Report

The Impact of Debt Burden on Sudan’s Ability to Attract Foreign Direct Investment and Reducing Poverty

Dr. Yessir Mohamed Alobaid

Sudan has an area of about 1.8 million square kilometers and an estimated population of 33.4 million, half of which live in urban areas. As a result of the secession, the country lost 25% of its land area and about 20% of its population. Sudan is strategically located in the upper eastern part of Sub-Saharan Africa(SSA), bordering the Central African Republic, Chad, Egypt, Eritrea, Ethiopia, Libya, and South Sudan.

The country is endowed with 500 miles of coastline on the red sea, with a strategic port at Port Sudan serving most of its landlocked neighbors, including South Sudan. As the first Sub-Saharan country to gain independence, and given its strategic crossroad location between Sub-Saharan Africa and the Middle East in addition to its vast wealth of natural resources, Sudan is well placed to become a vital economic corridor for a handful number of landlocked neighboring countries.

However, despite the relentless effort that resulted in a long record of sound macroeconomic performance, Sudan remains in the grip of deep debt stress that continues to hold it back from achieving its potential. In particular, huge payments arrears to the multilateral institutions deprive the country of accessing the much-needed concessional financial support from the IMF, the World Bank, etc. The key to resolving this impasse lies with the major donors, predominantly the rich countries in the Western Hemisphere.

Sudan needs urgent access to the HIPCs, MDRI, and other debt-relief initiatives, to which it is irrefutably eligible, to resolve a crippling protracted debt crunch. For that to happen, the donor community, particularly the rich countries, needs to deliver long-promised financial resources and assurances to enable the multilateral institutions to re-engage fully and grant Sudan the much-needed concessional financial for poverty eradication and development.

Over the last decade, Sudan continues to face several challenges including, reducing the high level of poverty: building economic and political institutions for long-term development haul; finding a lasting peace solution, and accelerating development in war-affected areas of the country namely Darfur, Blue Nile and Southern Kordofan states; dealing with the ramifications of the global financial crisis including rising food prices; addressing the short term shock of economic instability resulting from the secession; and addressing the medium to long term impact of secession by economic diversification away from oil.

Sudan, deprived of access to international financial resources on concessional terms remains largely dependent on its sources to face all these overwhelming tasks of post-conflict peacebuilding, poverty reduction, and conflict resolution. This deprivation is mainly due to the debt distress and the sanctions that have been and still are major factors constraining Sudan’s growth capabilities and its ability to address these challenges.

Despite the burden of external debts, the government is determined to continue peacebuilding, reducing poverty, and reforming the economy. The international community has helped Sudan on various occasions including the facilitation of the CPA process, reaching a cooperation agreement with South Sudan to resolve post secession issues; and is expected to respect its commitment to further aid this process by finding a solution to the debt problem.

Why does Sudan Need Debt Relief?

1. The simple answer is for development: Sudan, as explained earlier, is a unique being and LDC just emerged from prolonged conflict and presently experiencing a multiplicity of challenges among them, in addition to huge unsustainable debt, conflict and insecurity, severe economic pressure resulting from loss of oil resources.

2. Divert resources from development and efforts related to attaining the MDGs: debt service repayments drain sizable resources. This impedes Sudan’s ability to attract Foreign direct investment and concessional financial resources. Lack of access to concessional financing has important negative implications on the economy and the country’s efforts to reduce poverty, finance infrastructure and social programs, and on programs designed to bring about innovation and job creation, which are all critical for revitalizing the economy.

3. Forcing Sudan to resort to non-concessional borrowing: to deliver on development programs, the government resorted to accruing more debt through non-concessional terms which have further exacerbated the burden.

4. The sizable volume of contractual arrears: The total contracted debt constitutes 86% including 49% of penalties on delayed payments and this demonstrates that Sudan’s repayment capacity cannot meet these obligations, given the fact that Sudan has never accessed any form of debt relief since 1984.

6. Sudan is technically qualified for debt relief: According to the INF debt sustainability analysis report, Sudan is qualified for debt relief and has met the technical requirements including debt reconciliation (over 90%), established good track records of macroeconomic performance with the IMF (13 SMPs) and prepared the Interim Poverty Reduction Strategy Paper (IPRSP).

Poverty Reduction Efforts and Pro-Poor Expenditure Trends:

Poverty in Sudan is high. About 46.5% of the households in Sudan live below the poverty line, representing approximately 14.4 million people or one out of two citizens in the country.

Sudan has developed strategies for attaining the Millennium Development Goals (MDGs).

Assessment of progress towards attainment of the MDGs shows that Sudan might not be able to achieve all of its targets. This is mainly because of the conflicts that Sudan has experienced and secondly the effect of the debt burden on Sudan’s ability to attract international financial resources.

With the three peace agreements (CPA, ESPA, and DPA) and the ongoing efforts to reach a lasting and comprehensive peace deal in Darfur, Sudan has its greatest opportunity in a generation to consolidate and sustain peace, improve the lives of all Sudan with positive impacts on South Sudan.

Both pro-poor expenditures and transfers to states have dropped tremendously after the secession. Pro-poor spending had steadily been maintained at an average of 12% of GDP from 200 through 2010, but sharply dropped to 7% of GDP in 2012. This indicates the government’s efforts in continuing to support pro-poor expenditures level have been seriously constrained. In recent years, pro-poor and transfers to states have increased the autonomy of the states and considerably improved their capacity to deliver basic social services. However, a sharp reduction took place after the secession of the South which jas seriously jeopardized the capacity of the state to deliver social services.

Re-engagement with the IMF: Sudan’s current outstanding arrears to the IMF amounted to US$ 1.5 billion. However, the country does not have the resources to pay off these arrears. Therefore, the Government will approach development partners for a concessional bridge loan or a grant to settle arrears to the Fund. Clearance of arrears will unlock new financing from the IMF, within the context of a Fund-supported financial arrangement, which will then be used to repay the bridge loan obtained from the cooperating partners.

The government is aware of the need to have a track record of implementing sound macroeconomic policies and assurances that appears that arrears to other official creditors will be cleared. In this regard, it is important to note that since 1997, Sudan has had a successful track record of implementing sound macroeconomic policies as witnessed by the stabilization of the economy through 14 IMF SMPs, the most recent having been concluded in 2010.

The government is currently implementing a series of reforms with the assistance of the AfDB, WB and the IMF, and some bilateral partners. The reforms focus, among other areas, on budget, tax administration, and debt management. Specifically, Sudan is working with AfDB to implement a countrywide public financial management project which is expected to improve the government fiduciary system and improve its accountability. The government is working with the IMF to formulate a new SMP and adopt measures of economic reforms.

Resolution of the debt problem through arrears clearance and comprehensive debt relief is a key prerequisite for laying a solid foundation for economic growth and poverty reduction, sustained service delivery, and progress towards the Millennium Development Goals (MDGs) in Sudan. In this regard, the successful implementation of this strategy for debt relief is a prerequisite for unlocking resources needed to finance development projects and pro-poor programs as outlined in the Interim Poverty Reduction Strategy Paper (I-PRSP) and the continuation of government economic reforms as outlined in the National Development Plam(NDP) 2012-2016, and for the inception and implementation of Sudan’s full PRSP.

Sudan understands that resolving the external public debt arrears, and ultimately accessing debt relief, requires strong support from its development partners. This is why the government appreciates the engagement of its creditors through various forums including; the establishment of the Sudam Technical Working Group (TWG) as essential and important technical support to walk Sudan through the process.

The government of Sudan appreciates the efforts of the International community which led to the establishment of the TWG on debt relief following the meeting that took place in Washington, D.C in April 2011. The government further hoped that the Troika( comprising Norway, and the United States of America) will continue to support the government effort in the joint approach to address the development partners to get assurances for resolving the debt problem.

The government of Sudan is committed to continuing its Re-engagement with the IMF to negotiate a new SMP and ensure that, following agreement on its debt resolution, appropriate measures to sustain debt in the medium and long term are undertaken.

Against the background, the GoS hereby puts forward its request for fast-track debt relief from all its creditors. The debt relief sought to be comprehensive and should cover all eligible debt, as leaving out any type would not lead to debt sustainability, and would subsequently jeopardize the release of the much-needed resources to support the revitalization of the economy, and accomplishment of the expected peace dividends, and the realization of the MDGs targets.

On the other hand, Paris Club creditors intend to cancel 14 billion dollars owed by Sudan, which was confirmed by the President of the Paris Club, Emmanuel Mullen, yesterday, that the club of official creditors agreed to cancel 14 billion dollars owed by Sudan and restructure the remaining 23 billion dollars owed by it. Speaking to reporters, after reaching an agreement yesterday, Mullen urged Sudan’s other public and private creditors to ease the country’s debt burdens in the same way. debt based on a commitment to macroeconomic reforms.

Mullen said that the Paris Club agreement directly cancels $14.1 billion and reschedules $9.4 billion, with long grace periods, so that Sudan does not have to make payments before 2024. He added: “This great effort demonstrates the international community’s support for the transition to democracy in Sudan and will help Sudan to re-engage with the international financial community and continue its reform and poverty-fighting policies.

At $23.5 billion, Sudan’s debts to the Paris Club, mostly arising from arrears and late payments, constitute a large proportion of the more than 64 billion dollars it owes to foreign creditors in general. On the other hand, Sudan is seeking to obtain similar or better results with creditor countries outside the Paris Club. This is a successful start for Sudan if Debt is relieved. In addition, Sudan intends to develop the country’s frayed railways network, through a plan worth 643 million dollars, and then connect the network with neighboring countries, as part of efforts to revive an economy that has been undermined by international isolation, wars, and internal conflicts. The African Development Bank and China State Construction Engineering expressed Corp Limited and Gulf companies have expressed interest in helping to restore the operation of about 2,400 km (1,490 miles) of currently disrupted railways, according to the Sudan Railways Authority.

The Sudanese government will initially spend $17 million to urgently repair parts of the other half of the national network already in use.

And the “Bloomberg” news agency indicated that the United States last December removed Sudan from the list of state sponsors of terrorism, which made it easy to import the main components of the reform processes, and exempted Khartoum from paying arrears to the International Monetary Fund opening the door to seeking to solve the debt problem once and for all. After the activation of Sudan’s account in the World Bank after the payment of the bridge loan amounting to 1.4 billion dollars by the United States of America and the opening of an account by the Central Bank of Sudan in the American Federal Bank and the arrival of Sudan to the decision point area.

This step will certainly move Sudan and make it able to attract Direct Foreign Investment, and in lowering poverty in Sudan, in addition to achieving the Millennium Development Goals.

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