful. The superiority this trade suggest that this activity is worth beyond of pastoral livestock in Sudan appears to be in that US$1 billion a year. pastoralists consistently use natural resources more Processing of meat and meat products for intensively and hence are able to produce more live- exports would be desirable as a higher-value stock products per unit of land area. Later studies added activity, but with only four large slaugh- replicated similar findings to the ones reported by terhouses in Sudan and none of them certified Wilson and Clarke (1976) for Sudan and the rest to international standards, exporting meat is of Africa. Superiority of pastoralists over sedentary impossible. There is also likely that there is farming may be due to the constant optimization by insufficient current foreign demand for meat. The experienced herders of the pasture forage their herds lack of certified slaughterhouses is one important graze. Behnke (2012) found that fenced pastures factor behind the fact that most of Sudan’s livestock south of Nyala (now in South Darfur) lost 75 percent exports are exported live. Exports consist primarily of their feed value (largely due to consumption by of sheep to Saudi Arabia and camels to Egypt. But termites and loss of digestible protein due to volatil- an important other factor is also that a large share ization) if left ungrazed from September to the end of the exports have to be live, since they are used to of the dry season in May. Similar findings are avail- fulfill the religious obligation for families to sacrifice able for Mali, Ethiopia, Kenya, Botswana, Zimbabwe, a sheep for Eid ul Adha. Many of the sheep will also and Uganda. As a result, pastoralists consistently use be slaughtered for the Hajj season, for the millions natural resources more intensively and produce more of pilgrims to Saudi Arabia’s west coast. So there livestock products per unit of land area than do sed- is considerable uncertainty about the size of the entary farmers, indeed even commercial ranchers. potential export market for meat, at least when con- Given the unique performance of the sidering the current two main destinations: Saudi livestock sector in Sudan and the fact that Arabia and Egypt. Agriculture and livestock: key for economic diversification 83 C.  Markets and Trade shows that the average size of live animals export- ers grew from US$500 thousand in 2008 to US$2.6 Agriculture trade has increased significantly million in 2012, almost doubling between 2011 and between 2008 and 2013. After many years of decline 2012. Most of the growth in exporter size was due (World Bank 2009b), agricultural exports are regain- to the size of incumbents, i.e. existing exporters, ing their position after the large decline of oil exports rather than growth of new active exporters. This sug- since 2011. Agricultural exports values showed an gests that new entrants may find it difficult to enter increasing trend from US$329 million in 2008 to the market, possibly due to market entry barriers US$1,626 million in 2013 (Figure 3.4.1), and its and costs associated with getting into the livetsock share in total export rose from only 3.3 percent export business. in 2008 to almost 23 percent in 2013 (the relative The international markets for Sudanese live- increase is of course also a consequence of declining stock exports are concentrated in Arab countries. total exports since oil’s fall). This improvement is Most of live sheep exports go to Saudi Arabia, which mainly led by good performance of major agricultural accounts for more than 50 percent of livestock export products like livestock, sesame, gum arabic, exports from Sudan. Egypt is the main destination and cotton. However, the agricultural trade balance of live camel export (primarily as beasts of burden), remains negative due to the high food imports bill, primarily through border trade. Meat is destined which mainly goes for imports of wheat and wheat mainly for the United Arab Emirates, Egypt, Qatar, flour, sugar and vegetables, and animal oil. and Jordan, but with a downward trend due to high competition, especially from Australia and Brazil. Livestock exports Hides and skins are sold to a wide range of coun- tries including United Kingdom, China, United Arab Livestock exports have rapidly become an impor- Emirates, Turkey, and Saudi Arabia. tant part of Sudan’s foreign trade and reached a The fact that there is no recent registered total export volume in excess of US$670 million ban imposed on the import of sheep and goats per year in 2013. Figure 3.4.2 summarizes Sudan’s from Sudan by Saudi Arabia reflects progress. recent export values of livestock products. There Bans on Sudanese exports were in place prior to has been more than a tenfold increase by 2013 2007, but not since (World Bank 2014e). This is compared with 2008 (which was an outlier due to an achievement of the health program adopted by an imposed export ban and quarantine measures). the Government of Sudan and recognized by the Live sheep exports dominate the picture, represent- Government of Saudi Arabia regarding vaccina- ing more than 70 percent of livestock export. Next tion and inspection for exported sheep (Table 3.1). in importance is the export of live camels and hides Recognition of the programs extends to the 17 and skins, which both are about 14 and 10 per- GAFTA markets (World Bank 2014e). cent, respectively, of livestock export. Meat export But a number of major constraints to live- fluctuate greatly which is largely a reflection of the stock exports persist (Tufts 2013; and World inability of Sudanese meat to compete with other Bank 2014e). First, numerous animal migration/ suppliers especially to the Gulf region, due to high transport routes are blocked by allocations of land cost, lack of modern export facilities, quality con- siderations, and unsustainable supply.40 40 No cold or frozen meat is exported from Sudan because of inad- Livestock exports is a growing business for equate abattoirs, handling, and transport facilities for chilled meat. existing exporters. An examination of statistics Small assignments of whole carcasses of sheep and goats and quarter carcasses of beef are exported through special arrangement between from the World Bank’s Exporter Dynamics Database exporters and importers. 84 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Table 3.1: Vaccination and Inspection Regime for Sheep Exports Location/timing Activities Inspection and vaccination close to First veterinary inspection and vaccination. Animals held in an inspection center under observation for production area 7–10 days. Entry into a quarantine area Second inspection at inland quarantine station by veterinarians. Blood sample taken from every animal for brucellosis testing. Animals held for 7–10 days. Inspection on the way to the port Third animal inspection in quarantine area by veterinarian. The group of animals receives three certificates: for number of animals, free from infectious and noninfectious diseases, and for animals in good health. Prior to loading on ships Fourth inspection seven days prior to shipment. Animals are held in quarantine and inspected to verify that they have no evidence of infectious or noninfectious disease and not generally weak. Source: World Bank (2008b); and World Bank 2014e. to mechanized farming, which is often unprofitable. in 2014 are US$2,135/ton for sesame from Sudan Second, the reliance on local breeds lowers relative compared to US$2,050/ton for sesame from Ethiopia productivity and increases cost. However, these and US$1,900/ton for sesame from Nigeria.41 local breeds are also in great demand in importing Sesame exporting, like any other oil seed, is countries. Third, multiple charges and fees imposed a business dominated by large existing export- by local authorities also raise cost of production in ers; new entrants into the markets are facing real Sudan. Fourth, weak services for transportation, difficulties. Sesame accounts for about 50 percent storage and cooling, packaging and technology for of Sudan’s oil seed exports. Looking at the World meat processing. Fifth, there is a shortage of skilled Bank’s Exporter Dynamics Database shows that not human resources and administrative capability to only the number of entrants into oil seed exports provide extension and veterinary services to reduce declined between 2009 and 2012 but the entrants’ the spread of diseases that may affect exports. Sixth, share in total oil seeds exports also fell dramatically domestic marketing is inefficient and there is only from 78 to 28 percent. This implies that entrants in a handful of international markets. The domestic 2012 were fewer and substantially smaller than in market is dominated by broker’s men who impose 2009. This indicates—similar to the livestock sec- multiple fees and charges, while international tor—that new entrants may find it difficult to enter markets are concentrated in few countries in Gulf the market, possibly due to market entry barriers region. Seventh, the availability and access to finance and costs associated with getting into the oil seed for small producers is not sufficient. and sesame export business. Sudan’s export markets for sesame are Sesame exports relatively well diversified and Ethiopia may be considered the major competitor for Sudan (for Sudan exports about two thirds of its sesame exports of African sesame producers). Sudanese production, and is among the main exporters sesame has penetrated China, Europe, and African of sesame seeds worldwide. Sesame exports in countries as well as traditional markets in the Gulf 2008–2013 accounted for about 32 percent of agri- and Arab countries (Figure 3.4.4). Gulf and Arab cultural exports and about 3.3 percent of total export (Figure 3.4.3). Sesame exported from Sudan received favorable prices compared to other African export- 41 The Sudanese sesame crop is distinguished for its high quality compared to the sesame produced by other countries due to the ing countries because of high quality and grading country’s suitable environment and climate. Sudanese sesame seeds e.g., world prices declared by Sudan Trade Point are characterized by higher oil content and less acidity. Agriculture and livestock: key for economic diversification 85 FIGURE 3.4: Sudan’s Agriculture Exports: Livestock, Sesame, Gum Arabic, Wheat and Cotton 1) Agriculture trade performance (US$ mn) 2) Livestock export value by subsectors (US$ mn) 2,500 2,500 800 2,000 2,000 600 1,500 1,500 400 1,000 1,000 200 500 500 0 0 0 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 Export value Food import value Sheep Goats Camels Agriculture trade deficit Cattle Meat Hides and skins 3) Sesame export value and quantities 4) Key destinations for Sudan‘s sesame exports (US$ mn) 120,000 400 40% 100,000 300 30% 80,000 60,000 200 20% 40,000 100 10% 20,000 0 0% 0 2008 2009 2010 2011 2012 2013 Eu Turkey COMESA ALG + TUN Asia Arab Quantity (‘000 tons) Sesame (% of total ag export) 2012 2013 Value (US$ mn) Sesame (% of total export) 5) Sudan‘s share in gum arabic trade 6) Cotton export value and quantities 200 50% 150 2,500 40% 2,000 150 100 30% 1,500 100 20% 1,000 50 50 10% 500 0 0% 0 0 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 Sudan ('000 tons) Rest of World ('000 tons) Export quantity ('000 Bales) Export value (US$ million) Sudan share in World Exports (%) Export unit price US$/bale (right-hand axis) Source: World Bank staff own calculations, based on data from the Central Bank of Sudan; the Sudan Ministry of Agriculture and Irrigation; the Gum Arabic Council; and UNCTAD. countries are the major importers of sesame from The marketing of oilseeds from farm gate to Sudan with a share of more than 34 percent in 2012, the final consumer depends on the Sudanese state followed by China with a share of 25 percent. of origin. Sesame is produced in different qualities 86 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT and can be sold as grain (usually white sesame) or Gum arabic exports crushed for oil (usually produced from the lower quality red sesame). For sesame produced in Sennar, Gum arabic falls under the trade embargo and in North Kordofan, the majority of sesame grow- imposed by the U.S. sanctions, but trade with ers sell their seeds within two or three weeks after it is possible through a specific license (World harvest to an assembler or village collector who is Bank 2015a). While gum arabic is not covered by also often a trader. Only a small portion of sesame either an exemption or general license, American growers (large commercial farmers) have storage companies wishing to import gum arabic from Sudan facilities and can wait for better prices. The village can apply for a specific license. In November 2000, collector then sells the seeds to local processors of Congress adopted legislation to require the Secretary sweet sesame paste (Tahania) or to traditional local of the Treasury to consider approving licenses for oil processors. The rest of the sesame seeds are deliv- the import of gum arabic from Sudan. As a result, ered to auction markets where traders buy the seeds Gum arabic became an exception to the compre- to sell it either to the export market or to local oil hensive trade restrictions imposed by the United and paste processors, or producers of livestock cake. States Executive Branch. The processed products42 are sold to the wholesal- Gum arabic exports performed strongly ers or retailers before reaching domestic consumers. between 2008 and 2013. Figure 3.4.5 shows the Sesame farmers receive about 78 percent good gum arabic export values and quantities since of the final FOB export price. In Gadarefe the 2008. This was mainly because of increased domestic sesame farmers receive about 78 percent of the final production stimulated by reform measures (liberal- FOB export price if they sell to local village assem- ization of gum arabic market and removal of monop- blers. The major marketing costs between “farm oly) adopted by the Government, and also the increase gate” and the export point at Port Sudan consist in local processing of gum arabic. The sharp increase of transport costs (28 percent), various certificate in gum arabic export in 2013 was due largely to the fees (5.2 percent), state tax (1.8 percent), and port boost in domestic production as a result of a good charges (3.2 percent). The handling costs at Port rainy season and expanded production and export Sudan and Gadarefe are about 18 percent of all finance, better world prices and promotion efforts marketing costs.43 exerted by the Gum Arabic Board via participation The buying prices at the central market are in international fairs and membership in the AIPG. very high, allowing farmers to receive about The market for gum arabic trade is domi- 93 percent of the final FOB export price, and nated by a few countries. The European Union reduce exporter return to only 2.4 percent. This is the biggest importer of gum arabic with France, is a very specific feature of the Sudanese market, Germany and UK as major importers and re-export- which potentially affects the overall competitiveness ers of processed gum arabic. The United States is of Sudanese sesame in the world markets. Imagine the second large importer of gum arabic followed a situation where the buying price at the central by Japan. There are emerging new markets for gum market increases by 5 percent above the current arabic in India, China and South Korea. In 2012, level. This would then exceed FOB price valued at the official exchange rate (SDG5.9/US$, at time of 42 Local processors (asarat) that cater to local needs are found in 2014 fact finding), hence, negative net return for different regions and states. The rural population usually prefers the exporter. However, the sesame exporters can com- sesame oil from local sesame processors, because of its higher quality. 43 World Bank staff were able to partly analyze the supply value chain pensate lower net return by using part of foreign for sesame produced in Gadarefe and numbers reported here are from exchange to import other commodities into Sudan. this (incomplete) analysis. Agriculture and livestock: key for economic diversification 87 France was by far the main importer of gum arabic of gum arabic export, opening new markets, and from Sudan with a share of more than 30 percent providing finance services and quality control. The (33.6 percent) followed by India 7 percent, Italy adopted reform measures have had positive impacts 6.6 percent and United States of America 6 per- on improvement of production, prices, and income cent (Central Bank of Sudan, Annual Report 2012). of gum producers as many taxes and charges imposed There are other small importing countries of gum on gum arabic have been abolished (about 13 out arabic distributed between Arab countries (Saudi of the 18 taxes and charges) (World Bank 2013c). Arabia, Emirates), Asian countries (Pakistan) and As a result, gum arabic trade, production, African countries (Egypt and Algeria). export and domestic prices were greatly enhanced For decades export marketing of gum arabic after 2009. Liberalization has led to an increase in was under the sole responsibility of the monopo- production, export, and domestic prices (Figures lized Gum Arabic Company. From 1969 to 2009 2.3.5 and 2.4.6). Looking at the value chain for gum the Gum Arabic Company (GAC) had the sole con- arabic marketing from El Obeid to Port Sudan in cession to export raw gum arabic. The main role of 2012 is informative. In 2012, gum arabic producers the GAC was to preserve and monitor the quality of received about 84 percent of the final FOB export raw gum arabic exported and to support producers price if sold at central market (auctions). The major with production and extension services. The GAC marketing costs from El Obeid to the export point at had implemented a floor price system for gum at Port Sudan consist of transport costs (48 percent), buying centers (auctions). However, the monopoly fees (19 percent), and port charges (23 percent). of the GAC in gum arabic trade was widely regarded These cost ratios have been declining since 2009 as as the main reason behind the deterioration of gum suggested by anecdotal evidence. As a result, there arabic production and export in Sudan. Over many is an improvement in the ratio of buying prices to years, the low prices paid to producers (about 10–15 the FOB prices reflecting higher prices at auctions, percent of export price) accompanied by poor sup- which has a favorable impact on producers. port services led farmers to cultivate crops other than gum arabic. The GAC also faced administrative Cotton exports problems that led to inadequate international pro- motion and marketing of gum arabic. In addition The share of cotton in agricultural export sharply there were other factors outside the company such declined from 15 percent in 2008 to only 1.5 per- as low involvement of banks in the gum arabic trade, cent in 2012, but 2013 saw a sharp recovery. This multiplied fees and taxes, and lack of strategic stocks. is a result of a decrease in quantity exported from 139 A decision was made in 2009 liberalizing the thousand bales to only 13.4 thousand bales in 2012, gum arabic trade and removing the concession despite improvement of world prices (Figure 3.4.6). that granted monopolistic power to the GAC. In 2013, the cotton export largely recovered. But only This bold move by the government liberalized the short- and medium-staple cotton is exported despite marketing and export of raw gum arabic. The floor the fact that Sudan in the past was famous in pro- price system was also suspended. Meanwhile, a deci- duction and export of extra-long staple cotton. The sion was taken to establish the Gum Arabic Board sharp decline in export is due mainly to a reduction (GAB) to coordinate reform measures and support in area and production of cotton, especially in the the revival efforts of the gum arabic sector. The main Gezira Scheme. The deterioration of cotton produc- objectives of the GAB were somewhat similar to the tion and export has led to loss of traditional markets former GAC, but without monopoly power or con- for Sudan’s cotton, especially Europe. Sudan’s current cession. Since then, GAB is responsible for promotion markets for cotton are concentrated in a few countries 88 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT especially China and Egypt with a 2013 import share away from sorghum and millet to wheat, often of 33 and 19 percent respectively. imported. This has led to a significant increase in Similar to the marketing of gum arabic, cot- wheat imports, in quantity and value (Figure 3.5.1). ton marketing was in the sole hands of one state- Sudan imported 1.9 million tons of wheat on owned entity—the Cotton Public Corporation average during 2008–2013 with average value of (CPC)—for many decades. CPC was established US$829 million representing about 43 percent of in 1970 to undertake marketing of all cotton pro- total food imports. Wheat imports have exerted a duced in Sudan. In 1986 CPC was closed and the heavy burden on Sudan’s meager and deteriorating Sudan Cotton Company Ltd (SCCL) was formed. In foreign exchange resources and have worsened its 1993 the ownership structure of SCCL was changed negative trade balance. to let some private influence in, but the Government In response, the government of Sudan pro- remained in charge. The then-new mixed sharehold- motes domestic wheat production to reduce ers were made up of the Ministry of Finance, cotton the reliance on imported food and to reduce farmer groups from the Gezira, Rahad, and New expenditures on wheat imports.44 See Box 3.4 Halfa irrigation schemes, the Sudan Pension Fund, for a discussion of the interlinkages between food and the Farmers’ Commercial Bank. security, wheat self-sufficiency, and grain storage. But the role of central marketing in cotton The government also indirectly subsidizes wheat exports is declining and the influence of market imports through using the official exchange rate pricing has become stronger since 2011. Almost (SDG2.9/US$) which is much lower than the offi- all cotton grown under irrigation over the last cial rate (SDG5.9/US$), let alone the black market 35 years has been sold on the world market by the rate (between SDG8–9/US$). However, the cur- Sudan Cotton Company or its predecessors. This rent Government policy is intending to gradually marketing mechanism meant that prices received remove the subsidy and exchange rate distortions by cotton farmers in irrigated schemes were usu- from imported wheat, which may increase prices ally one uniform price for each variety, after costs and reduce consumption. of handling, ginning and marketing had been sub- The gradual phasing out of wheat subsidies tracted. But pricing policies have now changed and considered by the Government is a good first step. cotton producers are paid on delivery at the “farm World Bank (2015b) finds that the Government is gate” according to grade and type of cotton. There not (yet) fully prepared to seize its policies in support were two triggers for this policy change: 1) the dete- of the wheat sector. While the ultimate goal should rioration of cotton production; and 2) the changing be to discontinue all subsidies for wheat in place and environment of production relations especially in the let the market decide whether wheat production is Gezira Scheme. At the same time, the infrastructure efficient in Sudan, an initial compromise may be of the cotton industry is largely diminished e.g., the needed. To this end, this study follows World Bank number of spinning factories is estimated to be 15, (2015b) in its recommendation to first shift the only five of which are working, and there are 17 tex- focus of subsidies on domestically produced wheat tile factories, of which only one or two are working. and then, second, to gradually reduce the extent of subsidies on domestic production. Agriculture imports and attempts for Sudan currently pays too high a price for import substitution wheat imports and there are indications that by changing the import sources the government Sudan’s food consumption pattern has under- gone a profound shift over the past decades, 44 See, for instance, the 3-Year Salvation program set-up in 2012. Agriculture and livestock: key for economic diversification 89 BOX 3.4: Food Security, Wheat Self-Sufficiency, and State-Level Grain Storage Over much of the past decade, common discussions about food security in Sudan have conflated the concept that wheat self- sufficiency adds to food security. However, the reality is that the two concepts do not have much to do with each other. Examples from other countries are illustrative: First, Jordan produces virtually no grain at all, and yet has a high degree of food security, due to a substantial volume of modern storage (silos) distributed around the country, and efficient and transparent procurement of grain from the cheapest sources on the world market. Second, Indonesia has long considered itself food insecure, despite the fact that it is the third largest producer in the world of its staple grain (43 million tons of rice). Sudan consumers have changed their taste of grain and shifted to an emphasis on wheat. This gradual shift is taking place from the traditional dryland crops of sorghum and millet to wheat. In 2001 grain consumption per capita was 140 kg: 90 kg of sorghum, 10 kg of millet, and 40 kg of wheat. Now it is closer to 96 kg of sorghum (plus about 10 percent for animal feed) and 54 kg of wheat. Since wheat production has declined, there is now a noticeable gap between production and consumption, which must be filled by 1.7 million tons of wheat imports. Actually, Sudan was 24 percent self-sufficient in wheat in the 1980s, 49 percent in the 1990s, and reverted to 25 percent in the 2000s (Data from the Sudan Ministry of Agriculture and Irrigation). Consumers continue to change their taste (and demand) and grain consumption patterns may be significantly different again over the next decade. Assuming that the change in taste of the population is permanent, changing the cropping pattern will be a long gradual process, and indeed may only be partial. So the shift in production will not provide increased security for perhaps 10 years, and perhaps never in total. The greater part of current modern storage available now in Sudan is for wheat, not for sorghum and millet. In fact, current storage is usually either attached to flour mills or owned by flour millers at Port Sudan. The nature of the current grain storage is rather short-term, perhaps a week or two of buffer supplies between arrival of trucks, trains, and ships, and slow steady progress of the mills. Table 3.2 provides an overview of the known modern storages of Sudan. Current wheat storage capabilities exceed millet and sorghum and are in the range of two months of wheat consumption. Yet, since the wheat stores are fully private and are dedicated to the milling of flour for the various companies their effect as strategic storages is limited. Still, they represent the equivalent of over two months of current consumption. Compare this with the government’s stores of sorghum and millet, which only represent 20 days of consumption of those two commodities. Much more, they are all in the far eastern part of the country, whereas consumption is mainly in the west. Sudan today is more secure in wheat than in sorghum and millet. So food security does not reflect the fact that the wheat stocks are mainly imported, and the sorghum and millet are mainly produced domestically. The private sector as noted above is already carrying the capacity for 69 days of reserves of wheat, and it may be prudent to let this continue at no cost to the government. But there would be a need to add a more strategic look at the current storage. The difficult case involves the traditional crops, where only perhaps 20 days of modern reserves exist. This would be extremely expensive to raise to international levels, indeed even just to two months’ reserves status. Both capacity and stock of 490,000 tons would be required, as two months demand would be 740,000 tons in total, 490,000 more than now exist. At a minimum of US$220/ton for new capacity, this would be over US$100 million for new silos, and probably the same amount for the required sorghum. It is not clear that Sudan will soon have such investment funds for this purpose. Although a full-fledged national reserve system for all of Sudan’s residents may not be affordable at present an intermediate approach to introduce more storage could be designed. • To begin with a focus on the more vulnerable areas, perhaps in the west, could be selected to balance the current preponderance of facilities in the east (Port Sudan, Gedaref, etc.). • Then one could basically design a modern storage facility with the following credentials: Construct a 50,000 ton standard facility, designed for unloading and loading trucks up to about 25 tons. Assuming a generous daily ration of grain of 1/2 kg per day per Table 3.2: Modern Grain Storage in Sudan, 2013 Wheat Sorghum Millet Dal Group Port Sudan Silos 240,000 tons Port Sudan Silos 50,000 tons Flour mills (8) Silos 140,000 tons Gadarif Silos 100,000 tons New Gadarif Silos 100,000 tons 380,000tons 250,000 tons Source: World Bank staff estimates, based on data from Dal Group; and the Sudan Ministry of Agriculture and Irrigation. (continued on next page) 90 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT BOX 3.4: Food Security, Wheat Self-Sufficiency, and State-Level Grain Storage (continued) person, the facility’s 50 million kg of grain would cover 100 million days rations. If one assumes a ration period of 14 days, or at least until ships could arrive from other countries, unload, and have new grain distributed around the country, then this silo could serve 7 million people, or perhaps two states. • At US$220/ton of new capacity, and US$220/ton of sorghum, this facility could be built and filled for about US$22 million. • With proper fumigation and ventilation (all modern silos have these capabilities), the grain would last a very long time safely. However, if normal operations did not move the grain within perhaps six months, and to make sure to keep mechanical systems (and worker skills) up to par, long-term deals with local traders could be made, which would constantly refill the bins as they emptied. Apart from capital cost there is no anticipated significant other cost to be budgeted for the silos. As running costs of such silos are low, and the silo operation has a real opportunity to make a small profit when buying low (e.g., right after harvest) and selling high, it would be assumed that virtually no budget funds would be allocated after establishment. If the first regional reserve established a good track record, the government could add others, benefiting region after region, gradually creating a national system of food security. Operation of the silos could have the following features to maximize the impact of the proposed system: (1) Each silo would be in business for itself, perhaps with a bonus system through which staff could legitimately earn a small share of the profit. (2) As staff would be entrusted with a substantial amount (up to US$11 million) of liquid assets, and as those assets are meant for emergency situations, there would be random lightning audits of their contents. (3) There would be regulations of minimum levels, say 30,000 tons right before regional harvest, but then silos would be expected to fill up and stay full. This is feasible for a truck-served silo, rather than a port one, which needs to achieve empty space before arrival of a 50,000 ton ship to avoid demurrage. The key point here is to create space at harvest time, to maximize impact on (slightly) raising harvest prices for the farmers. Similarly, the silo could reduce peak prices to consumers shortly before harvest. could reduce the price paid significantly. Wheat with average production of 700 thousand tons. imports are being carried out primarily through Sugar in Sudan is produced in six sugar factories, flourmill companies. Examples are SAYGA, Weita, four publicly owned (Sennar, Elgoneid, Assalya, and and Seen. The main exporting countries of wheat New Halfa Sugar companies) and two joint venture to Sudan are now Australia, Canada, Germany, (Kenana and White Nile Sugar Co). The gap in and more recently India (Figure 3.5.2). The cost domestic sugar supply in Sudan on average is about of wheat imports could be significantly reduced if 600 thousand tons per year. Total consumption is Sudan imports wheat from other cheaper sources about 1.3 million tons in any given year. such as Argentina, Russia, Kazakhstan, and the U.S. The goal of self-sufficiency in wheat and sugar (Figure 3.5.3). to reduce imports is problematic. Foremost is the Sugar is another important food item for argument that the opportunity cost of producing Sudan. Figure 3.5.4 shows the development of wheat and sugar are very high. They in fact compete sugar imports over the period 2008 to 2013. There for the same limited irrigated land (e.g., two million is an increasing trend of sugar imports during the ha) near the Nile, where farmers also grow the more last five years: from US$108.9 million in 2009 with traditional crops, such as sorghum. In fact, anecdotal 6.6 percent share in total food imports to more than evidence suggests that farmers know the wheat and US$645 million in 2013 with a 27 percent share of sugar crops quite well but they have walked away food imports. This sharp increase naturally seems from producing them over time because there is due to the increase of local consumption of sugar.45 little profit to make in those crops under current It is government policy to boost domestic production of sugar to achieve self-sufficiency 45 Sudanese people consume about 33kg per capita per year, a little less and become a sugar exporter.46 Sudan is actually than the average citizen of the EU (38 kg/cap) (World Sugar Council). already one of the biggest African producers of sugar 46 See, for instance, the 3-Year Salvation program set-up in 2012. Agriculture and livestock: key for economic diversification 91 FIGURE 3.5: Sudan’s Agriculture Imports: Wheat and Sugar 1) Wheat imports: quantity and value 2) Main source countries for wheat imports 2,500 60% 500 40% 2,000 50% 400 30% 40% 1,500 300 30% 20% 1,000 200 20% 10% 500 10% 100 0 0% 0 0% 2008 2009 2010 2011 2012 2013 AUS CAN GER IND UKR TUR Import quantity ('000 tons) Import value (US $ million) Value (US$ mn) Share in food imports (right-hand axis) Share in total wheat imports (right-hand axis) 3) Sudan‘s wheat import price in perspective (US$/ton) 4) Sugar imports 30% 500 600 25% 400 500 20% 400 300 300 15% 200 200 10% 100 100 5% 0 0 0% 2010/2011 2011/2012 2012/2013 2013/2014 2009 2010 2011 2012 2013 Sudan import price All US grades Import value (US $ million) US (Kansas city) US (Texas gulf) Argentina Share in food imports (right-hand axis) Source: World Bank staff own calculations, based on data from the Central Bank of Sudan; the Sudan Ministry of Agriculture and Irrigation; and the United States Department of Agriculture (USDA). conditions. Low yields in wheat are particularly pro- productivity, profitability, and competitiveness nounced. On the other hand, sugar is a cheap, low of agricultural production. Inputs are products profit crop, and almost all sugar-procuring countries such as seeds, fertilizer, pesticides, machinery, and offer some sort of protection to their sugar industry. post-harvest material like packaging. The supply of To be able to compete on the world market, hence, agricultural inputs depends on the extent that there is Sudan would likely also have to offer similar levels a market for such products and the degree of govern- of protection (World Bank 2014g). ment involvement. The current government policy on agricultural inputs in Sudan is to exempt them from D. Agricultural Support custom duties and use of the official exchange rate for their imports, which is a form of indirect subsidy as Agricultural inputs there is a definite gap between official, commercial, and parallel market rates. Availability and access to agricultural inputs is The supply of agricultural inputs is orga- largely considered one of the main factors affecting nized mainly through the Agriculture Bank of 92 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 3.6: Sudan’s Agriculture Input Imports 1) Agriculture input imports (1) 2) Agriculture input imports (2) 250,000 2,000 200,000 1,500 150,000 1,000 100,000 500 50,000 0 0 Fertilizers (tons) Tractors (#) Jute and sacks (tons) Seeds (tons) Insecticides (tons) 2011 2012 2013 Source: World Bank staff own calculations, based on data from the Central Bank of Sudan. Sudan (ABS) and the private sector. The federal Improved seed technology is essential for Ministry of Agriculture and Irrigation is responsible bridging the gap between yields in demonstra- for qualifying companies for agricultural inputs tion trials and farmers’ fields. In this regard, imports through tenders. The Ministry also pro- the Federal Ministry of Agriculture and Irrigation vides services to the farmers through an extension distributed about 3.9 thousand tons of improved unit, and a subsidy to the small traditional rain-fed seeds, mainly sorghum, millet, groundnuts, and farmers (in kind), and is responsible for setting agri- vegetables in different states in 2012, in addition cultural standards for imported and exported com- to 1,500 tons provided by the FAO. Until recently, modities through its Plant Quarantine Department. seed production and certification were handled The import of fertilizers, tractors and jute by the central government through the Seed Unit and sacks constitute the major part of imported of the Extension Department in the Ministry of input value for agriculture inputs. While there Agriculture and Irrigation. National seed produc- are many seasonal effects playing a role in agri- tion was limited to field crops, while horticultural culture input imports, there is a trend emerging crop seeds were usually imported. In a move to for increased fertilizer inputs (Figures 3.6.1 and improve production of good quality seed and 3.6.2). This is a positive sign given that fertilizer boost the use of improved seed, the Arab Sudanese usage is among the lowest in the world and urgently Seed Company was formed through public-private needed to increase yields in the sector (see Section partnership. The government donated physical B of this chapter). assets and has a share of 42 percent of the com- The irrigated sector makes the most use of pany’s capital. The remainder was financed by the improved seed. Local seed, either kept from the Arab Authority for Agricultural Investment and previous year or bought from local markets, is the Development (AAAID). main seed source outside the irrigated sector; such Among the main constraints for providing seed, comprising second generations of improved agriculture inputs in Sudan are the fact that the varieties, is marketed without quality control other market is distorted and there is a shortage of than local knowledge of source. Some improved storage capacity. Many constraints face agricul- seeds are used in the rain-fed sector, notably in tural input supply in Sudan, some of them are the Blue Nile State. following: First, the distorted agricultural inputs Agriculture and livestock: key for economic diversification 93 market. One factor is the exchange rate policy The allocation of resources across various because part of agricultural inputs are imported lines of research is primarily a policy decision. at official exchange rates (SDG2.9/US$) through In 2008, 28 percent of Sudan’s agricultural research- the ABS and part at other adopted exchange rates ers were involved in crop research, 25 percent in (SDG5.9/US$) through the private sector. Also, livestock research, and 8 percent for forestry and shortage of supply and improper timing of deliv- natural resources (El-Siddig and Stads 2010). The ery, accompanied by low quality and standards, remaining researchers concentrated on postharvest, lead to other distortions. The private company socioeconomic, fisheries, and water and irrigation involved in the import of agriculture inputs gets research, or other matters. Horticultural crops are the authorization through bids controlled by the the most researched crops in Sudan, accounting for Ministry of Agriculture and Irrigation. Due to a lack 10 percent of the country’s total crop and livestock of transparency, real or perceived, this has resulted research. Sorghum accounted for 7 percent, and in importing lower quality inputs, as happened in cotton, legumes, oil crops, and wheat for 5 percent season 2012/13 when imported wheat seeds had a each. Sudan’s research on rain-fed crops is relatively low or zero germination rate in some places. Second, understaffed compared with research on irrigated the widespread use of deferred payment options crops (El-Siddig and Stads 2010). increases the cost. Third, there is a real shortage The Agricultural Research Corporation of storage capacity and unspecialized input stores. (ARC) is, in addition to the universities, the Fourth, the very low local production of inputs (for principal research arm of the government for example the local production of seeds covers only agriculture. Despite difficulties, ARC still has a 10 percent of domestic needs). And fifth, delay of staff of 446 researchers (170 PhD), 13 national inputs supply, lack of substitutes, and high insur- programs, 48 subprograms, 120 research projects, ance cost. 10 research centers, 3 research units, 25 research stations and 54 laboratories. The ARC over the last Agricultural Research year invented, implemented, and tested a number of technologies dealing with land preparation, irriga- Agricultural research, which is the respon- tion, cultural practices, plant nutrition, pest control, sibility of the central government, has been agricultural engineering, range and pasture and underfunded for decades. The annual budget others. More recently the ARC released high yield- allocated to Agricultural Research Corporation ing sorghum varieties and breeds for heat tolerant (ARC), the Animal Resources Research Corporation wheat. However, few of these technologies and the (ARRC) and universities is only about 0.3 percent many other technologies already “on the shelf” have of GDP. This level of funding has proven to be been tested under field conditions. totally inadequate for a country that is so heavily The current arrangement of fully designat- dependent on agriculture. In fact, Sudan spends ing agricultural and livestock research to the significantly less per unit of value of agricultural Ministry of Science and Technology needs to output on agricultural research than the average be revisited. Institutional reform in agricultural of African countries or developing countries as a research is required. Responsibilities of the Ministry group. The limited budget has resulted in a decline of Science and Technology should be confined to in staff numbers, reduced resources for funding policy coordination and frontier research, while research activities in the field, and a deteriora- the functional responsibility is to be designated to tion of the research facilities because of a lack of the relevant ministries. Coordination between the maintenance. agricultural research institutions is very weak. A 94 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT closer collaboration between these research insti- technology to farmers. The TTEA also maintains a tutions can be achieved through the establishment Technology Transfer Center and relevant Stations of the National Agricultural Research Systems whose mandate is to transfer technical information (NARS), an umbrella which determines research to stakeholders including farmers. themes to be carried out by ARC, ARRC, univer- The government delivery of Livestock and sities and other relevant research institutes. This Fishery extension services do not appear to be should lead to a more efficient use of resources contributing to significant increases in produc- and more relevant technology outcomes, which tivity. For livestock extension services, the General will in turn increase growth and development of Directorate of Extension, Technology Transfer the agricultural sector. and Pastoralists’ Development is responsible for extension matters related to livestock owners, Extension services pastoralists, and fishermen. The Directorate runs its grassroots programs based on the needs of pas- Agricultural extension services in Sudan are toralists, animal owners, producers, and fisher- provided by the government through the men. It develops strategies and programs of animal Ministry of Agriculture and Irrigation and the resources sector that concentrates on livestock, and Ministry of Livestock and Fisheries. Increasing trans-boundary and zoonotic disease control, in agricultural productivity requires extension ser- addition to the promotion of animal production vices to be improved. Given the fiscal constraints and fisheries. facing the Government it is recommended that There is a need to do a better job of involv- private companies selling inputs (seeds, fertiliz- ing the private sector in the delivery of extension ers) and major marketing/buying companies be services. In addition to the Federal Government, encouraged to deliver technical advice through state Ministries of Agriculture and state Ministries extension services and the increased use of con- of Livestock and Fisheries47 also provide extension tract farming. services. Some universities make a contribution The Technology Transfer and Extension to extension mainly through training. Examples Administration (TTEA) is responsible body for include the Extension and Rural Development agriculture extension services. The objectives Department at Sudan University of Science and of TTEA include: the development of agriculture, Technology and Department of Agricultural improvement in the production quality, enhance- Extension and Rural Development at University of ment of farmers’ income through rational exploita- Khartoum. Famer based organizations, including tion of natural resources, comprehensive human the Farmer Union and the Pastoralist Union, play prosperity via profitable, sustainable agriculture, key roles in farmer-to-farmer extension activities, and making agricultural products competitive in influencing extension policy, assessing extension international markets with the aim of assuring performance, and helping in setting extension pri- food security and increasing agricultural revenues. orities. Extension services remain weak and more TTEA has four main thematic programs: improv- attention needs to be given to using “tried and ing crop productivity, promotion of improved tested” approaches with well-trained professionals, seeds, integrated mechanization, and rural women including the private sector. development. The TTEA established administra- tion networks in the state ministries responsible for agriculture and worked closely with the states, 47 In some states, both ministries have been merged to form a single ARC, and universities to facilitate the transfer of ministry A. Goods Trade GOODS AND SERVICES TRADE TO BUILD ENDOWMENTS 4 Sudan has a revealed comparative advantage (RCA) in agriculture, meat and dairy, and seafood, as well as in extractive industries. Although the EU was once the main trading partner, the share of Sudanese exports destined to the EU has declined significantly over the past 15 years. At the same time, China has experienced a spectacular increase in its share of Sudanese exports since 2000. Sudan’s export basket is very concentrated, as shown the large shares of its top three and five export products, but the degree of product concentration decreases when looking at non-oil export. The lack of product diversification of Sudanese exports also stands out when compared to peer countries, as evidenced by its comparatively much higher Herfindahl-Hirschman index. The diversification of Sudan across destination markets is low, and has remained approximately constant. A few multi-product multi-destination exporters typically amass the majority of total exports in a country, but less so in developing countries; this is also the case in Sudan. Services and trade-in-services have an important role in economic diversification. But Sudan’s share of services Value Added (VA) in GDP is lower than expected for a country at its level of development. Services export growth remains below that of goods exports and GDP growth. Sudan registers more dynamic growth rates for other commercial services exports than for exports of travel or transport services, a fact that suggests the existence of some modern services. But Sudan’s services imports are undiversified in nature. Ensuring efficient access to a wide range of services is a key determinant in international com- petitiveness and efficiency. Diversification today needs to consider the changed competitiveness over time of products Sudan once produced. And there are a variety of products, including manufactured exports, which Sudan has exported in significant quantities in the recent past, or in small quantities today. In addition, there are ten “emerg- ing champions.” products, which are now being competitively exported from Sudan that were not so in the early 1990’s. Gum arabic, one of Sudan’s most well-known export product of agricultural origin, could serve as a starting point to showcase how to increase value-addition through both adding new process- ing steps into the value chain and increasing the value of the raw material through smart production- enhancing decisions. Reforms in services should focus on the development of framework conditions that facilitate the growth of professional services and address skills shortages and skills mismatches. In addi- tion, regional integration and multilateral negotiations offer opportunities for implementing regulatory reforms and reducing the skill gap through services liberalization. 96 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT a. Overview suggests the existence of a skewed distribution of exporter size in Sudan, with a heavy presence of Export growth, base and size small firms combined with a few very large firms. Sudan enjoyed very strong growth of non-oil Yet, this skew is less so than in other countries. exports between 2008 and 2012, but this was Please also see the Sudan DTIS Update (World Bank largely driven by gold. In fact, Sudan’s 2012 total 2014e), a parallel study to this Country Economic non-oil exports were four times the level in 2008 Memorandum that specifically analyzed trade and (Figure 4.1.1). Sudan exhibits the fastest growth in trade-related issues in the country. Box 4.1 provides total non-oil exports relative to its regional com- a short snapshot of the main findings. parators Ethiopia, Tanzania, and Zambia. While this is a good development for Sudan, especially since Departure of crude-oil exports after 2011 the non-oil sector is in the spotlight with the 2011 The secession of South Sudan in 2011 signifi- secession of South Sudan, the rise of non-oil exports cantly and adversely affected exports48 from both needs to be seen in the context of a very rapid rise the North and the South, and both oil and non- of gold exports, especially in 2012 and 2013. This oil exports. Non-oil exports of Sudan appear to will be shown in subsequent sections of this chapter. have originated primarily from the North, and can Sudan’s number of non-oil exporters is thus be treated as comparable over a long period of significantly smaller than that of its compara- time.49 In 2012 and 2013, oil exports from Sudan tors. This is even after controlling for income per and South Sudan together (red plus blue) fell signifi- capita, size, and time trends. Figure 4.1.1 shows cantly short of pre-partition levels, and in 2013 were that Sudan has, on average, substantially fewer non- still nearly 60 percent lower than those of united oil exporters than all of its regional comparators. Sudan in 2011, but still recovering (Figure 4.2.1). To account directly for country size, Figure 4.1.2 Oil exports from Sudan in 2013 were nearly 80 per- shows the numbers of exporters per 1,000 people cent lower than those reported for Sudan in 2011. and Sudan again appears as an underperformer In 2013, non-oil exports were also 52 percent lower in terms of the number of exporters per capita than their 2011 peak. (Figure 4.1.3). Sudan experienced an important Sudan’s non-oil exports grew steadily expansion, though, by 28 percent in the number of through 2010, decreased slightly in 2010 and exporters from 2008 to 2009—from 660 to 846— then picked up very rapidly in 2012 due to the (Figure 4.1.4). But between 2009 and 2012 the number of non-oil exporters declined again, despite 48 Throughout this note, “exports” refers to exports of goods. Sudan’s consistent total non-oil export growth over 49 Due to lack of reporter data for South Sudan (SSD), South Sudan that period. is always represented through mirror data sourced from UN COM- TRADE. The export data used for Sudan come from the mirror as The average and median non-oil exporter well, except in the case of HS71 which includes gold, for which in Sudan is relatively larger than in most reporter data from Sudan was preferred. These include data for both “former Sudan (SDN)” and Sudan (SUD) in COMTRADE. The mirror regional benchmark countries. Still, the aver- is adopted for several reasons. First, for most years the mirror data are age size of exporters is not significantly different modestly larger, suggesting more complete coverage. Second, reporter data from Sudan is missing for several years (1996, 1997, 1998, 2007, in Sudan (US$2.5 million) from countries like and 2013). Reporter data are used for HS71, including gold, as these Cameroon (US$2 million) and Tanzania (US$1.6 are more consistent with available data on Sudan’s production of gold. Given that other countries report receiving very little imports from million) (Figure 4.1.5). The median size of export- South Sudan except crude oil, one can reasonably attribute exports ers, however, is much higher than most compara- of other products to the region comprising present-day Sudan. For further discussion of the issues surrounding measurement of produc- tor countries in Africa (Figure 4.1.6). This relative tion and exports of oil and gold, see the sections of this document difference between the average and median sizes pertaining to those commodities. Goods and services trade to build endowments 97 FIGURE 4.1: Exporter Base and Size, Sudan and Selected other Countries 1) Total non-oil export growth (base year 2008) 2) Number of exporters, selected countries, 2012 4 Kenya 4,610 Ethiopia 1,826 3 Export growth Tanzania 1,796 Zambia 1,368 2 Cameroon 928 Uganda 910 1 Sudan 787 2008 2009 2010 2011 2012 Year 0 1,000 2,000 3,000 4,000 5,000 Sudan Ethiopia Tanzania Zambia Number of exporters 3) Number of exporters per 1,000 people, selected countries, 2012 4) Number of exporters in Sudan, 2008–2012 850 Kenya 0.12 Zambia 0.11 800 Number of exporters Cameroon 0.05 Tanzania 0.04 750 Uganda 0.03 700 Sudan 0.02 Ethiopia 0.02 650 0 0.05 0.10 0.15 2008 2009 2010 2011 2012 Number of exporters per 1,000 People Year 5) Average exporter size 6) Median exporter size Zambia 4.0 Ethiopia 0.109 Sudan 2.5 Sudan 0.105 Cameroon 2.0 Tanzania 0.026 Tanzania 1.6 Uganda 0.023 Uganda 1.3 Kenya 0.023 Ethiopia 1.2 Cameroon 0.022 Kenya 0.9 Zambia 0.015 0 1 2 3 4 0 0.02 0.04 0.06 0.08 0.10 Average exporter size in millions of USD Median exporter size in millions of USD Source: World Bank staff own calculations, based on data used for the World Bank Exporter Dynamics Database. Note: (2), (3), (5), and (6)—the following averages were used: 2008–2012 for Ethiopia and Sudan, 2007–2011 for Tanzania and Zambia, 2007–2010 for Bo- tswana and Uganda, 2006–2009 for Kenya, and 2007–2009 for Cameroon. 98 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT BOX 4.1: Main Findings of the Sudan DTIS Update The Diagnostic Trade Integration Study (DTIS) Update of 2014 identified priority Actions in support of the Government’s commitment to increase trade and diversify the economy. The study built on the earlier 2008 DTIS by identifying the major factors holding back the increase of agricultural exports and economic diversification. The DTIS Update found that high tariffs and other trade taxes on imports create incentives to produce for the domestic market and actively discriminate against exporters and potential exporters. But enabling exporters and potential exporters to obtain their inputs at internationally competitive prices would stimulate investment and growth and encourage diversification. Reducing trade costs and increasing trade represent the most powerful policy package available to the Government for reducing poverty and putting the economy back on a sustainable path. The DTIS Update recommended to stimulate exports through the implementation of a package of (difficult) reforms that lower the barriers to trade through reducing trade taxation, simplifying border and regulatory policies, and improving transport and logistics. Concretely, the following key reforms were recommended to stimulate exports: • Revise trade policy to simplify the tariff schedule, reduce the proportion of peak tariffs, and adopt a transparent and well- publicized policy on eligibility for duty rebates. The tariff schedule is characterized by a high proportion of peaks (15 percent and above), discriminatory excise duties and a Development Tax of 13 percent, which is a para-tariff. A comprehensive tax reform strategy that reduces reliance on trade taxation and promotes growth and investment should be revenue neutral and in many cases will results in increased government revenue. • Simplify and streamline border and regulatory policies. Sudan imposes many Non-Tariff Measures (NTMs) that increase the price of imports and the ex-factory price of Sudanese products. Many of these result from the high proportion of products that are required to be tested for mandatory standards. The testing frequently duplicates tests already carried out by qualified laboratories in the country of origin. Reducing the number of mandatory standards and replacing them with voluntary standards should be a priority. • Modernize customs clearance procedures. Multiple border agencies undertaking duplicative and redundant checking and repeated requests for the same information all serve to increase costs and reduce competitiveness. Prioritizing the establishment of a National Trade Portal will bring together all the information and forms required for moving goods across borders. It is a proven technique for reducing red tape and increasing transparency. Increased transparency regarding the correct application of trade policies and administrative procedures would increase the predictability of trade costs and transit times, making it easier for companies to integrate into regional and global value chains. • Reduce the price of transport and improve the quality of logistics services. In the short term, improvements in road transport will bring the highest returns. Priority actions include ensuring 24/7 access to the dry port of Khartoum through either relocation or constructing a by-pass. Further investment in infrastructure along the Port Sudan-Khartoum route would increase safety and reduce delays. Modernizing the regulatory framework for logistics services will facilitate increased reliability and reduce transport prices. Looking specifically at agriculture, the DTIS Update found that high input costs stemming from inefficient marketing and transport networks, and regulatory restrictions, all contribute to the observed low productivity underperformance of the sector. Sudan has the potential to be a major producer and exporter of agricultural products to their neighbors, traditional trading partners in the Middle East and globally. Despite the potential and recent positive growth the sector continues to underperform. Recent positive reforms in the policy environment, including the removal of the Gum Arabic Commodity Council monopoly, increasing the role of the private sector, privatizing previously state owned companies, and removing duties on agricultural inputs are all delivering results. The DTIS Update highlighted three areas where further reforms will reduce trade costs. These include streamlining the procedures for the registration of seeds and other agricultural inputs, removing the uncertainty over export licenses for staple crops (specifically sorghum), and improving productivity in the livestock sector. Finally, the DTIS Update highlighted that Sudan has the opportunity to deliver significant growth in the tourist sector, but that this requires both supply- and demand-side measures. In the short run the DTIS Update recommended that the Government of Sudan sends a positive signal that it is open for tourism by reforming the Visa regime, lifting in-country bureaucratic procedures, and updating the National Tourism Plan. A comprehensive development strategy, on the other hand, would take several years to evolve and requires improvements in policy and planning, human resource development, transport access, and product development and marketing. The recently updated National Tourism Plan addresses these issues and provides a useful road map for raising the profile of the sector and mobilizing resources for implementation. Box 4.2. provides more details on the DTIS update analysis of the tourism sector. Source: Excerpt from World Bank 2014e. Goods and services trade to build endowments 99 FIGURE 4.2: Sudan’s Export Performance Overview 1) Sudan / South Sudan exports of crude oil and 2) Sudan total exports excluding crude oil, all other products (non-crude oil), 1996 to 2013 1996 to 2013 15,000 3,000 13,000 11,000 2,000 9,000 7,000 5,000 1,000 3,000 1,000 –1,000 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sudan (Crude oil) Natural/cultured pearls, Electrical machinery South Sudan (Crude oil) precious stone equipment and parts thereof, Sudan (Non-crude oil) Live animals sound recorder etc South Sudan (Non-crude oil) Oil seed, oleagi fruits; Meat and edible meat offal miscellaneous grain, seed, fruit etc Copper and articles thereof Lac, gums, resins, and Beverages, spirits and vinegar other vegetable saps and extracts Rest of products Sugars and sugar confectionery (excluding crude oil) 3) Sudan’s exports excluding crude oil, 2011 4) Sudan’s exports excluding crude oil, 2012 2,250,000 2,250,000 1,750,000 1,750,000 1,250,000 1,250,000 750,000 750,000 250,000 250,000 –250,000 –250,000 Gold, non-monetary Sheep Sesame seeds Refined oil Gum arabic Cotton Copper waste and scrap Meat of sheep (fresh) Undenatured ethyl alc. Other prod. (excl. crude) Gold, non-monetary Sheep Sesame seeds Gum arabic Refined oil Raw sugar Waste/scrap prim. cells Copper waste and scrap Undenatured ethyl alc. Meat of sheep (fresh) Other prod. (excl. crude) Other waste and scrap Source: World Bank staff own calculations, based on data from UN Comtrade. expansion of gold.50 Exports of gold increased outcome being driven by the simultaneous drop in abruptly in 2012 after the secession of South Sudan crude oil exports and the increase in those of non- the previous year, accounting for most of the expan- monetary gold. sion of non-oil exports in 2012 (Figure 4.2.2). The share of crude oil and mineral fuels has been drop- 50 This refers to HS Chapter 71 data from the Harmonized System ping steadily since 2008, when it peaked at 94 per- (HS) of tariff nomenclature. Because Sudan has not yet reported export values for 2013, the figures corresponding to that year are all cent of total exports. Indeed, exports of gold were taken from the mirror, which in the case of HS Chapter 71 are likely slightly higher than exports of fuels in 2012, this to largely underestimate the real export value. 100 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Comparing Sudan’s export data (exclud- weakness in the country’s export performance. Also, ing crude oil) before and after the secession of the fact that both the share and the RCA of the cat- South Sudan shows the main difference being egory comprising agriculture, meat, dairy and sea- the considerable rise of non-monetary gold in food products increased between 2007 and 2012, 2012. Figures 4.2.3 and 4.2.4 display Sudan’s at the same time that those of extractive industries exports excluding crude oil, immediately before decreased, reflects the drop in crude oil exports and after the secession of South Sudan. As can be following the secession of South Sudan, which was readily seen, the top export products are roughly partially compensated for by the rise in exports of the same, as well as their export values, with only non-monetary gold. Annex 6, Table 0.14 provides the exception of non-monetary gold, whose exports an additional more detailed analysis of the RCA at rise considerably in 2012. Other differences with HS-6 level exports 2011 data include moderate drops in the exports The share of Sudanese exports destined to of sesame seeds and refined oil. At the same time the European Union has declined significantly exports of sheep expanded as well, consistent with over the past 15 years. The EU used to receive the presentation in Chapter 3 of this report. more than half of the country’s exports until 1998, which then abruptly dropped to very low percent- b.  Export orientation and growth ages, staying below 10 percent since 2003, though it picked up slightly after 2011. The U.S., the rest Between 2007 and 2012, Sudan showed a of Europe and Central Asia, as well as the rest of revealed comparative advantage (RCA) in agri- the world, also decreased their shares as Sudan’s culture, meat and dairy, and seafood, as well export destinations between 1996 and 2013. as in extractive industries (Table 4.1). The lack Canada’s share has been negligible until 2005 and of competitive advantages in other industries, is still very low since then, even though it increased together with the low complexity and value added substantially after the separation of South Sudan of these product categories, points out to a structural (Figure 4.3.1 and Table 4.2). Table 4.1: Change in Sudan’s Shares of Exports by Broad Productive Sectors, 2007–2012 (1) (4) Exports (2) (3) Exports (5) (6) 2007 Share RCA 2012 Share RCA (7) Sectors (US$ ‘000) 2007 (%) 2007 (US$ ‘000) 2012 (%) 2012 CAGR 1 Abriculture, meat and dairly, seafood (HS 1–10, 350,292 4.08 1.09 691,607 13.23 4.89 14.57 12–14) 2 Food, beverages, tobacco, wood, paper (HS11, 44,359 0.50 0.09 92,120 1.76 0.49 15.74 15–24, 44–48) 3 Extractive industries (HS 25–27, 68–71) 8,038,058 93.61 5.79 4,290,219 82.07 3.50 –11.80 4 Chemicals, plastics, rubber (HS 28–36, 38–40) 5,021 0.06 0.00 8,589 0.16 0.02 11.33 5 Textiles, apparel, leather, footwear (HS 41–42, 71,782 0.84 0.15 30,799 0.59 0.19 –15.57 50–65) 6 Iron, steel, and other metals (HS 26, 72–83) 50,368 0.59 0.06 55,389 1.06 0.21 1.92 7 Machinery, electronics, transportation equipment 20,644 0.24 0.01 56,293 1.08 0.05 22.22 (HS 84–89) 8 Other industries (HS 37, 43, 49, 66–67, 90–97) 2,852 0.03 0.01 1,308 0.03 0.01 –14.43 9 HS 99 7,241 0.08 0.02 1,269 0.02 0.01 –29.41 Source: World Bank staff own calculations, based on data from UN Comtrade. Goods and services trade to build endowments 101 Table 4.2: Sudan’s Total Exports Across Aggregate Destinations, 1996–2013 DESTINATIONS Sudan’s Rest of Total Exports Europe & (US$ ‘000) EU28 Central Asia China Rest of Asia MENA USA Canada ROW World 1996 144,379 8,040 38,483 55,467 43 19,635 65 4,113 270,225 1997 194,635 13,610 23,005 70,112 21,590 12,931 52 19,806 355,741 1998 208,384 15,584 1,467 90,987 36,701 3,350 429 15,489 372,391 1999 161,020 9,340 53,294 173,897 181,790 63 92 47,730 627,226 2000 246,569 7,560 731,728 608,550 141,921 1,913 87 24,781 1,763,109 2001 219,306 4,643 938,127 491,311 95,556 3,592 484 32,334 1,785,353 2002 230,910 18,485 1,157,585 434,971 238,962 1,458 154 20,027 2,102,553 2003 243,586 13,498 1,441,821 715,593 226,741 3,061 159 38,216 2,682,674 2004 208,496 14,173 1,705,877 1,633,919 318,436 3,839 11,555 30,552 3,926,848 2005 184,741 9,799 2,614,462 2,073,633 263,425 14,082 66,409 67,086 5,293,637 2006 145,141 13,585 1,943,482 3,466,392 304,680 6,501 63,137 96,519 6,039,436 2007 200,789 19,347 4,171,239 3,712,186 352,068 8,072 60,513 59,569 8,583,783 2008 190,918 24,914 6,325,890 5,940,921 549,862 5,404 64,504 193,158 13,295,571 2009 147,697 11,259 4,684,822 2,285,461 916,546 10,732 60,105 89,371 8,205,993 2010 128,918 6,830 6,671,907 2,137,653 1,700,399 8,801 80,596 135,241 10,870,344 2011 476,714 11,886 9,541,534 2,892,705 2,476,802 11,238 118,343 176,517 15,705,740 2012 190,383 14,306 1,554,267 679,768 516,851 6,991 106,421 92,335 3,161,322 2013 237,749 29,593 2,100,023 949,589 715,081 10,904 70,696 17,003 4,130,638 CAGR 2.98 7.97 26.52 18.18 77.16 –3.40 50.88 8.71 17.40 whole period CAGR –0.28 11.07 8.45 3.48 13.25 14.32 67.48 –2.86 6.77 since 2000 CAGR –29.38 57.79 –53.09 –42.71 –46.27 –1.50 –22.71 –68.96 –48.72 since 2011 Source: World Bank staff own calculations, based on data from UN Comtrade. Note: CAGR=Compounded annual growth rate. Sudan’s level of exports to the EU has been these products have been consistently and histori- steady but erratic, with some diversification. The cally sold by Sudan to the EU, while undenatured EU’s reported imports from Sudan have fluctuated ethyl alcohol emerged as a significant product in in a band from US$100 million to US$250 million 2009. Cotton and raw hides and skins, which were since 1996. It is significant to note that unlike the a large part of the EU’s exports to Sudan in the late United States, the EU has not engaged in significant 1990s, have declined in relative importance. Over import bans but has participated in the financial the period 1997–2001, the largest classification of sanctions. The variety of imports from Sudan has EU imports from Sudan is “aircraft, spacecraft, and fluctuated over the years. As of 2013, 90 percent parts thereof” (HS 88), for which the story is not of the EU’s imports from Sudan have consisted of obvious. gum Arabic, sugar and sugar products, sesame seeds China has experienced a spectacular increase and undenatured ethyl alcohol. The first three of in its share of Sudanese exports since 2000. In 102 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT 2000 China’s share reached 42 percent, which setter in those areas. In regional markets Sudan plays increased thereafter—with some fluctuation—until a similar role for sheep and sheep meat, and on an it reached over 60 percent in the two years preceding emerging basis in waste and scrap of primary cells the secession of South Sudan. Afterward, its share (Figure 4.3.2).51 decreased moderately, but nevertheless continued Sudan is likely a price taker in its other to be the destination of over one half of Sudan’s export markets, with market shares small or exports (Figure 4.3.1 and Table 4.2). The shares of negligible in recent years (Figure 4.3.3). Sudan’s the rest of Asia and of Middle East and North Africa global market share of crude oil abruptly fell to have been more variable, though relatively impor- 0.12 percent after the split in 2011. At that time, the tant throughout the whole analyzed period. Asia share of raw sugar returned to its historic percent- peaked at 41 percent in 2004 and then slowly got age range it had had since 2003 (around 0.2 per- back to its lower shares of the initial years (around cent), which even more than doubled and reached 20 percent). In turn, Middle East and North Africa 0.5 percent in 2013. The share of non-monetary reported its highest share in 1999, when it absorbed gold sharply increased above its historic trend in 29 percent of Sudan’s exports, and then abruptly fell 2009, when it reached 1.2 percent, and after a brief below 5 percent and remained at around that level fall in the two subsequent years it escalated to 1.3 for ten years. Since 2009 its share slowly picked percent in 2012. up again, getting to 17 percent in 2013, probably Sudan’s main export products 52 tend to driven by the increases in livestock exports in that exhibit very low diversification across desti- region as described in Chapter 3. nations, with only four of them having been The spectacular rise and recent fall of exported to more than seventeen countries Sudan’s exports to China is driven by oil. During between 1996 and 2013. These more global prod- the period 1996 to 1998, and perhaps earlier, the ucts are: gum arabic, which was exported at least dominant Sudanese export to China—based on once to 87 different markets; sesame seeds, exported China’s mirror data—was cotton. Sudan’s exports at least once to 75 different markets; refined oil, sold of oil to China began in 1999, and from 1999 to in 38 markets; and cooper waste and scrap, sold in 2011 exceeded 98 percent of total Sudanese exports 27 markets (Figure 4.3.4). The EU is the primary to China in most years. Even after the departure of market for gum arabic, MENA for sesame seeds, Sudan, China’s imports of Sudan were still around and China and the rest of Asia for copper waste 90 percent oil in 2013. The remaining exports and scrap. Most refined oil is destined for “Rest of of Sudan to China consist largely of oilseeds (i.e. World,” which includes SSA. sesame seeds), worth US$115 million in 2015, and Meanwhile, the remaining seven top export cotton (US$44 million), with some role for metal- products were sold in fewer markets, ranging lic ores (US$17 million) and (very recently) food between three and 17 individual countries. industry residues and fodder (US$11 million) as Indeed, between 1996 and 2013, crude oil was well as plastics and plastic products (US$6 million). exported to 17 countries, raw sugar not contain- Non-oil exports from Sudan to China have recently ing added flavor was exported to 14 countries, grown dramatically, from around US$40 million in 2009 to US$200 million in 2013. 51 “Waste and scrap of primary cells” refers primarily to used auto bat- Sudan has significant market power in global teries shipped mainly to South Korea, which likely recycles the lead export markets for gum arabic and sesame seeds. and other heavy metals to incorporate them, possibly, into batteries for Korean-made autos. Sudan’s power in global markets for gum arabic and 52 These are the 11 products with the largest export values in Sudan’s sesame seeds allude to its role of being a global price export data for year 2012. See Table 4.3 for the list. Goods and services trade to build endowments 103 Table 4.3: Destinations of Sudan’s Primary Non-Crude Oil Exports Product # destinations ever sold to (1996–2013) Primary destinations (2012–2013) Gum arabic 87 European Union 76% Sesame seeds 75 Middle East/North Africa 51%, China 27% Refined oil 38 Rest of World 95% (includes SSA) Copper waste and scrap 27 Rest of Asia 62%, EU 22%, China 16% Crude oil 17 China 72%, Japan 18% Raw sugar 14 EU ~100% (Poland, Spain, Romania, Finland) Waste and scrap of primary cells 10 South Korea 93% Ethyl alcohol, undenatured 10 EU ~100% (Netherlands, Italy, France) Gold, non-monetary 8 United Arab Emirates 78%, unspecified 17% Sheep meat, fresh & chilled 6 Jordan 100% Live sheep 3 Saudi Arabia 100% Source: World Bank staff own calculations, based on data from UN Comtrade. undenatured ethyl alcohol, and waste and scrap of both recently (just 0.8 percent between 2007 and primary cells to 10 countries, non-monetary gold 2012) and even less further in the past (0.09 percent to eight countries, fresh or chilled meat of sheep to between 2000 and 2006), evidencing the strong six countries, and sheep to only three individual recent dependence of the country on oil export and countries in the gulf states (see also Chapter 3 on the vulnerability associated with lack of diversification livestock exports). Sudan has exhibited slower growth than the There is considerable variability in the world’s average in most of its top export products important destinations for each of Sudan’s in recent years. The notable exception is crude oil less market-diversified main export products (before 2011), which was by-and-large its main (Table 4.3). Indeed, whereas sheep and sheep meat export product, and of a few other products, such are exported mainly to countries in the MENA, raw as cane molasses between 2000 and 2006, and sugar and undenatured ethyl alcohol are sold pri- non-monetary gold, sheep, sheep meat, and cop- marily to European Union countries. Crude oil is per waste, between 2007 and 2012. This behavior exported mainly to South and South-Eastern Asian can be seen from Figure 4.3.7, where the size of the countries, and the same is true for waste and scrap bubble reflects the share of Sudan’s export value of of primary cells, especially in recent years. Exports such product in the final year, reflecting its impor- of non-monetary gold are more geographically tance in Sudan’s export basket. When a bubble is diversified, even though still concentrated in a small above the red line, it implies that Sudan’s exports number of targeted markets. of the product it represents have grown faster than The analysis provides evidence of the strong the world exports of the same product, and simi- recent dependence of Sudan on oil export and the larly that Sudan has increased its market share for vulnerability associated with a lack of diversifica- that product. The top panel shows that most of the tion. As can be seen from Figures 4.3.5 and 4.3.6 main export products of Sudan grew more slowly the loss of South Sudan and its indirect effects has than world exports of the same products between brought an end to Sudan’s strong export performance, 2000 and 2006. In the second period (2007–2011), both in absolute terms and relative to comparator which comprises the split of the country in 2011), countries. Non-fuel exports have grown very slowly sheep, sheep meat, copper waste, and especially 104 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 4.3: Export Growth and Orientation 1) Evolution of Aggregate Destinations’ shares 2) Sudanese products with larger world in Sudan total exports, 1996–2013 market shares, 2013 100% 40% 80% 30% 60% 20% 40% 10% 20% 0% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1996 1998 2000 2002 2004 2006 2008 2010 2012 EU28 Rest of ECA China Rest of Asia Sheep Sesame seeds Gum arabic MENA USA Canada ROW Other meat of sheep, Waste and scrap of fresh or chilled primary cells 3) Sudanese products with larger world 4) Shares of destinations in Sudan’s exports, market shares, 2013 2006–2007 and 2012–2013 averages 2% 100% 1% 50% 1% 0% 0% 06–07 12–13 06–07 12–13 06–07 12–13 06–07 12–13 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Gum Arabic Sesame Refined oil Copper waste Crude oil Non-monetary gold Refined oil seeds and scrap Raw sugar not containing added flavor EU28 Rest of ECA China Rest of Asia Copper waste and scrap Undenatured ethyl alcohol MENA USA Canada Rest of World 5) Export growth around the world, 6) Export growth around the world, all products including oil, 2013 all products excluding oil, 2013 23 24 24 23 19 22 17 16 19 13 12 12 10 10 8 11 17 16 8 5 5 15 12 11 10 10 9 8 8 8 8 6 6 5 4 –18 2000–2006 2007–2012 2000–2006 2007–2012 Sudan Kenya Ethiopia Uganda Egypt Morocco Gahna Indonesia Mongolia Source: World Bank staff own calculations, based on data used from UN Comtrade. Note: (4) and (5): Data for Sudan in the second period were built by appending 2012 data for the new definition of Sudan (SUD). Data for Mongolia in the second period only span 2007–2010 due to lack of export data covering 2011 and 2012. (continued on next page) Goods and services trade to build endowments 105 FIGURE 4.3: Export Growth and Orientation (continued) 7) Growth of former Sudan’s exports to 8) Growth of former Sudan’s exports to its top 10 products relative to World exports its top 10 destinations relative to World exports 30 30 CHN ARE Crude oil 20 20 JPN Cane molasses Sheep Gum arabic 10 IDN 10 Cotton EGY SAU Sesamum seeds Gold 0 0 Other vegetables SYR –10 GRB –10 Sheep meat Other oil seeds –20 SGP –20 ITA –20 –10 0 10 20 30 –20 –10 0 10 20 30 Sudan Growth (2000–2006) 45 degrees line Sudan Growth (2000–2006) 45 degrees line 40 ARE Sheep meat Gold 60 Sheep 30 ITA 40 ETH 20 Cooper waste 20 SAU CHN Sesamum seeds CAN 10 Crude Refined oil IND oil Other waste THA 0 0 Gum arabic JPN Cotton –20 –10 IDN –10 0 10 20 30 40 –20 0 20 40 60 Sudan Growth (2007–2011) 45 degrees line Sudan Growth (2007–2011) 45 degrees line Source: World Bank staff own calculations, based on data used from UN Comtrade. gold improved their growth performance outpacing United Arab Emirates, and Japan between 2000 and the global average, at the same time that exports of 2006, between 2007 and 2011 its exports to seven crude oil slowed down, performing approximately of its top ten destinations grew faster than the world par to the world average. average, thus expanding Sudan’s market share in all On the other hand, Sudan has shown a rela- of them. It is worth noting that exports to China, tively better performance in terms of market which is by far Sudan’s most important destination diversification, which has markedly improved in both sub-periods, have always grown faster than in recent years. This is shown in Figure 4.3.8, the world average, even though this advantage is where the size of each bubble reflects the share of less marked in more recent years. Sudan’s export value to such destination in the final year, accounting for its relative importance. When a c.  Export diversification and survival bubble is above the red line, it implies that Sudan’s exports to that destination have grown faster than Export diversification the world exports to it, and similarly that Sudan has Sudan’s export basket is very concentrated, increased its market share in such market. Whereas as shown the large shares of its top three and Sudan’s world market share only increased in China, five export products, but the degree of product 106 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT concentration decreases when looking at non-oil 2010 and 2012 (Figure 4.4.5). This confirms the exports. Even though these measures have tended conjecture suggested by the indicators on exporter to decrease after the split of the country, especially size that the concentration among Sudanese export- in the case of the top three products, the figures still ers is increasing substantially during this period (see evidence a severe dependence of Sudan upon few the previous discussion of Figure 4.1). commodities. However, the degree of product con- The diversification of Sudan across desti- centration decreases considerably when only non- nation markets is also low, and has remained fuel products are considered (compare Figure 4.4.1 approximately constant (Figure 4.4.6). It is also with Figure 4.4.2). As figure 4.4.2 also shows, the much lower than that of most of its comparators, measured concentration of non-fuel exports has with only Mongolia exhibiting a worse performance increased markedly in the last few years. This is than Sudan in this respect. Together with the low explained by the emergence of gold exports, which product diversification of the country, this evidences became Sudan’s second largest export in 2009 (and a highly vulnerable situation of the country in its largest non-oil export). This implies that after the integration into global markets. secession of South Sudan, the country may have Using exporter-level data confirms both find- been forced into a path of higher product diversifi- ings of low diversification in product and des- cation, which could work to its advantage in future. tination markets. In fact, it shows that the degree Even though the share of the top three and five non- of diversification of Sudan’s non-oil exporters is oil products have increased after the secession of low in absolute and in relative terms. Firm-level South Sudan, they are still relatively low. However evidence suggests that most exporters have a very the number of products, which always had been limited portfolio of products and destination mar- low, showed a mild increase between 2006 and kets. Interestingly, Sudan’s non-oil exporters are 2011, but fell again after the split of the country. quite homogenous in their low product diversifi- The lack of product diversification of cation as the standard deviation of the number of Sudanese exports also stands out when com- products per exporter in the country is 3 compared pared to peer countries, as evidenced by its com- to standard deviations of 6 and 9, respectively, in paratively much higher Herfindahl-Hirschman Ethiopia and Tanzania. In terms of destination mar- index.53 This has furthermore increased in recent ket diversification, most of the African comparators years, while in many of its comparators it has actu- are similar, with a median number of destination ally decreased. This points out to a comparatively countries per firm of 1 and a standard deviation of disadvantaged position, both static and dynamic. close to 3. Sudan falls closely within those ranges Figure 4.4.3 presents the index comparing Sudan (World Bank Exporter Dynamics Database). and some comparator countries. A few multi-product multi-destination Using exporter-level data and calculating the exporters typically amass the majority of total Herfindahl index confirms the observed high exports in a country, but less so in developing level of concentration. The Herfindahl index of countries including Sudan. Large firms often exporter market shares is similar to Figure 4.4.3 and define exports from one country; well-known exam- shows that in Sudan is significantly higher than in ples include Nokia in Finland, Samsung in Korea, other countries (Figure 4.4.4). Indeed, again, Sudan exhibits the highest level of concentration among its regional comparators. In addition, there is actu- 53 The Herfindahl-Hirschman index is calculated as the sum of the squared market shares for all products. Higher values indicate in- ally an observable increase in the Herfindahl index creasing concentration, with a maximum score of 1.0 when there is of Sudanese exporter shares particularly between a single product. Goods and services trade to build endowments 107 FIGURE 4.4: Export Concentration and Survival 1) Export concentration in terms of all products, 2) Export concentration in terms of all products, including oil excluding oil 1.00 150 0.60 150 0.50 0.95 100 0.40 100 0.90 0.30 50 0.20 50 0.85 0.10 0.80 0 0.00 0 2006 2011 2012 2006 2011 2012 Share of top 3 products Share of top 5 products Share of top 3 products Share of top 5 products Number of products Number of products 3) Herfindahl-Hirschman Index at the products level, 4) Herfindahl index of exporter shares, Sudan and selected countries Sudan and selected countries 1.0 Sudan 0.16 Zambia 0.14 Tanzania 0.06 0.5 Cameroon 0.03 Uganda 0.02 Ethiopia 0.01 Kenya 0.01 0.0 Average 2000–2006 Average 2007–2012 0 0.05 0.10 0.15 Egypt, Arab Rep. Ethiopia Gahna Indonesia Herfindahl index of exporter shares Kenya Morocco Mongolia Uganda Sudan 5) Herfindahl index of exporter shares, 6) Sudan‘s export concentration in terms of change over time, Sudan destination markets 0.4 1.0 127 Herfindahl index of exporter shares 0.90 0.94 0.93 0.8 0.88 126 0.3 126 125 0.6 0.2 124 0.4 123 0.40 0.35 123 0.1 0.2 122 0 0.0 121 2008 2009 2010 2011 2012 2006 2011 Share of top 3 markets Share of top 5 markets HH market index Number of markets Source: World Bank staff own calculations, based on data used from UN Comtrade; and the World Bank Exporter Dynamics Database. Note: (4) and (5) is based on exporter level data. It shows the same trend as UN Comtrade data. (continued on next page) 108 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 4.4: Export Concentration and Survival (continued) 7) Decomposition of Sudanese export growth 8) Export survival rates of Sudan compared to along margins of trade in recent years peer countries (2000–2011) 126 125 100 112 105 90 80 85 70 65 60 45 50 25 40 0.1 0.5 0.6 4.0 0.1 1.0 0.5 1.9 30 5 20 –15 –6 –11 10 –14 –15 0 Export growth decomposition Export growth decomposition 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2000–2006 2007–2012 1 Increase of existing products in established markets Sudan Ghana Egypt 2 Decrease in existing products in established markets Indonesia Ethiopia Morocco 3 Extinction of exports of products in established markets Kenya Mongolia Uganda 4 Introduction of new products in new markets 5 Introduction of new products in established markets 6 Introduction of existing products in new markets 7 Product diversification in established markets Source: World Bank staff own calculations, based on data used from UN Comtrade. and Intel in Costa Rica (Freund and Pierola 2012). new destination markets. Indeed, not only has But Sudanese exporters are poorly diversified both the country had almost no other export increases in terms of products and destinations. They exhibit beyond those attributed to the expansion of existing significantly lower numbers of HS 6-digit products products to established markets, but also has even exported per firm and significantly lower number of experienced decreases and even the extinction of destination markets per firm than comparable coun- such traditional products in traditional markets. tries. This poor diversification performance is also Furthermore, these last indicators have worsened explained by the absence of a few highly diversified in recent years (Figure 4.4.7). multi-product multi-destination export superstars When compared to peer countries, the sur- dominating exports, a phenomenon commonly vival rates of Sudan are almost always the lowest observed in other countries. In Sudan in 2012, only since the early 2000s (Figure 4.4.8). This shows a 2 percent of Sudanese exporters sold more than ten very fundamental weakness of the country and fol- products and surprisingly they accounted for just 3 lows naturally from the low performance it has shown percent of total non-oil exports. See also Annex 6, in all the indicators that have been evaluated so far, Table 0.15 for details on the distribution of export- both in absolute terms and compared to its peers. ers across products and destination. B. Services Trade Export survival The analysis of Sudan’s exports across the exten- a. Overview sive and intensive margins of trade evidences the lack of capacity of the country to expand Services and trade-in-services have an important its range of exported products and to explore role in economic diversification. Services are Goods and services trade to build endowments 109 essential intermediate inputs and have the poten- constraints to the provision of adequate professional tial to enhance productivity and increase technol- services in Sudan. The section shows the importance ogy and skills transfers through significant positive of both exports and imports of high-value added, spillover effects throughout the economy. Services sophisticated services and professional skills for sectors can help Sudan diversify its economy and export diversification and increased competitive- reduce poverty. For example, while the agricultural ness. The chapter also illustrates how regulatory and sector is viewed as an important engine of growth, it trade policy reforms can be coordinated as part of has remained far below its potential and the country regional and multilateral negotiations. Policy recom- has stayed a net importer of agricultural products. mendations call for action in four areas: education, The productivity of farms will have to improve to regulation of professional services, trade policy, increase agriculture production. That means better and labor mobility at both the national and inter- transport infrastructure, agricultural technology, national level. and support services including financing. There is also potential for Sudan to develop its Sudan’s economy faces numerous challenges Tourism sector based on its rich history, but there that hamper the development of the services sec- are also great challenges. Box 4.2 describes the tor. While services such as transport and logistics, potential, but also the great challenges for tourism. financial services, or energy are addressed in the From the analysis, which was originally carried out context of various World Bank or other develop- for the DTIS Update in 2014, it is clear that develop- ment partner projects, higher-value knowledge- ing the tourism sector is a long-term endeavor that is intensive services such as business services remain closely linked to the country image of Sudan and the largely neglected. fact that sanctions imposed on Sudan prevent tour- Weak regulatory frameworks characterize ism technology to facilitate the sector’s development. most business services sectors. While regulatory self-assessments by ministries and regulators seem b.  Trade-in-Services in Sudan to suggest that the frameworks in place are adequate, the private sector points to numerous regulatory Sudan’s share of services Value Added (VA) in weaknesses. Also, stakeholders from both the pub- GDP is lower than expected for a country at its lic and the private sectors mentioned the absence level of development. A comparative assessment of adequate regulations and standards. There seems of the share of services VA in GDP for Sudan and to be a strong interest in developing the necessary selected Sub-Saharan African countries reveals that regulatory framework using “good practice” from Sudan’s falls below the fitted curve in 2000–2 and the region or elsewhere as guidance. Additional 2010–12, implying a smaller services sector than constraints in business services sectors are skills expected for the country’s level of development shortages and mismatches. (Figure 4.5.1). This section focuses on professional ser- Services export growth remains below that vices, a set of higher-value knowledge-intensive of goods exports and GDP growth. Sudan stands services sectors that are characterized by high in stark contrast with most neighboring countries regulatory intensity and are crucial for skills regarding growth of services exports compared to generation, which in turn are essential for diver- that of goods exports and GDP. While most Sub- sifying the human capital endowment of a coun- Saharan African countries register more dynamic try. A diagnostic of professional services markets growth rates for services as compared to goods in Sudan based on a recent World Bank Survey on exports or GDP growth, Sudan’s services exports Professional Services highlights the demand and the performance remains below potential (Figure 4.5.2). 110 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT BOX 4.2: Tourism in Sudan: Great Potential, Great Challenges Rich history and great potential Sudan has an opportunity to become an important global tourism destination. While largely unknown, Sudan has compelling attractions that could be of strong interest to tourists that seek out culture, adventure, wildlife, and scuba diving opportunities. Realizing this potential requires the removal of regulatory and policy constraints, ensuring stability and security, and improving the country’s image in international markets. Addressing these issues will provide the foundation for a productive and dynamic tourism sector in Sudan that can make significant contributions to economic growth, employment generation, cultural and environmental preservation, and social inclusion. Sudan is home to a number of world-class tourism attractions based on its unique cultural and natural resources. However, the reality of a country rich in natural and cultural resources has been overshadowed by the negative consequences of a lengthy civil war and social conflict culminating in the secession of South Sudan in July 2011. Even after South Sudan’s secession in July 2011, Sudan continues to suffer from insecurity, be it the conflicts in the states border South Sudan (South Kordofan, Blue Nile), the Darfur areas, or Red Sea states, which all, at various intensities show some level of conflict. In terms of culture, the country is well endowed with temples, monuments, and tombs dating back to the time of ancient Egypt, with which the Sudanese lands were closely connected. In fact, Sudan hosts a collection of pyramids that even outnumbers those found in Egypt. The influences of Christianity (6th century) and Islam (7th century) are also reflected in churches, mosques, and numerous religious antiquities. The country has a diversity of natural attractions in line with its varied ecosystems. The West is characterized by semi-desert conditions, the North is dominated by the arid Nubian Desert, the East contains over 700km of Red Sea Coast, and the South contains forested mountains, swamps, and rainforest. The country has eight national parks, two of which are marine-based. Some of the land- based parks have pockets of terrestrial wildlife that attract tourists interested in safaris. There is also a small hunting market. Yet the country’s top nature tourism product is scuba diving along the well-preserved coral reefs that line the Red Sea Coast. Great challenges ahead But issues related to the Sudan’s country image prevail as the key obstacle to further development of the tourism sector. Addressing those issues requires a demonstrable commitment to tourism by enacting key policy changes. Image problems are particularly prevalent among post-conflict countries. Yet many countries, particularly in Africa, have seen success in their post-conflict tourism development efforts. Sudan needs to take some critical initial steps, firstly reducing the bureaucracy and red tape required for obtaining visas, permits, and licenses. Sudan needs to show that it is open to tourism and truly work towards its facilitation. Without stability and security, tourist development efforts will yield limited returns. With them, and in combination with effective sector stewardship, the country’s image will improve. The current visa regime is not conducive to tourism. Unlike most other export sectors, tourism depends upon the customer coming to the place where the products and services are supplied. As this entails cross-border movements of tourists, immigration and entry/ exit control regulations play an important role in the sector. Travel to Sudan is bureaucratic, time consuming, and expensive for the tourist. Unlike nearly every other country in Africa, no tourists are eligible to obtain visas on arrival in Sudan. Instead, all tourists need to procure visas prior to arrival (or work with a registered local tour operator who can arrange for a counter visa for an additional cost). This process is not only expensive (approximate visa cost is US$100) but also requires the additional logistical burden of having to acquire a letter of invitation/introduction. Those not living in cities with a Sudanese consulate must bear the additional costs of sending application materials to a Sudanese consulate through a courier service. In-country bureaucratic procedures are an impediment to the free flow of tourists. Visitors are required to register with the Ministry of Interior within three days of entering the country. Registration costs US$60 in Khartoum and can consume the better part of a day. Alternatively many hotels will complete the registration on behalf of the tourist, but this still entails the tourist spending at least 24 hours in Khartoum before proceeding to the desired destination. Registration can be also done at the Red Sea for tourists that fly directly into Port Sudan. Additionally, tourists are required to obtain permits from the Ministry of Tourism for land travel and photography of any kind (at no cost). These extra burdens and costs, for which no parallel can be found within countries trying to promote tourism, act as a strong deterrent to prospective tourists. U.S. sanctions against Sudan blocks access to tourism technology and use of credit cards. The U.S. embargo has had a negative impact on tourism to the country, both in terms of creating a much more challenging business environment for operators as well as creating a major inconvenience for tourists. Tourism businesses face major challenges when trying to obtain essential equipment such as commonly used front desk and restaurant management systems. Without the ability to use credit cards, they must spend time and money to obtain licenses in order to make international transfers of funds. The embargo also results in high transactional costs for tour operators and hotel owners to receive funds sent by international tour operators via non-commercial banking systems such as Western Union or wired through third-party accounts in neighboring countries. Most importantly, international tourists are accustomed to using a credit card to guarantee services prior to arrivals or paying for services once in the country. Many also rely upon being able to withdraw local currency through ATM machines. Yet, as ATM and credit cards are not accepted in Sudan, tourists are forced to bring all the funds needed for their trip in cash. For example, a family of four visiting the country for 10 days (at an average expenditure rate of US$150 per person) would need to carry US$6,000. This is not only a major inconvenience, but also creates safety concerns. Likewise, it represents an added risk to tourism businesses, which have to ensure services (accommodations or tours) without a guarantee of being paid in case the tourists do not appear. Source: Excerpt from World Bank 2014e. Goods and services trade to build endowments 111 FIGURE 4.5: Trade-in-Services in Sudan 1) Services Value Added and Development in 2000–02 versus 2010–12 100 100 Average services value added Average services value added SYC as % of GDP, 2000−02 as % of GDP, 2010−12 80 80 SYC MUS MUS 60 RWA ZMB 60 UGA RWA KEN MOZ KEN MWI MWI UGA SDN 40 SDN 40 MOZ ZMB 20 20 6 8 10 12 6 8 10 12 Average log GDP per capita PPP, 2000−02 Average log GDP per capita PPP, 2010−12 2) Sudan‘s Exports of Goods, Exports of Services, 3) Exports of Transport, Travel, and and GDP Growth, 2005–2012 Other Commercial Services, Sudan, 2005–2012 25 25 20 20 Index 2005 = 1 15 Index 2005 = 1 15 10 10 5 5 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012 Exports of goods Exports of service GDP Other commercial Transport Travel 4) Services Imports, Sudan and COMESA COMESA 2012 Sudan 2012 Sudan 2005 0 20 40 60 80 100 Transport Travel Communications Construction Insurance Financial ICT Royalties OBS Personal recreation Source: World Bank staff own calculations, based on data from World Bank, World Development Indicators. Note: (1) The figure shows scatter plots of average services value added as a percentage of GDP against the log of average GDP per capita in purchas- ing power parity (PPP, current international US$) for the periods 2000–2002 (left panel) and 2010–2012 (right panel). The line indicates the fitted values obtained by a linear prediction of the relationship between share of services in total value added and income per capita. Sudan registers more dynamic growth rates suggests the existence of some modern services for other commercial services exports than for (Figure 4.5.3). This suggests that some modern, exports of travel or transport services, a fact that high-value-added services sectors already contribute 112 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT to export diversification and provide new oppor- the constraints to the development of professional tunities for export development. Indeed, a recent services, showing how inadequate domestic regula- survey of providers of professional services carried tions in conjunction with a lack of regional coop- out by the World Bank shows that about one-third eration holds back the development of the national of respondents in Sudan reported exports of ser- markets for services, and creates skills shortages and vices in 2011 (19 out of 60), a higher proportion skills mismatches, all of which have negative implica- than in most COMESA countries (15.7 percent at tions for competitiveness and limit exports. the COMESA level). These exports of professional services concerned, for the most part, regional cli- Professional services matter for Sudan’s c.  ents, and represented on average a third of exporters’ growth total revenue. This suggests that there is potential to develop Sudan’s services exports provided an Professional services contribute directly and appropriate trade policy and regulatory framework indirectly to economic growth, including low- are put in place and obstacles faced by profession- ering transactions costs and creating spillover als are lifted domestically and at the regional level. effects of knowledge to other sectors. For exam- Sudan’s services imports are undiversified. ple, engineering and IT services are knowledge- Imports of services can drive Sudan’s competitive- intensive sectors essential to the productivity and ness. Imports of intermediate inputs such as trans- sustainability of other economic activities, includ- port services, construction, insurance, and other ing the oil sector. Civil engineering is critical for business services can improve the productivity of the development and maintenance of a country’s manufacturing and services firms. Also, services physical infrastructure, while electrical engineer- can help address shortages in crucial sectors of the ing is important to the operation of public net- economy. For example, imports of professionals works such as utilities or commercial facilities and help alleviate Sudan’s skills shortages in health- communication systems (Cattaneo et al. 2010). care, education, or professional services. However, IT-based services including application services at this stage Sudan’s services imports are for the (such as application development and maintenance, most part comprised of transport and travel ser- system integration, IT infrastructure services, and vices (Figure 4.5.4). Sudan’s access to competitive IT consulting), or IT engineering services (such as services from which to draw high quality services manufacturing, engineering, and software product inputs is inadequate. Poor access to such critical development) also have an important impact on services translates into a competitive disadvan- productivity and growth. Accountancy is critical for tage in any sector, be it services, manufacturing accountability, sound financial management, and or agriculture. The fragmentation (by restrictive good corporate governance (Trolliet et al. 2003). regulatory policies and regulatory heterogeneity) of Users of professional services in Sudan are regional markets for these services prevents Sudan more productive than non-users. Data from the from fully benefiting from the potential gains from World Bank Survey of Users of Professional Services greater trade-in-services. Again, regional coopera- in Sudan show that firms that use accounting ser- tion to facilitate the movement of various profes- vices—whether externally outsourced or provided sionals could help address skills shortages or gaps in-house—have higher average labor productivity in relevant sectors. than firms without such professional services link- Ensuring efficient access to a wide range of ages (Figure 4.6.1). Also, the labor productivity gap services is a key determinant in international com- between users and non-users of accounting services is petitiveness and efficiency. This chapter identifies higher in Sudan as compared to the COMESA average. Goods and services trade to build endowments 113 Respondents to the World Bank Survey of The high usage of professional services and the Users of Professional Services listed a number higher productivity of Sudanese firms that use pro- of channels through which professional ser- fessional services than that of non-users may suggest vices affect their productivity and performance. that professional services are equally important for While many respondents indicated that they use the development of the economy as they are in more accounting services because of statutory require- developed economies. ments, they also name accounting services as useful Despite demand for professional services for maintaining and improving existing activities Sudan is characterized by limited availability within enterprises and as helpful in accessing loans. of professionals and skills mismatches in engi- Accounting and audit services also help manage neering and accounting services. While detailed costs, expenses, and income of the firm, disclose data on the exact magnitude of professional skills the company’s financial health, undertake future shortages in Sudan is unavailable, consultations with planning, and comply with tax laws and require- practitioners confirmed that the current demand for ments. Engineering services help firms understand qualified accountants or engineers in Sudan is grow- technological advancements and how to use them ing and is much larger than the available supply. effectively to construct, install, and maintain their Supply of professional services is limited by machinery in normal operating condition. Still, rent-seeking opportunities. Even though profes- such knowledge-intensive services remain largely sionals in Sudan receive high nominal wages rela- neglected and their development and export poten- tive to their counterparts in other African countries, tial remains overlooked. reflecting their scarcity relative to demand for their The business surveys undertaken in Sudan services, interviews revealed that there are limited report a high level of demand for professional incentives to become and practice as a professional services by the surveyed firms. The results of the in Sudan given rent-seeking opportunities in the user surveys (Figure 4.6.2) suggest that account- public and the oil sectors. A more severe scarcity ing, engineering, and legal services are important of engineers as compared to that of accountants intermediate inputs in the production of many sec- in Sudan is reflected by the earnings differential tors with more than 50 percent of all interviewed between those two types of professionals (compare enterprises using such services at least once per year. Figures 4.6.5 and 4.6.6). Demand for these services is expected to increase It is worth noting that discussions with the with economic growth in Sudan. private sector revealed that Sudan is facing not There is demand for basic and more sophis- only a shortage of highly skilled professionals ticated professional services. The surveys show but also middle-level skills shortages. Middle- that there is demand for all types of services, from level professionals who can provide services to accounting and auditing, to tax advice and man- underserved client segments and produce large agement consulting. Financial auditing is the main economic gains are sometimes an underappreciated source of revenue for accounting and auditing category of professionals. For example, accounting firms in Sudan, followed by accounting/bookkeep- technicians can provide basic recordkeeping ser- ing and management consulting and tax advice vices needed by SMEs. Engineering technicians can (Figure 4.6.3). Engineering firms in Sudan earn, on provide basic or standardized engineering services average, the largest fraction of their revenues from and are crucial in supporting engineering projects. providing planning and managing maintenance, Thus, the absence of middle-level professionals in survey sites, other services related to engineering, Sudan needs to be addressed. In the context of the and project management services (Figure 4.6.4). shortages of professionals at all levels and given 114 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 4.6: Professional Services in Sudan 1) Average Productivity of Users vs. Non-Users of Accounting Services, Sudan and COMESA 2) Usage of Professional Services, Sudan 14 100 12 80 10 8 60 6 40 4 20 2 0 0 Accounting – Sudan Accounting – COMESA Accounting Architecture Engineering Legal Users Non-users Users Non-users 3) Demand for accounting services in Sudan 4) Demand for engineering services in Sudan Planning and managing 19% 71% maintenance, survey sites 10% Financial auditing Other services 41% 18% related to engineering 8% Project management 17% Accouting 13% (incl. monitoring of execution) 12% (incl. bookeeping) 23% Engineering consulting 15% 18% Design and planning 10% Management 11% 13% consulting 12% Constuction cost 6% management 8% Tender and contract 6% 5% administration 13% Tax advice 12% Feasability studies 5% 9% Environmental assessments 2% Other services 1% 5% related to accounting 11% Testing and certification 1% 4% Sudan COMESA Sudan COMESA 5) Average Gross Monthly Salaries in Sudan: 6) Average Gross Monthly Salaries in Sudan: Accounting professionals Engineering professionals 1,514 1,552 1,098 1,088 1,033 948 733 732 464 486 417 404 Managers Senior professional Junior professional Managers Senior professional Junior professional Sudan COMESA Sudan COMESA (continued on next page) Goods and services trade to build endowments 115 FIGURE 4.6: Professional Services in Sudan (continued) 7) Top Regulatory Constraints Faced by Professional Services Providers in Sudan Transparency of public procurement procedures (%) Requirements to participate in public procurement (%) Speed of accreditation and qualification procedures (%) Speed of licensing procedures (%) Number of ompetiors (%) Fees/prices (%) Technical standards (%) Advertising and marketing (%) Accreditation and qualification requirements (%) Licensing requirements (%) Cooperation between professsionals (%) Shared exclusive rights (%) Multidisciplinary activities (%) – 10 20 30 40 50 60 70 80 Source: World Bank staff own calculations, based on data from World Bank Surveys of professional services in COMESA (2013). that it is less costly and less time consuming to measures affect the entry and operation of profes- train middle-level professionals, the development sionals and professional services firms, and can of middle-level/technical professionals should be undermine competition and constrain the growth Sudan’s priority in terms of skills formation. of the sector. Weaknesses in primary, secondary, and ter- Based on the results of a regulatory self- tiary education limit the ability of students to assessment performed by Sudanese ministries acquire professional skills. Factors related to edu- and professional associations, Sudan seems to cation, domestic regulation, trade, and labor mobility have a moderate regulatory framework for pro- explain skills shortages and skills mismatches in pro- fessional services. Entry requirements, such as pre- fessional services in Sudan. From a regional perspec- qualification requirements, licensing or membership tive, enrollment in higher education is higher in Sudan in a professional association, as well as regulations than in other Sub-Saharan African countries and is affecting the conduct/operations of professional ser- similar to that in Middle Eastern and North African vice providers such as price regulations, advertising countries, but the education sector shows weak learn- prohibitions, or restrictions on multidisciplinary ing outcomes at all levels (World Bank 2012). Given activities, tend to be less stringent in Sudan than in the relatively high enrollment rate in higher education, neighboring countries. For instance, according to it is important that students acquire the skills that the interviewed authorities, the range of exclusive match those needed by the labor market. activities reserved for engineering and legal profes- A weak regulatory framework can explain sionals in Sudan are among the least restrictive in the underdevelopment and the segmentation of Sub-Saharan African countries.54 Also, there are no markets for professional services. Professional services have traditionally been subject to a high degree of regulation, as a result of direct governmen- 54 Highly skilled professionals in the different professional services sectors generally have exclusive rights to perform certain activities tal regulation and of rules adopted by self-regulatory (e.g., auditing, representation of clients before courts, advice on legal bodies (professional associations). These regulatory matters, feasibility studies, design and planning). 116 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT price regulations affecting professional services, and services in Sudan include: nationality requirements advertising prohibitions concern only accounting to provide certain professional services, prohibi- services. A more detailed description of the regula- tions against using the name of the parent com- tory frameworks in all examined professional ser- pany, requirements to employ a certain percentage vices in Sudan is presented in Box 4.2. of nationals, and restrictions on the composition of The private sector identifies several regu- management of foreign professional firms established latory barriers affecting professional services in Sudan. Foreign professional degrees are recog- in Sudan. Additional information on the severity nized on an ad-hoc basis. Similarly, work permits of regulatory barriers comes from the 2012–13 are allocated and extended on a case-by-case basis. World Bank business surveys and is presented in The public procurement of government contracts Figure 4.6.7. This suggests that transparency and for accounting and legal services are also quite rigor- requirements to participate in public procurement ous in Sudan—foreign providers to the government as well as the speed of accreditation and qualifica- cannot sell numerous services. There are ownership tions procedures are among the top regulatory con- and control limits and restrictions on the form of straints faced by professional services providers in entry for foreign firms in all professional services Sudan. Restrictions affecting competition such as sectors. In terms of trade restrictions on importing advertising prohibitions and fees/price regulations professional services through mode 1—cross-border are also important barriers for business. trade—there is little possibility for a domestic resi- Trade barriers and immigration regulation dent firm/individual to obtain professional services can explain the segmentation of markets for directly from a foreign professional services firm or professional services. Trade barriers can limit office located outside the country. competition and the efficiency of professional ser- The national markets for professionals and vice providers. In general, foreign entry restrictions professional services in Sudan remain underde- include: i) restrictions on the movement of natural veloped. The main priorities relate to coordinating persons (nationality and residency requirements, the needed regulatory reforms with trade liberal- quotas, economic needs test, limits on the length of ization, and addressing the skills shortages and the stay, and recognition of academic and professional skills mismatches affecting professional services. qualifications); ii) restrictions on the establishment This suggests policy action in the following areas: of commercial presence (restrictions on foreign education, regulation of professional services, ownership, limits on the type of legal entry, and trade policy, and labor mobility at the national and limits on the scope of business); iii) restrictions on regional levels. cross border trade (entry restrictions and limits on the scope of business); and iv) restrictions on labor C. Potential for Future Trade mobility (procedures for hiring a foreign worker). Diversification: Goods and Services Trade restrictions in professional services are quite severe in Sudan. Explicit barriers to Successful economic development has typically trade cover foreign entry restrictions and discrimi- been accompanied by structural transformation, natory conduct restrictions. Key barriers relate to in which manufacturing and industry’s share of regulations pertaining to licensing and qualifica- output and employment rises at the expense of tion requirements. The accounting and legal sector agriculture, but this has not (yet) been seen in uses the labor market test or economic needs test Sudan (McMillan and Rodrik 2011; and see Chapter for license application by foreign services providers. 2.A). Manufacturing and industry typically display Other explicit trade barriers affecting professional higher productivity, higher wages, and faster rates Goods and services trade to build endowments 117 BOX 4.3: Domestic Regulation in Professional Services in Sudan In Sudan’s accounting sector there are mandatory continuing education requirements for members of the profession, while for both the accounting and the legal sector there are additional requirements include passing the professional examinations to become a full member of the profession. There are practical training requirements to become a full member of the accounting, engineering, and legal professions: one year for law practitioners, three years for accounting professionals, and five years for engineers. In addition, the accounting and the legal professions are also subject to other educational or vocational requirements over and above the academic degree to enter the profession (for example, the legal profession requirement is a one-year post-graduate course). All three sectors also regulate access to the profession through compulsory licenses or authorization granted by the Sudan Bar Association in legal services, the Accountancy and Audit Profession Organization in accounting services, and the Engineering Council for engineering services. Licenses are renewed periodically (for example, every two to five years for engineering). In the engineering sector, although there are no requirements for passing a professional examination to become a member, there are requirements pertaining to practical training (a few years for engineering technicians and five years for engineers). All these requirements are in addition to the mandatory university degree obtained to practice legally. In Sudan, engineering and legal services are not subject to exclusive rights of practice by engineers or lawyers; the scope of exclusive rights is broader in accounting services. Highly skilled professionals in professional services sectors have exclusive rights to perform certain activities (e.g., auditing, representation of clients before courts, advice on legal matters, feasibility studies, design and planning). The argument in favor of exclusive rights is that they can lead to increased specialization of professionals and guarantee a higher quality of service. But the negative price and allocation effects of exclusive rights, which act as monopolies, can be substantial, especially if they are granted for standardized services that can be provided at a lower cost by less-regulated or non-regulated providers, such as the middle-level professionals in these sectors. In the accounting sector, except for matters related to management consultancy services, investment advice, legal advice and representation, and expert witness in accounting, all other accounting type works fall under the exclusive rights domain of certified accounting professionals. The following activities are specifically provided by accounting professionals only: traditional accounting (bookkeeping); statutory audit; non-statutory audits; audit of mergers and of contributions in kind; insolvency practice; international audit; tax advice, and tax representation Regulation affecting the conduct/operations of professional services providers in Sudan seems to be less severe than in many neighboring countries. In all professional services, fees tend to be negotiated freely between practitioners and clients, but there is a Fee Committee at the Bar Association that deals with complaints from clients. All types of legal entities are permitted in engineering. By contrast, only sole proprietorship and general partnerships are permitted in accounting. Also, advertising is prohibited in accountancy but seems to be allowed in engineering and legal services. Source: Regulatory surveys undertaken in Sudan in 2012 and 2014. of technology adoption, but Sudan’s challenge is manufacturing, non-manufacturing industry, and to find ways to grow these sectors, and particularly services, have relatively similar levels of education to shift younger and more educated workers into (see Chapter 2.A). higher productivity jobs. There is a real lack of educated work force to At present, however, the agriculture and allow for effective diversification into new and services sectors account for the vast majority of higher value-added product areas. Half of the pop- employment in Sudan, with manufacturing pro- ulation in Sudan has never attended a formal school viding an almost negligible number of jobs. This and only a tiny portion has some post-secondary is even though both wages and labor productivity education. Only 15.8 percent of the population are much higher in industry and manufacturing than has at most secondary school education, and only in agriculture. The sector that employs most people 3.8 percent has some post-secondary education. Not in the economy—agriculture—is also the sector that surprisingly, education levels are substantially lower employs most people without education. Almost in rural than urban areas and substantially lower for two in three workers in this sector have no educa- women than men (see Chapter 2.A). tion and less than one in fifty has post-secondary But there are higher education levels education. Workers in the remaining three sectors, in younger cohorts, which represents an 118 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT opportunity for Sudan to shift employment into maps shows that primary products such as sesame more productive sectors. Older parts of the popu- seeds and live sheep and goats were competitively lation have lower education than younger parts and exported in the early-1990s, and continued to be the gender gap in education is smaller in younger exported competitively during 2009–11. However, cohorts than in older ones. Individuals aged 20–29 in the most recent period there is significantly lower have substantially higher levels of education: one number of competitively exported goods in more in ten has some post-secondary education and a “connected” parts of the network, implying a lack further one in three has some secondary education. of development of capabilities that allow easier Yet, at present younger workers are no more likely diversification into new products (i.e., in contrast to work in industry, manufacturing, or services to products in the core). than their older compatriots, indicating that there But diversification today needs to consider is little current capitalization on this opportunity the changed competitiveness over time of prod- (see Chapter 2.A). ucts Sudan once produced. This is possible by Sudan’s income level is below the expected adding the temporal classifications of products into income level based on countries that export “classics,” “emerging champions,” “disappearances,” goods found in Sudan’s export basket. This is and “marginals” (see Box 4.3 for terminology). The primarily a reflection of Sudan’s past oil richness product space analysis identifies 13 dominant clas- that only insufficiently led to broader rises in income sic exports, which show sustained competitiveness levels. But it is also a reflection of Sudan not taking (Figure 4.7.5 and Annex 6, Table 0.16). All of them full advantage of its export basket to boost export are primary products except for molasses (resource- growth and income. Figure 4.7.1 shows the cross- based) and leather of other hides (low-technology). country relationship between EXPY—a measure of It is noteworthy that molasses are also among the the sophistication of a country exports that repre- products that can be identified as significant export sents the income level associated with a country’s items back in the 1990s, which do not show these export basket—and economic growth as well as significance anymore in today’s export basket the trend in the income potential of national export (Table 4.4). baskets for Sudan and comparator countries. The There are also ten “emerging champions”, past dominance of oil is reflected in the increased products, which are now being competitively value of Sudan’s export basket measured by the exported from Sudan that were not so in the EXPY measure. See Annex 6 for details on EXPY early 1990’s. The most well-known of these are and other product space terminology. Sudan’s concentration of exports has risen significantly over the past three decades, which BOX 4.4: Product Space: Classics, indicates there may be scope for renewed diver- Emerging Champions, sification. Figures 4.7.2 and 4.7.3 show a repre- Disappearance, Marginals sentation of Sudan’s exports in the product space • “Classics” are products with demonstrated competitiveness for the time periods 1991–93 and 2009–11, and over time where it may be less risky to invest. reflects the country’s transition to a highly con- • “Emerging champions” are products in which Sudan has centrated export basket. Products manufactured increased its comparative advantage in global markets. • “Disappearances” are products that were competitive in competitively (i.e., with RCA>1) are marked in red the past, but have lost that competitiveness more recently. in Figure 4.7.2 and 4.7.3 and the evolution of the • “Marginals” are products in which Sudan had a low number of products with an RCA>1 can be seen in comparative advantage in the past and remain with low comparative advantage. Figure 4.7.4. Comparison of the two product space Goods and services trade to build endowments 119 FIGURE 4.7: (Export) Diversification – Past and Present 1) Income level and the export basket: 2) Sudan’s exports in the product space, 1991–1993 Sudan and the rest of the world SUD 1991–1993 Oil Leather Fruits Relationship of EXPY and Per Capita Income 10.5 Fishing Vegetable Oils Log of EXPY in 2011 10.0 Vegetables Forest Products SDN 9.5 Milk Cereal 9.0 Garments Mining 8.5 Iron/Steel 8.0 Vehicles Textiles 6 8 10 12 Electronics Log of GDP Per Capita PPP in 2011 (Constant USD) Machinery Animal Agriculture Chemicals 3) Sudan’s exports in the product space, 2009–2011 4) Evolution in Sudan’s Exports share and number of products exported competitively SUD 2009–2011 Oil Leather Fruits 60 60 Fishing Vegetable Oils 50 50 Vegetables Forest Products 40 40 Milk Cereal 30 30 Garments Mining 20 20 Iron/Steel 10 10 Vehicles 0 0 1982–84 1985–87 1988–90 1991–93 1994–96 1997–99 2000–02 2003–05 2006–08 2009–11 Textiles Electronics Machinery Animal Agriculture Chemicals Products exported competitively (RCA>1) (LHS) Export share of GDP (RHS) 5) Combining Sudan’s product space maps of 1991–93 with 2009–11 SUD 1991–2011 Oil Leather Fruits Fishing Vegetable Oils Vegetables Forest Products Garments Cereal Iron/Steel Mining Textiles Vehicles Classics Emerging Electronics Disappea- Marginals rances Animal Agriculture Chemicals Machinery Source: World Bank staff own calculations, based on data used from UN Comtrade; and the World Bank Exporter Dynamics Database. petroleum and gold. Additionally, 28 products that peanut oil. Mechanically, the surge in crude petro- were competitive in 1991–93 are no longer being leum exports is a large factor in the decline in the competitively exported, these “disappearances” number of products exported competitively as the include maize, green groundnuts, oilcake, and share of exports of many of these products are now 120 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT significantly lower given the tripling of the share of advantage (Lederman et al. 2015). Based on the exports to GDP. In other words, some products that experience of other countries, the presence of a were once a significant share of the total exports latent export basket can reduce both GDP volatil- are now a fraction of their original share due to the ity and terms-of-trade volatility, particularly for massive increase of crude petroleum, which was poor countries with small economies. At least two zero percent of the basket in 1991 and 94 percent types of shocks could potentially restore com- of the basket in 2011 (Figure 4.7.4). petitiveness of some of these historical products; a There are a variety of products (including reduction in the price of oil, such as experienced in manufactured exports) that Sudan has exported 2014 and 15, and a depreciation of the Sudanese in significant quantities in the recent past, or in currency, which could accompany a unification small quantities today. The rise of oil, and then of the exchange rate and could increase overall of gold, may have entailed a drawing away of labor, competitiveness. capital, and other resources from the production of goods that were significant in the 1990s in a type Prospect for value addition in gum arabic of “Dutch disease” phenomenon. Thus, the lack of diversification and low survival rates of Sudanese This chapter showed that Sudan has significant exports may be interrelated. Conversely, the market power in global markets for gum arabic. reduced significance of oil may allow some of these Since this power is based on the exports of raw, exports to return in the future (Table 4.4). Molasses undifferentiated products, there could be an oppor- could be one of them as mentioned earlier; organic tunity to slowly shift to more value addition through chemicals are currently marginal as identified in some processing. So while Chapter 3 looked at gum Annex 6, Table 0.16, but could possibly be repre- arabic marketing, the following will analyze the sent potential for forward integration from crude oil. gum arabic value chain. In order to do so, there is a Sudan’s historical export products represent need to understand current constraints on process- a source of latent comparative advantage, which ing products, and how to maximize value addition could emerge to contribute to macroeconomic through combining processing solutions with smart stability in the event of shocks. Many countries variations in producing the raw materials. Since have products in which they had historical compar- value addition would have to come through com- ative advantage but no longer do so today. These panies and activities carried out by the private sec- products provide a stock of latent comparative tor, it is also important to look at broader business Table 4.4: Manufactured Exports of Significance in the pre-Oil Period Of significance in the late Of secondary significance in Both of significance in the late 1990s and of 1990s 2011–2013 secondary significance in 2011–2013 • Molasses from sugar • Miscellaneous edible preparations • Cotton products—mostly yarn, but also fabrics and apparel • Organic chemicals (styrene, • Petroleum refining products • Leather and skins saturated monohydric alcohols) • Plastics, and plastic and rubber products • Vegetable oils, oilseed products, oil cakes • Essential oils and resins, • Copper and copper products • Aluminum, iron and steel products (structures, bars, etc. cosmetics • Undenatured ethyl alcohol • Alfalfa meal • Interchangeable metal tools • Wood, wood articles, and wood charcoal • Paper and paper articles • Prefabricated buildings Source: World Bank staff own calculations, based on data from UN Comtrade. Goods and services trade to build endowments 121 environment constraints to facilitate a shift towards gum arabic trade and Sudan’s dominant place in the more value addition. trade (World Bank 2015a). While Sudan is the largest producer of gum Enhancing the raw material production arabic in the world, it has no significant added directly benefits producers through the potential value processing, a phenomenon observable in for improved prices, and provides the base for most producing countries (World Bank 2015a). processors to build value added. While the factors Hence, a core objective of the sector in Sudan is to that determine quality, and harvest and post-harvest increase the level of value addition at origin and factors that deliver quality are well established, it is to increase the share of value-enhanced gum ara- clear that “best practice” is not always implemented bic products in the overall gum arabic trade from in the field. To illustrate, research in Sudan has Sudan. This would lead to improved returns and shown that maximum yields are obtained when resultant increases in the price paid to producers tapping of senegal is done between October 1st and for the raw material. November 1st, with the Sonke tool (rather than an The goal for gum arabic value addition axe or other implement), exposing an area about should be to reach a level in Sudan that can pro- 30cms long, and 5 cm wide. But tapping is often duce spray dried material with high and defined not done in the optimal period; yet, later tapping levels of functionality, particularly in emulsions (November 15th to December 15th) can reduce yields and encapsulation (World Bank 2015a). The pos- by up to 50 percent (World Bank 2015a). sibility of adding functionality is important as mar- Three additional measures to enhance gins are still not large for bulk sales of a standard the production and management of gum ara- processed spray dried gum arabic. Higher margins bic—both raw and spray-dried—could make a are created through the production of spray dried big difference to increase value addition and material with high and defined levels of function- hence returns to producers in gum arabic trade ality, particularly in emulsions and encapsulation. from Sudan (World Bank, 2015a): World Bank (2015a) argues that this requires man- agement and development of the raw material sup-  Access to pre-harvest crop finance. This is ply chain to improve the quality of the crude gum frequently quoted as a major requirement for related to functionality, and to put in place a trace- producers. Buyers will typically pre-finance ability system to allow maintenance of the identity their agents and other middlemen over whom and integrity of batches of crude gum selected for, they have control, but the constraint to direct and defined by their particular quality attributes. pre-finance to producers is a common problem A strategy to increase the level of value addi- for producers accepting pre-finance from one tion through the development of spray drying buyer and then selling to a different one. As capacity must therefore also address the devel- such, buyers without strong linkages exercise opment of raw material quality and the supply control over the producer. There are alternative chain. This will also address the perceived quality (traditional) ways to finance through the village problems with kibbled and powdered material that traders but these are linked to high effective result in current low levels of demand for these interest rates and low prices for material (World products and the basic value addition that they offer, Bank 2015a). and provide a basis on which to build increased  Bundling interest to enhance buyer-producer sales and value addition. Development of the supply links . Gum Arabic Producer Associations chain will also directly address the issues raised by (GAPA) have already been formed, but they overseas processors, and so help secure the overall need to be strengthened to effectively establish 122 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT a framework through which buyers can work in a manner that will increase not only the quantity with producers. This allows buyers to influence but also the quality of offerings. and improve practices and as therefore quality, Sudan could leverage earlier progress made price and production volumes, while providing in the education sector. For example, its success at the necessary interest and security to buyers to increasing enrollment at the primary and secondary enable them to consider direct pre-financing. levels generates growing demand for vocational and Support to producer groups—training, aware- higher education. The absence of links between edu- ness, and management—will be required to cational systems, employers, and users of services reduce defaults on pre-financing from buyers prevents young graduates from acquiring market- (World Bank 2015a). relevant skills. Several stakeholders from the private  Establish a simple practical product trace- sector have emphasized the coordination problems ability system. This is essential to maintain between employers, professional associations, and the link between product and quality through education institutions in the content of educational the supply chain. Traceability provides the base programs for engineers and accountants. Policy for differential pricing by quality, and enables actions to encourage collaboration between uni- containment and management of any groundnut versities, professional associations, and the private (or other) contamination issue that might occur. sector (for example through internships) could Raw material traceability feeds also directly into help students acquire skills and practical training. processing quality management systems (World Such collaborative actions are required to better Bank 2015a). understand and strengthen the links between the curricula and the skills required to support the Considerations for the development of expansion and diversification of the economy. The services requirements for medium- and high-level skills in more sophisticated business services need to feature Reforms in the area of services need to focus on in Sudan’s Education Sector Plan to mobilize both the development of framework conditions that internal and external financing. facilitate the growth of professional services, and Regional integration and multilateral nego- address skills shortages and skills mismatches. In tiations offer opportunities for implement- the short term, reforms need to focus on the devel- ing regulatory reforms and reducing the skill opments of the necessary regulatory framework and gap through services liberalization. Sudan is a incremental, qualitative improvements in domestic COMESA member and is currently negotiating its regulations that hamper the growth of the sector. WTO accession. How far and how quickly Sudan Top regulatory constraints identified by the private will proceed depends on political and economic sector include regulations regarding participation in considerations. Ideally, liberalization would be non- public procurement processes, competition issues, preferential so that domestic users of professional and the qualification and licensing requirements services have access to, and domestic professionals and registration and other administrative procedures can benefit from, exposure to the best service pro- that limit the entry and the operation of professional viders in the world. This protects countries from services firms. The regulatory reform process needs suboptimal regional providers. If, however, recip- to involve the private sector. In the long term, fac- rocal liberalization at the regional level is politi- ulties and other training programs must be created, cally more feasible, then Sudan ought to weigh the improved, and expanded to satisfy professional train- unquestionable benefits of market opening, even ing needs, but this must be planned and carried out in the narrow regional context, against the possible Goods and services trade to build endowments 123 costs of giving a first-mover advantage to what may such as the program that is currently being devel- be a second-best regional service provider. oped by the Inter-University Council for East Africa Steps need to be taken by Sudan to relax the (IUCEA) in terms of designing university curricula explicit trade barriers applied to the movement and research, and creating university/industry part- of natural persons and commercial presence of nerships for fostering knowledge could provide professional services. Examples of possible reforms guidance for Sudan’s education reforms. Also, col- include: articulating the economic and social moti- laboration with the IUCEA could contribute to the vation for nationality and residency requirements; reduction of education-related differences that frag- minimizing restrictions on the forms of establish- ment the regional market for education and thereby ments allowed; and developing a transparent and encourage trade in education between Sudan and consistent framework for accepting professionals neighboring countries. with foreign qualifications. The reduction of explicit Opening up regional boundaries and trade barriers also needs to be complemented with establishing Mutual Recognition Agreements the reform of immigration laws and rules on the (MRAs) would facilitate Sudan’s services inte- hiring of foreign workers. gration with its African partners. The free move- Deeper regional integration, through regula- ment of COMESA nationals without work permit tory cooperation with neighboring partners who requirements would be of great help to increase have similar regulatory preferences, can use- business opportunities within the region and fully complement non-preferential trade liber- boost service exports. Sudan could learn from East alization. Regional integration would also enhance Africa’s experience with MRAs in accounting and competition among services providers, enable those architectural services. The EAC Common Market providers to exploit economies of scale in profes- Protocol, adopted by the Multi Sector Council in sional education, and produce a wider variety of ser- 2009 includes an annex on a framework agreement vices. Regional integration brings further benefits in on MRAs for academic and professional qualifica- that a larger regional market is able to attract greater tions. The five EAC countries have already signed domestic and foreign investment; and regionaliza- an MRA in accounting services and implementa- tion may help take advantage of scale economies in tion focuses on the following areas: requirements regulation, particularly where national agencies face for education, examinations, experience, conduct technical skills or capacity constraints. and ethics, professional development and re-certi- Regional integration may help Sudan take fication, scope of practice, and local knowledge. To advantage of scale economies in regulation, par- assist with the preparation of potential MRAs Sudan ticularly where national agencies face technical countries could benefit from technical assistance in skills or capacity constraints. Regional initiatives the context of the DTIS implementation. EXTRACTIVE INDUSTRIES: STILL IMPORTANT BUT NO LONGER DOMINANT 5 Remaining natural resources in Sudan are likely to provide some limited time-bound support to the efforts for diversification, but to consider the transient character of natural resources in post-2011 Sudan is pru- dent. The diminishing effects of both oil and gold on Sudan over the next 10–15 years are obvious. The constrained outlook for exports and revenues from domestic oil production places the spotlight on fees that the Government obtains for the handling of South Sudanese transit oil. Notwithstanding the fiscal benefits obtained from transit fees, these arrangements can only be expected to be transitory. With this background, the Government’s emphasis on promoting alternatives to the oil sector is well founded, and there have been early results in the form of the boom in gold exports. Traditional mining may, with suf- ficient support, provide a source of livelihood in rural areas that may have few other sources of economic support. Industrial mining may take some time to become established, however, such a development over the medium to long term would be more likely to provide a more balanced, export and revenue contribu- tion to the economy than traditional mining. Overall, the contribution of mining to Sudan’s economy over the medium term could be positive, however, the scale of the sector is very unlikely to rival that of the oil sector in its heyday and its fiscal impact may be substantially lower. Any more thorough evaluation of the contribution of the mining sector to economic development in Sudan would have to take into account negative externalities such as harmful environmental and social impacts. At the very least the remaining natural resource wealth available through oil and gold could be used to finance three of the more cost- intensive recommendations developed in this study. A. Overview producing little more than 100,000 bpd, with less than half of this exported and the sector contributed After a decade of heavy dependence on oil to just 2.8 percent of GDP and 27 percent of govern- fuel its economy, Sudan faced the abrupt loss ment receipts. A further two years have passed and of two-thirds of its oil production capacity in recent production has fluctuated around 120,000 June 2011. At secession Sudan as a whole was bpd (Ministry of Petroleum 2014; IMF 2013; and producing some 460,000 barrels per day (bpd) of IMF 2014a). However, oil prices, which at least crude oil, most of which was exported. As a result, were favorable in 2012, are now a source of con- export proceeds were the main foreign exchange cern after falling to around US$50 per barrel on the provider for the economy, the sector contributed international market. 16.3 percent of GDP (2010) and revenues from oil Simultaneously, after the secession, Sudan were 45 percent of domestic revenues and grants emerged almost overnight as one of Africa’s (2010). Within a year of secession Sudan was leading gold exporters. Official exports reached 126 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT 46 tons in 2012, valued at US$2.1 billion, plac- oil to meet domestic demand and exporting some ing Sudan fourth behind South Africa, Ghana, and US$11 billion worth of surplus crude annually, Tanzania and one of the top twenty gold exporters whose upfront installation costs had largely been in the world. Yet, by the end of 2013, world gold recovered. prices had dropped sharply. Although export vol- The secession of South Sudan in July 2011 umes and values have been lower than the peak, brought about an immediate and severe rupture they are nonetheless significantly higher than they in the oil sector, with oil reserves attributable to had been in the years prior to secession. Moreover, Sudan just 30 percent of pre-secession levels (BP the Government continues to issue statements sug- 2014; and Wood Mackenzie 2013).55 This meant a gesting that gold activity remains strong and is, in fall from an estimated 111 barrels to 43 barrels of fact, rising (for instance, see CBOS 2014). reserves per capita. In addition, the reserves to pro- The Government sees the gold sector as criti- duction ratio, which had stood at nearly 29 years fell cal to its plans to mitigate the impacts of the loss to about 26 years, depending on what rate of produc- of oil exports and revenues. It has followed a bold tion is assumed to be sustainable.56 Since oil is a finite plan to promote gold exports and encourage devel- resource, all governments must prepare for the day opment of gold mining. The gold buying policy of when resources become exhausted but in Sudan’s the Central Bank of Sudan has been central to these case that process was accelerated by secession. plans and the Government has further invested in Sudan’s trade balance suffered as well since a domestic gold refinery. Mining, whether done the surplus oil available for export after meeting traditionally using rudimentary techniques or fully domestic demand for refined petroleum products mechanized in industrial mining projects is being rapidly disappeared. Domestic needs had been ris- supported at the policy level both in Khartoum and ing fast and with the loss of production to the south, at State level. Sudan now needed to import petroleum products to meet demand that domestic refining capacity alone B. Sudan’s Oil Sector could not supply.57 Refinery capacity exceeds what Sudan can supply from its own oil fields, although Overview of recent developments owing to contractual obligations, a portion of its crude oil is still exported, meaning that refining Just before the turn of the century Sudan began to exploit oil resources first discovered in the 55 BP and Wood Mackenzie report different levels. BP originally 1970s, enabling the economy to double its size reported proven reserves of 6.7 billion barrels of oil at the end of 2010 but the 2014 report puts reserves at the end of 2012 for Sudan in real terms by 2010. Sudan joined the ranks of and South Sudan combined at 5.0 billion barrels, with 1.5 billion oil exporting countries in 1999, capitalizing on an barrels (30 percent) attributable to Sudan. Wood Mackenzie, reports “commercial” reserves, which is a narrower definition of what can oil market buoyed by rapid Chinese industrializa- be produced. According to these reports Sudan has just 0.52 billion tion and direct support of China to build the facili- reserves (BP 2014; and Wood Mackenzie 2013). 56 For this calculation, the analysis uses reserves reported by BP and ties needed to export crude oil. Oil exports quickly assumed that the nominal rate of production that could have been came to dominate exports, accounting for 86 per- sustained in Sudan after secession (free of any security and technical constraints) would have been some 160,000 bpd. If the far-lower cent of exports of goods and services on average reserve levels reported by Wood Mackenzie were assumed, the num- from 1999 to 2010. The fiscal contribution of the ber of years over which production could be sustained would be correspondingly less. sector surpassed all others, accounting for 47 per- 57 Domestic demand for petroleum products in Sudan is estimated cent of government receipts on average in the same to be reaching close to 120,000 bpd of oil equivalent and based on elasticity of demand and GDP projections would rise around 175,000 period (IMF 2012). By that time Sudan had in place bpd by 2020, far exceeding the projections of available domestic crude an extensive and integrated system for refining its oil as reported in various cases in Figure 5.1.4. Extractive industries: still important but no longer dominant 127 operates at below capacity. Data for the first half of Domestic oil resources and production 2014 indicate petroleum products imports weighing heavily on the trade balance, continuing the trend Sudan’s oil resources since secession consist seen in Figure 4.1.1. primarily of oil contained in reservoirs in the The reduction of production after secession Muglad–Sudd Rift Basin which were the target led to a sharp fall in Government fiscal receipts. of exploration in the 1970s and 1980s. Only a Before secession receipts from crude oil stood at small portion of the productive Melut Basin exists in some 60 percent of total Government receipts but the north (Figure 5.2). Indications of oil resources are estimated to have been just 15 percent of total in other inland basins have yet to be followed up receipts in 2013 (IMF 2014a). The level of receipts with exploration drilling, although there are 11 reflects total production volumes, the share that is blocks for which exploration rights were awarded transferred domestically for refining at controlled in 2012. Over the years non-associated natural gas prices and global oil prices. The precipitous fall of has been found in two of the other inland basins the latter in late 2014 will feed into government oil and in the Red Sea but in each case has been con- receipts, as discussed further below. sidered sub-commercial to exploit, although the The fiscal position has also been influenced Ministry of Petroleum is evaluating how to make by developments in South Sudanese production, use of this resource. since Sudan levies fees for the use of oil pro- The aggregate amount of oil reserves reported cessing facilities, pipelines, and port facilities vary according to the reserves definition used. located in Sudan. Within six months of secession The reserves reported by BP in their annual global an inability to settle boundary disputes and terms review are associated with oil fields that were already under which Sudan would handle oil shipments in production in 2012 and amounted to 1.5 billion from the south resulted in oil production being barrels by year end (including proven and prob- suspended for some 18 months. Eventually pro- able reserves but not possible reserves: BP 2014). duction resumed once terms were agreed between Only one additional field has commenced opera- the two countries in the Bi-Lateral Agreement on Oil tions since 2012, for which reserves data are not and Related Matters. In 2013, receipts under these reported. Additions to reserves would result either arrangements are estimated to have been nearly from the re-evaluation of reserves at existing fields 7 percent of total receipts (IMF 2014a).58 These were or new discoveries once appraised. forecast to increase in significance in 2014 after the Sudan’s oil fields are of varying age and resumption of South Sudanese output, however, the productivity, with several having reached their outbreak of civil war there in December 2013 has decline phase. The Greater Nile (North) oilfields resulted in lower than projected receipts. and processing facilities are contained in Blocks The outlook for oil exports and govern- 2a, 2b, and 4 in the Muglad Basin. GNPOC is ment oil revenues is difficult to predict. The the Joint Operating Company and supplies Nile Government has projected rising domestic oil pro- Blend crude oil via the Heglig-Bashair Pipeline. duction and is also relying on South Sudan’s out- Production peaked in Greater Nile (North) at over put to both increase and continue to be exported 100,000 bpd (Wood Mackenzie 2013). Block 6, through Sudanese facilities. The following analysis also in the Muglad Basin, is operated by Petro- evaluates each of these elements and provides some Energy and supplies Fula Blend crude oil via the preliminary projections over fifteen years to 2030. The flows of oil that will be examined can be rep- 58 World Bank staff estimates based on IMF (2014c); this comprises tran- resented as shown in Figure 5.1.2. sit fees and the transitional payments under the Bi-lateral Agreement. 128 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 5.1: Sudan’s Oil Sector: Production, Trade and Flows 1) Petroleum product share of imports (value terms) 2) Flow of oil in Sudan (schematic) 20% Oil Domestic 18% refinery market 16% 14% 12% GRSS profit oil 10% South Pipeline Port Sudan Crude 8% Sudan JOC cost & transport terminal oil exports 6% oil fields profit oil 4% 2% GOS profit oil 0% 2010 2011 2012 2013 2014 1H Sudan oil fields JOC cost & profit oil 3) Recent crude oil production, bpd 4) Projected domestic crude oil production, bpd 140,000 180,000 117,342 116,959 160,000 120,000 140,000 100,000 120,000 80,000 100,000 60,000 80,000 60,000 40,000 40,000 20,000 20,000 0 – 2013 2014 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Blocks 2 & 4 Block 6 Block 17 Total Base High Low 5) Output and consumption of refined products, million tons 6) GOS Sources of Oil Revenues, US$ millions (2014 production and EIA central oil price) 6 1,000 900 5 800 4 700 600 3 500 400 2 300 1 200 100 0 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Domestic oil GRSS fees TFA JOC-south fees Output Consumption Source: World Bank staff own calculations and visualizations, based on data from CBOS 2014; Ministry of Petroleum 2014; IMF 2012; IMF 2013; and IMF 2014c Wood Mackenzie 2013; and the U.S. Energy Information Administration (EIA). Note: (5) 120,000 bpd in Sudan; 160,000 bpd in South Sudan. The TFA payment shown is pro-rated by year rather than linked to production level. Al Fula–Khartoum Pipeline. It is estimated to be Star Oil from the al-Barasaya field. Figure 5.1.3 producing close to its peak rate. Since 2012 pro- shows the composition of crude oil production in duction has started up in Block 17 operated by 2013 and 2014. Extractive industries: still important but no longer dominant 129 The Government has been working with the FIGURE 5.2: Key Oil Infrastructure in Sudan Joint Operating Companies (JOCs) on plans (and South Sudan) under which production could eventually be lifted to 175–200,000 bpd and has based its medium term economic projections on such plans. These plans include improvements in the rate of recovery from existing oil fields through a mixture of de-bottlenecking, improved oilfield practices, and enhanced oil recovery technologies.59 An agreement was recently signed by the Government with CNPC in respect of the Greater Nile (North) and Block 6 oil fields, under which it is reported investments to increase oil production will take place to help reach the Government’s production target. Details of the nature, scale and timing of these investments were not reported, though the Ministry of Petroleum’s target for 2015 is 140,000 bpd (EIU 2015). On an unusual note, the Government’s medium term plans also rely on expectations that successful exploration will add to produc- tion. In December 2014, the Minister of Petroleum announced that operators plan to drill 253 wells in Source: EIA September 2014. 2015, without specifying what kinds of wells these Note: The Thiangrial refinery is located near Palougue not as shown. would be (production, injection, appraisal, explo- ration). As a result of these wells reserve additions to 100,000 bpd after five years and to 45,000 amounting to 65.4 million barrels (equivalent to bpd after fifteen. The base case draws on avail- two and a half years of output at present rates) are able information about the reserve base and pro- expected (Reuters 2014). While there is reason to duction profiles of existing oil fields only as well as expect that some proportion of exploration wells installed processing and pipeline capacity (Wood will strike oil, not only is the success rate of explora- Mackenzie 2013). It assumes that no significant tion drilling difficult to predict but so too is the size investment in enhanced oil recovery takes place at of discoveries made, until they are fully appraised.60 existing fields and that there are no oil reserve addi- It is very unusual for governments to include such tions made through discoveries. Until information expectations in projections that are used for wider is available that would confirm significant invest- economic planning and budgeting. ments in Enhanced Oil Recovery (EOR), this study considers this conservative base case to be justified. Three scenarios for future oil production: Projections are subject to growing levels of uncer- base, high, and low tainty as the time horizon increases (Figure 5.1.4). This analysis argues that the base case projection 59 In Block 6 a pipeline is being built to tie in previously unexploited oil production can be sustained only at around fields to the processing facilities and main pipeline (Sudan Tribune 2014). 120,000 bpd and only for a year or two before 60 BMI (2014) also casts doubt on the ability to contract such the large a gradual decline takes hold, with output down number of drilling rigs implied by the official report. 130 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT The high case assumes that large investments bpd and can produce 2 million tons of heavy fuel in enhanced oil recovery proceed soon, thereby products (for instance, heavy coke and petroleum enabling oil production to rise to a peak rate of coke) each year, mostly for electricity production. 156,000 bpd before beginning its decline.61 While The El Obeid Refinery has a capacity to refine it is reasonable to assume that, given a favorable 15,000 bpd of Nile Blend and produces gasoline, security and commercial environment, substantial diesel, and fuel oil, with the latter—again used pri- investment would take place to enhance oil recovery marily for electricity generation—accounting for and find more oil, there remains considerable uncer- the largest share (IMF 2012). Refinery production tainty about when this will in fact take place.62 With is shown in Figure 5.1.5. regard to exploration, the long lead time needed to Although domestic refineries have been built bring any significant new discoveries into produc- and expanded over the years, domestic demand tion probably means that the impact on total pro- for refined petroleum products now equals domes- duction would only occur after 2025, so this upside tic supply capacity. Although the pace of demand possibility has not been considered (Figure 5.1.4). growth has slowed since secession, Sudan’s consump- The low case assumes that additional risks tion is likely to rise at rates exceeding average GDP to oil production result in output declining growth. The supply-demand balances vary across the earlier and more sharply than in the base case, range of petroleum product markets depending on the with output reaching just 22,000 bpd after 15 type of the crude oil supplied and configuration of oil years rather than 45,000 bpd. A significant source refineries. Gasoil, diesel, jet oil, and LPG are imported of uncertainty concerning the production outlook to cover the shortfalls in domestic production. On stems from the technical standards used to oper- the other hand, gasoline (mogas) output exceeds ate oil fields and the constraints imposed by the consumption and the surplus has been exported to difficult security situation. Though not possible to neighboring countries (IMF 2012). confirm from available data there is a possibility that The Government has long supplied its share oil fields have been “over-produced” in the inter- of profit oil to the oil refineries at controlled ests of short-term cash generation at the expense prices and may call on JOCs to supply oil refin- of overall oil field recovery (implying shorter field eries as well to meet domestic requirements. The life) (Figure 5.1.4). refineries receive Government crude oil at a fixed price of US$49 per barrel and JOC crude oil at nego- Domestic supply and exports of crude oil tiated prices linked to international market prices. The differential between export and controlled Government policy has been geared towards domestic prices has narrowed with the precipitous meeting domestic demand for petroleum prod- fall in global oil prices in recent months. This may ucts and exporting surplus crude oil. Two refiner- limit the incentives to smuggle refined products to ies—the main Khartoum refinery and its extension, neighboring markets that have until recently faced and the El Obeid Refinery—refine domestic crude higher product prices. oil to produce a wide range of fuels. The main Khartoum refinery can refine up to 50,000 bpd of 61 Based on IMF (2014c) which reflects discussions with the authorities Nile Blend crude and produces 2.5 million tons of for the period to 2019; the projection of output from 2020–2030 in this high case is based on World Bank staff estimates. fuel products per year, almost entirely for domes- 62 The objective of investment in EOR is to increase the proportion of tic consumption. The extension to the Khartoum oil in place that is recovered by stimulating well productivity through the injection of water, gas, steam or chemicals into the reservoir. refinery was constructed in 2004 to process the According to SUDAPET there are plans to lift the recovery factor at highly acidic Fula blend. It has a capacity of 40,000 existing fields from an average of 27 to some 35 percent. Extractive industries: still important but no longer dominant 131 Exports of crude oil are now confined to the quantity has to be allocated to meet eligible JOC JOC share of production less any domestic sup- costs. The value used in the model is based on the ply obligation. There are understood to have been export price of Sudanese crude oil FOB Port of some inconsistencies in official reporting of exports Sudan. The export price is specific to the crude oil but adjusted data for 2013 shows export of 43,000 type, in this case Nile Blend, or Fula Blend. This bpd (about 37 percent total domestic output; IMF analysis uses the simplifying assumption that the 2014c). This amount would imply that the JOCs export price is that of Brent crude oil less a discount, are exporting only a portion and not all of their oil reflecting the quality differential between Brent and entitlement under the EPSAs. Since domestic refin- Nile Blend. The second step is to allocate the balance ery capacity imposes a ceiling on how much crude of crude oil after cost oil has been deducted accord- oil could be supplied domestically, any significant ing to the profit oil splits in the EPSAs. increase in domestic oil production, as in the high The export value of crude oil is derived from case projection, would contribute to a significant projections of Brent crude prices issued by the increase in crude oil exports. Conversely, any deci- U.S. Energy Information Administration (EIA), sion to expand refinery capacity in view of the growth with adjustment for the price discount.63 The of domestic demand for petroleum products could be central EIA forecast is for oil prices, in real terms, expected to result in diminishing crude oil exports. to remain slightly below US$100 per barrel over the next six years before rising gradually again. Recent Fiscal revenues from domestic oil sharp falls in the price of oil on international markets production has forced a re-think of the short-to-medium term outlook for oil prices. Rather than modifying the Under the Exploration and Production Sharing central price forecast, which covers a long period, Agreements (EPSAs) that govern the allocation this analysis instead used high and low scenarios to of oil, the Government receives crude oil remain- test the sensitivity of the Government share of oil to ing after the JOC takes cost oil and its share of external market shocks. profit oil. The amount of cost oil is subject to a The Government’s share of crude oil produc- 50 percent ceiling in all the EPSAs, ensuring that tion in the base case scenario ranges between in each year some oil is allocated to profit oil and 40–45 percent in the period to 2030. It is assumed shared by the parties. Greater Nile (North) oil fields that the entire share is transferred to domestic oil are mainly mature and their capital costs have been refineries at the controlled price. If it is further largely recovered, so the amount of oil allocated to assumed that the transfer price is US$49 per bar- the JOC as cost oil is relatively low (i.e. lower than rel, the Government’s oil reaches a peak value of the ceiling would allow). In the case of Block 6 US$970 million in 2016. By 2025 the amount drops the recoverable costs are high enough that all cost to US$550 million. Production bonuses are also pay- oil will be allocated for a few more years. All oil able by the JOCs to the Government on the basis remaining after cost oil has been allocated is shared of cumulative production from individual blocks; between the Government and the JOCs. In aggre- however, the amounts are not significant compared gate, the Government is currently entitled to some to revenues obtained from its oil entitlement. 62–68 percent of profit oil depending on the EPSA. Each of the EPSAs has been modeled to 63 The price information is based on EIA Brent forecast (short-term determine the amount of oil available to the for 2014 and 2015); long-term thereafter, discounted based on real and nominal price forecasts provided by the EIA as of June 2014. Government and then aggregated. This involves Since recent price development has been downward, the central price first valuing oil production to determine what scenario, at least in the short term may be too optimistic. 132 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Higher or lower international oil prices This is equivalent to US$875 million a year if pro- affect Government oil revenues not through rated evenly across the 3 ½ year period during which the transfer price, which is fixed, but through the TFA is in force. This payment is supplementary increases or decrease in the Government’s oil to the processing, transportation, and transit fees entitlement. With recent oil prices sharply lower, described above. The arrangement is based on an there is expected to be an increase in cost oil allo- assumed supply rate of 152,000 bpd of GRSS oil cated to the JOCs (subject to limits imposed by the over the term of the agreement but if these volumes cost oil ceiling) and a commensurate decrease in the are not adequate to allow Sudan to recover the full Government’s oil entitlement. US$3.028 billion prior to the expiration of the agree- ment in December 2016, GRSS is required to pay Fiscal receipts from fees charged on South GOS the outstanding TFA balance 60 days prior to Sudanese crude oil the expiration of the term of the Bi-Lateral Agreement (IMF 2014c). Given output constraints due to the So long as South Sudan relies upon processing shut-in of fields in Unity State, this arrangement and transportation facilities in Sudan to export is likely to result in a large shortfall payment. It is its crude oil it will pay fees to the Government of unknown at this stage if the Bi-Lateral Agreement Sudan (GOS). Moreover, the level of fees payable will will be succeeded by one with a similar payment reflect the degree to which Sudan exercises monopoly guarantee or be tied only to actual exports of GRSS over such exports. There are two sets of arrangements entitlement oil. Nor is it known at what level tariffs under which fees are payable to GOS. The first is for processing and transportation will be fixed since the Bi-Lateral Agreement on Oil and Related Matters this will all need to be negotiated between the parties. (Bi-Lateral Agreement) between the two governments. In 2014, it is estimated that on average some This agreement was only reached in mid-2013, some 70,000 bpd of GRSS entitlement oil has been 18 months after oil production in South Sudan had exported through Sudan, generating US$233 been suspended. The second is a series of agreements million annually in processing and transporta- negotiated by GOS directly with the JOCs in South tion fees (excluding the TFA transit payment).64 Sudan (JOC-South) as recently as mid-2014. Predicting future levels of South Sudanese crude The Bi-Lateral Agreement requires the oil exports and the impact on payments to GOS is Government of the Republic of South Sudan complicated by uncertainties as to i) the resumption (GRSS) to pay GOS fees on GRSS crude oil pro- of output from Unity State and the level at which cessed in Sudan and transported to Port Sudan output in Upper Nile State can be sustained, ii) the for export. The agreement specifies separate pro- profit oil share allocated to GRSS under the EPSAs, cessing, transportation, and transit fees totaling iii) what portion of crude oil produced in the south US$9.10 per barrel supplied from Blocks 3 and 7 would in the future be refined in South Sudan; and (the two blocks in Upper Nile State from which iv) at what point South Sudan may have alternative regular deliveries have been possible since produc- routes to export crude oil by pipeline.65 Output in tion resumed in 2013) and US$11.00 per barrel South Sudan is running some 30 percent lower than from Blocks 1, 2, 4 and 5a in Unity State, where wells remain shut-in. 64 This calculation is based on total crude oil output of 160,000 bpd and a GRSS entitlement of 40 to 45 percent of this. Under the Bi-Lateral Agreement GRSS is also 65 South Sudan hosts two small oil refineries that have yet to operate required to pay US$15 per barrel up to a maximum but are understood to have capacities of 10,000 and 5,000 bpd of crude oil, respectively. It is not clear what arrangements have been of US$3.028 billion as a Transitional Financial made for them to obtain crude oil supplies from processing facilities Arrangement (TFA) ending in December 2016. located in Sudan. Extractive industries: still important but no longer dominant 133 projected in preparing the GRSS Budget for July oil valued at the controlled transfer price to 2014–June 2015 and, as in the north, substantial domestic oil refineries. This is significantly lower investment in EOR and exploration is needed to than the value that would have been obtained had avert a gradual production decline. entitlement oil been valued at the export price. In July 2014 the JOC of Blocks 3 and 7 in Other sources of revenue include net proceeds of South Sudan agreed with GOS to pay a combined SUDAPET, for which information is unavailable, processing and transportation tariff of $19.80 per and minor production bonus payments.67 barrel retroactive to June 2013 (the date when Payments received from GRSS and JOCs- oil supplies resumed) up until December 2016. South represent a significant additional revenue With falling oil prices, this means that Sudan is stream estimated to have been nearly US$1.8 able to obtain a growing share of the market value billion in 2014. The composition of GOS oil rev- of any South Sudanese oil it handles on behalf of enues in 2014 is shown in Figure 5.1.6 and is based the JOC destined for export. Assuming that these on current production levels in both countries, the terms apply to all JOC entitlement oil estimated central EIA price forecast for 2014, and calculations to be currently produced in Blocks 3 and 7 these based on the EPSAs and other agreements. This obligations would amount to US$650 million a only shows gross receipts of fees before GOS pays year.66The same agreement provides for a reduced tariffs to the owners of processing and transporta- tariff of US$12.10 per barrel for the period from tion facilities out of fees collected from GRSS and January 2017 to March 2022. A similar agreement JOCs-South. On the other hand it does not show the is in place for the oil fields in Unity State, albeit with supplementary payments due to GOS from JOCs- different tariffs. So if production were to resume, South for arrears in relation to the period from June the total amount payable by JOCs in the south to 2013 to July 2014. GOS would, of course, increase. An interesting feature of Government oil rev- An interesting feature of the arrangements enues is the limited direct impact that interna- for charging tariffs on transit oil is that they are tional oil prices have on revenue levels. Revenues based on agreements with GOS, not the opera- from domestic production are largely price insensi- tors of the facilities being used by suppliers from tive since all of the Government’s oil entitlement is the south. GOS has indemnified the suppliers for transferred to domestic refineries at a fixed price. any claims for payment by operators of the Central Revenues from South Sudan’s oil exports depend on Processing Facilities and transportation infrastruc- fixed tariffs per barrel of transit oil for the periods ture for their use. Out of its receipt of fees GOS pays specified in relevant agreements. This insulates a the owners of the processing and transportation significant share of Sudan’s total oil sector receipts facilities at the rates that apply generally for crude from the direct impacts of varying oil prices. There oil handling services and the net balance is retained are, nonetheless, secondary effects of changes in by GOS. Although the data necessary to quantify it international oil prices through adjustments in the precisely is not available, it would be reasonable to assume a margin over tariffs of some 3:1. 66 Total South Sudanese production in 2014 is estimated to be on average 160,000 bpd. Aggregate fiscal revenue position in 2014 67 The national oil company SUDAPET is a member of the JOC under each EPSA and, as such, receives cost oil and profit oil in proportion to its participation interest in the JOC. For purposes of this analysis, it It is estimated that GOS oil revenue from domes- is assumed that the proceeds of its share of oil are used to meet costs and the profit element is not Government revenue. In practice, as an tic oil production in 2014 reached some US$860 owner of SUDAPET the Government may receive revenue in the form million based on 48,000 bpd of entitlement of a transfer of net proceeds from SUDAPET. 134 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT amount of oil that needs to be allocated to cover the loss of oil revenues is about $4 billion. If our cost oil of the JOCs both north and south of the gold is not smuggled, it can provide this amount of border. Recent sharp falls in oil prices will result in money (...). So our policy now is to concentrate on the volumes of oil allocated to both governments closing the gate through which the gold is smuggled” falling as a result. (Martelli 2011). The main measures used were to Finally, that portion of transit fees cov- launch a Central Bank’s gold buying program and to ered by the shortfall provision in the Bi-lateral construct a national gold refinery. The Central Bank Agreement is also insulated from production has established a network of gold buying centers and changes in South Sudan. Notwithstanding this agents to offer competitive prices to the traditional significant level of protection, the current level of mining sector. Until 2012 unrefined gold purchased tariffs is only fixed for the period up to December this way would then be officially exported for refin- 2016 when the Bi-lateral Agreement with GRSS ing abroad. However, once the refinery was installed expires and the transit agreements with the JOCs- in September 2012 this gold could be refined into South provide for a reduced tariff rate starting in pure gold bars before being exported69 Furthermore, January 2017. a ban was placed on exports of unrefined gold and informal gold refining in December 2012 (Sudan C. Sudan’s Gold Sector Tribune 2012). Official exports had begun to increase in the Overview of recent developments run up to secession but, soon after, they surged to over US$2 billion in 2012 (Figure 5.3.1). Only in the wake of the loss of oil resources at Although exports were sharply lower the next year, secession, has the Government of Sudan turned they increased somewhat in 2014 and are, in any to minerals as part of a policy to diversify the case, far in excess of the levels seen before seces- economy. Although the country draws on a rich sion. Moreover, the dramatic growth of exports history of mining going back millennia, until very was not simply the result of a rise in international recently Sudan had been only a minor producer of gold, chromite, iron ore, a number of non-metallic 68 Other than gold, Sudan produces only modest quantities of miner- als, although copper is set to emerge as a significant mineral export. minerals, and construction materials. The geology Trade data lists only chromium among Sudan’s mineral exports aside of Sudan had always suggested potential that far from gold; however, the values have been insignificant compared to gold. There is very little information about the mines producing these exceeded both ancient and more recent levels of minerals, though it is understood the main source is Blue Nile State activity. Yet private sector investment to modern- (Ingessana Hills). The U.S. Geological Survey reports sporadic output of chromium and manganese ores and a variety of industrial minerals, ize traditional mining practices, or to identify and principally feldspar, gypsum, and kaolin. Within the next few years, measure viable deposits through targeted explora- however, the Hassai mines will begin exploiting a large copper orebody and plan to produce some 50,000 tons annually. At US$5,000/ton tion activities had been scarce. Most activity was revenue of US$250 million would result. There is some early stage taking place only on a small scale, much of it was exploration ongoing that suggests that, as at Hassai, copper may be hosted in a series of Volcanic Massive Sulphide deposits. Eventually, unregulated, and the sector made a very limited these could form the foundation of an industrial mining sector on a contribution to the national economy.68 significantly larger scale. Insufficient information is available to project other mineral production even though geological studies over the As part of its strategy to promote the mineral decades have detected mineralization in multiple areas. Aside from sector since 2011, the Government has made minerals produced for export there are considerable quantities of low-value construction minerals produced for domestic consumption. a concerted effort to encourage the mining of 69 It is possible that short term differences between refinery production gold and divert hitherto illicit gold flows into and exports would take place due to inventory changes. Moreover, since gold is also held officially in reserves as “monetary gold” it is pos- the formal export economy. In 2011 the Minister sible that releases or additions to such reserves would temporarily af- of Mines stated that “[t]he gap in the budget from fect export volumes and values and not be reflected in refinery output. Extractive industries: still important but no longer dominant 135 gold prices. As can be seen in Figure 5.3.2, export in independently building up a picture of mine volumes have grown at the same time and, indeed, production. The Ministry of Mines issues state- have been closely correlated with movements in the ments about total annual gold production (not international price of gold. specifically refined gold) from time to time. There The strong performance of official gold are no publicly available breakdowns of this total exports has given the Government confidence by month, quarter, or by composition. Moreover, that its policies have been working and that gold the statements are difficult to reconcile with official exports can eventually replace the role previ- export data. The two data series are compared in ously played by oil exports. To better understand Figure 5.3.4. The low level of production reported why gold exports boomed after secession and how in 2011 might reflect its limitation to production likely it is that exports can grow further, it is impor- reported by the few industrial mines then in opera- tant to identify the sources of the gold that is being tion. Thereafter, however, the picture changes and exported. Figure 7 shows the possible sources of official statements of production are at first similar gold that flow to the gold refinery in Khartoum. to but later well in excess of exports. It is thought The Minister of Mining has announced that gold likely that the official statements of production output reached 73.3 tons in 2014, which would are based on a mix of records from the Central place Sudan as Africa’s third biggest producer after Bank’s gold buying operations, gold refinery out- South Africa and Ghana and 12th in the world over- put (since September 2012), and estimates of gold all (Sudan Vision 2015a). Only 15 percent of this is that is produced traditionally and marketed out- reportedly attributable to industrial gold mining.70 side Central Bank channels. Since refinery output There is no official data to indicate the composition could include gold recovered from foreign sources of the remainder, although official statements refer of gold ore and old gold, this would be an unreli- to it all being supplied by the traditional sector.71 able measure of gold mined in Sudan. In view of However, in the absence of detailed data it is pos- the limitations of official data this analysis builds up sible that some of the gold that is supplied is either i) privately held “old” gold attracted by high gold prices;72 or ii) gold smuggled into Sudan for refining 70 Industrial gold mines are those that employ modern high volume mechanized mining and processing methods needing significant and re-export.73 Most of the focus in the subsequent upfront capital investment. analysis is on domestically mined gold since it is 71 The traditional gold mining sector refers to mining using mainly non-mechanized and small-scale methods of excavation and low likely to be the primary driver of Sudan’s ability to technology methods of gold processing to produce unrefined gold. continue to export significant amounts of gold into 72 Old gold (also referred to as “broken” gold) is refined gold that is in circulation mainly as jewelry and other ornaments but could also the future. Nevertheless, the ability of the Sudanese include gold bars that have been in storage. Such refined gold may, authorities to benefit from and, indeed, to promote if prices are attractive, or if the holder needs access to cash, be sup- plied for re-melting. For the most part this gold supply comes from supplies of old gold and smuggled gold to its refin- private individuals. ery may continue to be an important factor, so some 73 Newly mined gold may take several forms prior to refining into pure gold. It can take the form of lumps (nuggets), grains, and powder with discussion of these sources also follows. The flows high gold content and impurities. These would typically be extracted of gold mentioned above are shown in Figure 5.3.3. from rich alluvial deposits or rich near-surface vein systems. Or is can take the form of gold-bearing ore excavated from an ore-body in which gold may barely be visible with the eye. The latter is typical of Mine production of gold industrial mines that rely on high volumes and efficient technology to extract the gold content profitably. Sometimes this ore has varying mixed metallic content (e.g. gold mixed with silver and copper) and Determining the level of gold that is mined in impurities that are liberated from host minerals at the initial process- ing stage. All of these forms of gold are marketable and traded on the Sudan is complicated by the limited statistics basis of the amount of pure refined gold that can be recovered, with available from official sources and difficulties allowances made for the costs of refining and losses. 136 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 5.3: Sudan’s Mineral Sector: Production, Trade and Flows 2) Export volumes of gold correlated 1) Official gold exports (US$ ‘000) with price (Index 2004 = 100) 2,500,000 800 700 2,000,000 600 1,500,000 500 400 1,000,000 300 200 500,000 100 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Gold price index Export volume index 3) Flow of gold in Sudan (schematic) 4) Official reports of gold production and exports, tons 80 Mechanized Foreign mines refinery 70 60 50 Central Khartoum Gold buying 40 Old gold Bank refinery centers 30 Foreign sources 20 10 Traditional Foreign 0 2011 2012 2013 2014 mines refinery Production Exports 5) Comparison of estimated gold production from traditional mining, selected countries (tons per year) 70 60 50 40 30 20 10 0 Sudan Ghana Tanzania DRC Mali Ethiopia CAR Niger Source: World Bank staff own calculations and visualizations, based on data from CBOS 2014; Ministry of Mining and Natural Resources 2014; Sudan Tribune (2012 and 2014); Sudan Vision (2014a-b and 2015a); and World Bank Mining Assessments (various country issues) an independent picture of production by its prob- comprehensive and regular surveys of gold mine able source, for which it relies on publicly available sites, it is not possible to place complete reliance company reports, interviews, field visits, and third on this data either. party accounts. However, short of undertaking Extractive industries: still important but no longer dominant 137 It is clear that new investments in industrial Gagaba area in the northern Nubian Desert that mining are not the main reason that gold activity signaled a new period of heighted activity (Africa has risen so sharply since the secession of South Confidential 2012). Rushes to these extensive des- Sudan. Indeed, the contribution of industrial mines ert areas, in which surface gold outcrops had been to national gold production cannot have exceeded detected, seem to have gathered pace thereafter. 10 tons per annum, a conclusion confirmed by But traditional mining is not restricted just to the recent official statements (Sudan Vision 2015a).74 northern desert areas. A large gold rush took place Ariab Mining Company at Hassai in Red Sea State at Jebel ‘Amer in North Darfur in March 2012, evi- has operated the main industrial mines since 1992. dence of which was captured in satellite imagery Output peaked in 2003 at 5.7 tons; but in the (Ismail and Kumar 2013). Other reported areas absence of significant new investment recent pro- of traditional gold mining have included sites in duction has been no more than two to three tons per Northern, Nile, North and South Kordofan, Blue annum. Other industrial gold mines include those Nile, and Kassala States. Indeed, one source cites operated by Managem (Morocco), Tahe (Turkey), 150 locations found in 80 localities. A North and Rida (Sudan). These have come into operation Kordofan State official recently referred to 29 min- in the past five or so years but none matches the size ing sites being worked (Sudan Vision, 2014a). The of the Hassai mines. The World Bank estimates that Minister of Mines visited sites in the Kadugli and between them these mines could not have produced Ghadeer districts of South Kordofan in October more than 5 tons of gold per annum, although there 2014 (Sudan Vision, 2014b). No publicly avail- is some evidence that output is being supplemented able consolidated map or comprehensive register by low-grade material discarded by traditional min- of sites exists. ers which is re-treated to extract gold and mercury. Indeed, notwithstanding a lack of official This analysis projects gold production from data on traditional gold mining, there is a large industrial mines to increase gradually to some body of physical evidence of gold mining and 8–12 tons within five years based on an exten- processing taking place at multiple sites. This sion of mine life at Hassai and the commission- includes evidence of mining, and especially process- ing of several new mines. The Hassai mines are ing, taking place in a highly organized manner. For partly owned by the Government but together with example, field visits confirmed that gold-bearing its private partners financing is being sought to first mineral is transported in sacks after mining to a sustain output by recovering gold contained in tail- number of processing centers where crushing and ings and then to begin mining of a large copper-gold amalgamation of gold takes place. Such centers ore body, whereupon the mine will produce gold as are confined within perimeter fences with guarded a by-product of copper. Managem’s Qbgbih Mine entrances and are overseen by local authority offi- began operations in 2013 and plans to produce cials and police. Sophisticated trading systems have some 3 tons of gold annually. Expansions at the evolved involving miners, processors, gold buyers mines operated by Tahe and Rida plus projects being and suppliers of equipment and inputs (Ministry of advanced by Orca, Qatar Mining, and others could Mining and Natural Resources 2014). eventually contribute additional output after 2020. National surveys done on employment in the Traditional mining has proliferated very mining industry do not disaggregate employment rapidly to account for the bulk of Sudan’s mined gold. Though traditional mining has a long 74 The Minister of Mines stated that 63 tons out of the 73.3 tons history it was the reports in 2009 of a gold rush reportedly produced in 2014 is sourced from the traditional sector attracting tens of thousands of people to the Wadi rather than industrial mines (Sudan Vision, 2015). 138 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT BOX 5.1: How Many Artisanal and Small Scale (ASM) Gold Miners are There? Estimates of the number of people involved in ASM often provide large numbers but these are generally not based on reliable census work. If a country has both a formal and an informal gold sector, then the difference between the official production by companies, and the total gold produced, is used to estimate the number of artisanal miners. An often-used method to estimate the number of ASM miners is based on the supposition that a typical artisanal gold miner produces, say, 0.5–1g gold per day. If a miner works 200 days/year then 1kg gold produced corresponds to 5–10 miners. For example, in 2009 in Tanzania, total gold produced was about 40 tons, of which 36 tons derived from formal mines. If the “missing” 4 tons are apportioned to ASM activities, then this corresponds to 20–40,000 miners. Problems and uncertainties with these types of estimates include the fact that artisanal miners may work only part time as miners, whereas their main occupation could be, for example, subsistence agriculture; and that gold deriving from undisclosed sources may be apportioned to ASM activities, thereby legitimizing its origins. by mineral mined, making it difficult to estimate picking of gold nuggets located by metal detectors, the numbers of people engaged in traditional and shallow excavation of vein systems to obtain gold mining alone. It has been suggested that the gold-rich ore. Due to the nature of the vein systems, figure for gold miners may vary from as low as outcrops at the surface can be followed only to a 250,000 to as high as one million. Numbers quoted certain depth before heavy excavation equipment usually do not distinguish between those directly and reinforcement of walls and shafts is needed. engaged in mining, processing, and trading in gold. Investments in mechanization are seldom made in A ratio of 1:5 (direct vs. processing/trading) or this regard, although some pits as deep as 40 meters more would not be unusual. Another approach to are nonetheless being worked.75 assessing the size of the sector is to consider the Regrettably, this type of mining is not techni- productivity of the traditional gold miners. Box 5.1 cally sustainable in the long term, therefore rais- discusses the numbers of “artisanal” miners attribut- ing the question as to the longevity of Sudan’s able to certain amounts of production, drawing on present traditional mining boom. Artisanal gold experience from around the world. However, even mining is typically not sustainable for long periods if reliable numbers of miners were available, one at any single site, especially if not well planned. would have to be careful not to impute the total Indeed, there is evidence of many initially prolific amount of gold produced in view of varying richness sites having played out. Although low labor costs of gold mineralization and mining techniques used. can justify the heavy use of laborers to scavenge If the numbers engaged in traditional gold mining and dig for gold, eventually such operations run in Sudan are indeed as high as some sources have out of exploitable gold. It is possible for two or suggested, then this might be expected to have had three good years to be followed by a collapse—and a considerable impact on the overall labor market. falling gold prices can exacerbate this process. This is discussed further later in the chapter. Moreover, since the extent of resources is unlikely The recent surge in traditional mining can to be properly tested and measured before exploita- be explained in part by the low barriers to entry tion takes place, unless organized on a larger scale, into the sector, especially in the excavation and mining methods tend to be sub-optimal.76 Without primary processing phases. Traditional mining a comprehensive survey of traditional gold mining relies on access to surface and near-surface concen- trations of gold that can be accessed with little need 75 In many other countries such depths would be unattainable owing for mechanization. The methods that appear to pre- to friable soil and rock, and flood risk. 76 One example of this would be indiscriminate stripping of the surface dominate are hand digging of surface gold alluvial by bulldozers uncovering only targets obvious from the surface but sources, surface stripping by bulldozers followed by further burying or impeding access to less obvious targets. Extractive industries: still important but no longer dominant 139 sites one cannot confidently infer that, in aggregate, Sudan is projected to produce between 18–28 output of gold has been falling.77 However, there tons annually over the next five years, worth is evidence that many of the most prolific sites are US$750–US$1,130 million annually at a gold unable to be sustained. Such evidence includes price of US$1,300/oz. The contribution of indus- abandoned mine sites, the presence of scavenging trial mining will probably be greater than in the where more methodical mining had taken place past few years, as expansions take place and new previously, abandoned or under-used facilities at mines become operational. The traditional sector gold processing centers, and accounts by traders of will continue to be the source of most gold pro- falling activity, all of which were observed during a duced in this period, although the ability to sustain field visit in May 2014 and have been corroborated this contribution beyond this five-year period is by others familiar with the sector. Comparisons of gold produced by the tra- 77 The Ministry of Mines has launched a program of fieldwork to survey ditional sector in other countries rich in gold mining sites across the country, however, the findings will take some time to be assessed and reported upon. resources suggest that the huge scale of non- 78 Gold smuggled into Sudan for export appears to explain at least part industrial mining officially reported to be tak- of the gap between official gold exports and the estimates of domestic mine production in this analysis. The Central and East African region ing place in Sudan is anomalous. Countries such is rife with illicit movements of gold and anecdotal evidence is that as the DRC, Ghana, Tanzania, in which there is a gold has traditionally moved both in and out of Sudan (Radio Da- banga 2014). Unrecorded and illicit movements of gold within and thriving traditional gold mining sector, report levels between neighboring countries has reached particularly high levels of output that are no more than one quarter of the in recent years, with a disproportionate share of the gold ending up in the U.A.E., which is now a major gold trading hub. Unfortunately level implied by official statements. Figure 5.3.5 gold import data from the U.A.E by country is unavailable after 2011, illustrates this point. The number of people engaged reducing the ability to detect discrepancies that might imply unofficial exports from Sudan (PAC 2014). The U.A.E. records show a total of in such mining is similar to those numbers cited in 834 tons of gold imported in 2011, of which roughly one tenth was Sudan; all three reportedly engage one million or sourced from the Great Lakes region, which includes Sudan (i.e. about 80 tons). This includes raw mined gold, old gold (scrap and re-melt), more. Moreover, if gold is indeed being mined on and refined gold. Sudan’s official exports of gold to the U.A.E in 2011 the scale claimed, it is difficult to see how that level were 30 tons. The Ministry of Trade of the U.A.E. is reported to have stated that imports from Sudan in 2011 reached US$1.98 billion which could be sustained for very long.78 is far in excess of Sudan official exports of US$1.14 billion (Africa Drawing on the available evidence, it is pro- Confidential 2012). This discrepancy might point to significant illicit flows on top of official flows. It is assumed that until Sudan’s gold jected that the traditional mining sector could refinery was commissioned in September 2012, all Sudanese exports support production of some 10–15 tons of gold to the U.A.E were of raw mined gold and old gold. In 2012 and 2013 the U.A.E. accounted for 96 percent and 88 percent of Sudan’s official per annum over the next five years if gold prices exports of gold respectively. Supplies of old gold are the only other remain at current levels and new surface depos- source, aside from gold smuggled into Sudan for re-export, that could account for the gap between official gold exports and the estimates its of gold continue to be located as others are of domestic gold production presented here. Evidence of such sup- played out.79 The downside risk is that fewer sur- plies is available from traders in the local gold markets, especially at Omdurman, where it is customary for individuals to sell gold jewelry face deposits can be worked at current prevailing to raise cash. This takes place, for example, when school fees are due international gold prices, which are some 30 percent or when money must be raised for special events or pilgrimage. It is assumed that direct selling to the Central Bank and the gold refinery lower than at peak in 2012. Another limiting factor may also take place. Other possible sources of old gold are antiquities is the growing distance of exploitable deposits from that are illicitly traded to be re-melted. A Dubai TV broadcast in May 2014 made this allegation. roads and sources of water. The upside potential is 79 Forward projections are necessarily subject to a wide margin of error, that if gold prices increase in the near future, it will especially when reliable and comparable data is scarce. Among the factors taken into account in generating projections are the nature of potentially prompt more people to go to gold min- gold mineralization that is being exploited, economics of conducting ing areas made more attractive to exploit. operations in the various locations where gold is found, the techniques and technologies used to locate and exploit gold, limitations imposed Combining projections of gold produc- by geography, infrastructure and access to water and business con- tion by industrial and traditional mining, straints, including security issues. 140 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT increasingly doubtful. A more likely pattern is that The Central Bank of Sudan (CBOS) has been industrial mining will become the main source of executing a gold buying policy since 2011 with domestically mined gold after 2020. the expressed intent to generate hard currency through the export of gold. CBOS is understood to Government policies and institutions be able to outbid other buyers of gold through the price it offers and by waiving royalty, which would The Government’s drive to promote the min- otherwise be payable by licensed exporters. CBOS ing sector and divert smuggled gold into formal is reported to pay traders in Sudanese Pounds but channels demands close consideration of the role at the parallel market rate of exchange. In order to of public policies and institutions. Although the sustain such a policy in a fiscally constrained context sharp rise in gold exports coincided with a sharp and with limits to access of debt financing it has had escalation of gold prices, which no doubt encour- to print money, which has been one factor driving aged supply, it also coincided with deliberate poli- domestic inflation (Africa Confidential 2012). In cies of the Government to encourage gold activity 2014, for example, the overall annual inflation was to address the macro-economic dislocation that running at over 40 percent compared to the tar- resulted from South Sudan’s secession. Aside from geted annual inflation rate of 29 percent. The IMF launching an active gold buying policy and building has called on the authorities to rein in gold buying a state-owned gold refinery, the Ministry of Mining and other quasi-fiscal operations undertaken by has also been actively promoting the acquisition CBOS on behalf of the Government (IMF 2014c). of exploration rights over large tracts of land. This See Box 5.2 for some more details about gold buy- has resulted in a marked increase in the number of ing programs in general. mining agreements signed with a diverse range of In 2012 the Government opted to finance con- companies. Finally, in certain States the local admin- struction of a large gold refinery to take advantage istration has become active in the organization and of supplies of gold purchased by CBOS. The refin- oversight of gold processing and trading linked to ery was initiated with a capital of SDG100 million the rise in traditional mining. as a partnership between the Central Bank of Sudan BOX 5.2: State-Sponsored Gold-Buying Programs State-sponsored gold buying programs have been used as one means to promote and bring order to traditional gold mining and to combat smuggling. The practice has grown in importance since the 1990s among Central Banks in a number of gold producing countries (e.g., the Philippines, Ethiopia), though such programs have had various degrees of success or failure. Buying programs typically comprise a mix of measures such as i) providing the Central Bank with a monopoly on gold buying and export; ii) establishing networks of state agents with the legal authority and financial resources to buy from mining sites and traders; and iii) contracting a third-party to buy on behalf of the government who, in exchange, provide certain financial and technical services to miners. In all models, the ability of the state to establish itself as the dominant buyer in the domestic gold market is critical. Many buying programs have failed, principally due to the following factors: • Insufficient liquidity held by the government to purchase gold on a timely and sustained basis. • Inability of government to compete with prices offered by non-licensed traders and buyers. • Constraints in broader mineral governance that place obstacles between sellers and buyers. • Bearing in mind these factors, in order to succeed a government may consider the following: • Create incentives to sell to official buyers by coupling buying with technical or financial services rendered to miners. • Reduce or eliminate fees charged by official buyers. • Establish revenue-sharing arrangements with local government and communities, thereby motivating them to promote and encourage the sale of gold to the Government. Extractive industries: still important but no longer dominant 141 (70 percent), Ministry of Mines (15 percent) and While overall management of the mining Ministry of Finance (15 percent). The refinery has a sector is a Federal function, responsibility for current capacity of 150 tons of gold annually and 30 regulating traditional mining has been delegated tons of silver, which makes it Africa’s second largest to State level, giving rise to mutual dependency refinery after the Rand Refinery in Johannesburg. but also considerable complexity. The Regulation No data about its economic performance has been of Traditional Mining for Gold provides that States available for the research for this CEM. In particular, may issue licenses for traditional mining and it would be necessary to know the composition of supervise the sector through the offices of the State the intake of the refinery, output, and any inventory Minister of Mines.80 Moreover, the State authori- held, to be able to better identify sources of gold ties may group individuals practicing traditional (either mined or “old” gold) and both the value and mining into specified locations to locate grinding timing of gold exports. mills and other processing facilities. Among other With strong backing of the Government, things, these provisions raise questions about how the Ministry of Mines has actively promoted effectively and consistently mining, health, safety, development of the industrial mining sector to and environmental practices are regulated. supplement the traditional sector. The Ministry Along with delegated responsibility for regu- has offered tracts of land for mineral exploration lating traditional mining the States have respon- demarcated into blocks, which are then the subject sibility for levying taxes. The same Regulation of negotiation with interested companies. Well over mentioned above provides for a 5 percent levy on a hundred of these blocks have been allocated and the value of gold the proceeds, which is divided mining agreements signed. As a result, there are now 50/50 between the Federal Ministry and the State. a large number of foreign and Sudanese companies If the States are able to collect such levies this would holding mineral exploration rights. The work being represent a significant source of revenue in view of carried out by these companies ranges from very the scale of traditional mining taking place in recent preliminary exploration programs to locate potential years, however, it remains unclear how effectively mineral sites through to more detailed evaluation of revenue would be collected. Since royalties are cur- promising mineral deposits. As identified in an earlier rently waived under the CBOS gold buying program section, the progress of some advanced gold explo- no revenues are being raised through this channel. ration projects suggests that new gold mines may On the other hand the State’s appear to have been become operational in the next five or more years. levying a variety of fees at local sites. The Ministry’s efforts to promote the mining sector have included offering fiscal incentives. Economic impact of gold These have been used in part to overcome major obstacles linked to limited knowledge of opportu- The rapid emergence of the gold sector will nities and perceptions of high country risk among have important direct and indirect effects on potential foreign investors. The mining legislation the economy. At the national level gold exports empowers the Minister of Mines, working with the have generated large foreign exchange inflows at a Mining Committee, to set policy, issue licenses, time when the country has been struggling to adapt and sign negotiated contracts. These powers appear to the loss of oil export earnings and a rise in oil to be exercised independently of the Investment product import dependency. While the contribution Authority, with which all foreign investors must register. The scope and efficacy of fiscal incentives is 80 Available at: http://www.minerals.gov.sd/eng/Regulation_tradi- addressed in a later section on government revenues. tional.htm. 142 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Table 5.1: Main Elements of the Mining Fiscal Regime for Industrial Mines Royalty Profits Tax Government Free Share Tax Exemptions Gold: 6–7 percent (negotiable) 10 percent in one example seen, but according Negotiable (indicatively 20–30 Import duty and VAT during Base Metals: 5 percent to the National Investment Encouragement percent) exploration Act 2013, may be exempted Source: Company disclosures and interviews with government agencies. to the trade balance is clear, the impact of gold on inputs and infrastructure, and non-fiscal elements investment inflows and government finances is far of the investment climate. harder to measure. The following assesses the con- Flows of investment into the traditional min- tribution of the industrial and traditional mining ing sector are insignificant at the individual site sectors separately. level; however, the aggregate amount of cash Flows of investment into the industrial min- and short-term credit flowing into this sector ing sector appear to have increased in recent must have increased sharply in recent years. No years as the number of mining companies records of investment levels have been available. The engaged in mineral exploration and launching presumption is that investment is largely obtained new mines has grown. However, no records of in the domestic market. Field visits and other investment levels have been available in prepara- accounts suggest that domestic entrepreneurs have tion for this CEM. The Ariab Mining Company been willing to invest in earth-moving equipment has substantial investment needs in order to con- and transportation in order for new excavations to tinue to exploit gold and develop copper deposits, be launched. Moreover, at some processing sites amounting to some US$500 million over the next entrepreneurs have installed banks of grinding mills few years. Other companies with advanced explora- run by on-site generators. These too would require tion projects will need to raise funds to move into a considerable upfront outlay. mine construction and commissioning, probably of Revenues generated by traditional mining the order of some US$50–100 million each. In all are generally constrained by the limited extent cases, raising finance is constrained by limited access to which operations are licensed and subject to to the main international mining finance centers, taxes. Regulations issued by the Ministry of Mines which may tend to slow the pace of investment.81 make provision for State level regulation and tax Revenues generated by industrial mining collection. The proceeds of a 5 percent levy on pro- could be significant once mines are brought into duction are supposed to be split evenly between the production and reach profitability. On the other State authorities and the Federal Ministry. However, hand, the use of tax incentives reduces, or at least it is unclear how widely this is enforced. In place delays, likely receipts. Moreover, mines built with of direct imposition on miners, the State authorities large capital outlays typically take time to reach prof- can impose the levy on licensed gold traders and itability. The fiscal regime is subject to negotiation of dealers, who would factor this into the price paid to several key terms. Key elements of the fiscal regime sellers. It is unclear, however, how this arrangement are set out in Table 5.1. The use of fiscal incentives to attract mineral investment is not unusual, however, 81 The presence of companies such as Qatar Mining in Sudan suggest the World Bank has observed that very few min- that those willing to take on projects in Sudan have access to sources eral investments are simply tax driven, principally of capital that are neither impacted by sanctions or perceptions of high country risk. It is also observed that some Sudanese trading and because the conditions necessary for investment construction firms have obtained mineral rights, suggesting that they to take place depend on geology, access to critical are more likely to be able to mobilize funds than others. Extractive industries: still important but no longer dominant 143 works in practice, especially since a large amount of respondents declared having no qualification in the buying is now done by the CBOS through its agents. sector, a further 8 percent declared having com- The fact that the CBOS seeks to obtain gold from pleted primary education, and 7 percent having sellers and traders who would otherwise smuggle completed secondary. However it is important to gold out of Sudan, means that the 5 percent levy note that of the total 781 respondents, 57 percent is being waived by the CBOS. Some States are could not identify their education level within the understood to be levying other fees (Sudan Vision categories offered by the National Census, making 2015b) However, without having seen relevant rev- the data on education difficult to extrapolate. enue reports at Federal and State level it remains Mining is spread across the country, with no unclear what revenue flows are associated with the clear relationship between levels of activity and traditional gold mining sector. poverty rates at the district level. For instance, the districts of Abu Hamed and Berber, both of the Nahr Profile of miners and relationship to poverty el Nir State of the Northern region, report having 21 and 12 percent, respectively, of the active work- Most miners work in informal arrangements, ing population engaged in mining activities. Yet, a common characteristic of artisanal min- these two districts have some of the lowest poverty ing around the world. In the National Census rates in the country: that is 27.3 and 29.0 percent, (2008), of the 3.5 million respondents only 781 respectively. Indeed the national poverty rate per self-identified as miners, all of whom identified as district, according to the National Census (2008) is part of the working population (age 15–65). Of 49.8 percent. Consider on the other hand, Giesan these 781 self-reported miners, 84.8 percent were district in Blue Nile State of the Central region which male and 15.3 percent were female. 64.3 percent reports a mining population of 9 percent and a pov- of the same 781 respondents reported working erty rate of 77.4 percent; or Alrasad and Abu Jibieha for their own account, meaning these individu- districts of South Kordofan State in the Kordofan als work as day laborers. A further 27.7 percent region, who report 11.1 and 14.7 percent of their respondents reported being paid employees and working populations to be in mining, with poverty 3.6 percent reported being an employer within the rates of 49.8 and 53.3 percent, respectively. mining industry. It is likely that those who identi- There has been a doubling of mining employ- fied as paid employees are working for some of the ment statistics in certain districts since 2008. larger exploration and processing operations in the The Population and Housing Census (2008) had country. It is therefore important to note that the reported the highest levels of mining activities in vast majority of respondents are working likely in Bahri and Abu Hamed districts: that is 10.0 and informal arrangements, a common characteristic for 8.7 percent of the working population aged 15–65. other artisanal mining environments globally. Of Since that time Abu Hamed has doubled its per- those self-identified miners, 56.7 percent declared centage of the mining workforce to 20.9 percent, their role as the prime earner in the household, with as stated above. Other districts with significant an average mean age of 37. Though not disaggre- percentage increases include Berber (from 4.9 to gated for gender, it is most likely that these heads 12.0 percent), Giesan (from 3.6 to 9.0 percent), of households are male. A further 21 percent of the Abu Jibieha (from 5.9 to 14.7 percent), and Alrasad self-identified miners were either sons or daughters (4.4 to 11.1 percent). These statistics would seem of the head of household with an average age of 23. to suggest a rise in the level of activity, predomi- Education levels of people active in the min- nantly in traditional gold mining areas. It is how- ing sector appear to be very low. Ten percent of ever difficult to conclude whether these increases 144 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT in employment are made up of residents of the area the depth to which some excavations are dug and who are taking further interest in the sector since minimal use of support structures. Furthermore, the government put in place its buying policies. rudimentary health precautions are taken at min- Data from the National Census on migration does ing sites and processing centers, where water and however suggest that cross-districts migration is hygiene conditions are poor and do not appear to almost non-existent, with 99.4 percent of the total be subject to routine monitoring and inspection. surveyed population (3.5 million) reporting no Of note is the liberal use of mercury in the district migration. Hence it is plausible to assume recovery of gold at processing centers. During that rises are coming from within the available labor field visits it was evident that mercury is widely pool in the respective districts. Further investiga- available and traded. It is used in the traditional way tions are required to understand why levels have for amalgamation but it was also observed being increased and whether this employment is full-time used in grinding mills to assist with the liberation of or seasonal. gold, prior to washing and amalgamation.82 Mercury is therefore found in tailings generated during crush- Environment and social impact ing and grinding and seems to be deposited without containment. Tailings at some sites are collected The rapid expansion of gold mining has without for sale to those that have the facilities to re-treat doubt impacted local environments and com- them to obtain both residual gold and contained munities in a variety of ways. The pace at which mercury. Unfortunately, it is not possible to assess gold activity grew after secession in 2011 and the the scale of mercury used in traditional gold min- largely unmanaged proliferation of traditional min- ing as a whole. Nevertheless, given the amount of ing operations is bound to have generated multiple gold being recovered at sites like the ones visited, environmental and social challenges for which it can be inferred that the amounts are significant. regulatory institutions are typically ill-prepared. The Ministry of Mining seems to be aware In the absence of firm enforcement of labor stan- of the environmental and social consequences dards or environmental regulations, miners face of widespread traditional mining and has taken both physical and social vulnerabilities. However, some measures to deal with them. The Ministry given the economic attractiveness offered by min- of Mines is issuing licenses to companies able to ing compared to farming or other rural productive recover mercury from tailings and other discard activities, miners may consciously choose to take material and it has banned mercury imports other on these risks in pursuit of better economic welfare. than by a state trading company. There is also a Traditional mining sites are predominantly Directorate within the Ministry charged with envi- away from heavily populated and cultivated ronmental monitoring and enforcement. It has areas along the Nile but nonetheless generate participated in teams sent to inspect mining and a variety of harmful impacts. Aerial images bear processing sites. It has information that has been witness to the dramatic impacts of gold rushes with disseminated on the safe handling of chemicals and closely spaced excavations over extensive areas and technologies to help reduce likely contamination by shanty town-type development to support the influx mercury. How effective these measures are is dif- of people. Field visits provided evidence of the ficult to assess without careful survey of sites. Such widespread use of bulldozers to excavate topsoil to expose gold bearing rocks with little or no reclama- 82 tion of land as mining plays out. There appears to Amalgamation is a mineral processing method that extracts gold from mined ore using mercury to create amalgam, which is then be little attention to safety hazards, exemplified by decomposed leaving gold. Extractive industries: still important but no longer dominant 145 surveys are beginning to be undertaken, according will decrease. Even in the high case scenario for oil to the Ministry. Moreover, early in 2015 the Ministry production (Figure 5.1.4), this evolution is merely announced that it had secured the support of the slowed rather than changed. The same would be African Development Bank to help finance these true of a higher oil price environment; however, at and related activities. least in the short term, the oil price is unlikely to Anecdotal evidence of positive and nega- provide much support. tive impacts on livelihoods of the traditional The constrained outlook for exports and rev- gold mining boom in the communities in which enues from domestic oil production places the activity has been concentrated needs to be sup- spotlight on fees that the Government obtains for plemented by rigorous data collection. Positive the handling of South Sudanese transit oil. The impacts are reflected in the level of activity among analysis shows that this now has become at least as, trades that provide inputs into the mining and pro- if not more, important than the domestic oil sector cessing value chain. On the other hand, negative in terms of exports (almost all South Sudanese oil impacts on the availability of seasonal labor in the is presently exported) and government revenues. In agricultural sector have been reported. One report Figure 5.4 this manifests as the red line circle that spoke of this reducing the harvest of the sesame crop is somewhat between the oil position of 1999/2010 in some areas. There were several informal reports and 2025. Under present arrangements, the GOS of school students joining the gold rush in 2012–13, obtains fees from both the Government of Sudan either as child labor or accompanying their families. and the JOCs-South at levels that yield a consider- able fiscal surplus (after meeting tariffs charged D. Combined Implications of Oil and by the operators of processing and transportation Mining facilities in Sudan). Although the data necessary to quantify it precisely is not available, it would be While it appears inevitable that the contribution reasonable to assume a margin over tariffs of some of oil to Sudan’s economic development will 3:1. Moreover, this source of fiscal revenues is not decline over time it is by no means certain that linked to oil prices, so it is largely protected from the mineral sector will be a full substitute for present oil price uncertainties. An additional factor it, even though the mineral sector is quite likely is that the TFA provides for a shortfall payment to to make a bigger contribution than it has in the be made by GRSS to GOS in the event that produc- past, most notably in terms of exports. Figure 5.4 tion in South Sudan does not meet expectations. shows how the contribution of the two sectors to These arrangements effectively eliminate two of the Sudan’s economy might evolve in the medium term. principal sources of fiscal risk to Sudan. The oil sector was the mainstay of the economy for Notwithstanding the fiscal benefits obtained over a decade, whether measured in terms shares from transit fees, these arrangements can only be of GDP, exports, or government revenues (See expected to be transitory, a fact acknowledged Figure 5.4, red large circle on the right upper side). by the expiration dates of relevant agreements. Due to the reduced scale of reserves and production So while the current fiscal benefits, when com- and limited scope for reversing this, at least in the bined with revenues from the domestic oil sector medium term, the contribution is already shrink- help sustain the contribution of oil to the Sudanese ing and is likely to shrink even further by 2030. In economy, there are medium terms risks relating to Figure 5.4 this is characterized by a move towards i) an uncertain outlook for South Sudan’s produc- the lower left side, which shows that both the share tion rate (as well as uncertainty over TFA volumes in sports and the share in Government revenue if conflict in South Sudan persists for another year); 146 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Contribution of Oil and Minerals FIGURE 5.4:  not been readily available. Conservative expecta- to Sudan’s Economy tions of the fiscal contribution of the traditional mining sector are reflected in Figure 5.4 (green Gold’s contribution is growing circles for gold) in which the estimated contribution but has been mainly to exports 1999–2010 of gold in 2014 is weighted heavily towards exports Share of exports 2025? 2014 rather than to government revenues. 2014 Traditional mining may, with sufficient sup- 2014 2025? port, provide a source of livelihood in rural areas 2025? Oil’s contribution is declining that may have few other sources of economic sup- but transit fees lessen the impact 1999–2010 port. Traditional mining can create direct, indirect, Share of government revenue and induced demand for labor, goods, and services Share of GDP: Oil Including transit fees Minerals in areas where few alternatives exist. Field visits Source: World Bank staff own visualization. provided ample evidence that in localities in which traditional mining has been taking place, market and ii) the incentives created for South Sudan’s oil opportunities had been opened up for vendors to be used either domestically or exported via an of equipment and suppliers of support services.83 alternative route. Figure 5.4 shows the combined With sufficient mapping and resource evaluation contribution of the oil sector diminishing over the it is likely possible to identify areas that are suffi- medium term both in terms of exports and govern- ciently rich in gold so that traditional mining could ment revenues. be sustained for more than a few years. Experience The Government’s emphasis on promoting from around the world suggests that this planned alternatives to the oil sector is well founded, approach is only likely to take place if traditional and there have been early results in the form of mining takes place on a formalized basis, since this the boom in gold exports. A policy of encourag- provides a basis for miners to obtain legal title and ing gold produced domestically to be exported offi- hence finance. Policies for supporting artisanal and cially so that foreign exchange could accrue to the small-scale mining, such as in Tanzania, place an Government seems to have had success, at least in emphasis of formalization and the reservation of the short term, even though a major driver of gold areas considered to have high potential after tech- activity has been the gold price and the main sup- nical investigation. ply response has been from the traditional mining Industrial mining may take some time to sector, not the industrial mining sector. The main reach its potential; however, such a develop- policy concerns about this strategy is how long will ment over the medium to long term would be it be sustainable in the face of lower gold prices more likely to provide a more balanced export and/or diminishing scope for exploitation of gold and revenue contribution to the economy than by traditional methods. traditional mining. The Government has made Whereas the increase in traditional gold promotion of industrial mining a priority and taken mining has fueled a gold export boom, its fiscal a number of measures to encourage investment in contribution has been less significant. It is unclear mineral exploration. There are positive signs that how much of a fiscal contribution this sector can the technical conditions on which industrial mining sustain given policies that i) devolve fiscal power to could develop are in place, backed by efforts of the State level; and ii) depend on offering competitive prices to sellers of gold who would otherwise avoid 83 This was so in Abu Hamed, for example, in which one section of official channels. The data needed to assess this has town was dedicated to the sale of mining and processing equipment. Extractive industries: still important but no longer dominant 147 Ministry of Mines to enhance the geological database. over the medium term could be broadly positive, The mineral rich Arabian Nubian Shield straddles however, the scale of the sector is very unlikely Sudan and several of its neighbors and has been host to rival that of the oil sector in its heyday and to mining activity over millennia owing to an abun- its fiscal impact may be substantially lower. dance of accessible surface and near-surface deposits These considerations are reflected in Figure 5.4 by of gold and other valuable minerals. Large-scale gold the modest increase indicated in export contribu- and copper-gold mines developed in neighboring tion and low increase indicated in the contribution Egypt, Eritrea, and Saudi Arabia provide reason for to government revenues. There are numerous sce- optimism. However, the degree to which Sudan has narios that could unfold, including much less posi- been explored using modern techniques to establish tive ones, in which a lower gold price environment the viability of mechanized mining and to detect coupled with continuing constraints on financing of deeper lying deposits remains very limited. major mineral projects means that the recent gold For investment in industrial mining to take mining boom wanes. Any sustained program of place on a consistent basis there will need to be reforms to make the industrial mining sector more proof that projects can be brought to commercial competitive and to strengthen regulatory institu- fruition, notwithstanding financing challenges tions would require strong leadership and probably and a limited track record in the implementation external support to enhance institutional capability of contracts through all investment phases. In and effectiveness. this regard the financing by Ariab Mining Company Any more thorough evaluation of the contri- of the expansion plans at the Hassai mines and of bution of the mining sector to economic develop- progress of some of the more advanced gold explo- ment in Sudan would have to take into account ration projects would send a very positive signal to negative externalities such as harmful environ- the international mining community. Analysis car- mental and social impacts; neither is captured in ried out for this CEM in 2014 found that several Figure 5.4. At this stage, impacts of this kind arise aspects of the mining law and contracts, as well mainly in the context of traditional gold mining, as regulatory arrangements could be improved. though adequate regulatory care will be needed to Moreover, it was found that some of the non-fiscal ensure that further development of the industrial conditions necessary to attract and retain large-scale mining sector does not generate an excessive environ- investment through the full cycle from exploration mental and social burden. There is already evidence to production are not in place, such as early disclo- that traditional gold mining places the environment, sure of right-holdings and clarity as to how surface as well as the health and safety of laborers and their access is obtained. That being the case, the value dependents, at some risk, given its very rapid and of tax incentives, which have been used to induce widespread proliferation. It will be important for investment, may be questioned. such risks to be managed carefully to ensure that a In view of the uncertainties addressed above, good balance is achieved between economic oppor- the contribution of mining to Sudan’s economy tunity and environmental and social threat. ANNEXES Annex 1: MAMS Model: Structure, Data MAMS includes three core institutions: house- and Assumptions holds, government, and the rest of the world. Structure of MAMS  Households (an aggregate domestic private institution) earn incomes from factors, trans- Figure 0.1 summarizes the payment flows that are fers, and interest from the government (with captured by MAMS in any year. Activities produce, the interest due to loans from the households to selling their output at home or abroad, and using the government), and transfers from the rest of their revenues to cover their costs (of intermediate the world, net of interest on household foreign inputs, factor hiring, and taxes). Their decisions debt.84 These are used for direct taxes, savings, to pursue particular activities with certain levels and consumption. The savings share depends of factor use are driven by profit maximization. The shares exported and sold domestically depend 84 on the relative prices of their output in world and The household may lend to the government and borrow from the rest of the world; given this, it may receive interest payments from domestic markets. the government and make interest payments to the rest of the world. FIGURE 0.1: Aggregate Payment Flows in MAMS Factor domestic wages and rents private investment financing Households Markets private consumption trnsfr+interest dir taxes lending factor demand indir taxes trnsfr-interest gov cons and inv Government Private interm input demand Capital trnsfr-interest Account lending Activities lending Domestic FDI Commodity Rest of Markets imports World domestic demand exports foreign wages and rents private investment 150 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT on per-capita incomes. Their consumption deci- faces exogenous world prices—Sudan is viewed sions change in response to income and price as a small country in world markets without any changes. By construction (and as required by the impact on the import and export prices that it household budget constraints), the consump- faces. Domestic demanders decide on import and tion value of the households equals their income domestic shares in their demands on the basis of net of direct taxes and savings. the relative prices of commodities from these two  The government gets its receipts from taxes sources. Similarly, domestic suppliers (the activi- and transfers from abroad; it uses these for ties) decide on the shares for exports and domestic consumption, transfers to households, and supplies on the basis of the relative prices received investments (providing the capital stocks in these two markets.87 required for production of government ser- Factor markets reach balance between demands vices), drawing on domestic and foreign bor- and supplies via wage (or rent) adjustments. Across rowing for supplementary investment funding. all factors, the factor demand curves are down- To remain within its budget constraint, it ward-sloping reflecting the responses of produc- either adjusts some part(s) of its spending tion activities to changes in factor wages. On the on the basis of available receipts or mobilizes supply side of the labor market, unemployment additional receipts of one type or more in order is endogenous—the model includes a wage curve to finance its spending plans. (a supply curve) that is upward-sloping until full  The rest of the world (which appears in the employment is reached, at which point it becomes balance of payments) sends foreign currency to vertical (see Figure 0.2; its supply curve assumes Sudan in the form of transfers to Sudan’s gov- a minimum unemployment rate of 5 percent). ernment and households (net of interest pay- Unemployment is defined more broadly than in ments on their foreign debts), FDI, loans, and official statistics to include un- and under-employ- export payments.85 Sudan uses these inflows to ment. In the simulations, a broad definition of finance its imports. The balance of payments clears (inflows and outflows are equalized) via adjustments in the real exchange rate (the ratio 85 Sudan’s economy is treated as fully dollarized. 86 For example, starting from a balanced situation, a balance of pay- between the international and domestic price ments surplus could arise from increases in foreign exchange receipts levels in domestic currency), which take place (perhaps due to an increase in foreign aid or the world price of an export). The resulting increase in domestic demands (be it from the when the balance is in surplus or deficit.86 government or other agents) would not change international (export and import prices) in foreign currency but reduce their prices relative to domestic prices (the prices of domestic output sold domestically, Private investment financing is provided from via an appreciation of the model exchange rate and/or an increase in domestic private savings (net of lending to the domestic prices, in both cases representing an appreciation of the real exchange rate. This relative price change would encourage domestic government) and foreign direct investment (FDI). producers to switch part of their outputs from exports to domestic It is assumed that private investment spending will sales and induce domestic demanders to switch part of their demands from domestic sources to imports. This process would continue until adjust in response to changes in available funding the balance of payments surplus is eliminated. The opposite would or that private savings will adjust to finance a pre- happen in the case of a balance of payments deficit. 87 An individual production activity does not respond to changes in determined private investment level. relative prices for exports and domestic sales if its output only has In domestic commodity markets, flexible prices one destination, either exported in full or sold domestically in full. By the same token, domestic demanders do not have a choice between ensure balance between demands for domestic imports and domestic output for commodities if only one source is output from domestic demanders and supplies available. In the case of Sudan, some commodities do not enter trade (including government services) while others are only traded in one to the domestic market from domestic suppliers. direction (like the output of gold mining, which only is exported). The part of domestic demands that is for imports Such structural features reduce the flexibility of Sudan’s economy. Annexes 151 unemployment increases the scope for the existing FIGURE 0.2: The Labor Market in MAMS labor force to generate a larger (smaller) amount 5 of effective labor if the incentives to work were to 4 improve (deteriorate) without any change in the 3 labor-force participation rate; typically, this seems Wage realistic. Over time, the labor force grows due to 2 demography. For non-labor factors, the supply 1 curves are vertical in any single year (the supply is fixed) but switch over time as supplies change 0 85 90 95 (see next point). 100 – unemployment rate (%) The above discussion refers to the functioning of Supply Demand model economy in a single year. In MAMS, growth over time is endogenous. The economy grows due to accumulation of capital (determined by investment and depreciation), labor (determined by demogra- Table 0.1 shows the disaggregation of the data- phy), and other factors (following exogenous growth base for this analysis. The database consists of a trends), as well as because of improvements in TFP. Social Accounting Matrix (SAM), data on stocks Apart from an exogenous component, TFP depends (of factors of production and debts), elasticities (in on the levels of government capital stocks. production, consumption, and trade), and miscel- The disaggregation of MAMS varies widely laneous other data.88 The SAM was constructed across different applications depending on data on the basis of a 2004 SAM for Sudan (Siddig availability and the kinds of questions the model 2009) and data for 2012 that reflect the post- is called upon to analyze. For the Sudanese appli- secession macro, trade, and sector value-added cation, the database is disaggregated into some 60 structure of Sudan’s economy, parts of which was accounts (see Table 0.3), indicative of the aspects used to build a macro SAM (Table 0.2). The 2012 of Sudan’s economy that the model is able to con- information is primarily based on IMF (2014a, sider. Among other things, the database includes 2014b, 2014c), and CBOS (2014). In order to 11 production sectors. The factors of production ensure consistency with minimal adjustments, a are split into labor, capital (private and govern- matrix estimation program was applied to the SAM ment), and 4 natural resource factors (land for (Robinson et al. 2001).89 crops, land for livestock, oil, and gold), which are specific to individual sectors and thereby help making sure that their output growth respects 88 A SAM is a square matrix that that provides a comprehensive, con- natural constraints. sistent economy-wide summary of the payments in an economy during one year. It links institutions, factors, and production sectors. The latter are split into activities (which carry out production) and com- MAMS Database modities (representing activity outputs or imports without domestic production). Given the consistency requirement, each account must be balanced—its receipts must equal its outlays. The accounts of the Any analysis of Sudan’s economy faces severe data Sudan SAM closely match the disaggregation of MAMS (Table 0.1). challenges, severely aggravated by the 2011 seces- 89 More concretely, on the basis of 2012 data and structural features of the 2004 SAM (such as household consumption shares and the sion. Most available data apply to pre-2011 Sudan. input structure of production activities), an initial unbalanced 2012 In this situation, it is important to strive to make was constructed. The estimation program generates a balanced SAM subject to constraints that subset of cells exactly or approximately sum the best possible use of what is available in order up to observed 2012 data while otherwise minimizing deviations from to satisfy analytical needs. the structure of the initial SAM. 152 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Table 0.1: Disaggregation of Sudan MAMS see Annabi et al. (2006). For the oil sector, it is Category Item assumed that imports are near perfect substitutes Sectors Crops for domestic products (in effect permitting a smooth Livestock substitution of imports for domestic products as Gold and other mining the latter decline in importance) whereas, output Oil and products** is allocated in near fixed proportions between Manufacturing exports and domestic sales (reflecting that a rela- Construction tively inflexible part of the output is refined and Electricity and water sold domestically. Given the consistency features Trade, restaurants and hotels of an economy-wide model like MAMS (in markets Transport and communications for factors and commodities, quantities demanded Government services and supplied must be equal and all agents live under Other services budgetary constraints) most elasticities tend to play Factors Labor a qualitatively minor role as long as they stay within Capital – private accepted bounds. Capital – government Foreign and domestic debts stocks are based Natural resource of gold and other mining sector on the above-mentioned IMF and World Bank Natural resource of oil sector sources. The growth rates for utilization of the Land for crop production stocks of natural resources (oil and gold), which Land for livstock production are exogenous, were defined to match recent Institutions* Household (domestic non-government institution) trends and projected production growth for Government these sectors up to 2030. Private capital stocks Rest of the World were defined on the basis of cross-country data Financial institution (holds foreign reserves) on stocks and profit rates, and adjusted to ensure Auxiliary Taxes – direct plausible capital stock growth and rents for the institutional Taxes – domestic indirect base scenario (Arslanalp et al. 2010; Nehru and accounts Taxes – value added Dhareshwar 1993). Data on population (total and Taxes – imports in labor force age), and labor (stock, employment, Subsidies and unemployment) are based on UN (2014), Interest – dometic UNCTAD (2014), and IMF (2013). Interest – foreign The poverty results are generated by a module Investment Investment – private that draws on the simulated evolution of household Investment – government per-capita consumption, a Gini coefficient (which *Household government, and rest of the world have current and capital is exogenous), and an initial poverty rate, assum- accounts. ing that consumption is log-normally distributed.90 **The oil sector covers both crude production and refining. Using 2009 data for the then Northern provinces, 90 It is widely accepted that a log-normal distribution provides a good The elasticities that are used are displayed in approximation for within-country income and consumption distribu- tions (Bourguignon 2003; Easterly 2009). Inter alia, as noted by East- Table 0.3. They were defined on the basis of the erly (2009, pp. 28–29): (i) empirical cross-country analysis indicates literature and author assessments, drawing on a that the higher the initial poverty rate, the lower the poverty elasticity of growth; and (ii) the absolute value of the simulated poverty-elasticity combination of econometric evidence and experi- of growth with a log-normal distribution is inversely related to the ence from similar country applications; for a survey, initial poverty rate and positively related to per-capita income. Annexes 153 Table 0.2: Macro SAM for Sudan, 2012 (% of GDP) tax- tax- tax- tax- tax- int- int- cap- dcap- cap- cap- inv- inv- act com fac hhd gov row dir imp exp act va sub dom row hh gov fin row prv gov total act 97.2 97.2 com 83.6 5.7 8.8 1.8 17.2 1.5 118.6 fac 94.9 0.0 94.9 hhd 93.8 3.0 0.9 1.4 99.1 gov 0.0 1.7 0.4 9.8 row 16.8 1.1 0.0 0.0 0.7 2.1 0.0 2.3 2.6 2.8 20.6 tax-dir 0.7 0.7 tax-imp 2.1 2.1 tax-exp 0.0 0.0 tax-act 2.3 2.3 tax-va 2.6 2.6 sub 1.8 1.8 int-dom 1.4 1.4 int-row 0.1 2.7 2.8 cap-hhd 13.0 5.4 4.6 22.9 cap-gov –4.8 2.2 1.3 2.8 1.5 cap-fin 7.5 7.5 cap-row 10.5 0.9 11.3 inv-prv 13.2 3.9 17.2 inv-gov 1.5 1.5 total 97.2 118.6 94.9 99.1 9.8 20.6 0.7 2.1 0.0 2.3 2.6 1.8 1.4 2.8 22.9 1.5 7.5 11.3 17.2 1.5 Notation act production activities tax-exp taxes – exports cap-fin capital account – financialsystem com commodities tax-act taxes – activities cap-row capital account – restofworld fac factors tax-va taxes-value-added inv-prv investment – private hhd household (domestic non-government) sub subsidies inv-gov investment – government gov government int-dom interest on domestic government debt row rest of world int-row interest on foreign debt tax-dir taxes – direct cap-hhd capital account – household tax-imp taxes – imports cap-gov capital account – government the Gini coefficient is set at 0.353 and the initial is broadly consistent with recent World Bank and poverty rate at 46.5 percent (World Bank 2011a, IMF projections, including the analysis of Sudan’s p. 2; World Bank 2014b). mineral sectors in Chapter 5 of this CEM. It serves as a benchmark for comparisons with alternative Scenario Assumptions simulations. However, given that it is generated with the help of a more disaggregated model than The base scenario is designed to provide a plausible those used for these World Bank and IMF projec- picture of Sudan’s development up to 2030 that tions, the simulations offer additional detail on 154 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Table 0.3: Value-Added, Consumption, and rates in recent decades.91 Given projected popula- Trade Elasticities tion growth of 2.2 percent per year, average annual VA LES Armington CET growth in GDP at factor cost per capita is around Crops 0.70 0.56 2.00 2.00 1.8 percent. Livestock 0.70 0.76 2.00 2.00 Among other assumptions, it is important to Gold 0.08 take note of the following: Oil 0.08 1.23 18.00 0.38 Manufacturing 0.70 1.10 0.90 0.90  Government. Domestic payments to and from Construction 0.70 1.50 the government evolve on the basis of IMF/ Electricity-water 0.70 1.60 WB projections, imposed either as exogenous Trade 0.70 0.90 real growth rates (for consumption and invest- Transportation 0.70 1.23 0.50 ment) or as exogenous GDP shares (for import Government services 0.30 1.38 tariffs, domestic borrowing, domestic transfers, Other services 0.70 1.60 0.50 and subsidies. Payments received from abroad Notation: —foreign grant aid and foreign borrowing— VA = value added (elasticities of factor substitution in CES VA function); are exogenous in foreign currency, set at levels LES = Linear Expenditure system (elasticities of household consumption with respect to total consumption spending); that are consistent with IMF/WB projections. Armington = CES aggregation function for domestic demand (elastici- Domestic and foreign interest payments depend ties of substitution between imports and domestic output); CET = Constant Elasticity of Transformation function for domestic output on exogenous interest rates and the level of (elasticities of transformation between exports and domestic supply). foreign and domestic debt stocks; it is assumed that, starting from 2015, foreign interest is paid in full. Domestic taxes (direct and indirect) are developments up to 2030 that are consistent with scaled to clear the government budget. Given these macro projections. that all other major payments are defined to be The simulations start in 2012, the base-year for close to projections, the GDP shares for tax pay- the SAM and the bulk of the database. Coverage of ments are also close to projections. the base scenario starts with the key assumptions,  Savings-investment. Government investment is followed by a presentation and analysis of selected financed within the government budget. FDI is simulated results. exogenous in foreign currency. The GDP share In order to generate a base scenario that satisfies of domestically financed private investment is the criteria specified above, it is crucial to specify exogenous while the private savings rate adjusts appropriate rules and values for growth in GDP at to generate needed financing—domestic private factor cost and various payments (involving the gov- savings net of lending to the government is allo- ernment, the household, and the rest of the world), cated to investment. as well as mechanisms for the clearing of macro bal- ances (the government budget, the balance of pay- ments, and the private savings-investment balance). 91 Technically, the level of GDP is fixed, removing one variable from For the base scenario (but not for the other the model for each solution year. At the same time, a variable that scenarios), annual growth in GDP at factor cost is introduces a uniform adjustment in TFP in each production activity is flexed, assuring that the exogenous GDP level is reached and that the exogenous, in the ranges of 3–4 percent up to 2016 model continues to have an equal number of equations and variables. and 4–5 percent in subsequent years, generating an Among production activities, TFP is not adjusted for petroleum and other mining since production growth for these two sectors is based average of 4.1 percent for the period 2013–2030, a on exogenous projections. For all non-base scenarios, the GDP level figure that is slightly below Sudan’s average growth is flexible whereas the TFP adjustment variable is fixed. Annexes 155 Table 0.4: Definitions of Non-Base Scenarios Name Description Crop+ TFP growth for crop agriculture increased by 2 percentage points during the period 2015–-2030. Rem– Zero growth in private transfers, including worker remittances, from abroad, 2015–2030. Crop+rem– Combining the changes for Crop+ and Rem– Rexrdepr Series of simulations with real exchange rate depreciation in conjunction with withdrawal of foreign exchange to build up reserves TofT+ Stepwise* 10% decrease in foreign-currency import prices (excluding oil) in 2016–2018; stepwise* 5% increase in foreign-currency export prices (excluding gold and oil) in 2016–2018. Rationale: Normalized relations with RoW Aid+ Stepwise* increase in foreign grants to government in 2016–2018, in 2018 and subsequent year at $150 mn; stepwise* increase in conces- sional government foreign borrowing in 2016–2018, in 2018 and subsequent year at $600 mn. Rationale: Normalized relations with RoW. Debt– Stepwise* foreign debt relief in 2016–2018, by 2018 having removed 75% of Sudan’s 2016 debt. Rationale: Normalized relations with RoW. Normal Combining the changes for TofT+, Aid+ and Debt– *Stepwise = 25% of change in 2016, 62.5% in 2017, and 100% in 2018. New levels of prices, grants and borrowing stay in place 2019–2030.  Balance of payments. The government-related an annual rate of 6.7 percent; for gold, a recent items and FDI were described above. Among production decline is projected to continue until other non-government items, on the inflow 2016 after which production will stabilize with side, net private transfers and net private foreign a resumption of growth for 2019–2030 at an borrowing (which is small) are both exogenous annual rate of 3.4 percent. After the precipitous in foreign currency; among the outflows, net decline in 2015, oil (and oil product) export and additions to foreign reserves are exogenous in import prices (in constant US$) are projected to foreign currency while private interest payments increase gradually up to 2025 after which they (like their government equivalents) depend stabilize, with an average annual growth rate of on private foreign debt. The balance clears via 3.4 percent for the period 2016–2030. For gold, adjustments in the real exchange rate, which export prices are projected to continue their influences export and import quantities and gradual decline up to 2025 after which they also foreign currency values.92, 93 stabilize, for the full period 2013–2030 falling  Oil and gold price and production data. For at a rate of 0.9 percent. both commodities, production data is based on Chapter 5 of this CEM whereas interna- tional prices (in constant US$) are based on IMF (2014c), and World Bank (2015a, 2015d); 92 The real exchange rate is defined as follows: PW•EXR/PD where PW is an index of export and import prices in foreign currency, EXR in the absence of World Bank price projec- the nominal exchange rate (local currency units per foreign currency tions after 2025, prices are assumed to stay at unit), and PD an index of prices of domestic output sold domestically. 93 For example, a real depreciation raises the prices in local currency the 2025 level during the period 2026–2030. of exports and imports, for exports inducing domestic suppliers to The information is shown in the main text, increase quantities and foreign currency values and, for imports, inducing domestic demanders to decrease quantities and foreign Figure 2.2.1. For oil, production is projected to currency values, with the result being a surplus (or reduced deficit) peak in 2015 after which it declines gradually, at in the balance of payments. 156 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Scenario Results Table 0.5: Real Macro Indicators by Simulation (%annual Growth 2013–2030) 2012 Base Crop+ Rem– Crop+rem– TofT+ Aid+ Debt– Normal Absorption 243.1 3.1 3.9 2.2 3.2 3.5 3.2 3.4 3.8 Consumption – private 188.3 2.9 3.9 2.0 3.2 3.3 3.0 3.2 3.7 Consumption – government 12.8 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7 Fixed investment – private 38.6 2.7 3.5 1.6 2.6 3.2 2.9 3.1 3.7 Fixed investment – government 3.5 8.8 8.8 8.8 8.8 8.8 8.8 8.8 8.8 Exports 19.8 6.0 7.6 6.7 8.2 6.2 6.0 5.9 6.1 Imports 37.7 3.4 4.7 2.5 4.0 4.1 3.6 3.8 4.5 GDP at factor cost 213.6 4.1 5.0 3.7 4.8 4.3 4.2 4.3 4.6 Total factor employment (index) 3.0 3.3 2.8 3.1 3.2 3.1 3.2 3.4 Total factor productivity (index) 1.1 1.7 1.0 1.7 1.1 1.1 1.1 1.2 GNI 216.5 3.9 4.9 3.5 4.7 4.2 4.0 4.2 4.5 GNDI 219.5 4.1 5.1 3.5 4.6 4.4 4.2 4.4 4.7 GNI per capita 5.8 1.7 2.6 1.3 2.4 2.0 1.8 2.0 2.3 GNDI per capita 5.9 1.9 2.8 1.3 2.4 2.1 2.0 2.1 2.4 Real exchange rate (index) 4.4 3.7 4.8 4.0 4.2 4.3 4.3 4.1 Unemployment rate (%) 20.0 10.8 5.0 12.5 6.0 6.9 9.8 8.5 5.0 Headcount poverty rate (%) 46.5 38.4 29.4 47.2 35.8 34.2 37.4 35.8 31.4 Note: 1. Unless otherwise noted, column for initial year shows data in mn 2012 SDG. 2. For the unemployment and poverty rates, the base-year and simulation columns show base-year rate and simulation-specific final-year rates, respectively. Annexes 157 Table 0.6: Macro Indicators in 2012 and by Simulation in 2013 (% of GDP) Indicator 2012 Base Crop+ Rem– Crop+rem– TofT+ Aid+ Debt– Normal Absorption 108.0 104.7 103.3 96.3 96.6 104.2 105.5 106.951 106.9 Consumption – private 83.6 81.7 80.4 74.7 75.0 81.3 82.3 83.446 83.5 Consumption – government 5.7 5.2 4.7 5.5 4.9 5.0 5.2 5.113 4.9 Investment – private 17.2 14.3 14.9 12.4 13.3 14.6 14.5 14.913 15.3 Investment – government 1.5 3.6 3.2 3.7 3.4 3.3 3.5 3.479 3.2 Exports 8.8 26.0 27.1 33.0 32.7 25.8 25.6 24.7 24.1 Imports 16.8 30.7 30.3 29.3 29.3 30.0 31.1 31.6 31.0 GDP at market prices 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Net indirect taxes 5.1 9.0 8.2 9.8 8.7 8.5 8.3 6.8 5.8 GDP at factor cos 94.9 91.0 91.8 90.2 91.3 91.5 91.7 93.2 94.2 GNI 96.2 93.6 94.5 92.9 94.0 94.0 93.2 96.2 96.0 GNDI 97.5 103.6 102.4 95.0 95.6 103.2 103.3 105.8 105.0 Foreign savings 10.5 1.1 0.9 1.3 1.0 1.0 2.1 1.1 1.9 Gross national savings 8.2 16.7 17.2 14.9 15.7 16.9 15.9 17.3 16.7 Gross domestic saving 10.7 13.1 14.8 19.8 20.1 13.7 12.6 11.4 11.6 Foreign government deb 81.4 113.8 89.8 127.9 97.7 103.9 126.5 37.0 46.2 Foreign private debt 2.6 3.7 2.9 4.1 3.1 3.3 3.6 3.5 3.2 Domestic government debt 12.9 16.3 13.6 17.4 14.3 15.1 16.1 15.7 14.4 Table 0.7: Government Receipts and Spending in 2012 and by Simulation in 2030 (% of Nominal GDP) Final year Indicator 2012 Base Crop+ Rem– Crop+rem– TofT+ Aid+ Debt– Normal Receipts Direct taxes 0.7 1.1 1.0 1.2 1.1 1.1 1.0 0.7 0.6 Import tariffs 2.1 2.7 2.7 2.5 2.6 2.6 2.7 2.7 2.7 Other indirect taxes 4.9 6.9 6.0 7.8 6.7 6.5 6.1 4.5 3.7 Private transfers 1.7 2.9 2.9 2.7 2.7 2.9 2.9 3.0 3.0 Foreign transfers 0.4 0.4 0.3 0.5 0.3 0.4 0.7 0.4 0.6 Domestic borrowing 3.5 1.7 1.4 1.8 1.5 1.6 1.7 1.7 1.5 Foreign borrowing 2.8 0.9 0.7 1.0 0.8 0.8 1.9 0.8 1.7 Total 16.1 16.6 15.0 17.5 15.6 15.8 16.9 13.9 13.7 Spending Consumption 5.7 5.2 4.7 5.5 4.9 5.0 5.2 5.1 4.9 Fixed investment 1.5 3.6 3.2 3.7 3.4 3.3 3.5 3.5 3.2 Private transfers 3.0 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6 Commodity subsidies 1.8 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 Domestic interest payments 1.4 0.4 0.3 0.4 0.3 0.3 0.3 0.3 0.3 Foreign interest payments 2.7 3.4 2.6 3.8 2.9 3.1 3.8 0.8 1.2 Total 16.1 16.6 15.0 17.5 15.6 15.8 16.9 13.9 13.7 158 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Table 0.8: Balance of Payments in 2012 and by Simulation in 2030 (% of Nominal GDP) Final year Indicator 2012 Base Crop+ Rem– Crop+rem– TofT+ Aid+ Debt– Normal Outflows Imports 16.8 30.7 30.3 29.3 29.3 30.0 31.1 31.6 31.0 Factor income to RoW 1.1 2.8 2.7 3.1 2.9 2.7 2.8 2.8 2.6 Net interest income to RoW 2.8 3.6 2.8 4.0 3.1 3.2 4.0 1.0 1.3 Change in foreign reserves 0.9 0.9 0.7 1.1 0.8 0.9 0.9 0.9 0.8 Total 21.5 38.1 36.6 37.5 36.1 36.8 38.8 36.4 35.8 Inflows Exports 8.8 26.0 27.1 33.0 32.7 25.8 25.6 24.7 24.1 Private transfers from RoW 0.9 9.6 7.6 1.7 1.3 8.8 9.5 9.3 8.4 Official transfers from RoW 0.4 0.4 0.3 0.5 0.3 0.4 0.7 0.4 0.6 Private borrowing 4.6 0.1 0.1 0.2 0.1 0.1 0.1 0.1 0.1 Government borrowing 2.8 0.9 0.7 1.0 0.8 0.8 1.9 0.8 1.7 FDI 3.9 1.1 0.8 1.2 0.9 1.0 1.1 1.0 0.9 Total 21.5 38.1 36.6 37.5 36.1 36.8 38.8 36.4 35.8 Table 0.9: Real GDP at Factor Cost in 2012 and Growth by Simulation (% Annual Growth) 2012 Base Crop+ Rem– Crop+rem– TofT+ Aid+ Debt– Normal Aggregate sectors Agriculture 60.8 5.7 7.0 5.7 7.1 5.9 5.7 5.7 6.0 Industry 47.4 1.9 2.5 1.3 2.0 2.2 2.0 2.2 2.5 Mining 19.7 –3.4 –3.5 –3.4 –3.4 –3.4 –3.4 –3.4 –3.4 Manufacturing 15.9 4.3 5.1 3.6 4.5 4.6 4.4 4.6 5.0 Other 11.9 3.5 4.2 2.8 3.6 3.9 3.7 3.9 4.3 Services 105.4 3.8 4.6 3.2 4.2 4.1 4.0 4.1 4.5 Private 94.6 3.9 4.7 3.2 4.2 4.2 4.0 4.2 4.5 Government 10.8 3.7 4.0 3.3 3.7 3.8 3.7 3.8 4.0 Disaggregated sectors Crop agriculture 32.3 6.1 8.3 6.4 8.6 6.3 6.2 6.2 6.3 Livestock agriculture 28.6 5.1 5.1 4.9 4.7 5.4 5.2 5.2 5.5 Gold 7.7 –2.3 –2.5 –2.3 –2.4 –2.4 –2.3 –2.3 –2.4 Petroleum 12.0 –4.2 –4.2 –4.2 –4.2 –4.2 –4.2 –4.2 –4.2 Manufacturing 15.9 4.3 5.1 3.6 4.5 4.6 4.4 4.6 5.0 Construction 8.5 3.7 4.3 2.9 3.7 4.1 3.8 4.0 4.5 Electricity-water 3.3 3.1 3.9 2.5 3.5 3.4 3.2 3.4 3.7 Trade services 56.5 3.9 4.7 3.3 4.3 4.1 4.0 4.2 4.5 Transportation services 20.9 3.8 4.7 3.0 4.1 4.1 3.9 4.1 4.5 Government services 10.8 3.7 4.0 3.3 3.7 3.8 3.7 3.8 4.0 Other services 17.2 3.9 4.9 3.1 4.3 4.3 4.1 4.3 4.8 Total 213.6 4.1 5.0 3.7 4.8 4.3 4.2 4.3 4.6 Annexes 159 Table 0.10: Sector Structure in 2012 and by Simulation in 2013 (% of GDP) EXP-shr VA-shr EMP-shr IMP-shr EXPOUT-shr IMPDEM-shr 2012 Agriculture 15.6 28.5 63.6 16.9 3.7 7.7 Crop 11.6 15.1 35.8 15.2 4.4 10.8 Livestock 4.1 13.4 27.8 1.7 2.6 2.2 Industry 76.8 22.2 8.7 64.0 8.3 14.5 Mining 75.3 9.2 2.1 8.9 37.3 11.9 Gold 38.9 3.6 0.9 100.0 Petroleum 36.4 5.6 1.2 8.9 22.3 11.9 Manufacturing 1.5 7.4 3.6 54.1 0.3 17.2 Other 0.0 5.6 3.0 1.0 0.0 1.8 Services 7.5 49.3 27.7 19.1 1.0 4.9 Private 7.5 44.3 22.6 19.1 1.2 5.5 Government 5.0 5.0 Total 100.0 100.0 100.0 100.0 4.8 9.8 2030 Agriculture 75.2 38.9 73.0 3.3 38.9 3.3 Crop 55.3 23.0 45.2 3.0 41.7 4.6 Livestock 19.9 15.8 27.8 0.3 32.7 0.9 Industry 12.7 17.7 5.8 82.0 4.4 27.9 Mining 10.3 6.0 0.7 48.2 31.7 72.2 Gold 5.3 1.5 0.3 100.0 Petroleum 5.0 4.5 0.3 48.2 18.4 72.2 Manufacturing 2.4 7.0 3.0 33.5 1.1 18.4 Other 0.0 4.6 2.2 0.3 0.0 1.2 Services 12.1 43.4 21.2 14.7 5.4 7.7 Private 12.1 38.9 17.3 14.7 6.2 8.7 Government 4.5 3.9 Total 100.0 100.0 100.0 100.0 14.1 17.5 Δ (2030–2012) Agriculture 59.5 10.4 9.4 –13.6 35.1 –4.4 Crop 43.8 7.9 9.4 –12.2 37.2 –6.2 Livestock 15.8 2.5 0.0 –1.4 30.1 –1.4 Industry –64.2 –4.5 –2.9 18.0 –3.9 13.4 Mining –65.0 –3.2 –1.5 39.3 –5.5 60.3 Gold –33.7 –2.1 –0.6 Petroleum –31.4 –1.1 –0.9 39.3 –3.9 60.3 Manufacturing 0.9 –0.4 –0.7 –20.6 0.8 1.2 (continued on next page) 160 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Table 0.10: Sector Structure in 2012 and by Simulation in 2013 (% of GDP) (continued) EXP-shr VA-shr EMP-shr IMP-shr EXPOUT-shr IMPDEM-shr Other 0.0 –0.9 –0.8 –0.6 0.0 –0.5 Services 4.6 –5.9 –6.5 –4.4 4.4 2.8 Private 4.6 –5.4 –5.4 –4.4 5.0 3.2 Government –0.5 –1.1 Total 0.0 0.0 0.0 0.0 9.3 7.7 Notation Share in EXP-shr exports VA-shr value added PRD-shr production EMP-shr employment IMP-shr imports EXPOUT-shr sector output to exports IMPDEM-shr domestic demand from imports Annexes 161 Annex 2: Determinants of Savings in youth dependency ratio fell from 82 percent of Sudan working-age population in 2000 to 75 percent in 2012. The literature finds strong negative cor- The main text showed that national savings in realtion between youth dependency ratio and post-secession Sudan fell sharply and is low given saving. In this period, however, Sudan’s private its income level. Low savings further can translate savings rate fell from 17.5 percent in 2000 to into lower growth through lower investment. This 10.1 in 2012. This inconsistency can be attrib- annex provides a short analysis of the determinants utable to Sudan’s high and unchanged youth of savings from both macro and micro perspectives. unemployment. Youth unemployment effectively In doing so, the analysis uses estimates from World adds burden of youth dependency. Sudan suf- Bank (2013), which modified estimations by Loayza, fers from particularly high youth unemploy- Schmidt-Hebbel and Servén (2000) by incorporat- ment: new labor market entrants, those around ing nonlinearity of macroeconomic stability. See 20 years of age, face an unemployment rate of Figure 0.3 for results. around 24 percent. Comparison with the peer Sudan’s private savings behavior is mostly group countries shows that Sudan’s youth attributable to three determinants: macroeconomic unemployment rate is the second highest after instability, income level, and youth dependency: Egypt. Consequently, even as the young-age population bulge came of age and entered the i. Macroeconomic stability significantly affects labor market, the effective youth dependency on Sudan’s private saving.94 The sharp decline in income earners did not decline much. inflation in the late 1990s raised private sav- ing, whereas the skyrocketing inflation since The increase in private savings in the early the secession of South Sudan lowered private 2000s was accompanied by an increase in public saving. The above analysis found a negative savings. Before the advent of oil, public savings relationship between inflation and savings rate, was in the range of 0 to 1 percent of GNDI. Public which suggests that skyrocketing inflation dis- investment remained low and overall fiscal deficit courages households to save by depleting real was improving from the poor macroeconomic per- value of household assets and purchasing power formance in the early 1990s. Public savings started of household income. In such a case, households to rise following a rise in public investment in the dis-save to fill in consumption gap or to save in early 2000s. Because fiscal balance remained close to non-monetary form by increasing inventory of zero until the mid-2000s, public savings was mostly goods or save in foreign currency. driven by public investment. Large fiscal deficit was ii. The increase in income level since the advent registered in 2009 when the global financial crisis of oil in the 2000s boosted Sudan’s private sav- hit the Sudanese economy and in 2012 when Sudan ing. The literature suggests that households start lost nearly 55 percent of its fiscal revenues after the to save when their income exceeds subsistence secession of South Sudan. Public saving, in turn, is levels. The advent of oil accelerated economic recently driven by large fiscal deficit given public growth in the 2000s, leading to increase in pri- investment is declining. vate saving. Sudan’s per capita GDP stagnated in the 1980s and the 1990s but started to rise since the mid-1990s. 94 Balassa (1986) claims that stable and substantial level of domestic savings can be achieved by keeping the real interest rate stable and iii. The decline in youth dependency ratio, in gen- sufficiently high. Alternatively, Balassa proposes that low and stable eral, contributes to rising private saving. Sudan’s inflation, supported by a small budget deficit, encourages saving. 162 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT FIGURE 0.3: Savings Rates in Sudan, 1991–2013 1) Correlation between Inflation and Private 2) Correlation between Income and Private Savings in Sudan (1992–2012) Savings in Sudan (1992–2012) 20 30 Private saving, percent of GDNI Private saving, percent of GDNI 10 20 10 0 0 –10 –10 –20 –20 –30 –30 –40 –40 0 20 40 60 80 100 120 140 400 500 600 700 800 900 Inflation, percent GDP per capita (constant at 2005 US$) 3) Private Savings in Sudan (2000–2012) 4) Youth Unemployment: Sudan and its peer 20 50 18 Private saving, percent of GDNI 45 16 40 14 35 12 30 Percent 10 25 8 6 20 4 15 2 10 0 5 80 81 82 83 84 85 86 87 Tanzania Uganda Ethiopia Kenya Morocco Indonesia Algeria Sudan Egypt GDP per capita (constant at 2005 US$) Average 90s Average 00s Average 10s 5) Sudan’s Public Savings (1991–2013) 10 5 0 -5 –10 –15 –20 –25 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013p Public saving Overall fiscal balance Public investment Source: World Bank staff own calculations, based on data from World Bank World Development Indicators; and IMF World Economic Outlook. Note: (1) “p” denotes preliminary. Annexes 163 Annex 3: Timeline of U.S. Sanctions or petrochemical industries, including, but not Against Sudan limited to, oilfield services and oil or gas pipeline. The President of the United States signs into law 1997, 3rd November – Executive Order 13067 the Darfur Peace and Accountability Act of 2006 (blocking Sudanese Government property and (imposing sanctions against individuals respon- prohibiting transactions with Sudan) issued sible for genocide, war crimes, and crimes against 2002, 21st October – OFAC added names of indi- humanity, to support measures for the protec- viduals and firms to its specially designated tion of civilians and humanitarian operations, nationals list including Sudanese Petroleum and to support peace efforts in the Darfur region Corporation of Sudan). The two pieces of law also provided 2004, 5th April – OFAC issued an interpretative rul- relief to Southern Sudan and the Government of ing on publishing activities involving manuscripts Southern Sudan as well as select areas of Sudan from sanctioned countries including Sudan including Southern Kordofan/ Nuba Mountains, 2004, 2 nd August – OFAC added Farmers Blue Nile State, Abyei, Darfur and marginalized Commercial Bank in the specially designated areas in and around Khartoum (Specified Areas of nationals list for Sudan Sudan) by exempting them from some of the pro- 2004, 16th December OFAC issued a general license hibitions sets forth in the Executive Order 13067 pertaining to certain publishing activities in Sudan 2006, 17 th November – OFAC issued an 2005, 29 th March United Nations Security Interpretative Guidance regarding the appli- Resolution 1591 of 2005 passed a resolution cation of Executive Order 13412 to trans- obligating all United Nations members to sub- shipments of goods and financial transactions ject to asset freeze and travel restrictions indi- conducted through certain areas of Sudan viduals who are determined to have inter alia 2006, 3rd April – OFAC amended the Sudanese impeded the peace process, constituted a threat Sanctions Regulations to permit the exportation to stability in Darfur and the region, commit vio- or re-exportation, from the United States or by lations of international humanitarian or human a U.S. person, of any goods or technology to a rights law or other atrocities third-country government, or to its contractors 2005, 13th June OFAC issued amendments to the or agents, for shipment to Sudan via a diplo- Sudanese Sanctions Regulations to authorizes matic pouch inter alia (a) the operation of accounts in U.S. 2007, 29th May – OFAC added names of indi- financial institutions under certain circum- viduals and firms to its specially designated stances for individuals ordinarily resident in nationals list pursuant to Executive Order Sudan; and (b) U.S. persons to process transfers 13400 of April 26, 2006 as contributing to the of funds constituting noncommercial, personal conflict in the Darfur region. These include remittances to or from Sudan or for or on behalf Sudan Telecommunications Company Limited of individuals ordinarily resident in Sudan (SUDATEL), Sudan Gezira Board, Azza Air 2006, 26th April – Executive Order 13400 (block- Transport Company Ltd and Giad Motor ing property of persons in connection with the Industry Company Limited conflict in Sudan’s Darfur Region) issued 2007, 31st October – OFAC amended the Sudan 2006, 13th October – Executive Order 13412 block- Sanctions Regulations to implement Executive ing property and prohibiting transactions with Order 13412, provide interpretative sections in the the Government of including all transactions Regulations and introduce general licenses which by U.S. persons relating to Sudan’s petroleum expands the exemption relating to official business 164 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT of the U.S. Government and the United Nations transfer and transportation of human remains to include transactions and activities not only of to or from Sudan employees but also of contractors and grantees of 2011, 13th October – OFAC issued general licenses the U.S. Government and United Nations or any of authorizing the exportation or re-exportation the United Nation specialized agencies, programs, food to individuals and entities in an area of and funds (including, e.g., the World Bank Group Sudan other than the Specified Areas of Sudan and International Monetary Fund). 2011, 8th December – OFAC issued general licenses 2009, 10th June – OFAC amended the Sudan which inter alia authorizes related financial trans- Sanctions Regulations to expand the authoriza- actions and the activities supporting transship- tion of select imports for diplomatic or official ment—through Sudan to or from South Sudan—of personnel to include the provision of goods or goods, technology, and services for South Sudan’s services in the United States to the diplomatic petroleum and petrochemical industries missions of the Government of Sudan to the 2013, 15th April OFAC issued General License 1 United States and the United Nations, and to permitting certain academic and professional the employees of such missions exchange activities between the United States 2009, 9th September – OFAC issued a general license and Sudan, which are otherwise prohibited by authorizing the exportation and re-exportation of the Sudanese Sanctions Regulations including agricultural commodities, medicine, and medical establishment and operation by U.S. academic devices to the Specified Areas of Sudan institutions of academic exchange programs 2010, 10th March – OFAC issued a general license with academic institutions in Sudan authorizing the exportation from the United 2014, 11th August – OFAC issued General License States or by U.S. persons of certain limited 1A which modify the scope of authorization per- services and software related to the exchange mitted on April 15, 2013 and expands the defi- of personal communications over the Internet nition of “U.S. academic institutions”, permits 2010, 20th October – OFAC issued a statement such institutions to engage in activities involving on licensing policy that seeks to establish a Sudanese nationals and authorizes U.S. financial favorable licensing regime through which institutions to process money transfers inci- U.S. persons can request from OFAC specific dental to participation of Sudanese nationals in authorization for the commercial exportation or academic and professional exchange programs re-exportation of U.S.-origin agricultural equip- organized by U.S. academic institutions. ment and services to an area of Sudan other than 2015, 18th February – In order to advance free flow the Specified Areas of Sudan of information and to facilitate communica- 2011, 12th April – OFAC issued an Interpretative tions by the Sudanese people, OFAC issued an Guidance regarding the application of the amended general license pertaining to certain Sudanese sanctions regulations to the new state software, hardware, and services incident to per- to be formed by the secession of Southern Sudan sonal communications (essentially expanding 2011, 17th June – OFAC issued a guidance clarifying the scope of ICT devices, software and services that donations of food and medicine to non-Spec- for personal communication that can be made ified Areas of Sudan, when intended to be used to available in Sudan by U.S. persons). relieve human suffering, are exempt from the pro- hibitions of the Sudanese Sanctions Regulations Source: World Bank staff own compilation, based 2011, 12th October – OFAC issued general licenses on data from the U.S. Office for Foreign Asset authorizing processing of consular funds Control (OFAC). Annexes 165 Annex 4: Additional Details on Measuring a country’s RER misalignment RER Calculations and Theoretical Considerations The first step, measures an RER misalignment index after controlling for the Balassa-Samuelson effect. Examples of the theoretical relationship The Balassa-Samuelson effect captures the effect of between the real exchange rate and an economy’s productivity on its non-tradable goods’ exports prices. In detail, this can be explained as follows: usually it is observed that the prices of services (like Two examples show the theoretical impact of RER a haircut) are higher in developed countries than in adjustments on exports: developing countries because wages are higher in developed countries. But why are wages are higher in  First, a reduction in domestic demand would developed countries? It is because the tradable sector lower both the RER and the price of export. This of developed countries has higher productivity than is because the reduced domestic demand would that in developing countries. Given the law of one lower the prices of both the domestic non-trad- price on tradable goods, this implies that wages paid able and tradable goods. Since the price of the to tradable-sector workers in developed countries foreign tradable good does not change (much), have to be higher to commensurate their high pro- this implies that the domestic tradable good ductivity. In other words, low productivity explains would become relatively cheaper compared to a large part why the tradable/non-tradable good the foreign tradable good. This in turn would price ratio (i.e. the real exchange rate) in developing imply cheaper exports. countries is larger than that in developed countries. In addition, since both the prices of the After the Balassa-Samuelson effect is captured, the non-tradable good and tradable good decline remaining residual is considered the misaligned part. compared to the foreign goods, the relative price The Balassa-Samuelson effect is captured as of the domestic consumption basket becomes follows: lower, implying a depreciated RER. So there would be cheaper export and a depreciated RER. si,t ∗ lnRERiW,t = βsi,t ∗ (lnyi,t – lnyW,t) + ui,t  Second, consider a policy that would subsidize the production of domestic tradable goods. As It is a weighted regression (to take into a result, production of the domestic tradable account the fact that larger countries have heavier goods would expand and they would become weights in the regression). A country’s pro- cheaper compared to the foreign tradable good, ductivity is proxied by its output per capita. implying cheaper export. On the other hand, the unsubsidized domestic non-tradable goods Yi ,t si ,t = ∑ N would become relatively scarce and hence more Yj ,t j =1 expensive. The increase in the non-tradable goods’ prices could outweigh the decline of the is the weight of country i at time t. Yi,t is country tradable goods’ prices, thus possibly making i’ nominal output;. lnRERiW,t is the log of the real the price of the domestic consumption basket exchange rate of country i relative to the world; lnyi,t, to go up compared to that of the foreign con- lnyW,t are country i and world average output per sumption basket. The RER would appreciate. capita at time t. Coefficient β captures the Balassa- So the subsidy makes export cheaper, but the Samuelson effect with an expected negative sign. The RER appreciates. idea is that according to the Balassa-Samuelson effect, 166 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT a country’s RER, at any given time, is larger if its out- is larger, beyond the explanation of the Balassa- put per capita (a proxy for productivity) is smaller Samuelson effect. compared to the world’s output. This is slightly dif- ferent to Rodrik’s approach, in the sense that he only Measuring the impact of undervalued RERs regresses a country’s RER with its absolute output per on export and output growth capita. Since RER is a relative concept, the decision To examine econometrically the relationship was made to add the world average output to the between a country’s RER undervaluation with its right hand side of the equation to generate output export and output growth using international data differential, which is a relative concept as well. the following regression is used: Notice that there is no constant in the regression  u and no time and country fixed effects. The regres- growthratei ,t = α + γ i ,t + ft + fi + ε i ,t si ,t sion is designed that the sum of the right hand side exactly equals the sum of the left hand side every where growth rate is calculated for both real exports period (i.e. sum of ui,t equals 0 for all t). What it and real GDP, u  s is the undervaluation measure, i ,t i ,t means is that at any given time, on average, the and ft, fi are country and time fixed effects. The time world RER is exactly aligned. fixed effects is to control for global macroeconomic The results show that Balassa-Samuel effect is factors that affect all countries’ export in the same highly significant with a negative sign. It shows that way at a given time. The country fixed effects is to for each additional 1 percent output differential, control for country’s time-invariant characteristics. Balassa Samuelson effect on average explains 0.317 Essentially, with the country fixed effects, the follow- percent of RER appreciation. What this means is that ing question is asked: how does a real export growth for each 1 percent output differential, the produc- change within a country, given its RER undervalua- tivity differential accounts for 0.317 percent of the tion index relative to the rest of the world? The ini- RER differential between countries. tial value of export and output levels are controlled.  s will be the RER misalignment vari- u The expected sign of γ is positive: it implies that a i ,t i ,t able of country i where u  is the residual of the more undervalued exchange rate (a larger u  s ) is i ,t i ,t i ,t regression. A positive ui,t implies an undervalued associated with higher export and output growth. RER. That is, the RER is larger beyond the expla- Two results are derived and shown in Tables nation of the Balassa-Samuelson effect. In other 0.12 and 0.13. Simple descriptions of the results words, the tradable/non-tradable good price ratio are in the main text. Table 0.11: Panel Estimation Effect on Exports Growth of Undervaluation First-Stage Balassa-Samuelson Weighted relative GDP growth –0.317 ***(0.0117) Time Fixed Effect no Country Fixed Effect no Observations 8,184 R-squared 0.804 Notes: Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1 Annexes 167 Table 0.12: Undervalued RERs and Export Growth Second-Stage All Countries High Income Low Income ∆ln(real exports) ∆ln(real exports) ∆ln(real exports) Full Sample Full Sample 1950–1980 1981–2011 Full Sample 1950–1980 1981–2011 (1) (2) (3) (4) (5) (6) (7) ln(Initial Real Exports) –0.0999*** –0.0847*** –0.137*** –0.127*** –0.127*** –0.388*** –0.128*** (0.0225) (0.0151) (0.0233) (0.0187) (0.0437) (0.0631) (0.0250) Undervaluation 0.0598*** 0.0811*** 0.126*** 0.0497 0.0502** –0.0375 0.0699*** (0.0131) (0.0188) (0.0379) (0.0336) (0.0211) (0.0708) (0.0258) Constant 0.778*** 0.547*** 1.163*** 1.199*** 0.771*** 2.431*** 0.934*** (0.148) (0.104) (0.174) (0.168) (0.273) (0.401) (0.173) Time Fixed Effect yes yes yes yes yes yes yes Country Fixed Effect yes yes yes yes yes yes yes Observations 7,139 3,561 1,444 2,117 3,578 1,305 2,273 R-squared 0.139 0.159 0.157 0.209 0.148 0.334 0.159 Number of country id 156 75 63 75 81 63 81 Notes: Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1 Low Income countries: if the real GDP per capita was below US$6,000/year in 2000. Table 0.13: Undervalued RERs and Output Growth Second-Stage All Countries High Income Low Income ∆ln(real exports) ∆ln(real exports) ∆ln(real exports) Full Sample Full Sample 1950–1980 1981–2011 Full Sample 1950–1980 1981–2011 (1) (2) (3) (4) (5) (6) (7) ln(Initial Real Exports) –0.0916*** –0.141*** –0.215** –0.294** –0.0830*** –0.182*** –0.135*** (0.0204) (0.0450) (0.0983) (0.114) (0.0128) (0.0372) (0.0171) Undervaluation 0.0884*** 0.138*** 0.195*** 0.183** 0.0764*** 0.121*** 0.114*** (0.0204) (0.0496) (0.0731) (0.0828) (0.0123) (0.0248) (0.0184) Constant 0.743*** 1.205*** 1.984** 2.722** 0.601*** 1.322*** 1.042*** (0.156) (0.370) (0.924) (1.059) (0.0925) (0.267) (0.132) Time Fixed Effect yes yes yes yes yes yes yes Country Fixed Effect yes yes yes yes yes yes yes Observations 8,020 3,925 1,570 2,355 4,095 1,579 2,516 R-squared 0.140 0.219 0.295 0.297 0.129 0.182 0.175 Number of country id 165 80 68 80 85 73 85 Notes: Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1 Low Income countries: if the real GDP per capita was below US$6,000/year in 2000. 168 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Annex 5: Financial Soundness Indicators for the Banking Sector, 2006–13 Dec Dec Dec Dec Dec Dec Dec Mar Jun 2006 2007 2008 2009 2010 2011 2012 2013 2013 Capital Adequacy Regulatory capital to risk-weighted assets 1/ 19.7 22.0 10.5 7.1 10.0 13.0 12.0 — 14.9 Regulatory Tier I capital to risk-weighted assets 1/ 17.4 20.0 8.7 6.1 8.9 11.0 10.5 — 13.6 Asset composition and quality Loans to nongovernment to total assets 46.3 50.7 51.1 52.3 51.8 — — — — Gross NPLs to gross loans 19.4 26.0 22.4 20.5 14.4 12.6 11.8 11.3 10.4 NPLs net of provisions to gross loans 17.0 22.0 17.9 17.9 10.4 7.6 7.5 7.5 5.8 NPLs net of provisions to capital 63.7 85.0 71.0 74.8 43.7 33.3 33.5 30.5 25.5 Loans provisions to NPLs 14.0 15.0 20.0 23.9 31.7 39.8 36.5 33.3 43.7 Foreign currency loans to total loans 26.0 13.2 15.8 20.4 13.7 9.0 15.7 13.2 11.8 Deposits and investment accounts to total assets 60.0 55.5 57.4 63.2 63.9 63.5 63.4 64.5 65.1 Foreign currency deposits to total deposits 22.0 21.4 21.2 19.2 22.0 18.7 27.0 26.9 24.9 Off-balance sheet commitments to assets 33.0 32.5 34.4 28.0 31.5 29.8 32.2 29.9 28.9 Earnings and Profitability ROA (before tax) 3.6 3.7 3.0 3.8 3.9 4.2 4.4 1.0 1.3 ROE (before tax) 35.4 26.5 23.3 25.5 26.5 27.8 36.4 7.6 10.0 Liquidity BOS deposits to total assets 8.0 8.6 9.1 12.7 10.8 13.1 17.5 17.3 18.1 Required reserves to total assets 4.0 3.0 2.9 2.1 3.2 3.5 5.5 5.6 5.6 Required reserves to total reserves 39.0 34.8 26.0 14.5 25.5 23.9 28.6 28.9 28.0 Cash in vault to total assets 1.0 2.5 2.2 2.0 1.9 2.1 2.0 2.6 2.6 Liquid assets to total assets 25.0 25.6 28.0 34.2 35.3 36.3 41.7 39.6 39.8 Liquid assets to total short-term liabilities 75.0 75.0 85.0 97.0 98.2 93.8 102.5 96.3 96.7 Source: Central Bank of Sudan. Annexes 169 Annex 6: Additional Information for Export Performance Analysis Tables and figures Change in Sudan’s Shares of Exports, Main Export Products at HS-6 Level, 2007–2012 Table 0.14:  (1) (2) (3) (4) (5) (6) Exports 2007 Share RCA Exports 2012 Share RCA (7) Product Product Description (US$ ‘000) 2007 (%) 2007 (US$ ‘000) 2012 (%) 2012 CAGR 710812 Gold, non–monetary 197,391 2.32% 6.62 2,167,423 41.85% 40.11 61.48 10410 Sheep 61,456 0.72% 102.67 333,084 6.43% 770.21 40.22 120740 Sesame seeds 99,042 1.16% 163.84 147,845 2.85% 215.50 8.34 130120 Gum arabic 78,194 0.92% 486.43 92,291 1.78% 870.24 3.37 271000 Refined oil 63,746 0.75% 0.18 56,673 1.09% 0.19 –2.32 170111 Raw sugar not containing 19,550 0.23% 4.42 37,179 0.72% 6.86 13.72 added flavor 854810 Waste and scrap of primary 608 0.01% 0.89 36,258 0.70% 130.24 126.55 cells 740400 Copper waste and scrap 12,478 0.15% 1.00 26,070 0.50% 3.27 15.88 220710 Undenatured ethyl alcohol 0 0.00% 0.00 23,328 0.45% 10.09 n/a 20421 Other meat of sheep, fresh 5,134 0.06% 64.10 22,154 0.43% 252.30 33.97 or chilled Other (Total exports minus 254,466 2.99% 0.03 180,812 3.49% 0.04 –6.61 top 11 export products) Source: World Bank staff own calculations, based on data from UN Comtrade. Table 0.15: Joint Distribution of Sudan’s Exporters Across Products and Destinations Panel A. Distribution of Exporters in 2008 Number of destinations per firm 1 2 3 4 to 10 11 to 20 20 or more Total 1 52% 8% 3% 2% 0% 0% 65% 2 5% 7% 2% 2% 0% 0% 15% Number of products 3 1% 2% 3% 2% 0% 0% 8% per firm 4 to 10 1% 2% 2% 5% 0% 0% 11% 11 to 20 0% 0% 0% 0% 0% 0% 1% 20 or more 0% 0% 0% 0% 0% 0% 0% Total 59% 19% 10% 10% 1% 0% 100% (continued on next page) 170 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Table 0.15: Joint Distribution of Sudan’s Exporters Across Products and Destinations (continued) Panel B. Distribution of Total Merchandise Exports in 2008 Number of destinations per firm 1 2 3 4 to 10 11 to 20 20 or more Total 1 28% 6% 4% 7% 8% 0% 54% 2 2% 1% 1% 3% 0% 0% 7% Number of products 3 0% 2% 4% 4% 2% 0% 12% per firm 4 to 10 0% 2% 3% 17% 3% 0% 25% 11 to 20 0% 0% 0% 0% 2% 0% 2% 20 or more 0% 0% 0% 0% 0% 0% 0% Total 31% 11% 11% 32% 15% 0% 100% Panel C. Distribution of Exporters in 2012 Number of destinations per firm 1 2 3 4 to 10 11 to 20 20 or more Total 1 36% 11% 3% 2% 0% 0% 52% 2 6% 9% 3% 2% 0% 0% 20% Number of products 3 1% 3% 3% 3% 0% 0% 10% per firm 4 to 10 1% 2% 2% 9% 1% 0% 15% 11 to 20 0% 0% 0% 1% 1% 0% 2% 20 or more 0% 0% 0% 0% 0% 0% 1% Total 44% 25% 11% 17% 2% 0% 100% Panel D. Distribution of Total Merchandise Exports in 2012 Number of destinations per firm 1 2 3 4 to 10 11 to 20 20 or more Total 1 3% 66% 1% 2% 0% 0% 71% 2 0% 3% 0% 1% 0% 0% 5% Number of products 3 0% 1% 1% 2% 1% 0% 5% per firm 4 to 10 0% 0% 1% 13% 1% 0% 15% 11 to 20 0% 0% 0% 2% 0% 0% 2% 20 or more 0% 0% 0% 0% 1% 0% 1% Total 4% 70% 3% 19% 3% 0% 100% Source: World Bank staff own calculations, based on data used for the World Bank Exporter Dynamics Database. Annexes 171 Product Space Concepts basket, and it is calculated as a weighted average of PRODYs of the products exported by the country, Revealed Comparative Advantage (RCA): where the weights are the shares of the products in RCA for a product i in country j is calculated fol- the country’s export basket: lowing Balassa (1977), as the ratio of the share of  x ji  product i in total exports of country j, to the share EXPYj = ∑ i   ∗ PRODYi of world exports of product i in total world exports  Xj    x ji Product and Economic Complexity: Xj RCA ji = Complexity of a product is a function of the capa- ∑ j x ji bilities it requires, while the complexity of a country ∑j Xj is given by the number of locally available capabili- ties. To provide a numerical measure of product Country j will be competitive in exporting good i and economic complexity, Hidalgo and Hausmann if RCAji>1, which means that the share of product (2009) first define Diversification of a country as i in country j exports will be higher than the share the number of products that a country exports with of the same good worldwide. RCA>1, and Ubiquity of the product as the number of countries that export the product with RCA>1: PRODY: Ni To capture the income earning potential of any k j,0 = ∑ M ji ( Diversification ) particular product and sophistication of products, i =1 Hausmann et al. (2007) introduce concepts of Nj PRODY and EXPY. Income-earning potential of a k i,0 = ∑ M ji (Ubiquity ) product, PRODY, is calculated as a weighted aver- i =1 age of the income per capita of the countries that where i denotes a product, j denotes a country, and export the given product. Weights are ratios of the Mji=1 if a country j exports product i with RCA>1. share of the commodity i in the countries overall Using a method of iterations, authors compute rela- export baskets and aggregated value-shares across tive positions of each country and product, com- all countries exporting the good: pared to other countries and products. x ji The method of iterations calculates iteratively the Xj average value of the measure computed in the preced- PRODYi = ∑ ∗ GDPPC j ing iteration, starting with a measure of a country’s j x  ∑ j  ji  diversification and a product’s ubiquity. Each suc-  Xj  ceeding iteration takes into account the information The denominator in the RCA equation is not the from the previous iteration. These are given by: same as the denominator in the PRODY weights. In 1 i N RCA, denominator is the share of product j in world k j ,n = ∑M k k j,0 i=1 ji i,n−1 trade, while in the PRODY computation, denomi- nator is a sum of product i shares across countries. N 1 j ki,n = ∑M k ki,0 j=1 ji j,n−1 EXPY: Sophistication of country exports, EXPY, represents where n corresponds to a number of iterations. the income level associated with a country’s export Last two equations are computed until rankings 172 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT of countries and products stop changing between Open Forest: iterations. In this paper, we used kj,16 to measure Measures of density can be used to obtain an overall economic complexity, and ki,17 to measure product measure of the location of the country in the product complexity. space, and this indicator would measure the con- nectedness of existing export basket to the rest of Proximities of Products: the product space. Open forest provides a measure To measure the inter-relatedness of different prod- of the (expected) value of the goods that a coun- ucts, Hausmann et al. (2007) compute a probability try could potentially export (among the products that a country exports one product with a Revealed that it currently does not export with comparative Comparative Advantage (RCA)>1 given that it exports advantage). some other product with an RCA>1. Thus, two prod- Open forest is calculated as the weighted aver- ucts will be close to each other, and require similar age of the PRODY’s of all potential (currently non- capabilities, if countries which export product i tend exported) exports of a country, where the weights to also export product j with RCA>1, and vice versa: are country densities in these products. Therefore, the value of “open forest” depends on country’s ease ϕij = min (P(RCAi>1 | RCAj>1), P(RCAj>1 | RCAi>1)) of diversification into unexported products—and a country that exports products in the core of the which provides “proximity” as a numerical measure product space will have higher densities for unex- of relatedness of products i and j. ported products, and thus higher value of the open forest: Country Densities in Products: Probability of a country being able to export prod- open_forestj =∑idensityji ∗ (1 – xji) ∗ PRODYi uct i with RCA>1 is measured as a weighted sum of proximities of product i and all other products where xi = 0 for products i with RCAi<1, and xi = 1 in country’s export basket that are exported with otherwise. RCA>1. Hence, if a country exports large numbers of goods which are close (high proximity) to product Strategic Value of Unexported Products: i, there is a large probability that the country will be The strategic value of every good that is not cur- able to be competitive in exports of i. Probability w rently exported with comparative advantage can of exporting product i by a country j is measured be measured using open forest. This is done by by density of product i: calculating what would happen to open forest if a country started exporting that good with compara- ∑ i RCAiϕ ij tive advantage. If a product is closely connected to wi = ∑ i ϕ ij a wide range of other valuable products not cur- rently exported, it would result in a large increase Note: the density w of product i in country j can in open forest, and therefore have high strategic be interpreted as the “ease” of diversification into value because it would greatly expand the country’s product i. options for successful diversification. Annexes 173 Table 0.16: Sudan Exports in Product Space Framework, 1991–2011 Exports Exports RCA RCA 1991–93 2009–11 SITC2 Trade 1991–93 2009–11 avg avg Code Product Tech Density Path Complexity Volatility avg avg (‘000) (‘000) Classics 9710 Gold, non-monetary ST 0.08 84.05 742 1.68 1.79 7.78 3,545 742,469 2225 Sesame seeds PP 0.10 71.38 765 2.35 661.78 108.77 23,885 163,489 12 Live sheep and goat PP 0.06 96.82 658 2.34 345.85 109.14 41,563 105,314 2922 Natural gums, resins, PP 0.08 92.14 763 1.99 1,747.19 148.36 55,018 81,947 lacs and balsams 2631 Raw cotton PP 0.09 75.97 768 2.64 150.93 3.78 114,222 37,081 2924 Flora in pharmacy PP 0.07 100.84 744 0.83 49.89 11.61 6,411 19,156 112 Sheep and goat meat PP 0.05 90.38 701 0.70 8.91 3.84 1,970 16,823 2879 Other non-ferrous RB2 0.07 95.32 736 3.76 2.89 1.44 444 14,874 base metals 611 Raw sugar beet and RB1 0.06 85.64 752 1.68 1.68 1.22 722 12,434 cane 548 Fresh and dried PP 0.08 88.94 734 1.54 66.45 5.30 13,785 12,088 vegetables, roots and tubers n.e.s. 6115 Sheep and lamb LT1 0.08 107.39 757 1.83 8.09 5.98 944 6,625 leather 459 Unmilled buckwheat, PP 0.05 103.06 696 2.49 190.08 2.88 27,161 5,709 millet and other cere- als n.e.s. 615 Molasses RB1 0.06 113.38 720 1.62 176.58 6.45 11,228 5,063 6116 Leather of other hides LT1 0.08 104.65 751 1.51 3.29 1.83 407 3,133 or skins 9410 Live animals, n.e.s. ST 0.07 96.93 708 1.33 20.45 3.95 640 3,068 (zoo animals, pets, insects, etc) 812 Bran, sharps and other PP 0.06 116.73 709 1.75 5.28 1.62 256 1,767 cereal residues 2238 Oil seeds and fruits PP 0.06 118.10 699 1.44 3.41 1.91 91 1,573 n.e.s. 2112 Raw calf skins PP 0.06 125.72 653 2.93 16.66 3.99 640 1,355 2117 Raw sheep skin with PP 0.09 82.99 766 2.17 48.71 5.22 2,623 1,022 wool 2119 Hides and skins n.e.s. PP 0.07 111.50 721 1.80 30.87 1.47 549 620 2911 Bones, horns, corals PP 0.06 104.01 711 0.89 21.75 1.71 987 516 and ivory Emerging Champions 3330 Crude petroleum PP 0.10 45.42 762 2.47 0.00 9.32 0 9,307,506 2472 Sawlogs and veneer RB1 0.07 90.37 724 1.53 0.00 1.57 0 8,991 logs of non-coniferous (continued on next page) 174 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT Table 0.16: Sudan Exports in Product Space Framework, 1991–2011(continued) Exports Exports RCA RCA 1991–93 2009–11 SITC2 Trade 1991–93 2009–11 avg avg Code Product Tech Density Path Complexity Volatility avg avg (‘000) (‘000) Disappearances 2882 Other non-ferrous RB2 0.04 122.64 568 2.80 1.26 0.57 713 19,711 base metals 811 Green or dry hay PP 0.04 101.98 542 1.09 1.38 0.99 189 2,068 4236 Sunflower seed oil RB1 0.03 135.23 580 2.01 1.00 0.19 120 1,261 579 Fresh or dried fruit PP 0.06 110.79 712 0.75 4.69 0.06 3,441 1,229 n.e.s. 6851 Unwrought lead and PP 0.05 126.35 659 2.43 3.20 0.19 295 800 alloys 2111 Raw bovine and PP 0.05 139.02 574 1.74 8.09 0.18 2,551 654 equine hides 2221 Green groundnuts PP 0.05 91.71 761 1.41 30.93 0.37 3,153 572 2925 Planting seeds and PP 0.03 128.98 555 0.74 5.39 0.14 964 567 spores 542 Dried or shelled PP 0.07 97.74 754 0.91 2.27 0.08 575 504 legumes 2929 Vegetable origin PP 0.04 126.87 535 1.04 3.88 0.13 781 406 materials 8741 Non-electrical HT2 0.02 103.37 145 0.69 1.02 0.03 472 389 navigating devices, compasses 2116 Raw sheep skin with- PP 0.06 117.04 660 3.35 84.37 0.68 2,669 247 out wool 440 Unmilled maize PP 0.03 115.37 650 1.87 2.76 0.01 2,444 201 813 Oilcake PP 0.04 105.80 666 1.64 9.00 0.01 7,235 153 4239 Other soft vegetable RB1 0.02 138.00 264 2.46 6.58 0.03 742 135 oils 752 Spices other than PP 0.06 112.62 704 0.93 1.66 0.04 172 93 pepper 7233 Road rollers MT3 0.03 109.32 534 1.74 1.15 0.04 65 50 2731 Building stone PP 0.05 117.11 694 0.98 1.45 0.01 213 28 572 Fresh or dried citrus PP 0.04 114.79 615 1.15 1.24 0.01 165 22 n.e.s 6582 Textile camping goods LT1 0.03 109.52 634 1.03 1.02 0.00 88 6 7439 Centrifuges machinery MT3 0.01 155.53 43 0.93 1.40 0.00 476 3 parts n.e.s. 2732 Gypsum, plasters, PP 0.04 134.76 641 1.05 3.35 0.00 208 0 limestone flux and calcareous stone 2224 Sunflower seeds PP 0.02 124.70 503 2.30 15.18 0.00 1,260 0 4234 Peanut oil RB1 0.02 69.72 629 1.91 235.96 0.00 7,120 0 (continued on next page) Annexes 175 Table 0.16: Sudan Exports in Product Space Framework, 1991–2011(continued) Exports Exports RCA RCA 1991–93 2009–11 SITC2 Trade 1991–93 2009–11 avg avg Code Product Tech Density Path Complexity Volatility avg avg (‘000) (‘000) 612 Refined sugar RB1 0.04 140.95 594 2.20 6.95 0.00 1,702 0 2634 Cotton PP 0.06 112.03 750 2.36 10.30 0.00 40 0 2114 Raw goat skins PP 0.02 45.82 405 4.41 317.08 0.00 1,904 0 6513 Cotton yarn LT1 0.05 105.02 730 1.18 2.67 0.00 1,476 0 2632 Cotton linters PP 0.05 75.93 759 2.62 79.80 0.00 1,189 0 2633 Cotton waste PP 0.05 99.87 741 2.11 16.59 0.00 476 0 2232 Palm nuts and kernels PP 0.02 31.30 644 4.07 112.24 0.00 221 0 6113 Calf leather LT1 0.01 35.02 591 6.87 2.93 0.00 185 0 751 Pepper PP 0.04 103.87 714 1.48 1.93 0.00 118 0 576 Figs PP 0.03 70.69 551 0.72 1.30 0.00 17 0 2640 Raw processed jute RB1 0.05 38.64 764 2.14 1.17 0.00 12 0 and other fibres Marginals with large export value in 2009–11 (>$1 million avg) 2820 Iron and steel waste RB2 0.04 111.39 490 2.65 0.18 0.77 147 27,854 5121 Acyclic alcohols and MT2 0.04 101.61 643 2.03 0.00 0.38 0 14,387 derivatives 3354 Petroleum bitumen RB2 0.03 130.33 485 1.74 0.00 0.89 0 14,272 n.e.s. 3413 Liquified hydrocar- PP 0.06 56.06 740 2.16 0.00 0.06 0 7,638 bons 7781 Batteries HT1 0.02 137.97 243 1.02 0.03 0.23 18 7,246 1223 Tobacco, extract, es- RB1 0.03 140.18 546 0.66 0.01 0.90 1 2,641 sences and manufac- tures 11 Live bovines PP 0.04 141.36 474 1.06 0.00 0.44 0 2,158 573 Fresh or dried banana PP 0.06 62.71 767 0.68 0.02 0.19 9 2,058 and plantains 6114 Bovine and equine LT1 0.05 127.40 664 1.24 0.26 0.15 147 1,637 leather 7649 Parts of telecom and HT1 0.01 107.31 170 1.20 0.08 0.01 254 1,614 sound recording equipment 6821 Unwrought copper PP 0.04 103.41 685 2.57 0.00 0.02 0 1,296 and copper alloys 4242 Palm oil RB1 0.04 58.95 729 2.19 0.00 0.04 0 1,263 6353 Builders` carpentry RB1 0.02 163.48 366 1.12 0.11 0.08 52 1,250 and joinery 7929 Aircraft equipment HT2 0.01 103.47 135 0.98 0.44 0.02 993 1,155 parts n.e.s. 6415 Paper and paperboad RB1 0.02 162.94 163 1.26 0.00 0.05 1 1,136 in rolls or sheets Marginals with large drop in export value (>$1 million avg exports in 1991–93) 111 Bovine meat PP 0.03 131.27 530 0.87 0.91 0.01 1,416 315 REFERENCES Africa Confidential. 2012. 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