IMF: South Sudan faces massive economic challenges due to prolonged internal conflict and subdued oil prices
IMF Staff Completes 2016 Article IV Mission on South Sudan
“South Sudan faces massive economic challenges in the wake of prolonged internal conflict and subdued oil prices. A relapse of violence in July following the formation of the Transitional Government of National Unity three months earlier compounded the crisis which started in December 2013 and challenged the peace process. Real income, adjusted for terms of trade losses, has declined by about 50 percent since 2013 and the number of people in need of humanitarian assistance has risen to unprecedented levels. Inflation has soared to about 500 percent (12 months through October), the exchange rate has depreciated steeply, and foreign exchange reserves are close to exhaustion. According to UN specialized organizations, the conflict has led to nearly two million internally displaced, more than one million refugees in neighboring countries, and about five million food-insecure South Sudanese.”
December 14, 2016 (SSB) —- End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision
South Sudan faces massive economic challenges in the wake of prolonged internal conflict and subdued oil prices. Decisive economic measures and lasting peace are key to rebuilding confidence in the economy. Restoring of macroeconomic stability will require reduction of the large fiscal imbalance. An International Monetary Fund (IMF) staff team led by Jan Mikkelsen, met with the South Sudanese authorities in Nairobi, Kenya December 5-9 to hold discussions in the context of South Sudan 2016 Article IV Consultation. [1]
At the conclusion of the mission, Mr. Mikkelsen made the following statement:
“South Sudan faces massive economic challenges in the wake of prolonged internal conflict and subdued oil prices. A relapse of violence in July following the formation of the Transitional Government of National Unity three months earlier compounded the crisis which started in December 2013 and challenged the peace process. Real income, adjusted for terms of trade losses, has declined by about 50 percent since 2013 and the number of people in need of humanitarian assistance has risen to unprecedented levels. Inflation has soared to about 500 percent (12 months through October), the exchange rate has depreciated steeply, and foreign exchange reserves are close to exhaustion. According to UN specialized organizations, the conflict has led to nearly two million internally displaced, more than one million refugees in neighboring countries, and about five million food-insecure South Sudanese.
“Decisive economic measures and a credible pathway towards lasting peace are necessary to rebuild confidence in the economy. Restoring of macroeconomic stability will require immediate reduction of the large fiscal imbalance that in the last couple of years has led to a rapid expansion in government borrowing from the central bank and the accumulation of significant arrears. For this to be effective, it will require simultaneous efforts to promote reconciliation and address the security challenges and humanitarian emergency.
“The 2016/17 fiscal year budget recently adopted is an important step in the right direction towards restoring macroeconomic stability. The budget reflects most of the revenue and expenditure measures proposed by the IMF mission in May 2016 and presents a substantial reduction in the deficit from about 30 percent of GDP in 2015/16 to about 9 percent of GDP. The mission commends the authorities’ decision to stop direct loan advances from the Bank of South Sudan (BSS) to the government and to limit overall domestic financing. The mission urges the authorities to adopt further measures, including eliminating fuel subsidies and ghost workers and reducing costs of foreign diplomatic missions. Given a substantial decline in real wages for civil servants in 2016/17, the mission recommends that wages for lower grades be raised somewhat to compensate for the loss of purchasing power. These additional measures would reduce the overall deficit and financing requirement, which would be closed through domestic financing, essentially Treasury bills. If implemented, this budget would contribute to lowering inflation substantially and to stabilizing the exchange rate.
“The mission supports measures taken by the government to improve the public financial management framework, particularly the establishment of the Cash Management Committee. To further strengthen expenditure control and ensure successful implementation of the budget, the mission recommends the following additional measures: strengthening the cash management framework, tightening commitment controls with a view to reducing arrears, and passing the Procurement Act.
“In support of these steps, the Bank of South Sudan should apply available monetary policy instruments and implement prudential requirements in order to safeguard the integrity of the banking system. The mission encourages the Bank of South Sudan to introduce regulation for conducting repos. It recommends the immediate enforcement of the minimum reserve requirement, enforcement of minimum capital required, ensuring that the spread between the official and parallel rates is reduced to 2-3 percent by allowing the auction and indicative rates to reflect market conditions, using any opportunity to rebuild foreign exchange reserves, and completing regular audits of the central bank in 2017.
“The mission met with Minister of Finance and Economic Planning Stephen Dhieu Dau, Bank of South Sudan Governor Kornelio Koryiom Mayik, and top staff from both institutions, the ministry of Petroleum, and the National Bureau of Statistics. The team wishes to express its gratitude to the South Sudanese authorities for the constructive discussions.
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