Sudan’s transitional government continues to grapple with the reforms necessary to turn its economy around as debt has accumulated to unsustainable levels. Sudan has taken large strides towards securing debt relief, although immediate challenges to this ultimate prize include reining in the fiscal deficit, stabilising inflation, and maintaining domestic stability.
On 17 May, the International Monetary Fund (IMF) executive board approved a financing plan to cover its share of debt relief to Sudan. The amount of the financing was not disclosed. France, Germany, and Norway were among the countries also signalling their readiness to forgo repayment at a mid-May conference in Paris that showcased Sudan’s return to the international financial community. Removing IMF arrears, facilitated by a USD 1.5 billion bridge loan from France, clears the way for Sudan to get relief from global creditors under the Highly Indebted Poor Countries initiative (HIPC).
Among recent developments, the US removed Sudan from its State Sponsors of Terrorism List (SSTL) effective 14 December 2020, a designation that was a key barrier to debt relief. This has already begun to translate into some much-needed Foreign Direct Investment (FDI), loans and debt clearance (see SUDAN: INCHING TOWARDS PEACE WITHOUT ECONOMIC REFORM OR SANCTIONS REPRIEVE). This marked a critical step in helping Sudan advance the process of normalising relations with the international community (see SUDAN: MAKING A RE-ENTRY INTO THE INTERNATIONAL FINANCIAL SYSTEM).
PANGEA-RISK assesses that these series of positive developments bring Sudan closer to its goal of debt relief; indeed, it has never looked closer. However, domestic challenges to a substantial economic recovery remain. An overvalued currency, weak fiscal position, and the struggle to achieve domestic peace will continue to hinder real economic progress.
Debt deemed unsustainable
According to the 2020 debt sustainability analysis conducted by the IMF and World Bank, Sudan was in debt distress, with its debt estimated at 253 percent of GDP or USD 57.5 billion. As Sudan was cut off from the international financial system for decades, about 85 percent of its debt is in arrears – including unpaid interest and penalties. This is partly due to exchange rate devaluations and government defaulting on concessionary loans (from the IMF, World Bank, and African Development Bank) leading it to borrow funds at much higher interest rates from other lenders.
The share of total external debt in arrears increased to 85 percent in 2019 from 80 percent in 2017. The bulk of external debt in 2019 was owed to bilateral creditors (USD 41.5 billion, or 76 percent of total external debt), between Paris Club countries – of whom France, Austria, and the US are the largest. Another amount is owed to non-Paris Club countries, including Kuwait, Sudan’s largest creditor at USD 9.8 billion, Saudi Arabia, and China. Sudan also holds a higher than usual amount of debt to commercial lenders, estimated at almost USD 6 billion.
Sudan had sizeable arrears to the international financial institutions, owing USD 1.4 billion to the IMF alone – four times what Somalia, the most recent HIPC beneficiary, owed the IMF. Arrears to the main multilaterals, including the IMF, amount to USD 2.8 billion. These arrears have been an obstacle to reaching HIPC decision point in the past, and prevented Sudan from accessing new multilateral funding, although the recent US and French bridging loan to settle IMF and World Bank arrears marks an important step forward.
Lenders offer much-needed relief
Against this backdrop, Sudan developed and implemented a strategy to clear its arrears, leading the government to request a 12-month IMF staff-monitored program (SMP) as a means for eventually seeking debt relief from Paris Club creditors under the HIPC initiative. Sudan’s removal from the SSTL accelerated the country’s eligibility for HIPC initiative relief, and the latest discussions with the IMF and creditors in Paris have made substantial progress towards debt relief. The UK, Ireland, and Sweden have made similar briding loans to repay Sudan’s arrears to the African Development Bank, and the US has provided a bridging loan to pay off arrears to the World Bank.
France stated that it was “in favour of cancelling debt close to USD 5 billion.” Norway announced the cancellation of its bilateral debt in a statement, while Germany’s foreign minister tweeted that Berlin would waive debts of USD 440 million. Sudanese state TV reported that Saudi Arabia had “affirmed its readiness” to forgo USD 4.5 billion in debts, without giving more details. A group of creditors representing about half of Sudan’s commercial debt announced they will give its “fair share of debt relief” under the HIPC program – as long as other creditors do the same. Under HIPC most investors will forgive 85 percent-plus of all debt due to them, including London Club. While HIPC may take until 2024, creditors could quickly lift a large part of the burden by forgiving most of Sudan’s arrears after a “decision point” expected in June 2021 to kick off the HIPC process. However, after that decision point, Sudan will have to start making debt service payments.
A debt workout could provide interesting opportunities for investors in defaulted Sudanese commercial debt, which has previously been largely off-limits for many investors because of US sanctions. Potential recoveries could still be reasonable, even after significant HIPC debt reduction, given the size of the claim. The debt has accrued significant past-due interest (PDI), which could range from between 150 to 300 percent of the principal, after being so long in default.
Through debt relief, Sudan also opens its lines of credit with multilateral organisations and other countries, allowing it to receive new grants and loans at low or zero interest. The HIPC decision point would allow the country to borrow another USD 2 billion from the World Bank to fund urgent development projects, and bring in the IMF to finance more economic restructuring. That financing is badly needed since Sudan has been stuck in a prolonged economic crisis that triggered an uprising against former president Omar Al Bashir, who was ousted in April 2019.
Sudan’s pledged reforms
At the Paris summit, Sudan’s Prime Minister Abdalla Hamdok set out his government’s reform plans which include ending fuel subsidies, raising the power tariffs, and liberalising foreign exchange policy. These measures have all driven up inflation, the effect of which has only been marginally mitigated by the government’s Family Support Programme, which is designed to compensate many Sudanese people. In order to meet IMF conditions, the government now needs to commence a more politically perilous phase of reforms, including restructuring and reviewing the accounts of some 600 state companies.
Such reforms will put the civilian and reformiost faction of the government at loggerheads with the Islamists and military faction, which have long benefitted from patronage and entrenched embezzlement at these state companies. Finance Minister Jibril Ibrahim has been trying to place many of these state companies under treasury surveillance. However, Islamist supporters of the former ruling party under Bashir, as well as the military and intelligence services, are resisting such attempts. One state company that remains outside of the government’s control is “military-industrial” firm Giad, which remains overseen by the ministry of defence. Another opaque public entity is Sabika Al Zahabia, a gold mining company which remains controlled by the General Intelligence Service.
The primary risk to political stability will be upsetting the most powerful figures in the transitional government, such as the Deputy Chair of the ruling Sovereignty Council Mohamed Hamdan Dagalo ‘Hemeti’, who commands the elite paramilitary Rapid Support Forces (RSF). The RSF “military-industrial” network remains one of the best-financed and least transparent entities in Sudan, with more holding companies to finance the RSF being set up since the ouster of Bashir. Despite the acute economic problems facing Sudan, 22 percent of its national budget this year is directed to the military. If Prime Minister Hamdok cannot make meaningful reforms to redirect some of these funds to relieve the lives of Sudanese people, his government may face the same fate as Bashir’s.
COVID-19 pandemic deepened economic woes
The country is buried in a deep economic crisis worsened by the COVID-19 pandemic. Real GDP was estimated to have shrunk by 8.4 percent in 2020 after shrinking by 2.5 percent in 2019. The pandemic’s effect on commodity prices, trade, travel, and financial flows contributed to subdued economic activity. Reduced private consumption and investment as well as disruptions in value and supply chains also affected growth. Lockdown measures took their toll on the service sector, with 58 percent of GDP, and the industrial sector, with 22 percent. Inflation escalated to an estimated 124.9 percent in 2020, compared with 82.4 percent in 2019, mainly due to a 118 percent currency depreciation and monetisation of the fiscal deficit.
Public revenues decreased by 35 percent in 2020, while the pandemic prompted a big increase in spending, worsening the fiscal deficit to 12.4 percent in 2020, compared with 11.3 percent in 2019. The fiscal deficit, which accounted for 40 percent of government revenues in 2019, has primarily been financed by advances from the central bank. Fiscal imbalances are linked to several factors, including bloated public wages, uneven military spending, an expensive subsidy system, and below-average tax performance. Additionally, reduced demand among Sudan’s major trading partners in the Gulf lowered exports, but imports also declined. As a result, the current account deficit narrowed to 12.6 percent of GDP from 15.1 percent in 2019.
In July 2020, the government adopted an accommodative monetary policy by reducing the cash reserve ratio, boosting credit to the private sector to an estimated 12 percent of GDP at the end of 2020, still below the 14 percent of GDP it reached in 2019. While non-performing loans decreased from 3.5 percent in 2019 to 3 percent in 2020, returns on assets decreased to 1 percent from 1.8 percent, reflecting reduced profitability due to the sharp economic contraction (see SUDAN: CLEARING UP THE BANKING SECTOR TO ENHANCE TRANSPARENCY). Subdued economic activity increased poverty from 48.3 percent in 2019 to an estimated 56 percent in 2020.
Economic and sovereign debt outlook
Sudan’s economy is now projected to remain in recession in 2021, with a return to modest growth expected in 2022. Agriculture and mining will drive growth on the supply side, and private consumption and investment on the demand side. The improved political outlook and Sudan’s recent removal from the SSTL by the US will stimulate financial flows, benefiting growth. Poverty is projected to come down by 0.5 percentage points in 2022, reflecting the improved economic outlook.
Reduced foreign exchange from remittances and FDI is expected to lower imports, including fuel and food supplies, and increase inflation in 2021. However, the prioritisation of public spending and tighter monetary policies will reduce inflation from 129.7 percent in 2021. Fiscal and current account deficits are expected to improve because of planned reforms to accelerate economic recovery. The key risks to this outlook include low public revenues, which may trigger further monetisation of the deficit, and further depreciation of the local currency.
In terms of debt relief, Sudan stands a good chance of reaching ‘decision point’ over the coming months, given the progress so far and the strong commitment from the international community. However, while this is undeniably positive for the country, investors will remain sceptical by the larger-than-expected level of debt relief being targeted.
In addition to the difficult economic situation, Sudan is at a political crossroad, amid inter-tribal violence, and disputes between elements of the government. Additionally, social tensions have remained high, as the public remains wary of any attempt by the military (remnants of the toppled regime) to seize power during the transitional period (see SUDAN: LANDMARK PEACE DEAL TO PROVIDE MUCH-NEEDED BOOST TO ECONOMY).
The country is currently being run by a transitional government, as mandated by the Constitutional Charter for the Transitional Period of 2019. The Sovereignty Council, now composed of 14 members, including civilian and military representatives, is the collective head of state. While the transition period was initially set to last for 39 months, in late 2020, the transition period was recently extended to 2023. There is uncertainty regarding the trajectory of the transitional period and for Sudan’s future, as there several variables and factors that are susceptible to rapid fluidity. Different pathways for the country appear to be conceivable.
The most likely scenario, which ultimately amounts to the continuation of the status quo, is that the overarching political environment, and the power networks, will remain in place for the 12-month outlook. The Sovereignty Council, specifically the military members therein, will likely use their position to prevent widespread reform or the dismantling of existing patronage networks. This is likely to be achieved by either delaying the formation of an independent Legislative Council or through the threat of violence.
Several serious challenges can endanger the transition process. The dire state of the economy will not be fixed overnight and will continue to fuel grievances against the state of corruption and highly unequal wealth distribution if these are not institutionally addressed. Linked to this, the sectarian and tribalist patronage networks that the regime relied upon have accumulated wealth and can try to impede democratisation by buying off the opposition.
Furthermore, Sudan’s ongoing internal conflicts can destabilise the state and spoil the transition by undermining the civilian-led authority. In addition to domestic challenges, international and regional powers can use their leverage to incentivise key Sudanese actors to either uphold the agreement or sabotage it. Although international pressure may help reduce the likelihood of a full-scale civil war, there is a risk of escalation of the regional disputes. While the international spotlight has been focussed on Khartoum, the conflict zones – especially Darfur – witness an upsurge in violence against civilians. Although associated violence is likely to remain confined to current affected areas, Darfur and South Kordofan could become fiefdoms for rebel and military leaders alike, with the transitional government unable to dismantle personalised relationships between them and the Khartoum-based authorities.
Long episodes of violence can reinforce instability in the country and weaken economic opportunities both locally and abroad. However, multilateral financial support act as a strong buffer to the deterioration of the security environment as it enables the government to address some of these issues. The government can somewhat address the shortages in public goods and absence of public services and maintain existing patronage networks.