How will Sudan wade through the economic challenges post US-terror list?
The US on 14 December announced that Sudan had been removed from its list of State Sponsors of Terrorism (SST). The historic decision marks a decisive end to nearly three decades of official American opprobrium.
It’s been the culmination of years of stop-and-go negotiations that began under President Omar al-Bashir and resumed early this year, following Bashir’s ouster in 2019 and the signing of a power sharing agreement between the generals who overthrew him and the civilian opposition.
Sudan’s transitional Prime Minister Abdalla Hamdok made the lifting of the SST designation a priority upon his appointment in September 2019. The continued designation prevented the US from voting at international financial institutions in favour of debt relief for Sudan, whose economy is in deep crisis.
Crushed by $60bn in debt and in arrears with its creditors, Sudan has no access to international lending markets. Therefore, the Sudanese state resorted for years to printing money to finance the imports of subsidized products such as wheat, fuel and medicine, precipitating a collapse of the local currency, the Sudanese pound. This year its inflation soared over 250% and Sudan’s GDP is expected to contract by 8,4%.
Though the SST designation did not formally prevent foreign investors from entering Sudan, it remained, in the minds of the new civilian leadership in Khartoum, a seal of poor reputation that held the country hostage to risk-adverse compliance departments.
Strong signal to investors
By symbolically ending Sudan’s economic pariah status, the US’s delisting sends a signal to potential investors. In the aftermath of the announcement, Acting Finance Minister Hiba Mohammed Ali said that a delegation of US agricultural companies would come to Khartoum this week, the first in a series of visits from American investors.
The delisting also removes a major obstacle to debt relief. Sudan this year has made progress to meet the demands of creditors and international financial institutions, embarking on a sensitive reform of costly fuel subsidies (which made Sudan a major source of smuggled fuel in its region) and earning the IMF’s approval of a Staff Monitory Program – the first step to debt relief under the Heavily Indebted Poor Country initiative.
The government hopes the delisting will also facilitate the correspondent banking relationships, ending Sudan’s isolation from global financial systems and its reliance on informal transfers through intermediaries in Gulf countries.
Minister Ali indicated that Barclay’s and Citibank could soon step in. Such relationships could help the formal banking sector capture more of the estimated $2.9bn of remittances from Sudanese working abroad, which for now are overwhelmingly sent through the informal sector.
This, in turn, could help rebuild the Central Bank’s now fully depleted foreign exchange reserves and ultimately go towards stabilising the Sudanese pound, which slid from 78 to the dollar two years ago to about 267 today.
Debt relief will take time
Sudan’s path to economic recovery remains long and strewn with pitfalls.
Minister Ali said the US would provide $1bn in bridge financing to facilitate the clearing of Sudan’s arrears with the World Bank. But the IMF is keen to manage expectations. It warned that debt relief “will take time and will require patience and diligence”.
A combination of structural issues in the Sudanese economy will deter many but the most adventurous investors. Chief among them is the deep political uncertainty the country faces: the various components of the transitional administration – the military, civilians, and armed groups who made peace with the government in October – are meant to steer the country through a transition to a new constitutional order. But they are engaged in complex struggles for power that are delaying important decisions and cast a shadow over the future of the transition.
Additionally, corruption, opacity and informal arrangements are the norm in the business world; public tenders often remain opaque, cash transactions are pervasive, and central political and military figures hold extensive business interests, stifling competition.
The most immediate deterrent to foreign investment, however, lies in the currency crisis and resulting inflation, which make it all but impossible for economic actors to plan beyond a time horizon of a few weeks or months at best.
Vicious cycle in place
Sellers have resorted to raising their prices to hedge against further anticipated slides in the currency, further contributing to a vicious cycle that suppresses demand. Local production has mostly stopped. And the gaping spread between the official rate of the Sudanese pound (55 SDG to a dollar) and the parallel rate (267 SDG to a dollar) makes any transactions at the official rate unacceptable.
In practice, the country has already witnessed a tacit devaluation. The government allows both importers and exporters to use the parallel currency value and appears to have indirectly become an actor in the parallel market for dollars, via a “strategic goods portfolio” set up in June to finance imports of subsidised goods. Banks are helping their customers operate at parallel exchange rates, acting as go-betweens in three-way deals between their clients.
Under these conditions, few Sudanese expatriates will want to use newly established correspondent banking channels to send home money earned abroad if these transfers occur at official exchange rates. Informal transfers will remain the norm until confidence in the Sudanese pound is restored. This could happend if the central bank accumulates enough foreign exchange to float the Sudanese pound. This may require, a considerable cash injection. A former minister estimates that Sudan would need $4-5bn of cash while reforms are being implemented.
- The UAE or Saudi Arabia promised $3bn in 2019, when the generals were in charge, but stopped paying, having disbursed less than half, when the civilian-led government of Hamdok took charge.
- Devaluation or floating of the currency without the appropriate foreign exchange reserves at the central bank would lead to a further hike in prices and hurt ordinary Sudanese without solving the problem.
- Many among the civilians in government fear that the military could take advantage of protests resulting from an ill-planned devaluation or floating currency, to grab power, thereby ending the transition.
Restoring confidence in the Sudanese economy will ultimately require the government to bring the deficit back to manageable proportions. Reducing subsidies goes towards this goal. The removal of fuel subsidies in October and support from the World Food Program and USAID towards wheat imports will considerably decrease the government’s subsidised goods import bill.
The strategic goods portfolio, which finances these imports, no longer relies on freshly minted currency from the central bank, but demands that importers provide amounts in local currency equivalent to the dollar value of imports, a decision which should ease the pressure on the Sudanese pound.
Tougher decisions lie ahead. Hamdok and his government will need to raise revenue, curbing widespread tax avoidance, evasion, and exemptions, and to cut spending, while confronting the powerful interests of well-connected families and the military and security apparatus.
But recent political developments could complicate these efforts. The peace agreement signed in October in Juba foresees the absorption of armed groups into Sudan’s official military and security forces alongside a host of measures aimed at correcting the long-standing marginalization of peripheral regions.
The Finance Ministry estimates it could cost $7.5bn. The armed groups have become central players in Khartoum’s politics and are pushing for the agreement’s implementation.
An obvious target for budget cuts would be the bloated military and security sector. Under Bashir spending of those sectors consumed an estimated 60-70% of the state budget, and has since expanded. Military-owned companies, on the other hand, play key roles in most sectors of the economy, yet they largely operate outside the control of civilians.
Hamdok and his government have sought to establish oversight, but face obstruction from the generals, chief among them Gen. Abdelfattah al-Burhan, the head of the transition’s “Sovereignty Council”, who no longer hides his ambition for dominance.
On 1 December, he attempted a power grab, signing a decree that would give broad powers to a newly established “Partnership Council”, against the will of the civilians and some of the armed groups, only to concede in the face of resistance.
Hamdok, who for months praised the “partnership” with the military, appears to be losing patience. On 14 December, he said military involvement in ordinary business was “unacceptable”.
Bottom lineThe growing rift shows that in the Sudanese transition, the goals of economic reform and civilian rule are closely intertwined, making it clear that in this post-sanctions era, back to normal will still be a while