Visible Risks in South Sudan Draft Budget Proposal for Fiscal Year 2015/2016
By Garang Atem Ayiik, Juba, South Sudan
Introduction
July 5, 2015 (SSB) — In democratic societies, budget has become a very important tool through which the government identify macroeconomic risks, identify priorities and suggest how to address identified macroeconomic and budget risks.
Budget can be define as process in which private and public entities estimates their resources envelops, and identify activities to be financed in accordance with defined objectives and developed oversight functions to reduce revenue leakages or unnecessary expenditures.
To ensure comparability, budget is done annually to allow year-on- year comparison, for South Sudan budget cycle is July-June; in most countries budget is a people-centered exercise, in South Sudan, budget was presented on 1st July 2015 which theoretically, is the effective date leaving no room for public participation either by legislative function and public.
Key Facts and Risks on South Sudan 2015/2016 budget financing
As in 2014/2015, the proposed budget for 2015/2016 presented to parliament by the Minister for Finance and Economic Planning was prepared in an environment of serious uncertainty in terms of oil revenue flows resulting from civil war that started in 2013; and nearly 50% reduction of oil prices in world market from late 2014 prices.
In addition to shrinking revenues envelop, payment of balance of transitional financial assistance to Sudan, ballooning public .debts, and foreign currency induced inflation are key medium term challenges putting sustainability of the budget and national economy in significant doubt.
In this section, I have examine the assumptions and viability of achieving projected revenues. In doing so, I have done comparative analysis of the budget for 2014/2015 and 2015/2016 fiscal years for each revenue categories of net oil revenue, non-oil revenue, donors’ grants and public debts and made review comments therein.
Net Oil Revenue
In 2014/2015 fiscal year, the government budgeted 8.9 billion SSP in net oil revenue but actual revenue in 2014/2015 was 3.7 billion SSP. This was 60% less than budget.
This disparity in budgeted and actual net oil revenue was due to fall in oil prices in the world market which reduced by about 60% from budgeted price of $95 to about $50 dollars per a barrel in 2014/2015. From this analysis, the net oil revenue in 2014/2015 budget reduced by 60% which was proportionate with reduction in oil prices in the world market.
In 2015/2016 budget, government has proposed a budget for 1,201 billion SSP net oil revenue. This is 33% of the actual net oil revenue in 2014/2015 fiscal year. In 2014/2015 budget, oil prices were near budgeted prices in first half of the financial year and prices deteriorated to half budgeted prices in second half of the fiscal year 2014/2015.
In 2015/2016 budget, assuming prices are to be maintain as they were towards end 2014/2015 financial year, budgeted net oil revenue should be about 2/3 of actual net oil revenues in 2014/2015 which should be about 2.440 billion SSP. Why did the government budgeted for only 1.201 SSP billion which is 50% of my hypothetical projected net oil revenue of 2.440 billion SSP?
Net Non-Oil revenue
In fiscal year 2014/2015, actual net non- revenues was 962 million SSP. This was less by 1,692% of the budgeted of 2.654 Billion SSP. Economy contracted in 2014/2015, but this difference between actual and budget does not reflected contraction but points to an optimistic non-revenue projection in 2014/2015 budget.
In 2015/2016, government has budgeted 1,776 million SSP which is higher by 814 million SSP from actual net non-revenues in 2014/2015 budget. This is 85% higher than 2014/2015 actual revenue. This increase according to the budget statement is attributed to expected increase in customs and sales tax. This is a very ambitious projection considering that the government budgeted 1,692% of the actual expenditure in 2014/2015 financial year; this proposed budget is 85% higher than 2014/2015 fiscal year and furthermore, no visible reforms have been undertaken to warrant this bullish projection.
Grants from Donors
In fiscal year 2014/2015, government budgeted for 158 million SSP as grants from donors. Actual grant revenue was 99 million SSP in 2014/2015. Actual grants from donors were less by 37% from the budget. In 2015/2016, the government has budgeted $128 million SSP, which is 29% higher than actual grants from the donors in 2014/2015.
First, though the variance between actual grants in 2014/2015 and budgeted donors’ grant in 2015/2016 is 29%, there is an exposure that budgeted grants might not be realize. Second, there is need to encourage donors to utilize government systems to create synergies.
Public Debts
In 2014/2015 fiscal year, the government budgeted for 3.278 billion SSP in form of new borrowing. But according to the minister in his 2015/2016 budget proposal, actual 2014/2015 new borrowing was 7.225 billion SSP which was 220% higher than budgeted.
In the same period, government budget 3.711 billion SSP in form of repayments of Principal and Interest. Surprisingly, the actual repayments of Principal and Interest turned out to be 2.310 billion SSP which is 38% higher than budget. There are two issues here on repayment of Interest and Principal; one, it is either repayments was deffered in 2014/2015; or second, the budget was very unrealistic how can actual interest and principal repayment be less by 38% than budgeted while actual new borrowings has increased than budgeted by 220%?
In 2015/2016, the government has budgeted for 220 million SSP as new borrowing and 7.537 billion SSP in expected deficit financing. This bring total borrowing in 2015/2016 budget to 7.757 billion SSP. Surprisingly, the 2015/2016 is silent on repayment of Interest and Principals which was 24% of actual spending in 2014/2015.
Emerging Macroeconomic Challenges
In this section, I did a broad review of key macroeconomic risks and recommend areas of engagement to enhance stability and mitigation of associated fiscal and monetary policy risks for South Sudan economy.
2015/2016 funding issues:
First, the net oil revenue has been under budgeted as only 50% of my expected revenue from net oil has been put in the budget. there is need to re-look and get clarity why on 1.021 billion SSP instead of 2.2440 billion SSP; second, non-oil revenue for first time exceed net oil revenue in the budget, I believe there is an overstatement of non-oil revenue in the budget; thirdly, donors’ grants seem overstated too but focus should be to ensure donor’s uses government systems and finally, public debts and deficit financing provides biggest risk being 73% of budget and more surprisingly, the budget is silent on repayment of Interest and Principal which was 24% of actual spending in 2014/2015
Unsustainable Public debts
Accordingly to Minister in his 2015/2016 budget proposal, the public debt stands at 12 billion SSP by the end of 2014/2015. Assuming no repayments for the interest and principal will be done in 2015/2016 as there is no provision in proposed budget, the total public debt will be about 20 billion SSP by the end of 2015/2016 financial year. Being a sum 12 billion SSP opening balance in 2015/2016 financial year and 2015/2016 new loans and deficit financing of 7.757 billion SSP.
With this estimates of 20 billion public debts by the end of 2015/2016, assuming 10 million people, the debt per capita will be 2,000 SSP. At this is rate, this is a serious national exposure in such a short period.
Weakening macroeconomic fundamentals
With already widen gap between official and parallel market rate for foreign currency rate, with additional 7.537 billion SSP in deficit financing, this will lead to increase deterioration in exchange rate and this will induced inflation.
In last financial year, government has used deficit financing. In the proposal, the minister provides two reasons why this has not lead to hyper-inflation; one, because reduction of prices in Uganda which off-set against exchange rate deterioration, and second suppliers paid keep their monies in banks instead of consuming and investing them.
It remains to be seen how off-setting by prices reduction in Uganda will continue. Furthermore, keeping money in the banks by suppliers with deficit funding is not convincing. At less maybe those being paid had reach their optimal consumption and investment levels. Is it possible because of fear for investing abroad due sanction or lack of hard currencies to repatriate these monies explain this?
Managing Transitional Financial Assistance to Sudan
In Sep 2012, the Republic of South Sudan entered into an agreement with Sudan. In this agreement, the RSS agreed to pay transits fees and one-time $3.028 billion dollars to be pay over 3.5 years.
Though there are no details on remaining liability, the Minister in his budget proposal alluded to some payments to Sudan in-kinds, a clear indication of financial inability on part of South Sudan to settle its liability.
Assuming for the $3.028 billion was to be paid over 3.5 years assume equally, furthermore assume as there was no stress in 2013/2014 financial year, the RSS paid $1 billion in this financial year. In 2014/2015 due to war and reduction in oil prices, the government settled only $0.25 billion this is in-line with reduction of production due to closure of Unity and Tharjath Oil-fields and reduction of prices in oil prices and claim that Sudan has begun to confiscate oil for non-payment.
This hypothetical assumptions showed that RSS might not have settle half of Transitional Financial Assistance to Sudan. The agreement demands at the expiry of the agreement, which is towards end of 2016, RSS should pay Sudan the balance which is approximately about $1.5m from above hypothetical estimates. This liability points to worsening further macroeconomic fundamentals.
Moving towards EAC
While government has given lip-service to joining EAC, the economic fundamentals points to a different direction, unrealistic budget, worsening macroeconomic fundamentals, regulated exchange rate and unsuitable public debts. All these indicators are not compatible with EAC economies and the budget has not shown efforts to converge with EAC.
Who is getting the Money?
In 2015/2016 budget, salaries constitute 54% of total budget, 26% as transfers to states and oil producing states; 17% goes to operating expenses; 2% going to capital and finally 1% to others. These numbers show little goes to services provision and development.
From sectors perspective, security get 45% of the budget but if security related agencies in rule of law sector added, the security get nearly 59% of the budget. All other sectors get less than 5% except Public Administration which got 8% and Education with 7%. 2015/2016 continue to be a non-development budget.
Conclusions and Recommendations
Improvement capacity of Central Bank as it will seriously expose economy if deficit financing is not properly managed;
Prepare exit strategy for Transitional Financial Assistance to Sudan by end of 2016;
Create South Sudan Revenue Authority and staff it with capable employees, this has to be through a competitive mechanism for increase non-oil revenue mobilization;
Start mainstreaming EAC integration into economic planning;
Create strong Public Debt Unit within MoFEP as this is most risky area of South Sudan Economy;
Pursue peace to put oil back in pipeline in Unity and Tharjath;
Reduce government wage bill to about 30%– 35% of the budget. The current cost is not sustainable.
Garang Atem Ayiik is a Certified Public Accountant and member of the Institute of Certified Public Accountant of Kenya (ICPAK) and An Independent Economic commentator on South Sudan economic policies. He can be reached at garangatemayiik@gmail.com
About Post Author
