SUDAN
Country Economic Memorandum
Realizing the Potential for
Diversified Development
SUDAN
COUNTRY ECONOMIC MEMORANDUM
Realizing the Potential for
Diversified Development
Sudan Country Economic Memorandum
September 30, 2015
TABLE OF CONTENTS
Acknowledgements......................................................................................................................................... vii
List of Abbreviations......................................................................................................................................... ix
Summary of Findings and Policy Conclusions.................................................................................................. xi
Chapter 1: What Kind of Growth and Diversification Suits Sudan? .................................................................1
A. Pathways to the Future: Economic and Sectoral Scenarios to 2030................................................................... 2
B. Components of Inclusive Growth..................................................................................................................... 9
a. Ingredients for growth.................................................................................................................................... 9
b. Components of pro-poor growth..................................................................................................................... 14
C. Institutions are Critical to the Diversification of the Endowment Base of the Economy.................................. 16
a. Ability to manage natural resource rents......................................................................................................... 17
b. Ability to provide public services.................................................................................................................... 25
c. Ability to regulate economic activity............................................................................................................... 35
D. Lessons for Sudan: Growing Endowments and the Production Base............................................................... 40
a. Macroeconomic management crucial for economic growth................................................................................ 41
b. Agriculture and livestock: important for inclusive growth................................................................................. 41
c. Goods and services trade to build endowments................................................................................................. 43
d. Extractive industries: still important, but less dominant................................................................................... 43
Chapter 2: Structural Change and the Role of the Real Exchange Rate for Exports and Growth.....................45
A. Structural Change: Evidence from the Labor Market...................................................................................... 45
B. The Role of the Exchange Rate........................................................................................................................ 55
C. Volatile and High Inflation: Important Determinant of the Real Exchange Rate.............................................. 62
Chapter 3: Agriculture and Livestock: Key for Economic Diversification........................................................67
A. Overview........................................................................................................................................................ 68
B. Production...................................................................................................................................................... 74
C. Markets and Trade......................................................................................................................................... 83
D. Agricultural Support...................................................................................................................................... 91
Chapter 4: Goods and Services Trade to Build Endowments .........................................................................95
A. Goods Trade................................................................................................................................................... 95
a. Overview.................................................................................................................................................... 96
b. Export orientation and growth.................................................................................................................... 100
c. Export diversification and survival.............................................................................................................. 105
iv COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
B. Services Trade............................................................................................................................................... 108
a. Overview.................................................................................................................................................. 108
b. Trade-in-Services in Sudan......................................................................................................................... 109
c. Professional services matter for Sudan’s growth............................................................................................... 112
C. Potential for Future Trade Diversification: Goods and Services..................................................................... 116
Chapter 5: Extractive Industries: Still Important but no Longer Dominant ..................................................125
A. Overview...................................................................................................................................................... 125
B. Sudan’s Oil Sector......................................................................................................................................... 126
C. Sudan’s Gold Sector..................................................................................................................................... 134
D. Combined Implications of Oil and Mining................................................................................................... 145
Annexes........................................................................................................................................................149
Annex 1: MAMS Model: Structure, Data and Assumptions................................................................................ 149
Annex 2: Determinants of Savings in Sudan....................................................................................................... 161
Annex 3: Timeline of U.S. Sanctions Against Sudan........................................................................................... 163
Annex 4: Additional Details on RER Calculations and Theoretical Considerations............................................. 165
Annex 5: Financial Soundness Indicators for the Banking Sector, 2006–13....................................................... 168
Annex 6: Additional Information for Export Performance Analysis.................................................................... 169
References.....................................................................................................................................................177
List of Figures
Figure S.01: Base Simulation: Selected Macro Indicators (Index; 2012 = 100)...................................................... xviii
Figure S.02: Base Simulation: Aggregated Sector GDP (Index; 2012 = 100).......................................................... xviii
Figure S.03: Real Exchange Rate and Export Quantity (index Base = 100).............................................................. xix
Figure S.04: Poverty Rate in 2012 and Various Scenarios......................................................................................... xx
Figure S.05: Growth Decomposition of Production Factors in Sudan, 1989–2012.................................................. xxi
Figure S.06: Employment by Sector....................................................................................................................... xxii
Figure S.07: Average Annual Inflation in Sudan, 1999–2014................................................................................. xxii
Figure S.08: Fiscal Revenues and Composition (SDG mn).................................................................................... xxiii
Figure S.09: Overall Budget Deficit, 1991–2013................................................................................................... xxiv
Figure S.10: Sudan’s RER Misalignment................................................................................................................. xxv
Figure S.11: Sudan’s Official and Market Exchange Rate (SDG/USD)..................................................................... xxv
Figure S.12: Sudan’s Wheat Yields in Perspective.................................................................................................. xxvi
Figure S.13: Herfindahl-Hirschman Index at the Products Level, Sudan and Selected Countries.......................... xxvii
Figure S.14: Sudan’s Wheat Import Price in Perspective (USD/ton)....................................................................... xxix
Figure S.15: Livestock Export Value by Subsectors (USD mn)............................................................................... xxx
Figure S.16: Sudanese Products with Larger World Market Shares, 2013.............................................................xxxiv
Figure S.17: Doing Business 2014: Ranking by Component, Sudan and Selected Countries................................xxxvi
Figure S.18: Trading Across Borders Indicator 2014, Sudan and Selected Countries............................................xxxvi
Figure S.19: Projected Domestic Crude Oil Production, Bpd..............................................................................xxxvii
Figure S.20: Contribution of Natural Resources to Sudan‘s Economy.................................................................xxxviii
Figure S.21: Export Volumes of Gold Correlated with the Price (Index 2004 = 100)...........................................xxxix
Table of Contents v
Figure 1.1: Model Base Scenarios: Selected Indicators, 2012 to 2030....................................................................... 5
Figure 1.2: Model Alternative Scenarios: Selected Indicators, 2012 to 2030............................................................. 7
Figure 1.3: Fiscal Policy and Public Debt............................................................................................................... 19
Figure 1.4: Savings Rates in Sudan, 1991–2013..................................................................................................... 22
Figure 1.5: Savings and Investment Rates in Sudan and Selected Countries........................................................... 23
Figure 1.6: Economic Activity................................................................................................................................ 27
Figure 1.7: Health and Education Spending and Outcomes in Sudan..................................................................... 32
Figure 1.8: Business Enabling Environment........................................................................................................... 37
Figure 1.9: Two Approaches to Diversify an Economy........................................................................................... 40
Figure 2.1: Illustration of Structural Change in an Economy.................................................................................. 45
Figure 2.2: Structural Change through Sector Decomposition of GDP ................................................................... 46
Figure 2.3: Demographics and Education in Sudan................................................................................................ 48
Figure 2.4: Employment and Labor Force Participation in Sudan........................................................................... 50
Figure 2.5: Sudan’s RER Misalignment in Perspective of other African Oil Exporting Countries............................. 57
Figure 2.6: Undervaluation and Export Growth, Selected Countries...................................................................... 59
Figure 2.7: Inflation, Monetary and Financial Sector Developments....................................................................... 64
Figure 3.1: Overview of Agriculture in Sudan........................................................................................................ 72
Figure 3.2: Agriculture Yields in Sudan, Sorghum and Millet................................................................................. 76
Figure 3.3: Agriculture Yields in Sudan, Wheat, Oil Seeds, Gum Arabic, Cotton and Livestock............................. 78
Figure 3.4: Sudan’s Agriculture Exports: Livestock, Sesame, Gum Arabic, Wheat and Cotton................................ 85
Figure 3.5: Sudan’s Agriculture Imports: Wheat and Sugar.................................................................................... 91
Figure 3.6: Sudan’s Agriculture Input Imports....................................................................................................... 92
Figure 4.1: Exporter Base and Size, Sudan and Selected other Countries................................................................ 97
Figure 4.2: Sudan’s Export Performance Overview................................................................................................. 99
Figure 4.3: Export Growth and Orientation......................................................................................................... 104
Figure 4.4: Export Concentration and Survival.................................................................................................... 107
Figure 4.5: Trade-in-Services in Sudan................................................................................................................. 111
Figure 4.6: Professional Services in Sudan............................................................................................................ 114
Figure 4.7: (Export) Diversification – Past and Present......................................................................................... 119
Figure 5.1: Sudan’s Oil Sector: Production, Trade and Flows............................................................................... 128
Figure 5.2: Key Oil Infrastructure in Sudan (and South Sudan)........................................................................... 129
Figure 5.3: Sudan’s Mineral Sector: Production, Trade and Flows........................................................................ 136
Figure 5.4: Contribution of Oil and Minerals to Sudan’s Economy....................................................................... 146
Figure 0.1: Aggregate Payment Flows in MAMS................................................................................................... 149
Figure 0.2: The Labor Market in MAMS............................................................................................................... 151
Figure 0.3: Savings Rates in Sudan, 1991–2013................................................................................................... 162
List of Tables
Table S.01: Sudan’s Performance Vis-à-Vis the Ingredients of Growth................................................................... xxi
Table S.02: Summary of Main Findings and Recommendations............................................................................... xl
Table 1.1: Major Ingredients to Growth and Sudan’s Record................................................................................ 12
Table 1.2: Simulations of Savings and Growth Rates for Turkey........................................................................... 24
Table 2.1: Age Composition of the Population in Sudan....................................................................................... 47
vi COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Table 2.2: Dependency Ratios in Sudan................................................................................................................ 47
Table 2.3: Education and Employment Status, Percent of Total............................................................................ 52
Table 2.4: Education Breakdown of Employment by Economic Sector, Percent of Total....................................... 53
Table 2.5: Annual Value-Added (VA) Per Worker by Sector (US$)....................................................................... 54
Table 2.6: Distribution of Daily Wages by Industrial Sector (US$)........................................................................ 55
Table 2.7: Effects of Undervalued RERs on Export and Output Growth Sudanese Data........................................ 60
Table 2.8: Structure of the Financial Sector in Sudan............................................................................................ 63
Table 3.1: Vaccination and Inspection Regime for Sheep Exports......................................................................... 84
Table 3.2: Modern Grain Storage in Sudan, 2013................................................................................................. 89
Table 4.1: Change in Sudan’s Shares of Exports by Broad Productive Sectors, 2007–2012................................. 100
Table 4.2: Sudan’s Total Exports Across Aggregate Destinations, 1996–2013..................................................... 101
Table 4.3: Destinations of Sudan’s Primary Non-Crude Oil Exports.................................................................... 103
Table 4.4: Manufactured Exports of Significance in the pre-Oil Period............................................................... 120
Table 5.1: Main Elements of the Mining Fiscal Regime for Industrial Mines........................................................ 142
Table 0.1: Disaggregation of Sudan MAMS......................................................................................................... 152
Table 0.2: Macro SAM for Sudan, 2012 (% of GDP)........................................................................................... 153
Table 0.3: Value-Added, Consumption, and Trade Elasticities............................................................................ 154
Table 0.4: Definitions of Non-Base Scenarios...................................................................................................... 155
Table 0.5: Real Macro Indicators by Simulation (%annual Growth 2013–2030)................................................. 156
Table 0.6: Macro Indicators in 2012 and by Simulation in 2013 (% of GDP)...................................................... 157
Table 0.7: Government Receipts and Spending in 2012 and by Simulation in 2030 (% of Nominal GDP).......... 157
Table 0.8: Balance of Payments in 2012 and by Simulation in 2030 (% of Nominal GDP).................................. 158
Table 0.9: Real GDP at Factor Cost in 2012 and Growth by Simulation (% Annual Growth).............................. 158
Table 0.10: Sector Structure in 2012 and by Simulation in 2013 (% of GDP)....................................................... 159
Table 0.11: Panel Estimation Effect on Exports Growth of Undervaluation........................................................... 166
Table 0.12: Undervalued RERs and Export Growth.............................................................................................. 167
Table 0.13: Undervalued RERs and Output Growth............................................................................................. 167
Table 0.14: Change in Sudan’s Shares of Exports, Main Export Products at HS-6 Level, 2007–2012.................... 169
Table 0.15: Joint Distribution of Sudan’s Exporters Across Products and Destinations.......................................... 169
Table 0.16: Sudan Exports in Product Space Framework, 1991–2011.................................................................. 173
List of Boxes
Box 1.1: Sudan’s Experience with the Oil Revenue Stabilization Account (ORSA).............................................. 18
Box 3.1: Land Tenure and Land Policy............................................................................................................... 70
Box 3.2: Studying the Rehabilitation of the Gezira Scheme................................................................................ 73
Box 3.3: Recent Policy Changes in Gum Arabic and Their Impact...................................................................... 81
Box 3.4: Food Security, Wheat Self-Sufficiency, and State-Level Grain Storage.................................................. 89
Box 4.1: Main Findings of the Sudan DTIS Update............................................................................................ 98
Box 4.2: Tourism in Sudan: Great Potential, Great Challenges......................................................................... 110
Box 4.3: Domestic Regulation in Professional Services in Sudan....................................................................... 117
Box 4.4: Product Space: Classics, Emerging Champions, Disappearance, Marginals......................................... 118
Box 5.1: How Many Artisanal and Small Scale (ASM) Gold Miners are There?................................................. 138
Box 5.2: State-Sponsored Gold-Buying Programs............................................................................................. 140
ACKNOWLEDGEMENTS
T
he World Bank greatly appreciates the close (Economist, DECHD) on the Sudanese labor market;
collaboration with the Government of Sudan Omar Lyasse (Sr. Agricultural Economist, GFADR),
in the preparation of this Country Economic Imad Yousif (Consultant, GMFDR), and Joseph
Memorandum. The team is grateful for the support Goldberg (Consultant, GMFDR) on agriculture sec-
received, especially the Ministry of Finance and tor analysis; Michael Ferrantino (Lead Economist,
National Economy, to carry out the analysis and GTCDR) and Gabriela Schmidt (Consultant,
provide feedback and comments on preliminary GTCDR) on summary analysis of export performance;
findings during the CEM Seminar in Khartoum Nora Dihel (Sr. Economist, GTCDR) on trade in ser-
in December 2014 and the Annual Economic vices; Ana Fernandes (Sr. Economist, DECTI) and
Conference in June 2015. Esteban Ferro (Consultant, DECTI) on exporter level
Preparation took place in 2014/15 and included analysis; Bill Battaile (Sr. Economist, GMFDR) on
several missions to Sudan for first-hand consultation product space brief; and Bryan Land on the contri-
and stakeholder discussions with representatives bution of oil, gold and other mineral wealth. Mosllem
in Khartoum and other parts of Sudan: (1) Mission Alamir (Sr. Economist, GMFDR) and Saef Ibrahim
on Agriculture (March/April 20–14), (2) Mission (Consultant, GMFDR), both Khartoum-based, pro-
on Gold and Mining (May 2014), (3) Mission on vided local advice, supported data gathering, and
Industrialization and Trade Development (May 2014), helped in-country follow-up to various teams and
and (4) Seminar on Preliminary Findings of Background missions.
Papers (December 2014). The team is grateful to The report was prepared under the overall
the Government of Sudan and the World Bank’s guidance of Albert Zeufack (Practice Manager,
Khartoum office for excellent logistical support to GMFDR), Bella Bird (Country Director, AFCE4),
make those missions happen. and Paolo Zacchia (Program Leader, AFCE4). Pablo
The report was prepared by a team led by Fajnzylber (Practice Manager, GPVDR) provided
Michael Geiger (Sr. Country Economist, GMFDR). guidance and support particularly at concept and
The report benefitted from background papers and the early preparation phase. Kevin Carey (Lead
inputs prepared by (in the order of the report’s Economist, GMFDR) commented at various stages
outline): Hans Lofgren on alternative scenarios for and provided crucial guidance and advice. The peer
Sudan to 2030 (Sr. Economist, DECPG); Jane Bogoev reviewers were: Andrew Goodland (Program leader,
(Economist, GMFDR) on pro-poor growth and AFCE3), Taehyun Lee (Sr. Economist, GMFDR),
recent macro-economic developments; Toru Nishiuchi Mombert Hoppe (Sr. Economist, GTCDR), Andres
(Economist, GMFDR) on savings and investments; Ha Garcia (Sr. Economist, GTCDR), Nadia Belghith
Nguyen (Economist, DECMG) on real exchange rate (Sr. Economist, GPVDR), and Susana Moreira (ET
misalignment (Economist, DECMG); Robert Garlick Consultant, GEEDR)..
LIST OF ABBREVIATIONS
AAAID Arab Authority for Agricultural ha hectare
Investment and Development HIPC Highly Indebted Poor Countries
ARC Agriculture Research Corporation IFAD International Fund for Agricultural
ARRC Animal Resources Research Development
Corporation IMF International Monetary Fund
ASM Artisanal and Small Scale Mining MAMS Maquette for MDG Simulations
bn billion MDTF Multi Donor Trust Fund
bpd barrels per day mn million
CBOS Central Bank of Sudan NBHS National Benchmark Household
CBS Central Bank of Sudan Survey
CGE Computable General Equilibrium OFAC US Office for Foreign Asset Control
COMESA Common Market for Eastern and RCA Revealed Comparative Advantage
Southern Africa RER Real Exchange Rate
CPC Cotton Public Corporation SAM Social Accounting Matrix
DB Doing Business SCCL Sudan Cotton Company Ltd
DSA Debt Sustainability Study SDG Sudanese Guinea a.k.a. Sudanese
EIA US Energy Information Administration Pound
EOR Enhanced Oil Recovery SDN Sudan
FDI Foreign Direct Investment SSA Sub-Saharan Africa
fed feddan SSD South Sudan
GAB Gum Arabic Board SUD Sudan
GAC Gum Arabic Company TFA Transitional Financing Agreement
GAFTA Greater Arab Free Trade Area TFP Total Factor Productivity
GDP Gross Domestic Product TTEA Technology Transfer and Extension
GNDI Gross National Disposable Income Administration
GOS Government of Sudan VA Value-added
GRSS Government of the Republic of South VAT Value Added Tax
Sudan WDI World Development Indicators
SUMMARY OF FINDINGS AND POLICY CONCLUSIONS
F
rom 1999 to 2011 Sudan had a period resource rents have changed. The secession of
where it benefited from extensive discov- South Sudan triggered a negative natural resource
eries of natural wealth through oil. During shock that requires economic and fiscal adjust-
the “oil economy” economic growth exceeded the ment. If the authorities were to allow a market-
historical average of 4.9 and reached 6.1 percent based exchange rate adjustment this would lead
on average per year. Likewise, oil revenues rapidly to a “reverse” Dutch Disease situation, where non-
became the main source of public revenues and, at natural resource sectors such as agriculture could
its peak, contributed more than 50 percent of total gain competitiveness. However, this “reverse”
revenues. Relatively stable macroeconomic man- Dutch Disease scenario is being challenged by high
agement during the oil economy led to a rise in the inflation rates, a key symptom of the post-secession
savings rate, initially through increases in private Sudan, and to a lesser extent by the recent expan-
savings, followed by an increase in public savings sion of gold production and exports.
in the 2000s.
But the oil economy had also clear symptoms Current Economic Context
of Dutch Disease. Agriculture suffered from
neglect, and there were urgent calls to invest Sudan is still suffering from the economic and
natural resource rents into economic diversi- fiscal effects that were a result of the secession
fication efforts. Given overreliance on oil and an of South Sudan in 2011. With the secession, the
uncertain political situation vis-à-vis South Sudan, country lost about 75 percent of its revenues and
the 2009 Sudan Country Economic Memorandum most of its predominant economic activity: crude oil
encouraged private sector-led growth to drive a exports. But growth for 2014 was 3.1 percent and
more diversified economy, particularly through a shows some continuation of a recovery that started
revival of the agriculture sector. The 2009 CEM then in 2013. Growth in 2015 is expected to be around
proposed a set of interdependent steps to overcome 3.5 percent. In the short-term, gold production and
the single reliance on natural resources. The work exports along with an improving trade of agriculture
called for developing and maintaining the neces- products, especially livestock, are driving this recov-
sary enabling environment for growth, specifically ery, but the medium-term outlook remains uncertain.
macroeconomic stability and effective fiscal man- Sudan’s post-secession adjustment was pri-
agement. The report also highlighted the need to marily managed via the fiscal side. Rising deficits
implement policies aimed at improving the invest- were countered through fiscal austerity and central
ment climate. A key identified need was to increase bank financing. The latter had a significant impact
returns in the agriculture sector, whose productivity on inflation, which was further fueled by significant
levels had declined over the oil boom years. exchange rate adjustments in 2012 and 2013. Two
The heyday of the oil economy ended subsequent rounds of nominal adjustments with
abruptly in 2011, and economic diversification a combined nominal depreciation of 100 percent
is at center stage again; the signs of natural pushed the exchange rate to 5.7 SDG/US$ in 2013
xii COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
thereby increasing the import bill and further fuel- agriculture productivity growth and/or a normaliza-
ing inflation. tion of Sudan’s relations with the rest of the world.
Sudan’s fiscal position has improved in 2014 The impact of falling global oil prices is likely
reflecting fiscal reforms measures introduced in to be insignificant. Post-secession Sudan is no lon-
2013. This is important as it created fiscal space ger a large net exporter of crude oil. In fact, Sudan’s
within which the government was able to cut down crude net oil exports fell from US$8 billion in 2011
central bank financing of the government (0.4 to as low as US$ 0.4 billion in 2013. Looking at oil
percent of GDP in 2014 vs. 0.7 percent in 2013). and oil-related products together, Sudan is already
Sudan’s overall deficit was lowered to 1.2 percent a net oil importer.
of GDP in 2014 compared to 2.1 and 3.7 percent in Sudan’s economic outlook hinges signifi-
2013 and 2012, respectively. Key reforms to achieve cantly on improvements in domestic and regional
this included a cut in oil subsidies in Sudan and political environments. The political environment
efforts to increase tax revenue. with the rest of the world has improved somewhat
One of the key symptoms of the 2011 seces- over the past year with progress on a national dia-
sion shock, the Sudanese inflation rate has sig- logue to rein-in conflicts within Sudan. But uncer-
nificantly increased since 2011. It has been over tainty associated with the conflict in neighboring
30 percent since 2012 (annual CPI rate, period South Sudan and about oil transit fees remains high.
average). In 2014 it reached its preliminary annual More recently, Sudanese Banks have experienced a
high at about 37 percent, though it declined from breakdown in their correspondence relations with
a peak of 47 percent in July 2014 to 25 percent in foreign banks as a result of de facto tightened U.S
December 2014. Declining food inflation is compen- sanctions against Sudan. As a result, Sudan’s trade
sated for by an increase in core inflation, which indi- activities have been adversely affected and the short-
cates the still-existing monetary impact on overall age of foreign exchange has worsened.
inflation, as well as increased inflation expectations.
The current account deficit was still large in Conflict, Governance, Poverty, and
2014. But it narrowed to 6.9 percent of GDP from Debt: Sudan’s Long-Term Challenges
8.7 percent in 2013 and 9.2 percent in 2012. The
narrowing account is a reflection of a gold-driven Sudan has been in conflict for most of its history
increase in exports and fiscal consolidation efforts since independence. This conflict arises out of
that lower the import bill. Exports covered 65 percent non-inclusive institutions with limited effectiveness
of imports in 2014 compared to 54 percent in 2013. and often-disputed legitimacy across Sudan, and
The short-term growth outlook is set on has resulted in depressed development outcomes.
recovery mode, albeit on a modest level. An While the defining conflict between the northern
anticipated good agriculture harvest and further and southern regions was largely resolved by the
increasing livestock exports contribute to positive secession of the latter to form the Republic of South
growth, and robust gold exports will support the Sudan in July 2011, tensions still remain. Several
continuing recovery with about 3.5 percent growth other conflicts with varied histories persist in dif-
in 2015. But gold may be a temporary phenomenon ferent stages of intensity, stalemate, or resolution.
only and, given its primarily artisanal nature, has Weak institutions at both national and subnational
only limited effect on the economy at large. The levels are unable to resolve most conflicts, often
analysis in this CEM argues that in a base scenario resulting in violence. Violent conflict, especially
to 2030 growth will be around 4.1 percent, which rebellion against the center and armed response
can be potentially driven higher through stronger by the state, is a direct contributor to the extreme
Summary of Findings and Policy Conclusions xiii
poverty in Sudan’s conflict-affected areas. Security bearing rocks with little or no reclamation of land
concerns continue to inordinately shape economic as mining plays out. There appears to be little atten-
and fiscal choices made by the government resulting tion to safety hazards, exemplified by the depth to
in detrimental development outcomes and perpetu- which some excavations are dug and minimal use
ating weak institutions for public goods provision. of support structures. Furthermore, rudimentary
Sudan presents institutional discontinuities health precautions are taken at mining sites and
across its various regions, which is reflected in processing centers, where water and hygiene con-
its regional economic imbalances and its geog- ditions are poor and do not appear to be subject to
raphy of conflict. At the center, Sudan has institu- routine monitoring and inspection.
tions that enforce compliance and execute core state Yet, Sudan holds tremendous potential,
functions of providing security, commanding fiscal much of it unrealized due to long-running con-
mechanisms, and delivering services. However, flict and governance challenges. Some of this
state presence and effectiveness diminishes further potential was realized in earlier decades, (including
outside Khartoum and is out-rightly contested in during early industrialization) in large scale irriga-
many peripheral areas. As with political power, the tion in support of food and export crop agriculture,
economy is centered in Khartoum and proximate and in investments from recent natural resources
riverine states giving rise to significant inequality discoveries. Once the largest country in Africa,
between the center and periphery, and historically even in its diminished state Sudan holds the poten-
between riverine and hinterland communities. tial to be an economic powerhouse. It sits at the
Development and poverty indicators starkly crossroads of sub-Saharan Africa and the Middle
mark the resulting inequality. While Sudan boasts a East, with fertile lands and abundant livestock, and
GNI per capita of US$1693 (2013) its poverty rate is some remaining natural resources (oil and gold),
46.5 percent. In fact, poverty ranges from 26 percent which make it the third largest economy in North
in Khartoum state to 62.7 percent in Darfur, based Africa (after Egypt and Morocco) and the largest
on 2009 data. The incidence of poverty in urban economy in the greater eastern Africa region. The
areas, particularly Khartoum, is significantly lower consolidation of peace in Sudan has the potential
than that of the rural areas. Rural areas are more than to positively impact peace and development in the
two and half times as poor as the capital and almost region, especially in the Nile River Basin, South
twice as poor as the rest of the urban areas. While Sudan, and the Sahel.
rural areas account for a little over 60 percent of the From an economic perspective, Sudan’s
Sudanese population, they account for almost for 80 ongoing debt crisis that dates back to the 1980s
percent of Sudan’s poor. For the rural population, any is truly unsustainable. Sudan’s debt crisis in the
poverty reduction strategy needs to build on agricul- 1980s started with the Government’s inability to
tural growth, while at the same time looking into the service its debt service obligations, which in turn
creation of off-farm employment opportunities there. led to an unprecedented increase in arrears. This is
The rapid expansion of gold mining has a key feature of Sudan’s striking debt burden up to
generated a variety of harmful impacts that will the present, where 85 percent of Sudan’s debt is in
further complicate development in rural areas. arrears. Both domestic and external causes for the
Aerial images bear witness to the dramatic impacts debt crisis are widely recognized (Rahman 1995;
of gold rushes with closely spaced excavations over and Ahmed 2008), including the global recessions
extensive areas and shanty town-type development of the 1970s and 80s due to the oil price shocks,
to support the influx of people. There is widespread an overvalued exchange rate and insufficient debt
use of bulldozers to excavate topsoil to expose gold management capabilities within the government.
xiv COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Sudan’s external debt stands at about US$45 Institutions Important for Growth and
billion (79 percent of GDP) as of end-2013, of Diversification in Sudan
which 85 percent was in arrears. The large major-
ity of the debt is public and publicly guaranteed debt The CEM starts out with a series of simulations
(valued at US$43.4 billion, of which 88 percent and a review of recent key literature on growth
in arrears), mainly owed to bilateral creditors and and diversification with the aim of defining a
almost equally divided between Paris Club and non- suitable approach for growth and diversification
Paris Club creditors (37 vs. 36 percent of the total). for Sudan. Using projections to 2030, an analysis
Only a small fraction is commercial debt owed to of economic scenarios sets the stage and highlights
suppliers (US$1.6 billion). Sudan is also in arrears some key aspects of potential policy changes. The
with multilateral creditors, including the WB, the analysis employs MAMS, a simulation model of
IMF, and the AfDB. the CGE (Computable General Equilibrium) type
As a result, current external public borrow- developed at the World Bank for medium- and
ing is very limited mainly due to Sudan’s inabil- long-run policy analysis. The base scenario matches
ity to access international financial means. Total economic developments anticipated by the Sudan
contracting of external debt has remained below 1 Country Team of the World Bank and in recent
percent of GDP per year since 2011. Given eco- reports from the IMF; it highlights the difficulties
nomic and financial sanctions as well as the fact that of creating an economic structure without heavy
Sudan is in arrears with most creditors, the country reliance on resource exports, including the need for
has effectively been cut off from external financ- real exchange rate depreciation to induce expan-
ing sources. The government currently can only sion of the production of tradables for exports and
contract new debt with a limited number of still- replacement of imports, resulting in a slowdown in
disbursing multilateral and non-Paris Club bilateral consumption and investment growth.
creditors such as China. Some US$152 million of The sectoral structure of Sudan’s economy
new debt (0.2 percent of GDP) was contracted in the shows the growing importance of agriculture,
first half of 2014, of which $147 million is on non- less importance of extractives, and relative stabil-
concessional terms (which is well within the annual ity of other sectors (manufacturing, services) by
non-concessional borrowing limit of US$600 mil- 2030. The simulations also show that the strongest
lion prescribed by the government’s Staff Monitored growth rates are from sectors that are capable of
Program with the IMF: IMF 2014a). There has not producing internationally competitive tradables.
been any new private external debt in decades. Simulations suggest that in the absence of dominant
Relief to Sudan’s external debt crisis will be resource-based exports, growth must be centered on
critical. Normalization with the rest of the world sectors producing tradables that are exported and/
and debt relief would not only mean that Sudan or replace imports. Therefore a sectoral focus of this
could potentially access significant external assis- CEM is to examine agriculture and trade of goods
tance resources, but also a bettering in Sudan’s terms and services as a means to grow the endowments
of trade and potential to explore currently closed base of the country.
external markets. But the envisioned HIPC debt relief The non-base scenarios point to the benefi-
process is slow and requires renewed emphasis of the cial effects of agricultural productivity growth. In
Government on reaching out to creditors, normal- addition, the role of agriculture would likely become
izing relations with international financial institu- more prominent in a setting with a supportive,
tions, and continuing to establish a track record of depreciated real exchange rate. Simulations of nor-
cooperation with the IMF on policies and payments. malization (represented by improved terms of trade,
Summary of Findings and Policy Conclusions xv
debt forgiveness, and more foreign aid) suggest that revenues. Still, more effective volatility management
it would have positive effects on macro indicators, within a fiscally sustainable framework requires a
boosting Sudan’s integration with the world economy, medium-term outlook on natural resource revenues.
improving household welfare, reducing poverty, and At its peak during the oil economy between
facilitating Sudan’s structural transformation. 1999 and 2011, oil revenues contributed more
The second part of the analysis attempts to than 50 percent of total fiscal revenues. This
identify a suitable growth and diversification situation ended abruptly in 2011 and oil revenues
strategy for Sudan and looks at the 2008 Growth are expected to fall to around 10 percent of total
report (World Bank 2008a) in search of “ingredi- revenues over the next five years. In addition to
ents for growth.” It finds that Sudan’s performance oil revenues from Sudanese domestic production,
vis-à-vis the “ingredients of growth” is mixed and fees of South Sudanese oil flowing through Sudan’s
between 2000 and 2011 and heavily dependent on oil infrastructure and time-bound proceeds of the
the effects of the oil economy. The same section also transitional financing agreement (TFA) between
explores the question on how to achieve “pro-poor” the two countries are expected. More effective
growth. It finds that, given that poverty in Sudan is volatility management within a fiscally sustainable
deep and largely a rural phenomenon, the agricul- framework requires a medium-term outlook on
ture sector is crucial for efforts to reduce poverty. natural resource revenues. During the pre-secession
Looking at other economies that were suc- period Sudan had some experience in utilizing an
cessful in their diversification efforts shows that oil revenue stabilization account (ORSA)—a failed
they were able to broaden their endowments base attempt to smooth expenditure. After two years of
by maximizing a triad of institutions to deliver balanced budgets in 2010 and 2011, a significant
services that ultimately increase productivity. deficit opened up in 2012.
This triad includes the abilities to manage natural Financing the budget deficit is now one of
resource rents, to provide public services, and to the key challenges in post-secession Sudan, but
regulate economic activity and foster a business- options for foreign financing of the budget defi-
enabling environment (World Bank 2014e). cit are limited. Given the constrained financing
Looking at Sudan, there are important weaknesses in options for Sudan it will be important to mobilize
all the three areas, often complicated by conflict and more domestic resources for productive use, most
fragility, sometimes through uncertain assignments notably domestic savings to support investment. But
of responsibilities in an ever more decentralizing Sudan’s national savings fell to a low of 8.5 percent
public administration. Overall, this analysis finds of Gross National Disposable Income (GNDI) in
there is much scope to improve the effectiveness of 2012, the lowest level since 1999. Stable macroeco-
these institutions to lay the groundwork for a more nomic management in the late 1990s and 2000s,
diverse endowment base, and ultimately, a more and the oil economy led to a rise in the savings rate.
diversified economy. But with the secession Sudan’s private and public
The ability to manage natural resource rents savings fell sharply. It is well-known that domestic
refers to the ability to pursue overall stabilizing savings matter because they fund investment, which
macroeconomic policies of which stable fiscal in turn lead to higher economic activity and growth.
management is key, sometimes achieved with But it matters even more as tapping into foreign
stabilization funds for natural resource rents. For savings is not a real option in today’s Sudan where
Sudan, the CEM finds that the Government’s ability to FDI is scarce and portfolio investments are close to
manage natural resource rents is limited; yet, natural being impossible given Sudan’s isolated status in
resources have also declined in importance to fiscal the world financial system.
xvi COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
The ability to provide public services relates responsibilities to the sub-national governments;
to the ability of governments to invest into the particularly vis-à-vis publicly funded pro-poor
human capital of the younger generation and activities. A sound revenue assignment system
to build infrastructure that can be used for is an essential pre-condition for successful fiscal
forward-looking economic activities in the long- decentralization. Since resource disparities exists
term. Sudan’s ability to provide public services is across the states of Sudan, the primary component
a constraint. Historically, GDP growth in Sudan of successful fiscal decentralization is a more equi-
was rarely driven by enhancements in total factor table and transparent system of intergovernmental
productivity, which would indicate a rising role of resource allocation across different levels of govern-
human capital formation in the growth process. ment. Fiscal decentralization has brought consider-
And human capital formation depends on the effec- able extra resources to the States and substantially
tive provision of services. In that regard, Sudan increased overall per capita social spending over the
has undergone a process of decentralization that past ten years. Yet, the observed increase in social
assigned basic service provision to subnational lev- spending has not translated into a more balanced
els. Since fiscal decentralization is lagging behind, distribution of resources by the government to
however, states do not have the ability to live up to address inequality across states and reduce poverty
their responsibilities and outcomes, for instance, for gaps. Ultimately, the weaknesses in public service
education are both low and with a large variabil- provision in Sudan stem from poor prioritization of
ity across states. Finally, conflict, governance, and spending and an inadequate focus on results.
debt are all complicating factors for government to Conflict, governance, and debt are all com-
effectively deliver services. plicating factors for government to effectively
Sudan has had a period of one decade with deliver services. Sudan has been in conflict for most
positive real economic growth rates driven by of its independence history. The secession of South
oil GDP since the discovery in 1999. High pro- Sudan solved the key conflict in Sudan, but not all
ductivity is crucial for sustaining high growth, yet conflict has been eliminated; tensions continue and
in Sudan total factor productivity has been low or are expected to persist in the foreseeable future. In
even negative in the majority of years since oil was most regions of Sudan, conflict over access to natu-
discovered. The secession of South Sudan signifies ral resources between pastoralists, agro-pastoralists
the latest structural break in the economy that is due and settled farmers is endemic and also contributes
the loss of the majority of oil reserves and related to regional conflict, such as in the Sahel. Weak
fiscal revenues. The sectoral decomposition of GDP governance and accountability have contributed to
growth suggests that, historically, the major driver fragility and conflict, including between the center
of growth in Sudan was and now still is the service and periphery. At the same time, conflict and fragility
sector. From the expenditure side of GDP in Sudan contribute to the plethora of governance challenges
it is clear that domestic consumption (public and in Sudan. Fragility and conflict in Sudan is also
private) has been the major driver of GDP growth driven by corruption, further reinforcing barriers to
over the past decade and the role of investment was investment and equitable growth that would provide
rather modest. opportunities to citizens. Intrinsic to issues of allo-
Sudan has undertaken political decentral- cation and management of resources and the need
ization reforms since the early 1990s with the for greater transparency and accountability are the
aim to transition the responsibility for basic broader issues of the transformation of the state by
service delivery to the subnational, state level. providing for more participation of citizens and com-
Decentralization has devolved a number of key munities in decisions. Sudan’s prospects for service
Summary of Findings and Policy Conclusions xvii
delivery and poverty reduction are also hampered a regime of export controls related to military or
by its huge stock of external debt, most of which is dual-use goods. The largest, yet most difficult to
in arrears, with the implication that Sudan is cut off assess impact of the sanctions regime on Sudan is
from much needed official development assistance. transmitted through the financial system. Financial
The ability to regulate economic activities sanctions create difficulties for non-US companies
refers to the Government’s capabilities to estab- in trading with Sudan, partly due to the fact that
lish and nurture a business-enabling environment. U.S. dollar transactions are routed through the U.S.,
Since 2008 Sudan has experienced a slight deteriora- and partly due to the fact that many non-U.S. banks
tion in the business-enabling environment; the coun- have very significant dealings with the U.S. and want
try lags behind the comparators in getting credit and to avoid the appearance of being involved in trade
protecting investors, resulting in a lower rank for ease with Sudan. Sanctions have also a direct impact on
of doing business. Sudan ranked at 170 for getting the real economy through restrictions on sourcing
credit and 157 for protecting investors in the Doing of inputs and replacement parts. But the absolute
Business indicators (2014). When it comes to start- level of real economy impact of sanctions remains
ing a business, Sudan’s performance is similar to the unknown. For instance, Sudan’s non-oil exports
comparator countries. Sudan ranked at 131 for start- are concentrated in a small number of markets, but
ing business while Kenya was at 134 and Ethiopia at this is likely not solely a consequence of economic
166, respectively. The difficulties to run a business in sanctions against Sudan. In fact, it looks as if Sudan
Sudan lie more in the lack of support to investors and is isolated even within Africa. However, sanctions
business people than administrative procedure. The have exacerbated the isolation through increasing
strength of investor protection index is relatively low the difficulty in settling cross-border payments,
at 3.3 out of 10. For a country with sea access, Sudan which affects trade with all partners including their
has a relatively low ranking on the trade facilitation African neighbors. Yet, there is reason and evidence
component of the Doing Business indicators (Figures to believe that a normalization of relations with the
S.17). The Doing Business (2014) ranking for Sudan rest of the world, including a lifting of economic
(155th) on trading across borders is closer to the ones sanctions, could promote export diversification.
for landlocked countries and slightly worse than the In sum, the CEM finds that there is a case
regional average for Sub-Saharan Africa (SSA) (141). for Sudan to approach growth through diver-
Landlocked countries, such as Uganda and Ethiopia sification from two angles: the production and
in the comparators, often have more penalties than the endowment base, both of which rely on the
non-landlocked ones in trading across borders (Alvis effective utilization of key institutions. Taken
et al. 2010). Sudan, with relatively good port infra- together the direct and indirect approach define a
structure, does not appear to be taking full advantage coherent way for Sudan to diversify that takes into
of its geographic location. It is notable that the cost consideration the current and future sectoral struc-
to import is close to the price for the neighboring ture of the economy, existing sectoral policies of the
comparator landlocked countries. Government, as well as the need for long-term insti-
Economic and financial sanctions imposed tution building as a foundation for diversification
on Sudan since the late 1990s complicate the through broadening the national endowment base.
Government’s ability to regulate economic activi- This analysis therefore uses a sectoral focus
ties. The United States imposed economic sanc- and looks at agriculture as sources for diversi-
tions on Sudan in 1997. Over the years, the trade fication, but also makes the case that trading
sanctions have been relaxed. The United States of goods and services—especially of the higher
now exports a variety of goods to Sudan subject to value-added kind—could be a means to grow
xviii COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE S.01: Base Simulation: Selected Macro FIGURE S.02: Base Simulation: Aggregated
Indicators (Index; 2012 = 100) Sector GDP (Index; 2012 = 100)
300 300
250
200
200
150
100
100
50 0
2012 2015 2018 2021 2024 2027 2030 2012 2015 2018 2021 2024 2027 2030
Absorption Exports Agriculture Gold Petroleum Manufacturing
Imports GDP at factor cost Other industry Private Services Public Services
Source: World Bank staff own calculations using the MAMS Sudan Model. Source: World Bank staff own calculations using the MAMS Sudan Model.
the endowment base of the country. It is from The shares of exports and gross national
this framework that the remainder of this CEM savings in GDP are projected to increase sig-
unfolds with a detailed analysis of agriculture and nificantly from 2012 to 2030. In spite of moder-
trade of goods and services, and concludes with ate import growth and low foreign borrowing, the
an analysis of the extractive sectors (oil, gold) in import and foreign debt GDP shares both increase;
search of fiscal support for the diversification this is due to expected exchange rate depreciation.
agenda of the future. In the government budget, a comparison between
GDP shares data for 2012 and 2030 indicates that
Pathways to the Future: Economic and the receipt shares for taxes and domestic transfers
Sectoral Scenarios to 2030 increase while both foreign and domestic borrowing
decline; on the spending side, investment increases
Looking forward, a base scenario simulation sug- strongly while subsidies (to petroleum prod-
gests that the most likely growth outcome over ucts) decline, reflecting a projected policy change.
the next 15 years is that Sudan’s economy will In the balance of payments, the GDP shares in 2030
grow at around 4 percent annually. GDP at factor compared to 2012 are boosted by exchange rate
cost growth is above the growth rates for absorption depreciation; among outflows, the main change is
(the sum of private and government consumption expected to be higher imports while, among inflows,
and investment) and private final demands (private the main changes are increases for exports and pri-
[or household] consumption and private invest- vate transfers while borrowing and FDI are lower.
ment) due to export growth in excess of import The sectoral structure of Sudan’s economy
growth, driven by real exchange rate depreciation shows a growing importance of agriculture, a
(Figure S.01). Among macro items, only govern- decline in the importance of extractives, and
ment investment grows more rapidly than GDP, a relative stability of other sectors (manufacturing,
reflection of that it starts at a very low level. This services) by 2030 (Figure S.02). The main sectoral
structural adjustment is needed to put an end to changes by 2030 include:
unsustainable foreign government borrowing, par-
ticularly at the backdrop of a projected decline in Increased prominence for the agricultural sec-
gold export prices. tor: its shares in exports, value-added, and
Summary of Findings and Policy Conclusions xix
employment all increase (most dramatically FIGURE S.03: Real Exchange Rate and Export
for exports) while its share in total imports falls Quantity (index Base = 100)
and imports meet a smaller share of domestic 160
demand for agricultural products; 150
Export quantity index
Reduced importance for extractives, especially in 140
exports but also in value added and employ- 130
ment, combined with increased reliance on
120
imports to meet domestic demands; and
110
Relatively small changes in other sectors, even
100
though manufacturing and private services 100 105 110 115 120 125
both become slightly more open, with increased RER index (SDG/Foreign currency)
shares in total exports and imports, larger shares Agriculture Mining Manufacturing
Total Private services
of output going to exports, and imports meeting
larger shares of domestic demand. Source: World Bank staff own calculations using the MAMS Sudan Model.
Two main alternative scenarios are tested
for Sudan’s economy, addressing (i) the poten- The simulation confirms the importance of
tial role of agriculture as the economy enters the real exchange rate as a factor that works for
an era in which oil only will play a marginal or against export growth, especially in agricul-
role, with gold only partially making up for ture. Figure S.03 shows a positive and near-linear
this loss; and (ii) the effects of a potential nor- relationship between the real exchange rate and
malization of relations with the outside world. export quantities (both total and sectoral); in the
Accordingly, the non-base scenarios are divided into background, the maximum depreciation, at almost
two groups. (1) The first focuses on issues related to 22 percent, is associated with an addition to foreign
the responses of the economy to policies leading to reserves corresponding to close to 6 percent of GDP.
stronger TFP growth for crop agriculture and depre- According to the simulation results, the elasticities
ciation of the real exchange rate. (2) The second of real exports with respect to the real exchange rate
group addresses channels through which normal- are around 0.7 for manufacturing, private services,
ized foreign relations may influence the economy: and total exports but much higher (around 2.1) for
improved terms of trade (via higher export prices agriculture. These findings are consistent with the
and lower import prices as Sudan’s access to markets observed downturn for the agricultural sector during
improves), increased aid, and debt relief. the period of oil boom and suggest that real deprecia-
During the oil boom, Sudan’s real exchange tion should facilitate stronger export performance.
rate appreciated, penalizing production of Simulating an increase in agriculture produc-
non-oil tradables, a phenomenon commonly tivity by 2 percent (Crop+) shows a very strong
known as “Dutch disease,” but this is now being effect on economic growth and poverty reduction.
reversed. Unless major new natural resources are An increase in agriculture productivity by 2 percent
uncovered and exploited, Sudan will in the future per year would increase GDP growth by almost one
reverse this trend, as indicated by the sector pattern percentage point from 4.1 in the base scenario to 5
of growth for the base scenario, including above- percent by year to 2030. In addition, Crop+ would
average growth for agriculture. In this new external increase household consumption and reduce the head-
environment, the prospects for high payoffs from count poverty rate to 29.4 percent in 2030 compared
policies supporting agricultural growth are better. to 38.4 percent in the base scenario (Figure S.04).
xx COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Another simulation of the “normalization” of 2011 heavily dependent on the effects of the oil
relations with the rest of the world points to simi- economy. The advent of oil brought about signifi-
lar, yet slightly lower positive economic effects cant changes in the economy mainly over the past
than Crop+. Simulations capture effects via three 10 to 15 years, which were often reversed in the
channels, initially introduced separately—improved most recent period since 2011 due to the secession
terms of trade (the simulation TofT+), increased aid of South Sudan. Those changes are particularly pro-
(Aid+), and foreign debt relief (Debt-)—and sub- nounced in the areas of investments and savings,
sequently combined in one simulation (Normal). the export sector, FDI inflows, price stability, and,
The welfare impact of normalization is positive and ultimately on GDP growth (Table S.01).
increased household consumption would lower Yet, there are patterns of policies and eco-
poverty by about 7 percentage points in 2030 com- nomic variables that explain some of the past
pared to the base scenario. Normalization translates performance of the Sudanese economy.
into a 16 percent increase in real household per-
capita consumption in 2030, with the strongest No lasting structural change
impact from improved terms of trade, followed
by debt relief and increased aid. The increases in The long-term historical growth performance
household consumption bring about a 7 percentage shows that Sudan has undergone three distinc-
point reduction in poverty in 2030 compared to the tive economic periods since 1989, but lacks
base scenario (Figure S.04). lasting structural change. The first period can be
distinguished from 1989 to 1997 when the average
Looking Back to Shape the Future GDP growth reached 4.9 percent and was driven
mainly by labor and total factor productivity growth.
To find promising areas of focus for Sudan, this This was a period of experimenting with economic
analysis compares Sudan with successful other reforms and liberalization of the economy. The
countries, which were analyzed and described in second period can be noted from 1998 to 2007. As
the 2008 Growth Report (World Bank 2008a). a result of the advent of oil, the average economic
Sudan’s performance vis-à-vis the “ingredi- growth increased by 1.2 percentage points, reaching
ents of growth” is mixed and between 2000 and an average rate of growth of 6.1 percent. Typical for
this period is that physical capital became the major
FIGURE S.04: Poverty Rate in 2012 and driver of economic activity, whereas the contribu-
Various Scenarios tion of labor and TFP significantly decreased. This is
48
a reflection of intensified capital investments in the
46.5
46 country fueled from the oil economy and satisfied
44
42 through both domestic sources and FDI.
40 38.4
37.4
The latest and third period in the economy
38
35.8 started in 2008 and is coined by negative TFP
36 34.2
34 growth. This period includes the 2011 secession
32 31.4
30 29.4 that is associated with the loss of the majority of
28
26
oil reserves and related fiscal revenues. Declining
24 growth rates of this period was driven by a decline
22
20 in physical capital and the negative contribution of
2012 Base Crop+ TofT+ Aid+ Debt– Normal the TFP growth (Figure S.05). This is not surprising
Source: World Bank staff own calculations using the MAMS Sudan Model. as investment in oil-related activities fell with the
Summary of Findings and Policy Conclusions xxi
Table S.01: Sudan’s Performance Vis-à-Vis the Ingredients of Growth
Growth “ingredients” from the Growth Report Sudan’s historical record
High levels of investment ≥ 25% of GDP and savings between Average level of gross investment during the period 1980–2012 is 18.8% and during
20–25% of GDP the period 2000–2012 is 25.7% of GDP. Average gross fixed capital formation during
the period 1980–2012 is 15.3% of GDP and average during the period 2000–2012 is
21.2% of GDP. Average level of gross savings for the period 1980–2012 is 13.4% of GDP
and during the period 2000–2011 is 23.4%. Post-secession savings rates are in single
digits and too low to drive and match investments.
Technology, knowledge and know-how transfer (requires FDI) Average level of FDIs for the period 1980–2011 is 3.3% of GDP, for the period
2000–2012 is 7.8% of GDP. FDI in post-secession Sudan is negligible.
Supporting competition and structural change The World Bank Investment Climate Assessment of 2009 suggests a poor functioning
of markets to allocate resources in the economy. This is primarily due to tight controls
through the state in procurement processes, financial markets, and land markets
(World Bank 2009b).
Labor market support The formal labor market is tightly controlled, preventing the efficient match of supply
and demand, and giving rise to informal, unregulated labor markets (World Bank 2009b).
Export promotion and exchange rate policy Average level of exports of goods and services for the period 1980–2011 is 10.5%, for
the period 2000–2012 is 16.9%. Official nominal exchange rate depreciated sharply in
2012 and there is a parallel exchange rate market.
Financial sector development and openness Private credit-to-GDP ratio average for the period 1980–2012 is 11.8%, for the period
2000–2012 is 12.9%.
Macroeconomic stability Average annual inflation for the period 1980–2012 is 40.2%, for the period 2000–2012
is 12.3%. The inflation is volatile during the recent period 2008–2012. Budget deficit
is narrowing from 7.1% of GDP in 2008 to 5% in 2012. External public debt is growing
rapidly from 60.2% of GDP in 2008 to 79% of GDP in 2013.
Source: World Bank (2008a); and World Bank staff own calculations, based on data from the WDI and IMF, and the analysis of World Bank 2009b.
secession, FDI declined, and overall economic senti- FIGURE S.05: Growth Decomposition of
ment declined. The severity of the contraction can be Production Factors in Sudan,
explained by the importance of physical capital and 1989–2012
TFP in Sudan’s economic development prior to 2008. 15
Growth rate (percentage points)
Successful economic development has typi- 10
cally been accompanied by structural transfor-
5
mation, in which manufacturing and industry’s
share of output and employment rises at the 0
expense of agriculture (McMillan and Rodrik, –5
2011). Manufacturing and industry typically display
–10
higher productivity, higher wages, and faster rates
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
of technology adoption, but Sudan’s challenge is to
find ways to grow these sectors, and particularly to Total factor productivity Human capital per labor
Labor Capital stock Real GDP growth
shift younger and more educated workers into higher
productivity jobs. Source: World Bank staff own calculations, based on data from World
Bank World Development Indicators (WDI).
However in Sudan the agriculture and services
sectors yet account for the vast majority of employ-
ment in Sudan, with manufacturing providing an are much higher in industry and manufacturing than
almost negligible number of jobs (Figure S.06). in agriculture. The sector that employs most people
This is even though both wages and labor productivity in the economy—agriculture—is also the sector that
xxii COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE S.06: Employment by Sector 2006 period. The persistently high inflation was also
3,500,000 accompanied by high volatility. As one of the key
3,000,000 symptoms of the 2011 secession shock the Sudanese
2,500,000 inflation rate has significantly increased since 2011,
2,000,000 and has been over 30 percent since 2012 (annual
1,500,000 CPI rate, period average) (Figure S.07). Analyzed
1,000,000 with monthly frequency, inflation was even higher
500,000 over certain periods (exceeding 40 percent) such
0 as in the second half of 2012 and the first quarter
Rural men Urban men Rural women Urban women
Agriculture & Foresty Other industry of 2013 when inflation reached a monthly peak of
Manufacturing Services 47.9 percent in March 2013, after which the price
Source: World Bank staff own calculations, based on data from National level growth started to decelerate. There was another
Benchmark Household Survey (2009). peak of inflation at 46.8 percent in July 2014, which
relaxed to 25.7 percent in December 2014.
employs most people without education. Almost two A major driver of the upsurge inflation since
in three workers in this sector have no education and 2011 was the approach to monetize the budget
less than one in fifty has post-secondary education. deficit by the Central Bank of Sudan through
Workers in the remaining three sectors—manufac- granting direct loans to the government. This
turing, non-manufacturing industry, and services— resulted in rapid monetary expansion that triggered
have relatively similar levels of education. growth of prices. Another significant measure that
contributed to an upsurge in inflation since June
High and volatile inflation 2012 was the adoption of a reform package that
resulted in steep devaluation of the official nominal
Inflation in Sudan has had a history of high exchange rate, an increase in taxes, and the gradual
rates and increased volatility since the 1980s. elimination of fuel subsidies. All of these measures
Since the advent of the oil economy in 1999, aver- resulted in price increases, especially the announced
age annual inflation in Sudan has been around or elimination of subsidies of petroleum products.
above 10 percent with the exception of the 2003 to The latter affected expectations about higher prices
FIGURE S.07: Average Annual Inflation in Sudan, 1999–2014
50% 40%
40% 30%
30% 20%
10%
20%
0%
10%
–10%
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Overall inflation Food inflation Core inflation Non-tradables/Tradables Tradables Non-tradables
Source: World Bank staff own calculations, based on data from CBOS 2014; IMF 2013; and World Bank World Development Indicators (WDI).
Summary of Findings and Policy Conclusions xxiii
for petroleum products in the near future that had FIGURE S.08: Fiscal Revenues and
spillover effects on the other prices in the economy. Composition (SDG mn)
35,000
Weak natural resource management, 30,000
budget deficits and low savings 25,000
20,000
During the oil economy in Sudan oil revenues 15,000
rapidly became the main source of public rev- 10,000
5,000
enues and contributed more than 50 percent total
0
revenues at its peak, but this situation ended 2008 2009 2010 2011 2012 2013
abruptly in 2011. With the secession of South Tax revenues Oil revenues
Sudan came a substantial loss of oil revenues and the Other non-tax, non-oil revenues
share of oil to total revenues declined from 59 per- Source: World Bank staff own calculations, based on data from IMF
2013; and World Bank World Development Indicators (WDI).
cent in 2011 to 16 percent in 2012 (Figure 1.3.1).
Even though they increased significantly, tax and
non-tax-non-oil revenues could not compensate for
this massive shock in the decline of oil revenues; Sudan is required to pay US$15.00 per barrel up
overall revenues declined by 33.5 percent between to a maximum of US$3.028 billion as a Transitional
2011 and 2012. During the pre-secession period Financial Arrangement (TFA). The TFA period ends
Sudan had some experience in utilizing a so-called in December 2016. In addition, the ongoing civil
oil revenue stabilization account (ORSA), a failed conflict in South Sudan puts significant uncertainty
attempt to smooth expenditure (Box 1.1). on the payment of the TFA obligations.
Oil revenues are expected to fall to around More effective volatility management within
10 percent of total revenues over the next five a fiscally sustainable framework requires a
years. At the same time, the ability of the govern- medium-term outlook on natural resource rev-
ment to generate fiscal revenues from the gold sector enues. This observation was made in the 2009
will be rather limited, primarily due to the nature CEM; yet it is still an issue in today’s Sudan. The
of gold mining that is first and foremost artisanal current practice of government is to include into
in Sudan. Only if Sudan succeeds in establishing a their medium-term plans expectations that suc-
modern industrial mining sector will there be the cessful exploration will add to production. This
real possibility for relevant fiscal revenues from substantially increases the government’s forecast
the gold sector. This is a medium- to long-term for oil revenues over the medium-term with a high
endeavor however, and Chapter 5 will provide an risk of not being able to meet those targets. A simi-
assessment of these prospects. lar issue is observable in the mining sector, where
In addition to oil revenue from Sudanese production figures are unclear and may also reflect
domestic production, fees of South Sudanese smuggled in and old gold.
oil flowing through Sudan’s oil infrastructure Sudan’s budget has consistently been in defi-
and time-bound proceeds of the transitional cit since 1991 and only occasionally reached sur-
financing agreement (TFA) between the two plus during the oil economy (Figure S.09). During
countries are expected. Chapter 5 will estimate the oil economy oil revenues rapidly became the main
that those additional oil-related funds are in the source of public revenues and contributed more than
order of 10 to 20 percent of total revenues until 50 percent total revenues at its peak, but this situa-
2016. Under the Bi-Lateral Agreements South tion ended abruptly in 2011. With the secession of
xxiv COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE S.09: Overall Budget Deficit, in the aftermath of the secession. Given its serious
1991–2013 negative repercussions, however, monetization is not
5 sustainable in the long term; it leads to an upsurge in
0 inflation, an impairment of monetary transmission
mechanisms, crowding out of credit to the private
Percent of GDP
–5
–10
sector, real exchange rate appreciation, and worsen-
ing foreign trade competitiveness. At the same time,
–15
the effects of the Sudanese debt crisis, paired with
–20
the financial and economic sanctions imposed on
–25
the country, have effectively cut Sudan off from the
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013p
international financial system.
Source: World Bank staff own calculations, based on data from World Given the constrained foreign financing
Bank World Development Indicators (WDI). options for Sudan it would be important to mobi-
lize more domestic resources for productive use,
most notably domestic savings to support invest-
South Sudan came a substantial loss of oil revenues ment. But Sudan’s savings rate is low. Sudan’s
and the share of oil to total revenues declined from 59 national savings fell to a low of 8.5 percent of Gross
percent in 2011 to 16 percent in 2012. Even though National Disposable Income (GNDI) in 2012, the
they increased significantly, tax and non-tax-non- lowest level since 1999. Stable macroeconomic
oil revenues could not compensate for this massive management in the late 1990s and 2000s, and the
shock in decline of oil revenues, and overall revenues oil economy led to a rise in the savings rate. In the
declined by 33.5 percent between 2011 and 2012. initial phase of this trend, private savings started to
After two years of balanced budgets in 2010 rise towards the end of the 1990s, followed by an
and 2011, a significant deficit opened up in 2012, increase in public savings in the 2000s. The exact
but was narrowed again in 2013. Even though a opposite happened in 2011 with the loss of three-
reduction of total expenditures was achieved 2012 quarters of oil revenue and the subsequent macro-
the decline in expenditure could not keep pace with economic and fiscal crisis that hit the Sudanese
the decline in revenues. The budget deficit shot economy after the secession. Against this backdrop,
up from virtually zero (–0.2 percent of GDP) to Sudan’s private and public savings fell sharply.
3.8 percent deficit in 2012. Much more, in 2013 the Domestic savings matter for Sudan’s eco-
expenditure side expanded again in real terms, but nomic transition from a largely oil-dependent
with a recovery of GDP growth from negative to posi- towards a more diversified and sustained growth
tive territory in 2013, expenditure as percent of GDP and development mode. There are two important
decreased. As a result, the deficit narrowed from points related to domestic savings. First, there is
3.8 percent of GDP in 2012 to 2.3 percent in 2013. the well-known relationship between savings and
The gradual elimination of oil subsidies starting in investment, where savings fund investment, which
September 2013 manifested this consolidation effort in turn leads to higher economic activity and growth.
and the 2014 deficit is expected to further decline. International evidence suggests this positive corre-
Financing the budget deficit is one of the key lation. Second, Sudan is not interlinked with the
challenges in post-secession Sudan, and options international financial system and hence economic
for foreign financing of the budget deficit are lim- actors have very limited opportunities to finance
ited given Sudan’s debt crisis. So far, the dominant investment through external sources. Together, the
source of financing has been through monetization lack of access to foreign savings urges post-secession
Summary of Findings and Policy Conclusions xxv
Sudan to raise its savings rate beyond pre-secession FIGURE S.10: Sudan’s RER Misalignment
levels to finance investment for growth. 0.2
0.1
0
Long history of overvalued real exchange –0.1
rate (RER) –0.2
–0.3
Sudan’s RER has been greatly overvalued over –0.4
–0.5
most of the past 40 years. From 1970 to the
–0.6
present, there are only two years when the RER is –0.7
undervalued (Figure S.10). For the rest of years, the –0.8
1970 1976 1982 1988 1994 2000 2006
RER is greatly overvalued, by as much as 65 per-
Misalignment
cent in 2008. In 2010 and 2011 the overvaluation
reduced to 50 percent and 40 percent—still very Source: World Bank staff own calculations, based on data from PENN
World Tables.
significant numbers. The overvaluation may have Note: Undervaluation zone is above 0.
slightly eased in the years 2012 and 2013 where
the nominal exchange rate devalued by almost 100 to other African oil exporting countries, most of
percent (Figure S.11). But the positive RER effects which experience Dutch-disease-like symptoms.
of this nominal depreciation, were again eaten up Empirical evidence presented in this analysis sug-
by persistently high inflation rates of 35.1, 36.3 and gests that a 10 percent lower real exchange rate
37.4 percent in 2012, 2013, and 2014, respectively. could raise economic growth by 0.9 percentage
The historical overvaluation is consistent points in Sudan. Given data constraints the rela-
with the gaps observed between official nominal tionship between the exchange rate and export
exchange rates and black market exchange rates. growth in Sudan cannot be confirmed with the same
If one was to consider the black market exchange methodology, but an undervalued RER is expected
rate as a de facto market-driven equilibrium value to contribute to export growth similar to what is
of the nominal exchange rate, the official nominal observed across all countries considered (separate
exchange rate was overvalued to the tune of 50 to 70 work on economic scenarios, presented later in this
percent in 2010 and 2011. Given data constraints, summary, shows an elasticity of 0.7 between real
there is no measure of RER Misalignment for Sudan
after 2011. However, based on the gap between the
FIGURE S.11: Sudan’s Official and Market
official and the black market rates, and given the his-
Exchange Rate (SDG/USD)
torical relationship between the two that reflects the
10
RER Misalignment Index, it is likely that the extent
of RER overvaluation remained at a similar level in 8
between 2012 and 2014. Such an overvaluation 6
pattern identified through the misalignment index
4
is consistent with other estimates. For instance, the
IMF Article IV in 2014 estimated that the Sudan real 2
exchange rate was about 40 percent overvalued in 0
2014 (IMF 2014c).
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
A more competitive real exchange rate could
support export and output growth. Sudan’s real Official exchange rate Market exchange rate
exchange rate overvaluation of the 2000s is similar Source: CBOS; and World Bank World Development Indicators (WDI).
xxvi COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE S.12: Sudan’s Wheat Yields in Wheat, (a crop not natural to Sudan, but produc-
Perspective tion is encouraged by the government) has yields
8,000 that are among the lowest in the world, if not the
7,000 lowest (Figure S.12). Similar developments are seen
6,000
in the main oil seeds—groundnut and sesame. Two
5,000
4,000
notable exceptions to the decreasing production
3,000 and yield trends are gum arabic and cotton, which
2,000 has seen a renaissance over the past years with very
1,000 strong production particularly in 2013.
0
Livestock production is strong and rising,
Sudan
Ethiopia
Egypt
Libya
Chad
Kazakhstan
Pavlodar
Kzylorda
but under pressure of losing land for pastoral
land use. Livestock are raised in almost all parts of
2012 2013 Sudan, but mostly concentrated in western Sudan
Source: World Bank staff own calculations, based on data from the Cen- (Kordofan and Darfur states) and owned primar-
tral Bank of Sudan; the Sudan Ministry of Agriculture and Irrigation; and
ily by nomadic tribes. Contrary to commonly held
selected World Bank Agriculture Country Reports.
belief, the rationale for pastoral livestock is less
grounded in satisfying basic needs, such as search-
exchange rate depreciation and export growth). ing for water to drink, and more due to the unique
In fact, given that Sudan’s exports of non-natural economic benefits of engaging in pastoral produc-
resource and agriculture products comprise mainly tion. The superiority of pastoral livestock in Sudan
low-value, raw and unprocessed products, which appears to be that pastoralists consistently use natu-
compete primarily on prices, the historic and cur- ral resources more intensively and hence are able to
rent RER overvaluation was and is a major inhibiting produce more livestock products per unit of land
factor for export development in the country. But area than any other form of livestock production.
there are macro-economic trade-offs of devalua-
tion, e.g., its tendency to increase import prices Very concentrated export markets
and thus contribute to inflation, so any changes
in the exchange rate may need to be accompanied The export basket of Sudan is very concentrated,
by adjustments in the macroeconomic policy mix. as shown the large shares of its top three and
five export products, but the degree of product
Extremely low productivity in agriculture concentration decreases when looking at non-oil
exports. Even though these measures have tended
The story of agriculture in Sudan is, by and large, to decrease after the split of the country, especially
a story of low productivity. Low crop yields are in the case of the top three products, the figures
associated with low fertilizer usage in the country. still evidence a severe dependence of Sudan upon
In 2009 the average fertilizer use per hectare of few commodities. However, the degree of product
cropland was 7.3 kg, which ranked Sudan at 129 concentration decreases considerably when only
among 155 countries, far behind Ethiopia, Sudan’s non-fuel products are considered. This implies that
poorer neighbor. To illustrate, sorghum and millet after the loss of South Sudan, the country may have
yields are low and generally on a downward trend, been forced into a path of higher product diversi-
yet more so in the rain-fed production areas than fication that could work to its advantage in future.
in irrigated regimes, where yields are more stable Even though the share of the top three and five non-
or have slightly increased over the past decade. oil products have increased after the loss of South
Summary of Findings and Policy Conclusions xxvii
Sudan, they are still relatively low. However the Herfindahl-Hirschman Index at
FIGURE S.13:
number of products, which always had been low, the Products Level, Sudan and
had shown mild increase between 2006 and 2011, Selected Countries
but fell again after the split of the country. 1.0
The lack of product diversification of
Sudan also stands out when compared to peer
countries, as evidenced by its comparatively 0.5
much higher Herfindahl-Hirschman index.1
Furthermore, the index has increased in recent
years, while in many of its comparators it has actu-
0
ally decreased. This points out to a comparatively Average 2000–2006 Average 2007–2012
disadvantaged position, both static and dynamic. Egypt, Arab Rep. Ethiopia Ghana Indonesia
Figure S.13 presents the index comparing Sudan Kenya Morocco Mongolia Uganda Sudan
and some comparator countries. Source: World Bank staff own calculations, based on data used from UN
Yet, Sudan has significant market power in Comtrade.
global export markets for gum arabic and sesame
seeds. Sudan’s power in global markets for gum
arabic and sesame seeds allude to its role of being that effort, but so is the role of the exchange rate.
a price setter in those areas globally. In regional Additionally, Sudan has a few agricultural export
markets Sudan plays a similar role for sheep and products with global or regional market power,
sheep meat, and on an emerging basis in waste and which could be used as basis for an agriculture
scrap of primary cells. diversification strategy and to explore agro-pro-
It is noteworthy that the role of sanctions in cessing as a next step towards light manufacturing.
export concentration is not clearly evident. In But there are striking examples of policy
fact, it looks like that Sudan is isolated even within inconsistencies in the agricultural sector that
Africa. However, sanctions have exacerbated the prevent the sector from unfolding to its full
isolation through increasing the difficulty in settling potential. Examples identified in the study include
cross-border payments, which affects trade with all the policies to promote self-sufficiency in wheat;
partners including their African neighbors. (World centralized marketing of agricultural products;
Bank 2014e). livestock, land tenure, and land policies; and the
inability to stop the decline of the Gezira scheme.
Agriculture and Livestock are Key for
Economic Diversification in Sudan Mistaken belief about food-security and
wheat self-sufficiency
All signs point to agriculture as the key sector
for diversification in the medium- to long-term. Over much of the past decade, common discus-
Agriculture is clearly underperforming and simula- sions about food security in Sudan have conflated
tions show that growth in agricultural productivity the concept that wheat self-sufficiency adds to
could have a very strong impact on raising economic food security. However, the reality is that the two
growth and reducing poverty. At the same time,
there is a clear opportunity to raise productivity 1
The Herfindahl-Hirschman index is calculated as the sum of the
squared market shares for all products.Higher values indicate in-
given the extremely low yields currently observed creasing concentration, with a maximum score of 1.0 when there is
in Sudan. Fertilizer usage will be instrumental in a single product.
xxviii COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
do not have much to do with each other. Other coun- limited. Still, these stores represent the equivalent of
try examples are illustrative: First, Jordan produces over two months of current consumption. Compare
virtually no grain at all, and yet has a high degree of this with the government’s stores of sorghum and
food security, due to a substantial volume of modern millet, which only represent 20 days of consump-
storage (silos) distributed around the country, and tion of those two commodities. Much more, they
efficient and transparent procurement of grain from are all in the far eastern part of the country, whereas
the cheapest sources on the world market. Second, consumption is mainly in the west. Box 3.4 devel-
Indonesia has long considered itself food insecure, ops a proposal to establish state-level modern grain
despite the fact that it is the third largest producer in storage in Sudan.
the world of its staple grain (43 million tons of rice). Yet, the government encourages domestic
Sudan consumers have changed their taste in production for wheat even though there is no
grain and shifted emphasis to wheat, a process comparative advantage for its production in
that will continue and grain consumption pat- Sudan, which needs more seasonality than most
terns may be significantly different again over the of country provides. This is why Sudan’s average
next decade. This gradual shift is taking place from yield is half of Chad’s, one quarter that of Ethiopia,
the traditional dryland crops of sorghum and millet and 1/14 that of Egypt. Sugarcane is somewhat dif-
to wheat. In 2001 grain consumption per capita was ferent, in that some areas of Sudan have achieved
140 kg: 90 kg of sorghum, 10 kg of millet, and 40 good yields in international terms. But sugarcane is
kg of wheat. Now it is closer to 96 kg of sorghum the second highest water-consuming field crop in
(plus about 10 percent for animal feed) and 54 kg the world, after rice. Meanwhile, Sudan’s irrigation
of wheat. Consumers continue to change their taste schemes are deteriorating rapidly, and the largest,
(and demand) and grain consumption patterns Gezira, is almost to the point of collapse in terms of
may be significantly different again over the next delivering water. Sudanese farmers know this, and
decade. Assuming that the change in preference of they have turned against sugar as decisively as they
the population is permanent, changing the cropping have turned against wheat. As for government sup-
pattern will be a long gradual process, and indeed port of wheat production, this study follows World
may only be partial. So the shift in production will Bank (2015b) in its recommendation to first shift the
not provide increased security for perhaps 10 years, focus of subsidies on domestically produced wheat
and perhaps never in total. and then, second, to gradually reduce the extent of
Sudan is today more secure in wheat than in subsidies on domestic production.
sorghum and millet. So food security does not At the very same time that the government sub-
reflect the fact that the wheat stocks are mainly sidizes wheat imports, Sudan also pays too high
imported, and the sorghum and millet mainly a price for wheat imports; indeed, there are indi-
produced in-country. The greater part of current cations that by changing the import sources the
modern storage available now in Sudan is for wheat, government could significantly reduce the price
not for sorghum and millet. In fact, current storage paid. Wheat imports are being carried out primarily
is usually either attached to flour mills or owned through flourmill companies, for examples SAYGA,
by flour millers at Port Sudan. As a consequence, Weita, and Seen. The main exporting countries of
current wheat storage capabilities exceed millet and wheat to Sudan are now Australia, Canada, Germany,
sorghum and are in the range of two months of and more recently India. The cost of wheat imports
wheat consumption. Yet, since the wheat stores are could be significantly reduced if Sudan imports wheat
fully private and are dedicated to the milling of flour from other cheaper sources such as Argentina, Russia,
for the various companies whose strategic storage is Kazakhstan and the U.S. (Figure S.14).
Summary of Findings and Policy Conclusions xxix
Centralized marketing of agriculture FIGURE S.14: Sudan’s Wheat Import Price in
products Perspective (USD/ton)
500 445
414
For decades export marketing of gum arabic was 372 397
400
under the sole responsibility of the monopolized
300
Gum Arabic Company. From 1969 to 2009 the
Gum Arabic Company (GAC) had the sole conces- 200
sion to export raw gum arabic. The main role of the 100
GAC was to preserve and monitor the quality of raw
0
gum arabic exported and to support producers with 2010/2011 2011/2012 2012/2013 2013/2014
production and extension services. The GAC had Sudan import price All US grades
implemented a floor price system for gum at buy- US (Kansas city) US (texas gulf) Argentina
ing centers (auctions). However, the monopoly of Source: World Bank staff own calculations, based on data from the
the GAC in gum arabic trade was widely regarded Sudan Ministry of Agriculture and Irrigation; and the United States
Department of Agriculture (USDA).
as the main reason behind the deterioration of gum
arabic production and export in Sudan. Over many
years, the low prices paid to producers (about 10–15 gum arabic have been abolished (about 13 out of
percent of export price) accompanied by poor sup- the 18 taxes and charges) (World Bank, 2013c).
port services led farmers to cultivate crops other Similar to the marketing of gum arabic, cot-
than gum arabic. The GAC also faced administra- ton marketing was in the sole hands of one state-
tive problems that led to inadequate international owned entity, the Cotton Public Corporation
promotion and marketing of gum arabic. In addi- (CPC), for many decades. CPC was established
tion there were other factors outside the company in 1970 to undertake marketing of all cotton pro-
such as low involvement of banks in the gum arabic duced in Sudan. In 1986 CPC was closed and the
trade, multiplied fees and taxes, and lack of strate- Sudan Cotton Company Ltd (SCCL) was formed. In
gic stocks. 1993 the ownership structure of SCCL was changed
In a bold move by the government a 2009 to let some private influence in, but the Government
liberalized the gum arabic trade and removed the remained in charge. The then-new mixed sharehold-
concession that granted monopolistic power to ers were made up of the Ministry of Finance, cotton
the GAC, affecting the marketing and export of farmer groups from the Gezira, Rahadf, and New
raw gum arabic. The floor price system was also Halfa irrigation schemes, the Sudan Pension Fund,
suspended. Meanwhile, a decision was made to and the Farmers’ Commercial Bank.
establish the Gum Arabic Board (GAB) to coordinate But the role of central marketing in cotton
reform measures and support the revival efforts of exports is declining and the influence of market
the gum arabic sector. The main objectives of the pricing has become stronger since 2011. Almost
GAB were somewhat similar to the former GAC, all cotton grown under irrigation over the last 35
but without monopoly power or concession. Since years has been sold on the world market by the
then, GAB is responsible for promotion of gum ara- SCCL or its predecessors. This marketing mecha-
bic export, opening new markets, providing finance nism meant that prices received by cotton farmers
services and quality control. The adopted reform in irrigated schemes were usually one uniform price
measures have had positive impacts on improve- for each variety, after costs of handling, ginning, and
ment of production, prices, and income of gum marketing had been subtracted. But pricing policies
producers as many taxes and charges imposed on have now changed and cotton producers are paid
xxx COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE S.15: Livestock Export Value by inability of Sudanese meat to compete with other
Subsectors (USD mn) suppliers especially to the Gulf region, due to high
800 cost, lack of modern export facilities, quality con-
siderations, and unsustainable supply.2
600
Contrary to commonly held belief, the rationale
400
for pastoral livestock is less grounded in satis-
fying basic needs, such as searching for water
200 to drink, and more due to the unique economic
benefits of engaging in pastoral production. The
0
2008 2009 2010 2011 2012 2013 superiority of pastoral livestock in Sudan appears to
Sheep Goats Camels be that pastoralists consistently use natural resources
Cattle Meat Hides and skins more intensively and hence are able to produce more
Source: World Bank staff own calculations, based on data from the Cen-
livestock products per unit of land area. Later stud-
tral Bank of Sudan; and the Sudan Ministry of Livestock and Fisheries. ies replicated similar findings to the ones reported
by Wilson and Clarke (1976) for Sudan and the rest
of Africa. Superiority of pastoralists over sedentary
on delivery at the “farm gate” according to grade farming may be due to the constant optimization by
and type of cotton. There were two triggers for this experienced herders of the pasture forage their herds
policy change: the deterioration of cotton produc- graze. Behnke (2012) found that fenced pastures
tion and the changing environment of production south of Nyala (now in South Darfur) lost 75 percent
relations especially in the Gezira Scheme. At the of their feed value (largely due to consumption by
same time, the infrastructure of the cotton industry termites and loss of digestible protein due to volatil-
is largely diminished, e.g., the number of spinning ization) if left ungrazed from September to the end
factories is estimated to be 15 only five of which are of the dry season in May. Similar findings are avail-
working, and there are 17 textile factories, only one able for Mali, Ethiopia, Kenya, Botswana, Zimbabwe,
or two of them are working. and Uganda. As a result, pastoralists consistently use
natural resources more intensively and produce more
Livestock, land tenure and land policy livestock products per unit of land area than do sed-
entary farmers, indeed even commercial ranchers.
Livestock exports have rapidly become an impor- Given the unique performance of the live-
tant part of Sudan’s foreign trade and reached a stock sector in Sudan and the fact that pastoral-
total export volume in excess of US$670 million ism is so successful, there is surprisingly little
per year in 2013. Figure S.15 summarizes Sudan’s policy attention on the sector. This is important
recent export values of livestock products. There in part due to the interlinked issues of land tenure
was more than a tenfold increase by 2013 compared and land policy (Box 3.1), which need to be solved
with 2008 (which, however, was an outlier year due to sustain pastoral livestock production into the
to an imposed export ban and quarantine measures). future. But there are also other issues, such as inher-
Live sheep exports dominate the picture, represent- ent volatility of the sector and the real possibility for
ing more than 70 percent of livestock export. Next
in importance are the export of live camels and 2
No cold or frozen meat is exported from Sudan because of inad-
hides and skins, which are about 14 and 10 per- equate abattoirs, and handling and transport facilities for chilled meat.
Small assignments of whole carcasses of sheep and goats and quarter
cent, respectively, of livestock export. Meat exports carcasses of beef are exported through special arrangement between
fluctuate greatly, which is largely a reflection of the exporters and importers.
Summary of Findings and Policy Conclusions xxxi
it to be negatively affected by droughts and diseases. removal), and redesign of works to reduce mainte-
Hence there is a need for more policy focus on a nance needs. Most of those needs have accumulated
better, forward-looking management of the sector in recent years to the point of virtual collapse of the
(World Bank, 2015b). scheme’s irrigation and drainage functions.
In fact, the major problem of pastoralism In 2014 the head of Gezira’s Board of Directors
today is the loss of rangeland to mechanized resigned, while the President of Sudan has pub-
dryland and irrigated farming. A study in Gedaref licly declared the failure of the scheme. Almost all
State (Babikir 2011) reported that grazing lands of the scheme’s staff, which once numbered 10,000,
reduced from 78.5 percent of the State’s total area have been terminated and portable assets sold off.
in 1941 (28,250 km2), to 18.6 percent in 2002 To turn around its fortune, and to avoid a major loss
(6,700 km2). Meanwhile the mechanized farming to Sudan and its agriculture sector in particular, it
sector in the State increased by 725 percent in the would seem wise to design and implement a techni-
same period, from 3,150 km2 in 1941 to 26,000 cal feasibility study of rehabilitating Gezira, including
km2 in 2002. In other areas, center pivot irrigated an initial benefit-cost analysis of rehabilitation of the
farming is used. The old tradition of allowing herds scheme. Rehabilitating the scheme would no doubt
to graze crop residues, while they simultaneously be a large project, since it would have to compensate
fertilized the land, is now increasingly forgotten, in for decades of deferred maintenance.
fact impossible. Instead, farmers sell their residues It may be too early to provide any details
for cash and clashes between pastoralists and farm- of a rehabilitation program, there are a number
ers are now much more common than ever before. of priorities emerging from the analysis in this
study. On the engineering side, rehabilitation seems
Inability to stop the decline of the Gezira to require mechanized or hydraulic silt exclusion
scheme mechanisms at the inlets from the Nile. From an
organizational perspective any rehabilitation would
The Gezira Scheme is commonly regarded as the have to consider the following principles: (1) Land
centerpiece of Sudan’s agriculture but it is at the tenure: Secure (and transferable) land tenure would
verge of collapse. The Gezira scheme was once the have to be assured to all farmers in the scheme, with
pride of Sudan, given the enormous size of the irri- no differentiation based on when ancestors joined
gation system (900,000 ha), close to both the capital the scheme. (2) Allow farmers free choice of crops:
(and metropolis) of an arid country (Khartoum), and Experience shows that farmers know best what crop
its major port (Port Sudan). With its 90 years of his- to use to maximize yields and income. (3) Principle
tory, three million inhabitants, and certain natural of cost recovery: Real cost recovery would have to be
advantages (much of the scheme could be irrigated agreed by all farmers. Box 3.2 makes a case for the
by gravity with proper infrastructure maintenance), rehabilitation of the Gezira scheme and suggests
it is obviously the heart of Sudan’s agriculture. starting with an in-depth feasibility study.
Over the years, Gezira’s natural advantages
encouraged many unsustainable policy shortcuts Seize the Opportunity: Align Consistent
that eventually only contributed to the scheme’s Policies for Economic Development
decline. Some of those policies stretch back to the
colonial days, in areas as diverse as repeated abro- Reconsider exchange rate policies
gation of landholders’ rights, command cropping
plans, exploitation of farmers’ interests, skimping This analysis finds that a more competitive real
on spending both for routine maintenance (e.g., silt exchange rate could support export and output
xxxii COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
growth and would have a particularly large effect exception to this. (3) A slightly undervalued and
on the agriculture sector. Empirical evidence rather fixed exchange rate will help the govern-
presented in this analysis suggests that a 10 per- ment to accumulate foreign reserves to bolster the
cent lower real exchange rate could raise economic exchange rate regime and protect against economic
growth by 0.9 percentage points in Sudan. Likewise, volatility.
an undervalued RER is expected to contribute to Finally, a crawling peg arrangement may be
export growth and this report found an elasticity the preferred choice for a pegged exchange rate
of 0.7 between real exchange rate depreciation and regime as it combines the advantages of a peg but
export growth. Also noteworthy is that the impact can also avoid real appreciation. A hard peg (i.e.
of exchange rate adjustments is particularly pro- fixed exchange rate) runs the risk of real apprecia-
nounced in the agriculture sector. tion if domestic inflation is high. When the nominal
There are two approaches toward large exchange rate is fixed, an increasing domestic price
exchange rate adjustments: big bang vs. gradual. level means that the dollar price of the domestic
The first approach is to do a one-off devaluation. goods is more expensive compared to the foreign
However, a problem of a large sudden devaluation goods—an RER appreciation. With a crawling peg,
is that will bring about economic disruptions, for the nominal exchange rate is allowed to gradually
instance to trade and debt services, and inflation. devalue if domestic inflation is high. Since Sudan’s
And in a way Sudan already tried the approach inflation is rather high in the post-secession world,
twice, in 2012 and 2013, with limited success thus a crawling peg may be the preferred arrangement.
far. The second approach is to devalue gradually
and credibly. The upside to this approach is that Facilitate a stable and low inflation rate
the economy will only have to deal with incremen-
tal changes. The downside is that the depreciation A major driver of recent high inflation is to be
expectations would put pressure on the central bank found in the practice to monetize parts of the
to devalue earlier than planned. For this reason, budget deficit through the central bank. Given
credibility is key. Given the ever-changing black its serious negative repercussions, however, mon-
market rate and the earlier attempts in 2012 and etization is not sustainable in the long term; it
2013, gradual but ongoing devaluation may be the leads to an upsurge in inflation, an impairment of
approach of choice for Sudan. monetary transmission mechanisms, crowding out
In the medium- to long-term, and after the of credit to the private sector, real exchange rate
official and black market exchange rates have appreciation, and worsening foreign trade com-
been successfully unified, the question arises petitiveness through appreciating the real exchange
for what exchange rate regime may serve the rate. The monetization practice hence should be
country best. The choices are between pegged and urgently reconsidered, especially as core inflation
flexible exchange rates, and a case could be made for is on the rise, which signals increasing inflation
the former for the following reasons: (1) A pegged expectations.
exchange rate provides stability that is needed for
the export sector. This is especially important if the Improve the management of natural
country would like to promote exports. (2) A peg resource rents
provides an inflation anchor. Developing coun-
tries with low technical and institutional capability More effective volatility management within a fis-
often choose to peg their exchange rate as a way to cally sustainable framework requires a medium-
anchor inflation expectation. Sudan may not be an term outlook on natural resource revenues. The
Summary of Findings and Policy Conclusions xxxiii
current practice of government to include into In addition, the high youth dependency ratio
their medium-term plans expectations that suc- has a negative influence on the savings rates in
cessful exploration will add to production should Sudan. Reducing the effective youth dependency
be rethought. This practice substantially increases ratio through job creation is an important support-
the government’s forecast for oil revenues over the ive factor for higher savings rates. Since most of the
medium-term with a high risk of not being able to young workers start their career in the informal sec-
meet those targets. A similar issue is observable in tor, providing job opportunities in the informal sec-
the mining sector, where production figures are tor is a key in reducing youth unemployment. As the
unclear and may also reflect smuggled in and old youth dependency ratio is a critical determinant of
gold. It is imperative for natural resource manage- private saving, reducing effective youth dependency
ment to have a sound medium-term outlook on ratio through job creation in the informal sector
natural resource revenues including those from holds tremendous potential for enhancing saving.
domestic oil, fees, TFA, and gold mining. To provide job opportunities for the youth, labor
Reviving agriculture and building an emerg- market policy would need to be specific to increase
ing light manufacturing sector will require the capacity of the informal sector.
investment—public and private—in infrastruc-
ture. It is thus imperative for Sudan to raise its Increase agriculture productivity
gross national savings rate beyond the pre-seces-
sion levels. Low savings imply lower availability Agriculture inputs: Availability and access to
of funds for productive investment which could agricultural inputs is largely considered one of
transform the Sudanese economy from a highly oil- the main factors affecting productivity, prof-
dependent one to a more diversified one. Given that itability, and competitiveness of agricultural
the secession of South Sudan is a permanent shock production. The supply of agricultural inputs in
to the Sudanese economy there is a real urgency to Sudan is organized mainly through the Agriculture
support the transition to a more diversified economy Bank of Sudan (ABS) and the private sector. The
through higher levels of national savings. import of fertilizers, tractors, and jute and sacks
Stable macroeconomic management with constitute the major part of imported input value
low inflation and positive real interest rates for agriculture inputs, but while increasing, lev-
is crucial for raising both private and public els are too low to make a significant difference.
savings rates. The loss of revenues from oil after Improved seed technology is essential for bridg-
2011 directly lowered public saving. At the same ing the gap between yields in demonstration trials
time, the monetization of the budget deficit and and farmers’ fields. Agricultural research, which is
a weakening local currency led to skyrocketing under the responsibility of the central government,
inflation. Private savings immediately responded to has been underfunded for decades. The alloca-
this situation and lowered their holdings. Because tion of resources across various lines of research
international evidence suggests that the Ricardian is primarily a policy decision. The Agricultural
equivalence holds only partially (public savings Research Corporation (ARC) is the principal
only partially crowd out private saving), policy research arm of the government on agriculture, in
makers could stimulate national savings by raising addition to the universities. Agricultural extension
public saving. But not in the current fiscal situation services in Sudan are provided by the government
where Sudan finds itself. Going forward efforts are through the Ministry of Agriculture and Irrigation
needed to facilitate the build-up of private savings and the Ministry of Livestock and Fisheries. The
rates through lower inflation. Technology Transfer and Extension Administration
xxxiv COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
(TTEA) is the responsible technical body for agri- increased fertilizer usage yields of wheat and every
culture extension services. But the government other crop will remain at unacceptable levels.
delivery of Livestock and Fishery extension services Learning from successful reforms in agri-
do not appear to be contributing to significant culture markets: gum arabic and cotton produc-
increases in productivity. Looking forward, there tion and trade saw significant increases after
is a need to better involve the private sector in the relaxation of centralized marketing. In each
delivering extension services. case the Government had instituted monopolized
One of the main inhibiting factors on the marketing structures in the past (monopsonies) in
production side of crops is the very low level of the form of parastatal companies. As is often the
fertilizer applications. In 2009 the average fertil- case with such companies, paying farmers less and
izer use per hectare of cropland was 7.3 kg, which less for their products (independent of the world
ranked Sudan at 129 among 155 countries. In the price) seems an easy path to profitability, until the
same year, Ethiopia, Sudan’s poorer neighbor, used farmers stop harvesting or even planting their crops.
17 kg (ranking 115). Available statistics indicate that That this happened can be seen in low yields of not
Sudan used as much as 80 kg/ha in the mid-1970s, only both gum arabic and cotton, but also many
and 70 kg/ha in the 1980s. While it is not entirely other agriculture products. As the monopsonies
clear how the low fertilizer usage came about, it is were eventually relaxed and competition provided,
clear that the decline in agriculture is associated to prices received by farmers increased substantially,
fertilizer usage. Raising the bar of agriculture again and with them so did areas cropped and especially
in Sudan, hence, requires efforts to stimulate fertil- yields. Cotton yields tripled nation nationwide in
izer usage. All hindrances to fertilizer import and one year (2010/11), and in three years increased by
distribution, for whatever reasons, need to be lifted, 5 1/2 times—with no improvements in irrigation or
and indeed current policy needs to be replaced by varieties. Such remarkable increases in agricultural
government encouragement (and possible subsidi- yields show that poor agriculture performance is a
zation at first) of fertilizer usage in order to restart product of low fertilizer usage, weak varieties due
this basic ingredient of modern agriculture; without to often local breeds of seeds, but also, and pos-
sibly most importantly a lack of incentives for the
producers.
Sudan has significant market power in global
FIGURE S.16: Sudanese Products with Larger
World Market Shares, 2013 export markets and regional markets in two
product groups each. Sudan’s power in global
40%
markets for gum arabic and sesame seeds allude to
30% its role of being a price setter in those areas globally.
In regional markets Sudan plays a similar role for
20% sheep and sheep meat, and on an emerging basis
10%
in waste and scrap of primary cells (Figure S.16).
First steps towards agro-processing: gum
0% arabic could lead the way and show how to com-
1996 1998 2000 2002 2004 2006 2008 2010 2012
bine success in raw material trade with increas-
Sheep Sesame seeds Gum arabic
ing value-addition through the development of
Other meat of sheep, Waste and scrap
fresh or chilled of primary cells processing capabilities. In order to do so, there is
Source: World Bank staff own calculations, based on data used from UN
a need to understand current constraints to process-
Comtrade. ing products, and how to maximize value addition
Summary of Findings and Policy Conclusions xxxv
through combining processing solutions with smart products and the basic value addition that they offer,
variations in producing the raw materials. Since and provide a basis on which to build increased
value addition would have to come through com- sales and value addition. Development of the sup-
panies and activities carried out by the private sec- ply chain will also directly address the issues raised
tor, it is also important to look at broader business by the overseas processors, and so help secure the
environment constraints to facilitate a shift towards overall gum arabic trade and Sudan’s dominant
more value addition. place in the trade (World Bank, 2015a).
While Sudan is the largest producer of gum
arabic in the world, it has no significant added Address broader business environment
value processing, a phenomenon observable in constraints
most producing countries (World Bank, 2015a).
Hence, a core objective of the sector in Sudan is to Broader business environment constraints would
increase the level of value addition at origin and have to be tackled to facilitate the development
to increase the share of value-enhanced gum ara- of an agro-processing and light manufacturing
bic products in the overall gum arabic trade from sector since the business environment in Sudan
Sudan. This would lead to improved returns and remains challenging. The 2014 Doing Business
hence increases in the price paid to producers for (DB) report ranks Sudan 149 out of 189 economies,
the raw material. ranking it marginally lower in comparison with
The goal for gum arabic value addition some of its regional neighbors (Kenya 129, Uganda,
should be to reach a level in Sudan that can pro- 132, and Ethiopia at 125). Enabling Sudan to benefit
duce spray dried material with high and defined more fully from the export and growth opportuni-
levels of functionality, particularly in emulsions ties offered by both the regional and global economy
and encapsulation (World Bank, 2015a). The pos- requires: improving the business environment;
sibility to add functionality is important, as margins facilitating trade and regional integration within the
are still not large for bulk sales of a standard pro- Common Market for Eastern and Southern Africa
cessed spray dried gum arabic. Higher margins are (COMESA) and the Greater Arab Free Trade Area
created through the production of spray dried mate- (GAFTA); making credit more available and afford-
rial with high and defined levels of functionality, able, especially to smallholders’; and addressing the
particularly in emulsions and encapsulation. World skills gap. Governance and accountability prob-
Bank (2015a) argues that this requires management lems also need to be addressed. Enhancing policy
and development of the raw material supply chain certainty and predictability requires the reduction
to improve the quality of the crude gum related and removal of the legal and regulatory hurdles to
to functionality, and to put in place a traceability business.
system to allow maintenance of the identity and Since 2008 Sudan has experienced a slight
integrity of batches of crude gum selected for, and deterioration in the business enabling environ-
defined by, their particular quality attributes. ment; the country lags behind the comparators in
A strategy to increase the level of value addi- getting credit and protecting investors, resulting
tion through the development of spray drying in the lower rank for the ease of doing business
capacity must therefore also address the devel- (Figure S.17). Sudan ranked at 170 for getting
opment of raw material quality and the supply credit and 157 for protecting investors in the Doing
chain. This will also address the perceived quality Business (World Bank 2014c). When it comes to
problems with kibbled and powdered material that starting a business, Sudan’s performance is similar
result in current low levels of demand for these to the comparator countries. Sudan ranked at 131
xxxvi COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Doing Business 2014: Ranking
FIGURE S.17: (Figure S.18). The Doing Business (2014) ranking
by Component, Sudan and for Sudan (155th) on trading across borders is closer
Selected Countries to the ones for landlocked countries and slightly
Mongolia
worse than the regional average for Sub-Saharan
Africa (SSA) (141). Landlocked countries, such as
Indonesia
Uganda and Ethiopia in the comparators, often have
Ghana more penalties than non-landlocked ones in trading
Uganda across borders (Alvis et al. 2010). Sudan, with rela-
Ethiopia tively good port infrastructure, does not appear to
be taking full advantage of its geographic location.
Kenya
It is notable that the cost to import is close to the
Sudan
price for the neighboring comparator landlocked
0 25 50 75 100 125 150 175 countries.
Paying tax (rank) Protecting investors (rank)
Getting credit (rank)
Build human capital and increase female
Source: World Bank staff own calculations, based on data from Doing
Business (various years).
labor force participation to support
structural change
for starting business while Kenya was at 134 and There has not yet been a shift in employment
Ethiopia at 166, respectively. The difficulties to from agriculture and services towards manufac-
running a business in Sudan lie more in the lack turing, and there is a real lack of an educated
of support to investors and business people than work force to allow for effective diversification
administrative procedure. The strength of investor into new and higher value-added product areas.
protection index is relatively low at 3.3 out of 10. Half of the population in Sudan has never attended
For a country with sea access Sudan has a formal school and only a tiny portion has some
a relatively low ranking on the trade facilita- post-secondary education. Only 15.8 percent of
tion component of Doing Business indicators the population have at most secondary school
education, and only 3.8 percent have some post-
secondary education. Not surprisingly, education
Trading Across Borders
FIGURE S.18: levels are substantially lower in rural than urban
Indicator 2014, Sudan and areas and substantially lower for women than men
Selected Countries (Chapter 2.A). Increasing education levels across
MON
all age levels would hence be an important long-
IND term contribution to broaden the human capital
GHA endowment in support of diversification of the
UGA economy.
ETH But higher education levels in younger
KEN cohorts represent an opportunity for Sudan to
SDN shift employment into more productive sectors.
0 25 50 75 100 125 150 175 Older parts of the population have lower education
Rank than younger parts and the gender gap in educa-
Source: World Bank staff own calculations, based on data from Doing
tion is smaller in younger cohorts than in older
Business (2014). ones. Individuals aged 20–29 have substantially
Summary of Findings and Policy Conclusions xxxvii
higher levels of education: one in ten has some post- non-participation by men and by women who are
secondary education and a further one in three has not homemakers. The pattern is visible for both
some secondary education. Yet, at present younger men and women and in both rural and urban
workers are no more likely to work in industry, areas. Discouragement is concentrated amongst
manufacturing, or services than their older compa- respondents below median age, in line with a
triots, indicating that there is no capitalization on global phenomenon of falling youth labor market
this opportunity (Chapter 2.A). By creating a more engagement.
vibrant business environment the Government
could build the basis for thriving businesses in Utilize remaining natural resource wealth
higher value-added segments of the economy, which for agricultural revival
then could increase demand for younger, better-
educated members of the work force. Remaining natural resources in Sudan are likely
Labor force non-participation is far higher to provide some limited time-bound support to
for women than men. Many women are engaged the efforts for diversification, but to consider
in home production and there appears to be some the transient character of natural resources in
variance in whether they self-report this as work. the post-2011 Sudan is prudent.
Looking at employment and labor force participa- The oil projections to 2030, for instance, pro-
tion for five-year age cohorts shows that non-par- vide a good example (Figure S.19). Certainly the
ticipation for females rises sharply across cohorts. level will lower over the next one or two decades,
This pattern may reflect a life-cycle explanation in and more significantly in the base case considered
which many women complete education and do in this analysis, which is significantly lower than
not transition into the formal labor force. It may the Government’s own projections (equivalent to
also reflect a cohort explanation in which younger the high case). In either case, it seems inevitable
women are obtaining more education than their that oil production will decrease to below 100,000
predecessors and will go on to enter the labor force. bpd, but the question is whether this will happen
These explanations cannot be separately tested now or in three, five or ten years
until additional waves of household survey data The outlook for gold is slightly more opti-
become available. But the same pattern is not visible mistic, and Sudan is projected to produce
for men, most of whom are either in schooling or
in the labor force. Younger men are slightly more
likely than older men to be neither studying nor FIGURE S.19: Projected Domestic Crude Oil
in the labor force Production, Bpd
The overwhelming majority of women that 180,000
160,000
are labor force non-participating report that 140,000
they are full-time homemakers or housewives, 120,000
which is not an uncommon reporting. But there 100,000
80,000
is a high number of discouraged job seekers that 60,000
show labor force non-participation. This pool of 40,000
20,000
untapped potential workers represents both a chal-
–
lenge and opportunity for Sudan. Almost 750,000 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
working-age respondents are not employed, not Base High Low
studying, and report that they perceive job search Source: World Bank staff own calculations, based on data from Sudan
as useless. This accounts for a large majority of Ministry of Petroleum 2014; IMF 2014c; and Wood Mackenzie 2013.
xxxviii COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Contribution of Natural
FIGURE S.20: spotlight on fees that the Government obtains for
Resources to Sudan‘s Economy the handling of South Sudanese transit oil. The
analysis shows that this now has become at least as,
Gold’s contribution is growing if not more, important than the domestic oil sector
but has been mainly to exports 1999–2010
in terms of exports (almost all South Sudanese oil
Share of exports
2025? 2014
is presently exported) and government revenues. In
2014
Figure S.20 this manifests as the red-line circle that
2014 2025? is somewhat between the oil position of 1999/2010
2025?
Oil’s contribution is declining and 2025. Under present arrangements, the GOS
but transit fees lessen the impact
1999–2010 obtains fees from South Sudanese oil transportation
Share of government revenue
through Sudan at levels that yield a considerable
Share of GDP: Oil Including transit fees Minerals
fiscal surplus (after meeting tariffs charged by the
Source: World Bank staff own visualization.
operators of processing and transportation facilities
in Sudan). Moreover, this source of fiscal revenues
is not linked to oil prices, so it is largely protected
between 18 to 28 tons annually over the next five from the present oil price uncertainties.
years—worth about US$750–US$1,130 million Notwithstanding the fiscal benefits obtained
annually. The traditional sector will continue to be from transit fees, these arrangements can only be
the source of most gold produced in this period, expected to be transitory. The time-bound charac-
although the ability to sustain this contribution ter is manifested in the fact that there are expiration
beyond this five-year period is increasingly doubt- dates of relevant agreements. At the same time, there
ful. A more likely pattern is that industrial mining are medium-term risks relating to i) an uncertain
will become the main source of domestically mined outlook for South Sudan’s production rate (as well
gold after 2020. It is unlikely that production after as uncertainty over TFA volumes if conflict in South
2020 would be significantly higher than 18 to 28 Sudan persists for another year); and ii) the incen-
tones estimated for the next five years. tives created for South Sudan’s oil to be used either
The diminishing effects of both oil and gold domestically or exported via an alternative route. As
on Sudan over the next 10 to 15 years are obvi- a consequence, Figure S.20 shows the combined
ous. Figure S.20 provides a summary of the natural contribution of the oil sector diminishing over the
resource wealth analysis and shows how the contri- medium term (to 2015) both in terms of exports
bution of the both oil and gold to Sudan’s economy and government revenues.
might evolve in the medium term. The red large The Government’s emphasis on promoting
circle shows the effects of the oil economy where alternatives to the oil sector is well founded,
oil was both a driver for exports and Government and there have been early results in the form of
revenues. This is likely to shift towards the lower left the boom in gold exports. A policy of encourag-
side over the next 10 years. Even in the high case ing domestically produced gold to be exported offi-
scenario for oil production this evolution is merely cially so that foreign exchange could accrue to the
slowed rather than changed. The same would be Government seems to have had success, at least in
true of a higher oil price environment, however, at the short term, even though a major driver of gold
least in the short term the oil price is unlikely to activity has been the gold price (Figure S.21) and
provide much support. the main supply response has been from the tradi-
The constrained outlook for exports and rev- tional mining sector, not the industrial mining sec-
enues from domestic oil production places the tor. The main policy concerns about this strategy is
Summary of Findings and Policy Conclusions xxxix
the length of time it will be sustainable in the face FIGURE S.21: Export Volumes of Gold
of lower gold prices and/or diminishing scope for Correlated with the Price
exploitation of gold by traditional methods. (Index 2004 = 100)
Traditional mining may, with sufficient sup- 800
port, provide a source of livelihood in rural areas 700
600
that may have few other sources of economic sup-
500
port. Traditional mining can create direct, indirect, 400
and induced demand for labor, goods, and services 300
in areas where few alternatives exist. With sufficient 200
mapping and resource evaluation it is likely possible 100
0
to identify areas that are sufficiently rich in gold so 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
that traditional mining could be sustained for more 1H
than a few years. Experience from around the world Gold price index Export volume index
suggests that this planned approach is only likely Source: World Bank staff own calculations, based on data from CBOS
2014; and Ministry of Mining and Natural Resources 2014;
to take place if traditional mining takes place on a
formalized basis, since this provides a basis for min-
ers to obtain legal title and hence finance.
Industrial mining may take some time to very unlikely to rival that of the oil sector in its
take off, however, such a development over the heyday and its fiscal impact may be substan-
medium to long term would be more likely to tially lower. These considerations are reflected in
provide a more balanced export and revenue con- Figure S.19 by the modest increase indicated in
tribution to the economy than traditional mining. export contribution and low increase indicated in
The Government has made promotion of industrial the contribution to government revenues. There are
mining a priority and taken a number of measures numerous scenarios that could unfold, including
to encourage investment in mineral exploration. much less positive ones, in which a lower gold price
There are positive signs that the technical condi- environment coupled with continuing constraints
tions on which industrial mining could develop are on financing of major mineral projects means that
in place, backed by efforts of the Ministry of Mines the recent gold mining boom wanes. Any sustained
to enhance the geological database. The mineral program of reforms to make the industrial mining
rich Arabian Nubian Shield straddles Sudan and sector more competitive and to strengthen regula-
several of its neighbors and has been host to min- tory institutions would require strong leadership
ing activity over millennia owing to an abundance and probably external support to enhance institu-
of accessible surface and near-surface deposits of tional capability and effectiveness.
gold and other valuable minerals. Large-scale gold Any more thorough evaluation of the contri-
and copper-gold mines developed in neighboring bution of the mining sector to economic develop-
Egypt, Eritrea and Saudi Arabia provide reason for ment in Sudan would have to take into account
optimism. However, the degree to which Sudan has negative externalities such as harmful environ-
been explored using modern techniques to establish mental and social impacts. At this stage, impacts
the viability of mechanized mining and to detect of this kind arise mainly in the context of traditional
deeper lying deposits remains very limited. gold mining, though adequate regulatory care will
Overall, the contribution of mining to be needed to ensure that further development of
Sudan’s economy over the medium term could the industrial mining sector does not generate an
be positive, however, the scale of the sector is excessive environmental and social burden. There
xl COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
is already evidence that traditional gold mining of the state-level grain storage; and (3) efforts to
places the environment, as well as the health and increase the education level of the population to
safety of laborers and their dependents, at some risk, increase the human capital endowment to support
given its very rapid and widespread proliferation. diversification.
It will be important for such risks to be managed
carefully to ensure that a good balance is achieved Summing it All Up
between economic opportunity and environmental
and social threat. The primary objective of this CEM is to support
At the very least the remaining natural efforts by the Government of Sudan to transi-
resource wealth available through oil and gold tion towards a more diversified and “pro-poor”
could be used to finance three of the more economy. Table S.02 summarizes the main find-
cost-intensive recommendations developed ings and argues that there is an opportunity to
in this study. These were: (1) The rehabilita- better align more consistent policies for economic
tion of the Gezira scheme; (2) the establishment development.
Table S.02: Summary of Main Findings and Recommendations
Findings Recommendations
No lasting structural change Remove exchange restrictions and enhance policy consistency
• Unify official with black-market rate and maintain a neutral real exchange rate through low inflation
High and volatile inflation • Lower budget deficits and lessen reliance on domestic deficit finance
• Allow more resilient investment financing through higher domestic savings
Weak resource management, • Limit use of financial sector interventions for specific sector promotion
budget deficits and low savings
Improve the management of natural resource rents
Long history of overvalued real • Establish a sound medium-term outlook on natural resource revenues
exchange rate • More effective volatility management
Extremely low productivity in Increase agriculture productivity through a set of key (policy) changes
agriculture Agriculture policy changes
• Rethink centralized marketing of agriculture products and learn from recent gum arabic and cotton experience,
where centralized marketing channels were broken up.
• Gradually decrease subsidy on domestic wheat production (capitalizing on the recent reform to abolish the
preferential wheat exchange rate).
• Diversify wheat imports to lower the wheat import bill.
Agriculture investments
• Promote fertilizer usage.
• Establish modern state-level grain storage.
• Prepare for rehabilitation of the Gezira scheme.
• Strengthen agriculture extension services and better leverage the private sector.
Pilot the move from agriculture to agro-processing
• Pilot gum arabic spray-drying in combination with increasing the value of raw material.
• Apply lessons from pilot for other successful raw exports such as sesame, cotton, and livestock.
Highly concentrated export Address broader business constraints to create space for structural transformation
markets • Facilitate access to credit
• Strengthen investor protection
• Reduce cost to import
Build human capital to support skills-intensive modern services and reduce spatial disparities
• Increase education levels across all age levels to broaden the human capital endowment for a diverse economy
• Increase labor force participation for women, which is far lower than for men.
Summary of Findings and Policy Conclusions xli
To underpin the findings and recommenda- promote exports and growth. The inflation rate
tions described in this summary, the CEM ana- is highlighted as a key variable to influence the
lyzes Sudan’s economy and its challenges in five level of the real exchange rate.
interlinked chapters. 3. Agriculture: key for economic diversification: This
chapter reviews agricultural production and yield
1. What kind of growth and diversification suits trends, analysis how markets work in the sector
Sudan? This presents the economic and sectoral and which products are traded most. It concludes
scenarios to 2030 to identify a sectoral focus with a description of agriculture support services.
for this analysis. It also contains a short base- 4. Building endowments through trade: goods and
line in the form of other country experiences services. Here trade patterns and goods export
in promoting growth and poverty reduction. performance are reviewed to identify Sudan’s
The crucial role of institutions critical to diver- main trading products and markets. The role
sifying the endowment base of an economy of business services is analyzed and highlighted
will be highlighted. Finally, some lessons are as another key element for diversification. The
drawn for Sudan’s way to grow and diversify chapter concludes with an outlook about the
its economy. potential for future (export) diversification.
2. Structural change and the role of the real exchange 5. Natural resources: still important but not dominant
rate for exports and growth. This chapter will first anymore: This chapter analysis both the oil and
provide evidence from the labor market on the gold sectors in the country in two separate sub-
lack of structural change in the economy. Then chapters. It concludes with a combined fiscal
it will show the role of the real exchange rate to and economic outlook of both.
WHAT KIND OF GROWTH AND
DIVERSIFICATION SUITS SUDAN? 1
This beginning chapter of the CEM sets the stage for the analysis, and presents various approaches and
lessons from other countries in relation to achieving economic growth through diversification. It starts
out with presenting the results of a simulation model of the CGE (Computable General Equilibrium) type
developed at the World Bank for medium- and long-term policy analysis. The model is used in two
ways. First, to look at the sectoral structure of the economy now to 2030 to identify sectors of focus of
the analysis. Simulations suggest that in the absence of dominant resource-based exports, growth must
be centered on sectors producing tradables that are exported and/or that replace imports. Second,
to present a series of alternative scenarios to show the impact of key changes in the economy such as
increased TFP growth and the effects of normalization of Sudan’s relations with the rest of the world
that would, for instance, lead to an increase in Sudan’s terms of trade and foreign aid. The non-base
scenarios point to the beneficial effects of agricultural productivity growth, showing also that the role
of agriculture would likely become more prominent in a setting with a supportive, depreciated real
exchange rate
The second part of the analysis in this chapter looks at the 2008 Growth report to identify the “ingredients
for growth” from the countries analyzed in 2008 (World Bank 2008a). It finds that Sudan’s performance
vis-à-vis the “ingredients of growth” is mixed, and between 2000 and 2011 was heavily dependent on the
effects of the oil economy. The same section also explores the question on how to achieve “pro-poor”
growth. It finds, given that poverty in Sudan is deep and largely a rural phenomenon, the agriculture sec-
tor is crucial for efforts to reduce poverty.
The third part of this first chapter looks at a recent report about “Diversified Development” (World Bank,
2014d), which argued that diversification of an economy should be perceived as the diversification of its
endowments rather than the production base. The section then follows the analysis presented in World
Bank (2014d) and looks, at the triad of institutions that was instrumental in other countries to diversify
the endowment base. It finds that Sudan’s ability to manage natural resource rents is limited; yet, natural
resources have also declined in importance to fiscal revenues. Still, more effective volatility management
within a fiscally sustainable framework requires a medium-term outlook on natural resource revenues.
The analysis also shows that Sudan’s ability to provide public services is a constraint. Historically, GDP
growth in Sudan was rarely driven by enhancements in total factor productivity, which would indicate a
rising role of human capital formation in the growth process. And human capital formation depends on
the effective provision of services. In that regard, Sudan has undergone a process of decentralization
that assigned basic service provision to subnational levels. Since fiscal decentralization is lagging behind,
(continued on next page)
2 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
however, states do not have the ability to live up to their responsibilities and outcomes for instance for
education are both low and with a large variability across states. In addition, conflict, governance and
debt are all complicating factors for government to effectively deliver services. Finally, the government’s
ability to regulate economic activity is being assessed by looking at the business-enabling environment.
This environment has stagnated or even slightly deteriorated since 2008, which is a key factor that holds
back private activities in support of the Government’s diversification agenda. The picture here is also
being complicated by the economic and financial sanctions imposed on Sudan.
The chapter concludes that there is a case for Sudan to follow an approach to growth and diversifica-
tion that pursues both diversification of the production base and of the endowment base. Agriculture is
important for “pro-poor” growth and has also great potential to realize quick wins due to its extremely
low productivity at present. Trade in goods and services can be seen as an important vehicle to broaden
the endowment base and to connect Sudan with international production networks. But lack of skills and
skills mismatches indicate that diversifying the human capital base with advances in education is important
to support trade in manufactured goods and higher-value added business services. Finally, extractives are
still important in Sudan, although they are no longer dominant; still, a good assessment of the potential
is a prerequisite for sound future natural resource management.
Pathways to the Future: Economic
A. Looking forward: The base scenario to 2030
and Sectoral Scenarios to 2030
The base scenario assumes that, for the period
This analysis develops a base scenario for 2013 to 2030, annual growth in GDP at factor cost
Sudan designed to represent a central case for is at 4.1 percent. GDP at factor cost growth is above
the evolution of Sudan’s economy up to 2030, the growth rates for absorption (the sum of private
and compares this case to a set of alternative and government consumption and investment) and
scenarios to show how development paths private final demands (private [or household] con-
may differ under alternative assumptions. The sumption and private investment) due to export
analysis is important because it highlights the pos- growth in excess of import growth, driven by real
sible impact of key policy changes on the goal of exchange rate depreciation. Among macro items, only
economic development in Sudan. By construction, government investment grows more rapidly than
the base scenario matches the broad developments GDP, a reflection of the fact that it starts at a very low
of the economy anticipated in recent World Bank level. A change in sector structure is needed to put
and IMF reports (World Bank 2014a–g; and IMF an end to unsustainable foreign government borrow-
2014a–c). The non-base scenarios address domes- ing, particularly against the backdrop of a projected
tic issues (agricultural productivity growth and the decline in gold export prices. Annex 1 has detailed
real exchange rate) and the effects of normalized results for the base scenario and other scenarios sum-
relations with the rest of the world. Apart from marized in Tables 0.5–0.9 and 1.1.1–1.1.5.
standard macroeconomic indicators, the analysis Sudan switches from being a net exporter
also highlights the impact of alternative scenarios to net importer of oil in 2018–2019. As a result,
on sectoral developments. the recent oil price decline and projected low price
What kind of growth and diversification suits Sudan? 3
level up to 2030 (compared to 2012) has a posi- growth for public investment (which starts at merely
tive impact on Sudan’s economy. GDP growth is 1.5 percent of GDP) (Figures 2.1.3 and 2.1.4).
primarily due to increased factor employment. In Within production sectors, annual growth
per capita terms, projected growth rates are around rates are close to 4 percent except for stronger
2.2 percentage points lower (i.e. 1.9 percent), given growth for agriculture and negative growth
projected annual population growth at this rate. The for the mining sector (petroleum and gold).3
growth rates for employment and private per-capita Agriculture growth benefits most strongly from
consumption are still sufficient to reduce the unem- improved incentives due to exchange rate deprecia-
ployment and poverty rates, respectively. tion. On the other hand, the two mining sectors,
The shares of exports and gross national petroleum and gold, show negative growth due to
savings in GDP will increase significantly from natural constraints of resource availability (Annex
2012 to 2030 (Annex 1, Table 0.6). In spite of 1, Table 0.9). Over time, growth is also quite stable,
moderate import growth and low foreign borrow- initially relatively low for relatively non-traded
ing, the import and foreign debt GDP shares both sectors (public services and other industry) since
increase due to exchange rate depreciation. In the they do not benefit from the improved incentives
government budget (Annex 1, Table 0.7), a com- due to exchange rate depreciation (Figures 2.1.5
parison between GDP shares data for 2012 and and 2.1.6).
2030 indicates that the receipt shares for taxes and The sectoral structure of Sudan’s economy
domestic transfers increase while both foreign and shows growing importance of agriculture, less
domestic borrowing decline; on the spending side, importance of extractives, and relative stability
investment increases strongly while subsidies (for of other sectors (manufacturing, services) by
petroleum products) decline, reflecting a projected 2030. Annex 1, Table 0.10 compares 2012 data to
policy change. In the balance of payments (Annex 1, simulated base results for 2030 in terms of sector
Table 0.8), the GDP shares in 2030 compared shares in exports, value-added, employment, and
to 2012 are boosted by exchange rate deprecia- imports as well as, for each sector, the output share
tion; among outflows, the main change is higher destined for exports and the demand share met by
imports while, among inflows, the main changes imports. The main changes by 2030 include:
are increases for exports and private transfers, while
borrowing and FDI are lower. Increased prominence for the agricultural sec-
Looking at the components of domestic tor: its shares in exports, value-added, and
demand, public investment is projected to have employment all increase (most dramatically
the strongest initial and overall growth, albeit for exports) while its share in total imports falls
starting from a very low level. Figures 2.1.2 to and imports meet a smaller share of domestic
2.1.5 show the evolution over time for the level of demand for agricultural products;
real macro aggregates (at 2012 constant prices). Reduced importance for extractives, especially in
While expansion in GDP at factor cost is relatively exports but also in value added and employ-
smooth, absorption initially declines when exports ment, combined with increased reliance on
initially increase and imports contract to address imports to meet domestic demands; and
external imbalances (Figures 2.1.2 and 2.1.3).
All domestic final demands (private and public
consumption and investment) decline in 2013 3
These relatively uniform growth rates across sectors are in part due to
scenario assumptions, including relatively uniform rates of productiv-
after which growth is positive during the rest of ity growth. The patterns of future deviations from these assumptions
the period, with the strongest initial and over-all are difficult to predict.
4 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Relatively small changes in other sectors, even Looking forward: Alternative scenarios
though manufacturing and private services
both become slightly more open, with increased Two main alternatives scenarios are tested for
shares in total exports and imports, larger shares Sudan’s economy, addressing (i) the potential
of output going to exports and imports meeting role of agriculture as the economy enters an era
larger shares of domestic demand. in which oil only will play a marginal role and
only in part is replaced by gold; and (ii) the effects
The simulations show the strongest growth of a potential normalization of relations with the
rates for from sectors that are capable of pro- outside world. Accordingly, the non-base scenarios,
ducing internationally competitive tradables. defined in Annex 1, Table 0.4, are divided into two
While the simulations cannot provide an accurate groups. (1) The first focuses on issues related to
and detailed picture of the future sector structure the responses of the economy to policies leading to
of Sudan’s economy—such a picture would require stronger TFP growth for crop agriculture and depre-
knowledge about too many unknowns—it can high- ciation of the real exchange rate. (2) The second
light some of the main trends. Simulations suggest group addresses channels through which normal-
that in the absence of dominant resource-based ized foreign relations may influence the economy:
exports, growth must be centered on sectors pro- improved terms of trade (via higher export prices
ducing tradables that are exported and/or replace and lower import prices as Sudan’s access to markets
imports. It is therefore noteworthy that a sectoral improves); increased aid; and debt relief.
focus of this CEM is to look at agriculture and trade During the oil boom, Sudan’s real exchange
of goods and services as a means to grow the endow- rate appreciated, penalizing production of
ments base of the country. non-oil tradables, a phenomenon commonly
Assuming more optimistic extractive sector known as “Dutch disease,” but this is now being
developments in the base scenario has only a reversed. Unless major new natural resources are
marginal impact, further underlining the impor- uncovered and exploited, Sudan will in the future
tance of the development of a non-extractive reverse this trend, as indicated by the pattern of sec-
productive sector for tradables. In order to test toral growth for the base scenario, including above
the sensitivity of the results to the assumptions for average growth for agriculture. In this new external
the mining sector (including an early decline in oil environment, the prospects for high payoffs from
production and declining gold export prices; see policies supporting agricultural growth are better.
Figure 1.2.1), a more optimistic scenario (named
Mining+) was tested. It is identical to the base except Simulating increased TFP growth for crop
for that (i) gold export prices stay constant in real agriculture (Crop+), stagnant private
terms up to 2030 (instead of declining during the transfers (Rem–), and these two simulations
period 2016–2025 at an annual rate of 3 percent); combined (Crop+Rem–)
and (ii) oil production follows the high case shown TFP growth has a strong positive impact and
in Chapter 5. The results, which are summarized the decline in remittances a negative impact on
in Figures 1.2.2, 1.2.3, and 1.2.4, suggest that GDP at factor cost, imports, and domestic final
Mining+ would marginally raise the growth rates demands. The simulation combining the two pre-
for GDP (+0.1 percent) and private consumption dictably has a more muted effect (Figure 1.2.5).
(+0.2 percent) and mitigate the required change in For all three simulations, exports are boosted due
sector structure. Nevertheless, the effects would be to stronger TFP growth for a major tradable sec-
quite marginal. tor (Crop+), improved export incentives due to
What kind of growth and diversification suits Sudan? 5
FIGURE 1.1: Model Base Scenarios: Selected Indicators, 2012 to 2030
1) Base: Selected macro indicators (2012 SDG mn) 2) Base: Selected macro indicators (Index; 2012 = 100)
700 80 300
Absorption and GDP at factor cost
250
500 60
Exports and imports
200
300 40
150
100 20
100
–100 0 50
2012 2015 2018 2021 2024 2027 2030 2012 2015 2018 2021 2024 2027 2030
Absorption GDP at factor cost Exports Imports
3) Base: Domestic final demands (2012 SDG mn) 4) Base: Domestic final demands (Index; 2012 = 100)
350 80 500
400
Private consumption
Other final demands
250 60
300
150 40
200
50 20
100
–50 0 0
2012 2015 2018 2021 2024 2027 2030 2012 2015 2018 2021 2024 2027 2030
Private consumption Public consumption Private investment Public investment
5) Base: Aggregated sector GDP (2012 SDG mn) 6) Base: Aggregated sector GDP (Index; 2012 = 100)
350 40 300
Agriculture and private services
250 30
200
Other sectors
150 20
100
50 10
–50 0 0
2012 2015 2018 2021 2024 2027 2030 2012 2015 2018 2021 2024 2027 2030
Agriculture Private services Manufacturing Other industry Public services Gold Petroleum
Source: World Bank staff own calculations using the MAMS Sudan Model.
depreciation (Rem–), and both of these effects depreciation. The other sectors that are most
combined (Crop+Rem–). GDP growth, total and strongly affected—manufacturing, other industry,
for most sectors, is positively affected by higher TFP and private services—are influenced by domestic
growth for crops, also when it is combined with demand developments. Gold is the only sector that
lower remittances (Figure 1.2.6). shrinks when agricultural productivity is boosted,
Among individual sectors, crop agriculture a reflection of its export orientation and the wors-
gains most, not only when targeted but also ening of export incentives. Also in terms of export
when a decline in remittances leads to real growth, the agricultural sector gains under all three
6 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
simulations (Figure 1.2.7). Other tradables with depreciation would be needed to facilitate stronger
export flexibility (livestock and gold) respond to export performance.
major changes in the real exchange rate, contracting
exports under Crop+, expanding them under Rem–, Normalization of relations with the rest of
and with only minor changes under Crop+Rem–. the world
In sum, the simulation results suggest that The “normalization” simulations capture effects
agricultural TFP growth has a generally positive via three channels, initially introduced sepa-
impact on macro indicators and sectoral growth. rately—improved terms of trade (the simulation
However, given that it leads to appreciation of the TofT+), increased aid (Aid+), and foreign debt
real exchange rate, it may discourage other exports.4 relief (Debt-)—and subsequently combined in
Export growth across all relevant sectors is boosted one simulation (Normal). Given that this quan-
by smaller foreign exchange inflows from a non- tification at best is highly approximate, the results
trade source (here with lower worker remittances should be viewed as input into thinking on these
as an example), but in this case the impact on other issues as opposed to offering precise impacts.
macro indicators and sector growth tends to be nega- Normalization simulations show that terms-
tive, with the exception of strongly export-oriented of-trade improvements (TofT+), raise GDP
sectors. In the context of lower remittances, higher growth by 0.2 percentage points. In fact it has a
agricultural TFP growth mitigates or may even over- more positive impact on absorption (increase by
come (depending on its strength) the negative macro 0.4 percentage points), reflected in higher private
effects of the loss in remittances. Stronger agricul- consumption and investment; growth for gov-
tural TFP growth also has significant positive effects ernment consumption and investment are kept
on poverty reduction and employment. unchanged (Figures 2.2.9 and 2.2.10).
The simulation also points to the importance Simulations also show that the 2030 unem-
of the real exchange rate as a factor that works for ployment and poverty rates would be signifi-
or against export growth. This is consistent with cantly lower in the normalization scenario than
the analysis presented in section 2.B of this report. In for the base scenario. The government is able to
order to further explore this aspect, MAMS was used reduce the tax rates and the tax intake (as share of
to run a set of hypothetical simulations for 2013 GDP) given that higher growth generates higher
which simultaneously had the real exchange rate revenues while two major spending items, govern-
depreciate and additional foreign exchange reserves ment consumption and investment, are fixed in real
put aside by the financial system. Figure 1.2.8 shows terms, reducing financing needs relative to GDP.
a positive and near-linear relationship between the The effects of increased aid are positive but
export quantities (both total and sectoral); in the modest. The effects of increased aid (Aid+) are
background, the maximum depreciation, at almost positive but, at the envisaged levels additional
22 percent, is associated with an addition to foreign grants and borrowing, very modest, raise most
reserves corresponding to close to 6 percent of GDP.
According to the simulation results, the elasticities
4
As an aside, for Sudan and other countries, different sources of
of real exports with respect to the real exchange rate foreign exchange earnings tend to compete for space in the basket of
are around 0.7 for manufacturing, private services, foreign exchange sources. The fact that after 1999 the expansion of
Sudan’s oil exports depressed exports from other sectors is an obvious
and total exports but much higher (around 2.1) for example. However, this displacement effect is weaker if the expan-
agriculture. These findings are consistent with the sion of exports for one sector is associated with expansion of foreign
exchange outflows, for example due to the importation of intermediates
observed downturn for the agricultural sector dur- or profit remittances (if the sector has significant foreign ownership)
ing the period of oil boom and suggest that real or if foreign exchange is set aside to add to foreign reserves.
What kind of growth and diversification suits Sudan? 7
FIGURE 1.2: Model Alternative Scenarios: Selected Indicators, 2012 to 2030
1) Oil and gold export prices (constant US$) 2) Base and alternative mining scenario:
and production quantities GDP and private Consumption
1.2 210
1.1 200
190
1.0 180
Index 2012 = 100
Indiex: 2012 = 1
0.9 170
160
0.8 150
0.7 140
130
0.6 120
0.5 110
100
0.4 90
2012 2015 2018 2021 2024 2027 2030 2012 2015 2018 2021 2024 2027 2030
Gold (production) Oil (production) Private consumption (Base) GDP (Base)
Gold (export price) Oil (export price) Private consumption (Mining+) GDP (Mining+)
3) Base and alternative mining scenario: 4) Base and alternative mining scenario:
Sector export shares Sector value-added shares
80 45
70 40
60 35
50 30
25
40
%
%
20
30 15
20 10
10 5
0 0
Agriculture Mining Manufacturing Private
Agriculture
Mining
Manufacturing
Other
industry
Private
services
Gov't
services
services
2012 2030 (Base) 2030 (Mining+)
5) Export simulations: 6) Export simulations:
Macro growth (devation from base) (%-age points) Macro growth (devation from base) (%-age points)
Absorption Crop
Livestock
Private
consumption Gold
Private Petroleum
investment
Manufacturing
Exports Other industry
Imports Private services
Government services
GDP at
factor cost Total
–1.5 –1.0 –0.5 0 0.5 1.0 1.5 2.0 2.5 –1.0 –0.5 0 0.5 1.0 1.5 2.0 2.5
Crop+ Rem– Crop+rem–
(continued on next page)
macro growth rates, including private demands are used to raise the trade deficit and to pay addi-
(consumption and investment) and imports, by tional interest.
0.1–0.2 percentage points (Figure 1.2.9). In the Foreign debt relief has a strong impact, lead-
balance of payments, increased government inflows ing to declining export growth and accelerating
8 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 1.2: Model Alternative Scenarios: Selected Indicators, 2012 to 2030 (continued)
7) Export simulations: Sectoral export growth 8) Real exchange rate and
(devation from base) (%-age points) export quantity (index base = 100)
Crop 160
Livestock 150
Export quantity index
Gold 140
130
Petroleum
120
Manufacturing
110
Private services
100
Total 100 105 110 115 120 125
RER index (SDG/Foreign currency)
–3 –2 –1 0 1 2 3 4 5 6 Agriculture Mining Manufacturing
Crop+ Rem– Crop+rem– Private services Total
9) Normalization simulations: 10) Normalization simulations:
Macro growth (deviation from base) (%-age points) Sector growth (deviation from base) (%-age points)
Absorption Agriculture
Private
consumption
Private Petroleum
investment
Exports
Other industry
Imports
GDP at
factor cost Public services
–2.0 0 0.2 0.4 0.6 0.8 1.0 1.2 –0.2 0 0.2 0.4 0.6 0.8
Toft+ Aid+ Debt– Normal
11) Normalization simulations: Real household consumption 12) Normalization simulations:
per capita, 2012–2030 (% deviation from base in same year) Poverty rate in 2012 and 2030 (%)
18 48
16 46
44
14 42
12 40
38
10 36
8 34
6 32
30
4 28
2 26
0 24
2012 2015 2018 2021 2024 2027 2030 22
20
Toft+ Aid+ Debt– Normal 2012 Base TofT+ Aid+ Debt– Normal
Source: World Bank staff calculations using the MAMS Sudan Model.
import growth. Foreign debt relief (Debt-) has increases by 0.3–0.4 percentage points for absorp-
a stronger impact—GDP growth increases by tion, private consumption, and private investment
0.2 percentage points while export growth declines (Figure 1.2.9). The driving force and the main
and import growth accelerates, permitting growth change in the balance of payments is a decline in net
What kind of growth and diversification suits Sudan? 9
interest payments on foreign debt. By 2030, the total of about 7 percentage points in 2030 compared
foreign debt would be 37 percent of GDP, compared to the base scenario. Figure 1.2.11 summarizes
to above 114 percent for the base scenario. For the the simulated welfare impact of normalization,
government, lower foreign interest payments make which translates into a 16 percent increase in real
it possible to reduce taxes (Table 2.3). Alternatively, household per-capita consumption in 2030, with
the government could raise spending. Whether this the strongest impact from improved terms of trade,
would lead to better social and economic outcomes followed by debt relief and increased aid. The
depends on the relative marginal efficiencies of gov- increases in household consumption bring about
ernment vs. private spending in terms of contribut- a 7 percentage point reduction in poverty in 2030
ing to Sudanese development objectives; it is beyond compared to the base scenario (Figure 1.2.12). At
the scope of this analysis to address this issue the very least, normalization would significantly
Combining all normalization changes under soften the challenge of adapting Sudan’s economic
one simulation shows cumulative gains in many structure so that it can thrive in the post-oil era,
macro indicators compared to the base scenario most importantly via a revival of agriculture and
(Figure 1.2.9). The combined result of debt relief other tradable sectors.
and higher foreign borrowing would lead to a 2030
foreign debt at 46 percent of GDP, compared to B. Components of Inclusive Growth
37 percent when debt relief is introduced without
an increase in foreign borrowing (Debt-). For the a. Ingredients for growth
government, the increases in receipts from foreign
sources is used to reduce taxation, which in 2030 is International experience
merely 6.9 percent of GDP (compared to 10.3 per- Economic growth is a necessary condition for
cent for base), other things being equal permit- economic and social development of any country
ting higher private consumption and investment. and key for poverty reduction (Dollar and Kraay,
Alternatively, the government could raise spending. 2002). But one of the key issues of a majority of the
At the sector level, normalization leads to low-income countries is how to boost economic
a diverse set of responses with the strongest growth and how to maintain it for a longer period
gains for sectors that primarily meet domes- of time in order to catch up with the middle- and
tic demands. Among the production sectors high-income countries. One of the most influential
(Figure 1.2.10), the real growth is unchanged for analyses in this field is the Growth Report of 2008
mining (which are constrained by the availability (World Bank 2008), which underlies this section
of natural resources). The gains are relatively weak of the report.
for government services (due to the fact that they Looking at a set of high-growth economies
primarily meet government demands, which are of the past, the Growth Report 2008 identified
unchanged in real terms) and agriculture (which is common characteristics of successfully applied
negatively influenced by real exchange rate appre- growth models—the “ingredients of growth”—
ciation, compared to the base). The growth gains to inform policy formulation around the world.
are stronger for the relatively non-traded private The Growth Report analyzed the experiences of the
service and other industry sectors, which primarily thirteen fastest growing economies5 in the world
are driven by domestic demand.
In sum, the welfare impact of normalization
5
Botswana, Brazil, China, Hong Kong – China, Indonesia, Japan,
is largely positive, with increased household con- the Republic of Korea, Malaysia, Malta, Oman, Singapore, Taiwan –
sumption leading to a decline in the poverty rate China, and Thailand.
10 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
that managed to sustain their growth rates of at is identified as key for the growth process in any
least 7 percent in the last 25 years (or sometimes economy. And the single most important govern-
longer). Six of these thirteen economies even man- ment support for having competitive markets is to
aged to reach the per-capita income level of indus- keep entry and exit barriers of markets low. This
trialized economies.6 There are seven “ingredients allows progressive and innovative firms to more
of growth” that could be particularly relevant for easily enter markets, which contributes to bring-
post-secession Sudan. ing about new technology, products, and services.
For an economy to grow there is a need More importantly, easy entrance of new and effi-
for high levels of investment and savings. This cient firms has a spillover on incumbent firms in
“ingredient” of growth is related to the need for an that it increases the need to raise the levels of their
initial accumulation of resources that can be used efficiency to stay in the market.
later on in the production of goods and services. Policies that allow flexible labor markets to
Typical for the high growth economies is that form and match supply and demand have been
their overall investments (public and private) are growth enhancing in other countries. The Growth
around 25 percent of GDP. Within this envelope Report argues that governments should support
and especially shown by some of the successful labor market flexibility in a view that this supports
Asian countries (China, Thailand, and Vietnam), the goal of structural change in the economy. It is
the public investment in the infrastructure sector further argued that policy measures that enable
was between 5 and 7 percent of GDP. The Growth workers and employers to more easily match each
Report 2008 emphasizes the importance of domestic other are particularly important. Sudan’s experience
savings as a counterpart of investments. Attracting in pursuing structural change from the perspective
FDI is important in that regard, but the Growth of labor markets is analyzed Chapter 2.A; it shows
Report argues that an economy should not only rely that Sudan’s record in furthering structural change
on foreign savings to avoid vulnerability to fluctua- and moving employment from low to higher value-
tions in inflows, especially in downturn periods. The added activities is very limited.
importance of domestic savings is their stability and Export-led growth is associated with high-
relative predictability. Sudan’s experience in match- growth countries, especially if it is of a diversi-
ing savings and investments is analyzed in Chapter fied nature. The export sector played a critical role
1.C; it will show that Sudan’s savings rate is low and in the thirteen high growth countries, especially
the savings-investments gap is large. in the initial period of their growth process. Much
To foster structural change and growth an more, policies to facilitate exports are most effec-
economy needs access to technology and knowl- tive if they support export diversification. Designing
edge through an active transfer of know-how. policies for non-natural resource exports is particu-
Technology transfer and inflow of know-how is larly important in resource rich countries.
usually associated with FDI inflows. In success- An active exchange rate policy can support
ful countries domestically owned companies are export development. In the early stages of export
able to absorb technologies and know-how from growth, experience shows that a low (depreci-
advanced countries, thereby compensating for the ated) exchange rate can support nurturing an export
relatively low capacity and resources for research sector. Keeping the exchange rate low initially also
and development. prevents the need of an economy to rely overly on
Successful countries in the past have sup-
ported competition and structural change. Public 6
Hong Kong – China, Japan, the Republic of Korea, Malta, Singapore
policy that clearly supports competition on markets and Taiwan – China.
What kind of growth and diversification suits Sudan? 11
capital inflows (foreign savings), which are notori- growth countries show that policies that avoid run-
ously unstable and unpredictable thereby increasing ning high budget deficits over long periods of time
the vulnerability to shocks. On the negative side, and efforts to keep debt-to-GDP ratios at sustainable
however, an exchange rate policy that pursues a levels pay off positively over time. In addition, in
depreciated path for export promotion tends to order to maintain macroeconomic stability an effec-
encourage mainly labor-intensive export sectors tive and committed government, clearly focused on
rather than higher-valued more technology inten- the long-term growth objectives, is needed.
sive sectors that are critical for long-term structural The Growth Report recommends support
change. The role of the exchange rate in Sudan’s to productivity enhancements in the agricul-
development experience over the past four decades tural sector as particular important for growth
is analyzed in Chapter 2.A; it shows that Sudan’s real in resource-rich African countries. Looking at
exchange rate was overvalued for most of the past sub-Saharan and resource-rich African countries
40 years and that the nominal devaluations after the the report identifies several key areas where the
secession of South Sudan were not able to devalue policy makers could place greater priority in order
the exchange rate in real terms due to simultaneous for growth strategies to “work.” For example, gov-
very high inflation rates. ernments should aim to provide greater support
Developed financial sectors that are open and to the agricultural sector in direction of increasing
connected with international financial markets the productivity. The majority of the labor force
are conducive to economic growth. Development employed in Africa (formally and informally) is
of the financial sector is particularly relevant because engaged in agricultural production. Hence, increas-
of its ability to support the goal of high savings for ing productivity may be important for raising the
high investments. A more developed financial sys- output per-worker and the overall value added. This
tem increases the level of financial inclusion, thereby would also reduce the unemployment rate and aid
helping the economy to better mobilize savings and the process of poverty reduction.
to allocate them more easily to investment needs. While the “ingredients of growth” generally
Consequently, the Growth Report 2008 encour- refer to domestic policies, those policies can be
ages policies that aid the development of financial leveraged through fostering an open interna-
systems. Another complementary determinant of tional environment and trade integration. The
growth is the financial openness of a country that, in Growth Report explicitly argues that all of the ana-
the long run, aids the goals of financial development lyzed high growth economies benefited from the
and deepening. Sudan’s international connectivity changing global environment, i.e. the process of
is significantly limited due to the role of economic rapid openness and integration of the world econ-
and financial sector sanctions imposed on Sudan omy after the 1950s. This process is still ongoing
successively since 1997. and is characterized by greater openness of local
Macroeconomic stability is one of the main and global markets, an increase of the volume of
pre-conditions for ensuring long-term growth of global trade, and increased financial integration that
an economy. Yet, the Growth Report does not offer stimulated the financial flows from one part of the
a unified definition of “macroeconomic stability.” world to the other, including capital movements
But it points to the fact that monetary and fiscal such as foreign direct investments (FDI).
policy makers hold the keys for macroeconomic sta- There are two main channels through which
bility in their hands. To this end, the Growth Report global integration of trade and capital flows can
emphasizes the need for independent central banks. leverage domestic policies for growth. First,
In terms of fiscal policy, the lessons from the high capital mobility and related FDI flows contribute
12 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
substantially to technology and know-how shar- by the trade integration in the world’s markets,
ing. To a large extent, FDI inflows in the thirteen provides an opportunity to local producers to
high growth countries of the Growth Report origi- specialize in areas where they have a comparative
nated from international corporations, which thus advantage. This process incentivizes local produc-
helped the countries to import new technology, ers to raise productivity and expand their output
knowledge and know-how from the rest of the globally, especially those from the manufacturing
world. The result of the spread of new technol- sector where spillover effects to other sectors in the
ogy and know-how in the domestic economies is economy are greatest.
that it substantially reduces the cost of acquiring
new technology and know-how. This in turn helps Situation in Sudan
recipient countries to develop their own competitive Sudan’s performance vis-à-vis the “ingredients
technologies and products, which supports the goal of growth” is mixed, and between 2000 and
of product diversification and structural change in 2011 heavily dependent on the effects of the
the economy. oil economy. Time-series data shows that there
Second, global integration leads to more were fundamental changes in the structure if the
competition on trade markets. More competition economy over the past 10 to 15 years mainly due
means more products on domestic markets and to the advent of oil in 1999 and in the most recent
tends to lower prices for inputs and end-consump- period since 2011, due to the secession of South
tion. It also provides an opportunity for domestic Sudan. Those changes are particularly pronounced
producers to face global demand and expand sales in the areas of investments and savings, the export
on international markets. At the same time, imports sector, FDI inflows, price stability, and, ultimately
of new technology and know-how, accompanied on GDP growth (Table 1.1). Some highlights are:
Table 1.1: Major Ingredients to Growth and Sudan’s Record
Growth “ingredients” identified by
the Growth Report 2008 Sudan’s historical record
High levels of investment ≥ 25% of GDP and Average level of gross investment during the period 1980–2012 is 18.8% and during the period 2000–
savings between 20–25% of GDP 2012 is 25.7% of GDP. Average gross fixed capital formation during the period 1980–2012 is 15.3% of
GDP and average during the period 2000–2012 is 21.2% of GDP. Average level of gross savings for the
period 1980–2012 is 13.4% of GDP and during the period 2000–2011 is 23.4%. Post-secession savings
rates are in single digits and too low to drive and match investments.
Technology, knowledge and know-how transfer Average level of FDIs for the period 1980–2011 is 3.3% of GDP, for the period 2000–2012 is 7.8% of
(requires FDI) GDP.
Supporting competition and structural change The World Bank Investment Climate Assessment of 2009 suggests a poor functioning of markets to
allocate resources in the economy. This is primarily due to tight controls through the state in procure-
ment processes, financial markets, and land markets (World Bank 2009b).
Labor market support The formal labor market is tightly controlled, preventing the efficient match of supply and demand,
and giving rise to informal, unregulated labor markets (World Bank 2009b).
Export promotion and exchange rate policy Average level of exports of goods and services for the period 1980–2011 is 10.5%, for the period
2000–2012 is 16.9%. Official nominal exchange rate depreciated sharply in 2012 and there is a parallel
exchange rate market.
Financial sector development and openness Private credit-to-GDP ratio average for the period 1980–2012 is 11.8%, for the period 2000–2012 is 12.9%.
Macroeconomic stability Average annual inflation for the period 1980–2012 is 40.2%, for the period 2000–2012 is 12.3%. The
inflation is volatile during the recent period 2008–2012. Budget deficit is narrowing from 7.1% of GDP
in 2008 to 5% in 2012. External public debt is growing rapidly from 60.2% of GDP in 2008 to 82.2% of
GDP in 2012.
Source: Growth Report (2008); and World Bank staff own calculations, based on data from the WDI and IMF, and the analysis of World Bank 2009b.
What kind of growth and diversification suits Sudan? 13
Investment and savings: Sudan’s average level effect of oil discoveries. Oil accounted for
of investment to GDP ratio was been below nearly 90 percent of Sudanese exports dur-
20 percent before 2000. Since then, mainly ing the 2000–2009 period showing a virtually
due to the oil discovery, the average level of non-diversified economy. This trend has only
investment has increased and was just above slightly relaxed after the secession with gold,
the 25 percent threshold level suggested by sesame, and livestock being the only significant
the Growth Report.7 Similar conclusions hold non-oil exports.
for the gross savings in the country, which had Exchange rate policy: Sudan’s real exchange
increased during the oil economy, reaching the rate showed substantial overvaluation dur-
lower bound of the suggested threshold level. ing the oil economy reminiscent of the classic
This indicates that the levels of savings and Dutch Disease symptoms. A theory-based real
gross investment were relatively high during exchange rate (RER) Misalignment Index estab-
the oil period. Nevertheless, investments were lished by the World Bank for countries around
concentrated on the oil-related economy and the world from 1950–2011 shows that Sudan’s
hence its contribution to diversify the economy RER was overvalued as much as 65 percent in
as such was rather modest. However, looking 2008. Several successive nominal depreciations
at the post-secession period shows that gross in 2012 and 2013 to the tune of 100 percent
national savings fell to a low of 8.5 percent of were not able to reverse this real overvalu-
GDP, the lowest level since 1999. Raising the ation trend because there was a simultaneous
savings rate to match and drive investments prevalence of high inflation in the years after
is an immediate need for Sudan’s economy to the secession. The real exchange rate thus is
master the transition. probably still overvalued, likely to the tune of
Technology and know-how transfer: As men- 50 percent (see Chapter 2.B).
tioned earlier, FDI is critical for technology Financial sector development and openness: The
and knowledge transfer. And indeed, FDI has financial sector in Sudan is clearly underdevel-
increased in Sudan from 2000 forward; an even oped as noticed from the relatively low level of
more rapid inflow can be seen over the 2003 credit-to-GDP ratio of 11–12 percent of GDP.
to 2010 period. This was again related to the The financial sector is also much closed with low
oil economy. Data from fDi Markets, which levels of interconnectivity to the international
records Greenfield projects in Africa, shows financial system. The economic and financial
that between 2003 and 2010, two-thirds of sanctions implemented since 1997 play a role
recorded Greenfield projects went into the natu- in this, and in fact have recently even tightened
ral resource sector (coal, oil, and natural gas); due the BNP Paribas court ruling in 2014 (see
much more, it records a virtual standstill of FDI Chapter 1.C).
in Sudan since the secession of South Sudan in Macroeconomic stability: While GDP growth
2011, confirming the dominance of the natural intensified starting in 2000 due to the oil dis-
resource sector in the previous period. It also covery, rates of growth stalled since 2008,
highlights the fact that in present day Sudan even before the secession of South Sudan.
FDI-induced technology and know-how trans-
fer is minimal and negligible. 7
Similarly, the average fixed capital formation was low before 2000
Export promotion and diversification: Sudan’s but has increases since yet was still below the Growth Report threshold
of 25 percent over the 2000 to 2012 period. The difference between
exports-to-GDP ratio expanded significantly the gross and fixed capital formation is due to inventories that were
starting in 2000, which was undoubtedly the increasing over time in Sudan.
14 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
To some extend the prediction of the 2009 pitfalls of implementation of some of those “ingredi-
Country Economic Memorandum (World Bank ents” of growth that might have contributed to epi-
2009) (that argued in the medium- to long-run sodes of economic and/or financial downturns. The
Sudanese growth is not sustainable) became Growth Report also does not analyze the examples
true. This was mainly related to the extreme of other economies that have implemented many
dependency oil in the economy while there was a of the growth “ingredients” but nevertheless, the
clear neglect of the non-oil sectors. Similarly, the ingredients have not provided such straightforward
inflation rate has increased substantially since benefits for economic growth.
2008 and since then is quite volatile. In addition, A different strand of literature analyzes the
the budget deficit, although somewhat narrow- caveats of rapid implementation of some of the
ing, has been continuously above 5 percent of growth policies in an environment of not fully
GDP even during the oil economy with all its credible institutional capacity and governmental
windfall fiscal revenues. This stubbornly high policies and slow structural transformation of
budget deficit is reflected in the indebtedness the system for which more dynamic transforma-
of the country where the stock of public debt to tion is required. A starting argument of this type
GDP has further increased over the past decade. of literature is that it is unquestionable that mac-
roeconomic stability, trade openness, and financial
Sudan’s agriculture productivity has not suf- liberalization are core requisites for the growth pro-
ficiently increased over the years of the oil econ- cess (World Bank 2005). However, the combination
omy to support agriculture-led diversification of of their implementation, the extent to which they
the economy. While the agricultural share of GDP should be implemented, and what dynamics should
was around or above 40 percent before 2000, the be considered depends on various specific internal
share dropped precipitously to below 30 percent in and external factors of a country. Some of the coun-
2007. Likewise, the annual growth of agricultural try’s internal factors for example are: initial condi-
productivity dropped from almost 6 percent between tions, quality and diversity of existing institutions,
1988 and 1992 to 1–1.5 percent between 2000 and credibility of the policy makers and their historical
2008. Low productivity is witnessed across many policy paths and actions, the commitment to pur-
products compared to many countries. In sesame, for sue and implement the policy targets. The external
instance, productivity of Sudan compared to other conditions of a country are related to the economic
major producing countries is very low as it is equiva- and financial developments of the major trading
lent to 18, 27, 58 and 51 percent of productivity in and financial partners, specificity of the region as
China, Ethiopia, India, and Nigeria, respectively. well as the systemic shocks in the global economy.
Wheat productivity tells a similar story, with more It is in this spirit of not only knowing the
details provided in Chapter 3 of this CEM. “ingredients for growth” but also the domestic
While this analysis does not suggest that limitations in Sudan that this report will aim to
Sudan’s growth record would have necessarily analyze and recommend policy options that can
been substantially different from the historical be both successful and implementable.
actuals if followed the prescriptions of other
country experiences, it does indicates the policy b. Components of pro-poor growth
areas that could be tried to better the growth
prospects of the economy. In fact, the Growth While economic growth is a necessary condi-
Report is focused mainly on analyzing the experi- tion for poverty reduction in a country, it is
ences of the successful stories, without analyzing the not a sufficient condition for reducing poverty
What kind of growth and diversification suits Sudan? 15
and income inequality in all economic areas and income inequality leads to a lower pace of
and regions equally (Loayza and Raddatz 2010; poverty reduction and the distributional pattern of
Warner 2011). In fact, economic growth can be growth will be less beneficial for the poor people
uneven across production sectors, income groups (Cord 2007). This indicates that higher rates of eco-
and regions in a country (World Bank 2009a). In nomic growth for longer periods of time are needed
order for any growth process to have wider ben- in order to get significant reduction of poverty and
eficial effects for the whole society of a country, income inequality. Furthermore, according to the
it needs to be inclusive and have an impact on all empirical findings of Easterly (2007), a high struc-
income groups and regions. tural inequality in income distribution may even be
There are two broad approaches of measur- an obstacle to economic growth. This is due to its
ing what is “pro-poor,” referring to absolute and negative effect on the growth elasticity of poverty,
relative declines of poverty. First, according to indicating the relationship between the economic
the “absolute” approach, “pro-poor” is defined as growth and the poverty rate.9
some agreed measure of poverty (defined in abso- The actual impact of economic growth
lute terms) to fall over time (Ravallion 2004 and on poverty reduction and income inequality
Khandker and Koolwal 2006). This absolute measure depends on the sectoral composition of growth.
of poverty could be set in terms of a threshold value Supporting growth in certain labor intensive sectors
of purchasing power of commodities and can be of the economy like agriculture, construction and
defined such as the number of people that live on less manufacturing can have greater effect on reducing
than US$1.25 a day measured in PPP. Consequently, the poverty compared to other less labor intensive
the “absolute” approach suggests that the economic sector like mining, utilities and services (Loayza
growth is pro-poor if and only if the number of and Raddatz, 2010 and Warner, 2011). Promoting
people that live less than US$1.25 a day declines.8 growth in agricultural sector can be particularly
The second approach defining the “pro- important for economies like Sudan where a great
poor” growth—the “relative” measure—consid- extent of the labor force is engaged.
ers income inequality changes in the process of
growth. According to the “relative” approach, the 8
The major weakness of this approach is that it defines the pro-poor
growth in absolute terms, without considering the equality of income
economic growth is considered to be “pro-poor” if distribution. For example, during a growth process, it may appear
the poor people (the low income group) benefit pro- that the absolute number of poor people may fall, but the poor or
the low-income group may benefit disproportionately less than the
portionately more than the higher income groups high- or middle-income groups. In this case the distribution of the
(Ravallion, 2004 and Khandker and Koolwal, income generated by the growth process may still be concentrated in
the higher income groups that may result in greater increase of the
2006). In other words, growth is “pro-poor” if the income inequality, although the “absolute” poverty indicator may sug-
incomes of the low income group increase propor- gest that the poverty in the country has declined. The proponents of
the “absolute” approach of pro-poor growth argue that, although this
tionally more than the incomes of the higher income measure undermines the income inequality, if there is some benefit
groups. Contrary to the “absolute” approach of from the growth process for the poor people then it still can, however,
be considered as beneficial.
“pro-poor” growth, the “relative” approach would 9
Another factor that affects the effectiveness of “pro-poor” growth
argue that if the poor people benefit less than higher policies is the geographic concentration of the poor people. A greater
concentration of poor people in certain geographical areas impedes the
income groups—although in absolute terms the effectiveness of pro-poor growth policies; this is since in these areas
poverty has declined—then the process cannot be it is more difficult and more time is needed for the growth process
to have any impact on poverty reduction. Related, the geographical
considered “pro-poor”. proximity of the areas where poverty is concentrated to the more
Poverty reduction depends crucially on the developed urban centers plays an important role. A greater proxim-
ity of these areas to the more developed urban areas leads to greater
initial level of poverty and inequality. According beneficial effects of the pro-poor growth policies on poverty reduction
to Ravallion (2004) a higher initial level of poverty and income inequality (World Bank 2009a).
16 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Economic growth in the agricultural sector greater income in the future and thus, improve
is particularly powerful to alleviate poverty and their welfare. Greater access to education will also
works in two ways: First, through a reduction empower gender equality where more opportunities
of unemployment and greater engagement of the will be created for rural female youth. And, finally,
labor force; and second, by raising the incomes in greater financial inclusion may lead to better solu-
agriculture that may reduce the income inequal- tions for farmers to finance and purchase fertilizers.
ity. Two examples where the growth of agricultural
production was the major driving force of poverty C. Institutions are Critical to the
reduction are Rwanda and China. An analysis Diversification of the Endowment
conducted by Xinshen (2013) for Rwanda for the Base of the Economy
period 2005–2011 indicates that development of
the primary sector had the most significant impact The 2009 Country Economic Memorandum
on poverty alleviation. This is in contrast to second- developed a clear agenda for reforms to over-
ary and tertiary sectors, which were driving GDP come the single reliance on oil and its associated
growth during that period, but both had relatively Dutch Disease symptoms in Sudan. The report
small effect on poverty reduction. Similar conclu- urged for private-sector-led growth to drive a more
sions can be drawn from the case China. Growth diversified economy, particularly through a revival
of agricultural production since the 1980s has been of the agriculture sector. The CEM then proposed a
the major factor for poverty alleviation in China’s set of interdependent steps to overcome the single
rural provinces where most of the poor people are reliance on natural resources. The work called for
concentrated (Montalvo and Ravallion 2010). But in developing and maintaining the necessary enabling
China the pace of poverty reduction has also been environment for growth, specifically macroeco-
highly unequal among its provinces. nomic stability and effective fiscal management. The
There are a number of supporting policies for report also highlighted the need to implement poli-
the agriculture to thrive and increase the poverty cies aimed at improving the investment climate. The
reduction impact of growth in the rural sector. need to increase returns in the agriculture sector,
Greater access to electricity, for instance, brings whose productivity levels have declined over the oil
about more efficiency of agricultural production boom years, was identified as a key effort. Finally,
and also provides opportunities for farm workers the CEM emphasized that technocratic reforms need
to engage in food processing activities that may to be paired with good governance.
additionally increase their income (Khandker and Progress on the 2009 reform agenda has
Koolwal 2006). Likewise, infrastructural develop- been limited, but some key reforms may serve
ment, in particular building paved roads that con- as a model for further change. This new CEM
nect rural with urban areas, provides easier access to will argue that the agriculture sector is still suffer-
markets for farm and non-farm rural workers, which ing from very low productivity, the export basket
is also important for technology transfer between continues to be very concentrated, yet less so given
regions (Datt and Ravallion 2009). Improved access the declining relative importance of oil. Fiscal man-
to water and irrigation will increase the agricultural agement of recent years was dominated by coping
production and the living standards of agricultural with the effects of the secession of South Sudan,
workers. Greater access to education in rural areas which meant an unprecedented fall in revenues
increases the opportunities for the youth in continu- for the country. While a number of fiscal reforms
ing their education and also in finding higher skilled were implemented the budget deficit increased sig-
work in the urban areas by which they may generate nificantly after the secession and expenditures had
What kind of growth and diversification suits Sudan? 17
to be cut substantially. A large part of the deficit a more diverse endowment base, and ultimately, a
was financed through monetization by the central more diversified economy.
bank, which in turn led to strong post-secession
inflation. There was no real improvement in the a. Ability to manage natural resource rents
business environment with most indicators either
stagnating or falling. The ability to manage natural resource rents
Comparing the situation in today’s Sudan refers to the ability to pursue overall stabilizing
with the reform areas identified in the 2009 CEM macroeconomic policies of which stable fiscal
suggests that there is still a need to tackle the management is key, sometimes achieved with
underlying issue of furthering structural trans- stabilization funds for natural resource rents.
formation and economic diversification. There are For Sudan, this section finds that the Government’s
basically two approaches to do this, by either diver- ability to manage natural resource rents is limited;
sifying the production base of a country, through yet, natural resources have also declined in impor-
for instance advances in agriculture or manufac- tance to fiscal revenues. Still, more effective volatility
turing; or alternatively, a country can diversify its management within a fiscally sustainable framework
endowment base. World Bank (2014d) developed requires a medium-term outlook on natural resource
and discussed the latter approach, which argues revenues.
that diversification should be pursued as a result of
policies that diversify national asset portfolios; such Fiscal policy and public debt
portfolios include natural resources, built capital, During the oil economy in Sudan oil revenues
and public institutions. World Bank (2014d) thus rapidly became the main source of public rev-
argues that governments should “try to create the enues and contributed more than 50 percent
conditions for accumulating a balanced portfolio of total revenues at its peak, but this situation
of national assets, by exploiting natural resources ended abruptly in 2011. With the secession of
responsibly, building infrastructure and human cap- South Sudan came a substantial loss of oil reve-
ital, and instituting mechanisms to manage resource nues and the share of oil to total revenues declined
rents, provide public services, and regulate private from 59 percent in 2011 to 16 percent in 2012
enterprise” (World Bank 2014d: 31). (Figure 1.3.1). This massive shock in decline of oil
World Bank (2014d) argues that economies revenues could not be compensated for by increased
successful in their diversification efforts are able tax and non-tax-non-oil revenues, even though
to broaden their endowments base by maximiz- they increased significantly—and overall revenues
ing a triad of institutions to deliver services declined by 33.5 percent between 2011 and 2012.
that ultimately increase productivity. This triad During the pre-secession period Sudan had some
includes the abilities to manage natural resource experience in utilizing an oil revenue stabilization
rents, to provide public services, and to regulate account (ORSA)—a failed attempt to smooth expen-
economic activity (and foster a business enabling diture (Box 1.1).
environment). Looking at Sudan, there are impor- Oil revenues are expected to fall to around
tant weaknesses in all the three areas, often compli- 10 percent of total revenues over the next five
cated by conflict and fragility, sometimes through years. At the same time, the ability of the govern-
uncertain assignments of responsibilities in an ever ment to generate fiscal revenues from the gold sector
more decentralizing public administration. Overall, will be rather limited, primarily due to the nature
it finds there is much scope to improve the effective- of gold mining that is first and foremost artisanal
ness of these institutions to lay the groundwork for in Sudan. Only if Sudan succeeds in establishing a
18 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
BOX 1.1: Sudan’s Experience with the Oil Revenue Stabilization Account (ORSA)
The 2009 CEM argued that while Sudan had the foresight of creating an Oil Revenue Stabilization Account (ORSA) to help smooth
expenditure during the oil economy, the account failed to deliver to its promise due to poor management. Withdrawals from the
account had been highly volatile and nearly equal to deposits on net—highlighting its mismanagement and lack of effectiveness in
stabilizing expenditure. More importantly, there were heavy withdrawals when oil revenue was well above budgeted levels.
ORSA was a locked sub-account for the Government at the Bank of Sudan, the central bank. The Ministry of Finance and National
Economy had sole access to it. At the start of each fiscal year, a benchmark production figure and the Government of National Unity
and the Government of South Sudan agreed upon the price of the oil used. The account was to receive any revenues accruing from
production or price above the benchmark are, and withdrawals were to be distributed to both governments in proportion to their
share of total oil revenue.
At its peak, ORSA accumulated more than US$300 million in early 2006, but was depleted by time of the secession of South
Sudan. Substantial drawdowns from the account in 2006 to finance government expenditures in light of shortfalls from then delayed
new fields let to a near-depletion by end-December 2006. While ORSA was built up again over most of 2007 and early 2008, it was
again depleted in the wake of the global crisis and collapse of oil prices in late 2008 and 2009. It was not built up since that time and
with the secession of South Sudan disappeared from the scene.
Source: World Bank (2009b).
modern, industrial mining sector will there be a real expectations that successful exploration will add to
possibility for relevant fiscal revenues from the gold production. This substantially increases the govern-
sector. This is a medium- to long-term endeavor, ment’s forecast for oil revenues over the medium-
however, and Chapter 5 will provide an assessment term with a high risk of not being able to meet those
of these prospects. targets. The differences in assessment will be shown
In addition to oil revenue from Sudanese in Chapter 5 where the CEM base scenario is sub-
domestic production, fees are also expected from stantially lower than the Government medium-term
South Sudanese oil flowing through Sudan’s oil oil outlook. A similar issue is observable in the min-
infrastructure and time-bound proceeds of the ing sector, where production figures are unclear and
transitional financing agreement (TFA) between may also reflect smuggled in and old gold.
the two countries. Chapter 5 will estimate that those After two years of balanced budgets in 2010
additional oil-related funds are in the order of 10 to and 2011, a significant deficit opened up in 2012,
20 percent of total revenues until 2016. Under the but was narrowed again in 2013. Even though a
Bi-Lateral Agreements South Sudan is required to pay reduction of total expenditures was achieved 2012
US$15.00 per barrel up to a maximum of US$3.028 the decline in expenditure could not keep pace with
billion as a Transitional Financial Arrangement the decline in revenues. The budget deficit shot
(TFA). The TFA period ends in December 2016. In up from virtually zero (–0.2 percent of GDP) to
addition, the ongoing civil conflict in South Sudan 3.8 percent deficit in 2012 (Figure 1.3.2). Moreover,
puts the TFA payments in an uncertain light. in 2013 the expenditure side expanded again in
More effective volatility management within real terms (Figure 1.3.3), but with a recovery of
a fiscally sustainable framework requires a GDP growth from negative to positive territory in
medium-term outlook on natural resource rev- 2013 (Figure 2.1.1), expenditure as percent of GDP
enues. This claim was already made in the 2009 decreased. As a result, the deficit narrowed from
CEM; yet it is found that this is still an issue in 3.8 percent of GDP in 2012 to 2.3 percent in 2013.
today’s Sudan. Chapter 5 will analyze this in detail, The gradual elimination of oil subsidies starting in
but it is clear that the current practice of govern- September 2013 continues this effort and the 2014
ment is to include in their medium-term plans deficit is expected to further decline.
What kind of growth and diversification suits Sudan? 19
FIGURE 1.3: Fiscal Policy and Public Debt
1) Fiscal revenues and composition (SDG mn) 2) Revenues and expenditures (% of GDP)
35,000 30
30,000 25
25,000
20
20,000
15
15,000
10
10,000
5,000 5
0 0
2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013
Tax revenues Oil revenues Other non-tax, non-oil revenues Revenues Expenditure
3) Fiscal expenditure and composition (SDG mn) 4) Structure of Sudan‘s external debt in 2013
40,000
35,000
30,000 14%
36%
25,000
20,000
15,000
13%
10,000
37%
5,000
0
2008 2009 2010 2011 2012 2013
Current Capital Commercial Multilateral Paris Club Non-Paris Club
5) Sudan‘s stock of external debt, 2001 to 2013
600 60
500 50
400 40
300 30
200 20
100 10
0 0
2001 2003 2005 2007 2009 2011 2013
Total external debt (US$ bn, RHS) Percent of GDP
Percent of revenues
Source: World Bank staff own calculations, based on data from IMF 2012; IMF 2013; IMF 2014a; IMF 2014b; IMF 2014c; and World Bank World Develop-
ment Indicators (WDI).
Financing the budget deficit is one of the is not sustainable in the long term; it leads to an
key challenges in post-secession Sudan. In the upsurge in inflation, an impairment of monetary
aftermath of the secession the dominant source of transmission mechanisms, the crowding out of credit
financing was through monetization. Given its seri- to the private sector, real exchange rate appreciation,
ous negative repercussions, however, monetization and worsening foreign trade competitiveness.
20 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Options for foreign financing of the budget within the annual non-concessional borrowing limit
deficit are limited as Sudan’s external debt stood of US$600 million prescribed by the government’s
at about US$45 billion (79 percent of GDP) at Staff Monitored Program with the IMF. There has
the end of 2013 (Figure 1.3.5). Of this, about 85 not been any new private external debt in decades.
percent was in arrears. The large majority of Sudan’s However, it will be important for Sudan to minimize
external debt is public and publicly guaranteed non-concessional borrowing and avoid selective
debt (valued US$43.4 billion, of which 88 percent debt servicing to bilateral creditors, as these may
in arrears), mainly owed to bilateral creditors and complicate reaching agreement with creditors on a
almost equally divided between Paris Club and debt resolution strategy.
non-Paris Club creditors (37 vs. 36 percent of the Given the constrained foreign financing
total). Only a small fraction is commercial debt options for Sudan it will be important to mobi-
owed to suppliers (US$1.6 billion). Sudan is also lize more domestic resources for productive
in arrears with multilateral creditors, including the use, most notably domestic savings to support
World Bank, the IMF, and the AfDB (Figure 1.3.4). investment. The next section in this chapter will
The most recent joint World Bank and IMF Debt look at Sudan’s savings rate and identify the main
Sustainability Study (DSA) classifies Sudan being in determinants in a view to derive policy conclusions
debt distress (IMF 2014c). on how to increase savings in Sudan to support the
Sudan’s ongoing debt crisis dates back the transition to a non-oil economy.
1980s. It started with the Government’s inability
to service its debt service obligations that in turn Savings and investment: trends and
led to an unprecedented increase in arrears. This is determinants
a key feature of Sudan’s striking debt burden up to National savings in Sudan, which is the sum of
the present time, where 85 percent of Sudan’s debt public and private saving, fell sharply in 2012
is in arrears. There are widely recognized domes- to 8.5 percent of GNDI, after being double-digit
tic and external causes for the debt crisis (Rahman during the last decade (Figure 1.4.1). The ini-
1995; and Ahmed 2008), including the global reces- tial increase in the savings rate in the late 1990s
sions of the 1970s and 80s due to oil price shocks, was driven by the private sector after the col-
an overvalued exchange rate, and insufficient debt lapse in savings caused by a combination of poor
management capabilities within the government.10
Total contracting of external debt remained 10
An unfavorable external environment contributed to the debt crisis
below 1 percent of GDP per year since 2011, some three decades back. Sudan was vulnerable to the oil shocks of
the 1970s and 80s as it was a net oil importer that faced rapidly rising
but abstinence from non-concessional borrow- commodity prices, coupled with high interest rates and recessions in
ing will be important for debt relief. Given eco- most parts of the then western world (Rahman 1995). An overvalued
exchange rate during that time added to the problem as it further
nomic and financial sanctions as well as the fact eroded the export competitiveness of the country and ultimately led
that Sudan is in arrears with most creditors, the to a high degree of import reliance (Ahmed 2008). But there was
also a strong domestic element contributing to the debt crisis. A very
country has effectively been cut off from external concentrated export basket, comprised of primarily agriculture exports
financing sources. The government currently can such as cotton, sesame, groundnuts, livestock, sugar, oils seeds, and
gum arabic meant a real exposure risks related to volatile demand and
only contract new debt with a limited number of prices, both of which then unfolded (Ahmed 2008). Moreso, around
still-disbursing multilateral and non-Paris Club this same time a crisis developed in cotton, Sudan’s then principal
export crop, and exports and production dropped sharply. Addition-
bilateral creditors such as China. Some US$152 ally, economic adjustments programs were only partially implemented
million of new debt (0.2 percent of GDP) was con- due to the political economy of that times; the consequence was to
revert to external borrowing to stem the crisis. Finally, the absence of
tracted in the first half of 2014, of which US$$147 effective debt management capabilities in the government meant that
million is on non-concessional terms, which is well there was, de facto, no limit to external borrowing (Rahman 1995).
What kind of growth and diversification suits Sudan? 21
macroeconomic performance, external disturbances, GDS = GDP – (C + G)
and structural weakness. Public savings followed the GNS = GNDI – (C + G) = GDS + Yf + Tf
trend in the early 2000s when oil revenue started
to contribute to public investment and the budget. Hence, Gross Domestic Savings (GDS) and Gross
Private savings increased from –0.1 percent in 1995 National Savings (GNS) differ substantially if a
to 17.5 percent in 2000, whereas public savings country has large current transfers in the form of
increased from 0.4 percent in 1999 to 5.8 percent public (e.g., official aid) and private transfers (e.g.,
in 2004 (Figure 1.4.2). remittances) from abroad. In the case of Sudan,
The July 2011 secession of South Sudan had however, transfers in the form of aid are negligible
negative impacts on Sudan’s savings through and GDS and GNS are rather similar (Figures 1.4.4
a buildup of large economic imbalances. As a and 1.4.5). It is for this reason that the analysis in
result of the secession, Sudan lost almost three- this section uses GNS as underlying measure.
quarters of its oil revenues, and two-thirds of its Sudan’s national and private savings rates are
foreign exchange earnings. The budget balance comparable to those of neighboring Sub-Sahara
deteriorated considerably, registering a deficit African countries, but relatively low for an oil-
of 3.8 percent of GDP in 2012 from a surplus of producing country. In the 1990s, Sudan’s savings
0.3 percent in 2010 (Figure 1.4.3). Monetization rates were the lowest among peer countries. Thanks
of the budget deficit and weakening local currency to the improved macroeconomic performance and
in the parallel market led to skyrocketing inflation the oil revenues, Sudan’s national savings rates
from 15.4 percent in 2010 to 44.4 percent in 2012 rose from –0.7 percent in the 1990s to 16.4 per-
(end of year inflation). Against this backdrop, pri- cent in the 2000s, reaching the regional average
vate savings fell from 13.8 percent in 2010 to 10.1 (Figure 1.5.1). A similar development pattern
percent in 2012, whereas public savings dropped can be observed for Sudan’s private savings rates
further from 5.1 percent in 2010 to –1.6 percent (Figure 1.5.2). But then Sudan’s national savings
in 2004. rates fell to 14.0 percent in the early 2010s. A similar
The two most common definitions for sav- pattern in the national savings rate is observed for
ings refer to Gross Domestic Savings (GDS) and oil-producing Algeria, whose savings rates sharply
Gross National Savings (GNS). These concepts are rose in the 2000s, but declined in the early 2010s
derived from the national accounts. Gross Domestic when oil prices moderated.
Product (GDP) and Gross National Disposable The decline in savings in Sudan was led by
Income (GNDI) can be expressed as: public savings rates in the 2010s (Figure 1.5.3).
In oil producing countries, including Sudan, public
GDP = C + I + G + (X – M) savings rates rose in the late 2000s when oil prices
GDNI = GDP + Yf + Tf had a sharp uptick, but fell significantly in the early
2010s when oil prices were moderated. In contrast,
Where C is private consumption, I is investment non-oil producing countries, such as Tanzania and
(gross capital formation), G is government con- Ethiopia, steadily increased public saving, attributed
sumption, X is exports, M is imports; Yf is net factor to sound fiscal management.
income from abroad, and, Tf is net foreign private Savings rates are highly correlated with
and official transfers. investment and economic growth. This is con-
The relationship between Gross Domestic firmed in the literature Loayza et al. (2010) and
Savings (GDS) and Gross National Savings through a cross-country analysis shown in Figures
(GNS) can then be written as: 1.5.4 and 1.5.5. Although there has been
22 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 1.4: Savings Rates in Sudan, 1991–2013
1) National Savings in Sudan, 1991–2013 2) Private and Public Savings, 1991–2013
30 40
20 30
10 20
Percent of GNDI
Percent of GNDI
10
0
0
–10
–10
–20 –20
–30 –30
–40 –40
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013p
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013p
Gross public savings Gross private savings
3) Overall Budget Deficit, 1991–2013 4) Sudan‘s National Income
5 900
0 Constant 2005 US$ 800
Percent of GDP
–5 700
–10 600
–15 500
–20 400
–25 300
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013p
GDP per capita GNI per capita GNDI per capita (real)
5) Different Measures of Savings in Sudan
35
30
25
Percent of GDP
20
15
10
5
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Gross domestic saving Gross national saving
Source: World Bank staff own calculations, based on data from World Bank World Development Indicators; and IMF World Economic Outlook.
Note: (1) “p” denotes preliminary.
controversy on causality between savings and however, close connection between the two is
growth, the causality that runs from savings to observed, especially in the long run.
growth plays a critical role through the capital
11
Aghion et al. (2006) developed a theory that domestic savings af-
accumulation process.11 In theory, it does not fects economic growth in developing countries that are far from the
matter how investment is financed. In practice, technological frontier.
What kind of growth and diversification suits Sudan? 23
FIGURE 1.5: Savings and Investment Rates in Sudan and Selected Countries
1) National Savings Rates 2) Private Savings Rates
70 45
60 40
50 35
Percent of GNDI
Percent of GNDI
30
40
25
30
20
20 15
10 10
0 5
–10 0
Kenya
Uganda
Egypt
Sudan
Tanzania
Ethiopia
Morocco
Indonesia
Algeria
Kenya
Tanzania
Uganda
Sudan
Ethiopia
Egypt
Morocco
Indonesia
Algeria
Average '91–99 Average '00–'09 Average '10–'13
3) Public Savings Rates 4) Savings and Investment Around the World
20 40
35
Investment rate (% of GDP)
15
30
Percent of GNDI
10 25
5 20
0 15
10 Sudan
–5 5
–10 0
0 10 20 30 40
Egypt
Morocco
Uganda
Sudan
Kenya
Indonesia
Ethiopia
Tanzania
Algeria
Savings rate (% of GNDI)
Average '91–99 Average '00–'09 Average '10–'13
5) Savings and Growth Around the World 6) Savings and Investment in Sudan
10 30
8 20
GDP per capita growth
10
6
Percent of GNDI
0
4 –10
Sudan
2 –20
–30
0
–40
–2 –50
–4 –60
0 10 20 30 40
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013p
Savings rate (% of GNDI)
S-I gap Saving Investment
Source: World Bank staff own calculations, based on data from World Bank World Development Indicators; and IMF World Economic Outlook.
Note: (5) and (6): Analysis based on average data for the period 1990–2009.
Thus, low national savings jeopardize invest- (Figure 1.5.6). The increased saving-investment
ments and growth in post-secession Sudan. gap, in turn, has been financed by a deteriorat-
Initially, and despite the sharp decline in savings ing current account balance. The current account
rate, investment remained stable after the secession deficit was at 9.4 percent of GNDI in 2013, the
24 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Table 1.2: Simulations of Savings and Growth Rates for Turkey
a. Savings Rate under TFP Growth Scenarios (GDP per Worker Growth Rate = 4%)
Moderate High
(TFP Growth=1%) (TFP Growth=2%)
Initial 24.9 19.5
5 Years 26.0 18.3
10 Years 27.2 17.2
25 Years 31.1 14.2
b. GDP per Worker Growth under TFP Growth Scenarios (Savings Rate = 20%)
Moderate High
(TFP Growth=1%) (TFP Growth=2%)
Initial 3.00 4.10
5 Years 3.03 4.33
10 Years 3.05 4.51
25 Years 3.09 4.88
Source: Hevia (2010).
highest rate since 1996. It is true that investment For instance, macroeconomic stability determines
does not necessarily have to be financed by national the real rate of return for investment but contract
savings if a country has access to external sources. enforcement affects the smooth implementation of
But Sudan does not have good access to external investments.
sources due to its unique and isolated status in the Turning from the past to the future, it is
world. Moreover, a country cannot rely indefinitely imperative for Sudan to raise its gross national
on external financing since large current account savings rate beyond pre-secession levels. The
deficits tend to be not sustainable in the long term. analysis so far has illustrated that post-secession
However, due to diminishing returns, capi- Sudan’s national savings is low, creating chal-
tal accumulation through investment is not suf- lenges to economic diversification and sustained
ficient in the long term to sustain high growth. economic growth. Low savings imply the avail-
International evidence suggests that sustainable ability of fewer funds for productive investment
growth needs productivity growth through human that could transform the Sudanese economy from
capital enhancements and technological improve- a highly oil-dependent one to a more diversified
ments. A country case study about Turkey (Hevia one. Given that the secession of South Sudan is a
2010), for instance, shows that the link between permanent shock to the Sudanese economy there
national savings and economic growth critically is a real urgency to support the transition to a
depends on productivity growth (Table 1.2). In more diversified economy through higher levels of
addition, the channel from savings to productive national savings. To this end, the recent decline in
investment plays a critical role for economic growth. both private and public savings of particular con-
An efficient financial system is a necessary condi- cern for post-secession Sudan.
tion through which savings is effectively allocated
to investment.12 Likewise, the institutional capac-
ity and the rule of law affect investment decision. 12
Levin (2005).
What kind of growth and diversification suits Sudan? 25
Looking at the key determinants of savings, productivity, which would indicate a rising role of
stable macroeconomic management with low human capital formation in the growth process.
inflation and positive real interest rates is crucial And human capital formation depends on the effec-
for raising both private and public savings rates tive provision of services. In that regard, Sudan
(Annex 2). After 2011 loss of revenues from oil has undergone a process of decentralization that
directly lowered public saving. At the same time, the assigned basic service provision to subnational lev-
monetization of the budget deficit and a weakening els. Since fiscal decentralization is lagging behind,
local currency led to skyrocketing inflation. Private however, states do not have the ability to live up to
savings immediately responded to this situation and their responsibilities and outcomes, for instance, for
lowered their holdings. Because international evi- education are both low and with a large variabil-
dence suggests that the Ricardian equivalence holds ity across states. Finally, conflict, governance, and
only partially (public savings only partially crowds debt are all complicating factors for government to
out private saving), policy makers could stimulate effectively deliver services.
national savings by raising public saving, but not
in the current fiscal situation. Therefore, going for- Effective public institutions increase
ward, efforts are needed to facilitate the build-up of productivity
private savings rates through lower inflation. Sudan has had a period of more than one decade
In addition, the high youth dependency ratio with positive real economic growth rates driven
has a negative influence on the savings rates in by oil GDP since its discovery in 1999, end-
Sudan. Reducing the effective youth dependency ing abruptly in 2011. The secession of South
ratio through job creation is an important support- Sudan strongly affected economic activity, result-
ive factor for higher savings rates. Since most of the ing in contraction of GDP by 2.2 percent in 2012
young workers start their career in the informal sec- (Figure 1.6.1). The sharp drop of oil GDP and the
tor, providing job opportunities in the informal sec- slow-down of non-oil GDP in the country as a con-
tor is a key in reducing youth unemployment. As the sequence of the secession mainly drove this contrac-
youth dependency ratio is a critical determinant of tion of economic activity. One of the fast growing
private saving, reducing effective youth dependency non-oil sectors in Sudan after the secession became
ratio through job creation in the informal sector gold mining, which accounted for 2.8 percent of
holds tremendous potential for enhancing saving. non-oil GDP in 2012, and expanded by 64.7 per-
To provide job opportunities for the youth, labor cent in 2012 compared to 10.4 in the previous year.
market policy would need to be specific to increase Consequently, the non-oil GDP became one of the
the capacity of the informal sector. major driving forces of overall economic activity in
Sudan since 2011, registering growth rates between
b. Ability to provide public services 4.5 and 6.8 percent in the 2010–2012 period. But
the signing of the implementation matrix of the
The ability to provide public services relates agreement between Sudan and South Sudan in
to the ability of governments to invest into the March 2013 was one of the stimuli for the economic
human capital of the younger generation and recovery in 2013 when the Sudanese economy grew
to build infrastructure that can be used for by 2.7 percent. The signing of the agreement less-
forward-looking economic activities in the long- ened the tensions with South Sudan and enabled
term. Sudan’s ability to provide public services is resumption of oil production and flows from South
a constraint. Historically, GDP growth in Sudan Sudan, enabling a growth of oil GDP by 28 percent
was rarely driven by enhancements in total factor in 2013. Consequently, the economic recovery in
26 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
2013 was driven again mainly by oil GDP growth, capital investments in the country fueled by the oil
which outweighed a slow-down of non-oil GDP economy and satisfied through both domestic sources
growth. In 2014, non-oil GDP grew stronger than and FDI. Investment reached its peak over the 2003
oil GDP, probably reflecting the new normal for to 2006 period at about 24 percent of GDP, which
Sudan but also the disruption of oil extraction in was mainly achieved through expanding public
South Sudan due to internal conflict there. investment, although private investment did retain
While positive, Sudan’s growth was rather its dominant position in the economy (Figure 1.6.5).
volatile and its rate of expansion below the aver- The latest and third period in the economy
age for SSA, despite the positive effects of the oil started in 2008 and is coined by negative TFP
economy. The variability of GDP growth in Sudan growth. This period includes the 2011 secession
during the past decade (caused by the advent of oil that is associated with the loss of the majority of
and the secession of South Sudan) was quite high oil reserves and related fiscal revenues. Declining
and is the highest compared to a selection of com- growth rates of this period was driven by a decline
parator economies and SSA (Figure 1.6.2). Despite in physical capital and the negative contribution of
the extensive exploitation of natural resources, the the TFP growth (Figure S.05). This is not surprising
average GDP growth rate during the past decade as investment in oil-related activities fell with the
was in the lower half of its comparator countries secession, FDI declined, and overall economic senti-
(Figure 1.6.3). The level of GDP per capita in Sudan ment declined. The severity of the contraction can be
is also lower than the average for SSA, urging the explained by the importance of physical capital and
need for economic restructuring and diversifying TFP in Sudan’s economic development prior to 2008.
production structure and increase in productivity. The sectoral decomposition of GDP growth
High productivity is crucial for sustaining suggests that, historically, the major driver of
high growth, yet in Sudan total factor productiv- growth in Sudan was and now still is the service
ity has been low or even negative in the majority sector. In fact, the services sector contributed on
of years since oil was discovered in 1999. There average 64.3 percent to overall value added dur-
are three distinct period of the economy since 1989, ing the sample period between 2003 and 2013. In
based on an assessment of the contributions of the contrast, the contribution of the industrial sector
production factors by decomposing GDP growth was much lower with an average of 21.7 percent.
according to the Cobb-Douglas production function (Figure 1.6.7). A more disaggregated analysis of the
(Figure 1.6.4). The first period can be distinguished contributions of the value added of different produc-
from 1989 till 1997 when the average GDP growth tion sectors in the economy to overall GDP indicates
reached 4.9 percent and was driven mainly by labor that the shares of certain services such as trade, res-
and total factor productivity growth. This was a taurants and hotels, and transport and communica-
period of experimenting with economic reforms and tion has been increasing continually since 2005. This
liberalization of the economy. The second period of is not surprising as those services were important
economic development of Sudan can be noted from during the oil economy. Encouragingly, the share of
1998 to 2007. As a result of the advent of oil, the the manufacturing sector has increased since 2011,
average economic growth increased by 1.2 percent- albeit from a very low base (Figure 1.6.8).
age points, reaching an average rate of growth of 6.1 The importance of the service sector in Sudan
percent. Typical for this period is that the physical is similar to most of its comparator countries,
capital became the major driver of economic activ- but both the contributions of the industry and
ity, whereas the contribution of labor and TFP sig- agriculture sectors are relatively low. The aver-
nificantly decreased. This is a reflection of increased age contribution of the services sector in Sudan is
What kind of growth and diversification suits Sudan? 27
FIGURE 1.6: Economic Activity
1) GDP growth in Sudan, 2001–2014 2) Variation of GDP growth, percentage points
10% 100% 0.9
8% 80% 0.8
6% 60% 0.7
0.6
4% 40%
0.5
2% 20%
0.4
0% 0% 0.3
–2% –20% 0.2
–4% –40% 0.1
–6% –60% 0
Sudan
Algeria
Ethiopia
Egypt
Kenya
SSA
Morocco
Uganda
Indonesia
Tanzania
1999 2001 2003 2005 2007 2009 2011 2013
GDP Non-oil GDP Oil GDP (right axis)
3) GDP and GDP per capita growth, 4) Growth decomposition of production factors in
selected countries, 2003–2013 Sudan, 1989–2012
10 15
Growth rate (percentage points)
9
8 10
7
6 5
5
4 0
3
2 –5
1
0 –10
Ethiopia
Uganda
Tanzania
Indonesia
Sudan
Egypt
Kenya
Morocco
Algeria
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
SSA
Total factor productivity Human capital per labor
GDP growth GDP per capita growth Labor Capital stock Real GDP growth
6) Growth decomposition of production factors,
5) Public and private gross investment, 1999–2013 2003–2012, percentage points
30% 11
9
25%
7
20% 5
15% 3
1
10%
–1
5% –3
Ethiopia
Uganda
Tanzania
Indonesia
Kenya
Egypt
Sudan
Morocco
Algeria*
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total factor productivity Human capital per labor
GDP growth GDP per capita growth Labor Capital stock
(continued on next page)
within the average contribution of the whole group added of the industrial sector to overall growth in
of comparator economies estimated at 58.3 percent Sudan is lagging behind the comparison countries
(Figure 1.6.9). But the average contribution of value whose average contribution equals 27.5 percent.
28 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 1.6: Economic Activity (continued)
7) Growth by production sectors, 2003–2012 8) Gross value added by sector, 2003–2012
10 100%
8 90%
80%
6
Percentage points
70%
4 60%
2 50%
0 40%
30%
–2
20%
–4 10%
–6 0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2005 2006 2007 2008 2009 2010 2011 2012 2013
Not defined Services Industry Agriculture Mining Manufacturing Construction
Agriculture Value added growth Electricity and water Trade, restaurants and hotels
Transport and communications Other services
9) Average value added growth by production 10) Expenditure side of GDP growth in Sudan,
sectors, selected economies, 2003–2012 2003–2012
11 14
12
Growth rate (percentage points)
9 10
8
6
7 4
2
5 0
–2
3 –4
–6
–8
1 –10
–12
–1 –14
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Ethiopia
Tanzania
Uganda
Indonesia
Egypt
Morocco
Kenya
Sudan
Algeria
Not defined Net exports Investment
Agriculture Industry Services Not defined Consumption GDP growth
11) Expenditure side of GDP growth,
selected economies, 2003-2012
15
11
7
3
–1
–5
Ethiopia
Tanzania
Uganda
Indonesia
Kenya
Egypt
Morocco
Sudan
Algeria
Consumption Investment Net exports Not defined
Source: World Bank staff own calculations, based on data from World Bank World Development Indicators; and IMF World Economic Outlook.
Note: (5) and (6): Analysis based on average data for the period 1990–2009.
What kind of growth and diversification suits Sudan? 29
Likewise, although Sudan is a country with a great towards decentralization and enshrined it in an
agricultural potential this was undermined during institutionalized system, especially for fiscal decen-
the period of oil discovery. Although the average tralization. Both documents commit to fiscal decen-
contribution of agricultural production to overall tralization, to empower sub-national governments to
value added in Sudan is—relatively speaking—not align the use of resources more effectively with the
as low as that of industry, there seems much scope need to address wide regional disparities and trace
for an expansion of the agriculture sector as an the root causes of conflict.
important factor for poverty alleviation over the The INC provides the legal framework for
short and medium term. state and local legislative assemblies to oversee
From the expenditure side of GDP in Sudan the functioning of the various levels of sub-
it is clear that domestic consumption (public and national government. The CPA established that
private) has been the major driver of GDP growth decentralization and empowerment of all levels of
over the past decade and the role of investment government are cardinal principles of effective and
was rather modest. The average contribution of fair administration of the country. At the same time,
consumption to GDP growth in Sudan is estimated the CPA provided for a major reform to fiscal decen-
at 92.8 percent (Figure 1.6.10). The relative impor- tralization by the creation of the Fiscal and Financial
tance of domestic consumption in the economy was Allocation and Monitoring Commission (FFAMC) to
in fact the highest in Sudan relative to its compara- ensure a formula-based intergovernmental transfers
tor countries (Figure 1.6.11). This is not surprising system, though it remains unclear how this system
given the closed character of the economy that is is used in practice (World Bank 2013d).
also subject to a series of economic and financial Decentralization has devolved a number of
sector sanctions since 1997. On the other hand, the key responsibilities to the sub-national govern-
contribution of investment on GDP growth in Sudan ments; particularly vis-à-vis publicly funded pro-
is quite low and in fact the lowest among the com- poor activities. According to the INC of 2005 Article
parator economies despite the increase of domestic 24-B, obligatory responsibilities for sub-national
and foreign direct investments after the oil discov- governments include the provision of social services
ery. This suggests that the growth in investment (e.g., education, health, and registration of persons);
was below the potential of the Sudanese economy. regulation of businesses; and management of land. At
the top of that system is the National Government,
Fiscal decentralization and devolution of which has overall responsibility over functions such
basic service delivery as foreign policy, defense, security, immigration,
Sudan has undertaken political decentralization monetary affairs, and others (World Bank 2013d).
reforms since the early 1990s with the aim to tran- In reality, however, sometimes the division
sition the responsibility for basic service delivery of responsibilities is less clear-cut. In health and
to the subnational, state level. Sudan’s government education, for instance, the National Government
administration has three tiers: federal, state, and local, is involved in funding service delivery in specific
with elected legislatures at each level and elected state geographic areas (hard-to-reach) or to specific popu-
governors. At the sub-national level there are now 18 lation groups (e.g., mothers, under five children).
states each with several localities. Sudan’s decentral- Therefore, equally important is building an under-
ization is governed by a plethora of laws and agree- standing of respective responsibilities within a fed-
ments. The Interim National Constitution (INC) and eral system (World Bank 2013d). While the Federal
the Comprehensive Peace Agreement (CPA) of 2005 Ministry has a revenue generation and financing
represented critical milestones for Sudan’s efforts mandate, it also has coordinating, monitoring and
30 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
support (for poor performing states) functions, well as horizontal (inter-state) imbalances due to
which it seems to have largely relinquished to lower differing own-revenue potential and differing needs.
levels of government for service delivery. The result Several recent studies on Sudan have shown that the
is that no one is held accountable for results and effects of fiscal transfers to equalize social spending
ultimately the burden of service provision falls on and social outcomes patterns have been very limited,
the intended beneficiary. mostly due to weaknesses in the design of the inter-
A sound revenue assignment system is an governmental fiscal transfer systems (World Bank
essential pre-condition for successful fiscal 2007; World Bank 2011; and World Bank 2013d).
decentralization. In certain fragile states, such as Fiscal decentralization has brought consider-
Sudan, the soundness of the sub-national revenue able extra resources to the States and substan-
stream is a factor of the share of revenues collected tially increased overall per capita social spending
by sub-national entities, given the poor reliability over the past ten years. Federal spending in health
of the transfers from the central to sub-national and education at the state level has substantially
governments (World Bank PER 2013). In addition increased over the past decade, particularly since the
to raising revenues, local revenue mobilization also establishment of the Interim Constitution (INC) in
has the potential to foster political and administra- 2005. In real terms, and after adjusting for popula-
tive accountability by empowering communities. tion growth, education spending as per school-age
Further, communities are likely to be willing to population has grown by an average of 22 per per-
pay local taxes if the proceeds are used to provide cent per year, from SDG697 in 2000 to SDG2,242
local services. in 2010. This suggests the government has put sub-
In addition, sub-national entities are empow- stantial efforts into expanding public education and
ered by the INC to collect “own revenue.” Own increasing enrollment among school-age children
revenue is one of the three sources of funding for (Figure 1.7.1, left-hand panel). Per capita health
states and localities, in addition to federal transfers spending by the federal government at the state
and shared revenues. Article 195 of the Interim level has also followed a very similar trend. In real
National Constitution empowers states to collect terms, and after adjusting for population growth, per
own revenue from ten specific sources, and also capita health spending has grown by an average of
allows them to introduce “any other tax as may be 26 per percent per year, from SDG229 in 2000 to
determined by law” (Interim Constitution 2005). SDG829 in 2010 (Figure 1.7.1, right-hand panel).
The states have the highest degree of autonomy Yet, the observed increase in social spending
in defining own revenues, including authority to has not translated into a more balanced distribu-
determine rates (World Bank 2013d). tion of resources by the government to address
Since resource disparities exists across the inequality across states and reduce poverty gaps.
states of Sudan, the primary component of suc- Public spending on social investments, as measured
cessful fiscal decentralization is a more equitable by per capita federal spending in health and educa-
and transparent system of intergovernmental tion, is disproportionately allocated across states,
resource allocation across different levels of largely favoring states with low incidence of poverty
government. The specific objective of a sound inter- as measured by census data. Yet, annual per capita
governmental transfer system is to address vertical social expenditure in these three states was on
imbalances between the center and sub-national average only a third of that reported for the richest
levels of government with respect to revenues and state in the country, Khartoum Figure 1.7.2, panels
responsibilities (as expenditure responsibility for (a) and (b). It also appears that fiscal decentraliza-
basic services shifted to state and local levels), as tion has not had any observable effect in the way
What kind of growth and diversification suits Sudan? 31
in which federal resources are allocated towards and southern regions was largely resolved by the
social investments by the states. Figure 1.7.2, panels secession of the latter to form the Republic of South
(c) and (d) show the average real per capita spend- Sudan in July 2011, tensions still remain. Several
ing in health and education before and after fiscal other conflicts with varied histories persist in dif-
decentralization, with allocation patterns seeming ferent stages of intensity, stalemate, or resolution.
to have remained largely unchanged. Weak institutions at both national and subnational
Ultimately, the weaknesses in public service levels are unable to resolve most conflicts, often
provision in Sudan stem from poor prioritiza- resulting in violence. Violent conflict, especially
tion of spending and an inadequate focus on rebellion against the center and armed response
results. Regional imbalances are consistently robust by the state, is a direct contributor to the extreme
and clearly evident when looking at the state and poverty in Sudan’s conflict-affected areas. Security
local-level education outcomes for different states concerns continue to inordinately shape economic
(Figure 1.7.3). In education, measured by state and fiscal choices made by the government resulting
education spending per school-age population, in detrimental development outcomes and perpetu-
federal government investments across states are ating weak institutions for public goods provision.
strikingly different, particularly favoring the expan- Sudan presents institutional discontinui-
sion of basic education in relatively richer states. In ties across its various regions, reflected in its
2009, state spending in education per school-age regional economic imbalances and its geography
population in South Darfur (SDG64), West Darfur of conflict. At the center, Sudan has institutions
(SDG96), and North Darfur (SDG115) was on aver- that enforce compliance and execute core state
age half of that in Khartoum (SDG216), and a fourth functions of providing security, commanding fis-
of that in Northern state (SDG429). State education cal mechanisms, and delivering services. However,
spending per student, which measures the govern- state presence and effectiveness diminishes further
ment effort to improve the quality and access to edu- outside Khartoum and is outright contested in
cation among children already enrolled in school, many peripheral areas. As with political power, the
shows similar patterns. Exceptions are the Red Sea economy is centered in Khartoum and proximate
and Kassala states, where the government seems to riverine states, giving rise to significant inequality
be investing disproportionately more on improving between the center and periphery, and historically
quality and access to education among students, as between riverine and hinterland communities.
compared with other states that have similar levels Development indicators starkly mark the resulting
of poverty. Similar outcome trends are observable inequality: while Sudan boasts a GNI per capita of
in health and water and sanitation and the World US$1490 (i.e., lower middle-income) its poverty
Bank (2013d) provides in-depth analysis of this. rate is 46.5 percent. In fact, poverty ranges from
26 percent in Khartoum state to 62.7 percent in
Conflict, governance and debt: Darfur, based on 2009 data.
Complicating factors for government to The secession of South Sudan solved the
effectively deliver services13 key conflict in Sudan, but not all conflict has
Sudan has been in conflict for most of its inde- been eliminated; tensions continue and are
pendence history. This conflict arises out of non- expected to persist in the foreseeable future.
inclusive institutions with limited effectiveness The most potentially disruptive conflict remains
and often-disputed legitimacy across Sudan, and
has resulted in depressed development outcomes. 13
This section is largely based on analysis presented in World Bank
While the defining conflict between the northern (2013e): World Bank’s Interim Strategy Note for FY14 and 15.
32 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 1.7: Health and Education Spending and Outcomes in Sudan
1) Federal health and education spending
a) State education spending per school-age population b) State per capital health spending
3000
1000
2500
800
2000
In SDG
In SDG
600
1500
1000 400
500 200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2) Poverty rates and per capita federal expenditure in health and education
a) Poverty rates by State b) Per capital federal social spending
% SDG
3–16 13–18
16–40 18–22
40–60 22–33
60–74 33–50
74–82 50–80
c) Real per capital federal social spending d) Real per capital federal social spending
before fiscal decentralizing after fiscal decentralizing
% SDG
2–4 6–9
4–6 9–14
6–8 14–18
8–11 18–25
11–15 25–29
(continued on next page)
in the “Three Protocol Areas” (Blue Nile and South most from insecurity due to the conflict between
Kordofan states and Abyei area) where previous the Misseriya and the Dinka-Ngok over natural
peace protocols have not yet been fully imple- resources (water and pasture) in the borderlands
mented. Abyei is one of the areas that suffered of Sudan and South Sudan.
What kind of growth and diversification suits Sudan? 33
FIGURE 1.7: Health and Education Spending and Outcomes in Sudan (continued)
3) Poverty rates and education outcomes
a) Poverty rates by State b) State spending in education per school-age population
% in SDG
3–16 64–108
16–40 108–139
40–60 139–177
60–74 177–244
74–82 244–429
c) State spending per student in basic education d) Number of teachers per school-age population
in SDG
124–178 Per 10,000
178–208 1–11
208–276 11–20
276–305 20–35
305–542 35–58
58–136
No data
Source: World Bank (2013d).
In most regions of Sudan, conflict over access as well as displacement from internal and regional
to natural resources between pastoralists, agro- conflicts, and lack of well-regulated resource sharing
pastoralists, and settled farmers is endemic and among different groups, including across borders.
also contributes to regional conflict, such as in Weak governance and accountability have
the Sahel. Such conflict often leads to violence contributed to fragility and conflict, including
due to weak institutions for conflict management between the center and periphery. While some
and especially weak natural resources management progress in government openness and pro-poor
regimes. Climate change is likely to put further policy has been made, particularly since the sign-
pressure on already fragile ecosystems and the ing of the CPA and the enactment of the Interim
livelihoods dependent on them, which may lead National Constitution in 2005, there remains a
to further conflicts. In the western part of Sudan, substantial governance agenda ahead. Progress in
especially in Darfur, conflict is exacerbated by the delivery of basic services has been uneven and
porous borders that allow easy movement of rebels an acute challenge in peripheral areas. Governance
and arms, population shifts due to climatic changes institutions necessary to effect sound public financial
34 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
management—define and execute sectoral strategies; for example with regard to irrigation, which has
and ensure transparent, efficient, and equitable inter- involved a shift from directly using technical spe-
governmental transfers—remain weak. As shown in cialist skills toward being an attempt to play more
various governance indicators, Sudan’s capacity to of a policy role (World Bank, 2015b).
maintain peace and security, promote rule of law, Corruption drives fragility and conflict in
control corruption, and effectively manage public Sudan, reinforcing barriers to investment and
finance for delivery of services to the population equitable growth that would provide opportuni-
remains very low in absolute and in comparative ties to citizens. Institutional and governance weak-
terms, and has hardly changed since 1996. nesses are further exacerbated by internal conflict,
At the same time, conflict and fragility con- regional tensions, and international isolation, all of
tribute to the plethora of governance challenges which conspire to divert attention away from the
in Sudan. In fact, Sudan’s governance quality has governance agenda. A weak civil society is unable
been stagnating or declining over the past decade. to mount effective demands for improved corrup-
In particular, government effectiveness has declined, tion prevention and oversight systems or for greater
and control of corruption deteriorated, according to transparency that help reduce the opportunities for
the Worldwide Governance Indicators and reported corruption and misuse of resources.
in World Bank (2015b). In addition, Government Intrinsic to issues of allocation and man-
effectiveness has suffered due to an extended period agement of resources and the need for greater
of deciding appointments and promotions based on transparency and accountability are the broader
loyalty rather than merit, as well as relative interna- issues of the transformation of the state by pro-
tional isolation. The relative quality of staff in line viding for more participation of citizens and
ministries in Sudan has tended to decline over time communities in decisions. The government indi-
due to a confluence of several factors. Since 1989, a cation of its willingness to engage in an inclusive
shift in hiring preferences from meritocratic criteria process towards a new constitution might mitigate
to considerations about political loyalty was put in the lack of political reforms following the end of
place under the slogan of “empowerment.” This was the CPA. As the World Development Report 2011
compounded by more limited access to international points out (World Bank 2011c), inclusive com-
education and knowledge exchanges over the past pacts are crucial to reducing the exclusion that
20 years compared to earlier periods. often drives conflict and participatory governance
In addition, coordination challenges have is necessary to restore confidence in public gov-
been increased by the practice of establishing ernance at national and local levels. For Sudan,
various additional councils and by the process heeding calls by civil society and political parties
of decentralization (Word Bank, 2015b). High- for fair elections and an all-inclusive and partici-
level councils are often appointed ad hoc, mostly patory constitution-making process may represent
without a clear link to implementing agencies. the best opportunity to ground the needed insti-
Sector ministries have been requested to second tutional changes in a sustainable political process.
staff to such councils, including particularly moti- The Bank’s previous analytical and technical assis-
vated or well-qualified staff. In addition, the more tance work with the supreme audit institution and
decentralized system of governance means that parliamentary oversight committees (e.g., budget
state-level ministries have assumed a larger role and public finance committees) has also produced
in implementation. As a result, national minis- modest results in transparency in the management
tries have struggled with adjusting from a role of and use of revenue and follow up of reports of the
“doing things” to “organizing how things are done,” audit institution.
What kind of growth and diversification suits Sudan? 35
Sudan’s prospects for service delivery and and addressing the skills gap. Governance and
poverty reduction are also hampered by its accountability problems also need to be addressed.
huge stock of external debt, most of which is Enhancing policy certainty and predictability
in arrears, with the implication that Sudan is requires the reduction and removal of the legal and
cut off from much needed official development regulatory hurdles to business.
assistance. Sudan is also in arrears with multilat- Since 2008 Sudan has experienced a slight
eral creditors, including the World Bank, the IMF, deterioration in the business-enabling environ-
and the AfDB. The clearance of arrears would allow ment. All of the DB indicators experienced a relative
Sudan to access significant levels of concessional decline in their rankings,14 with “Getting Credit”
financing. Resolving Sudan’s debt crisis would make and “Starting a Business” indicators experiencing
available significant resources for its development, significant drops in comparison with other indica-
providing an opportunity to have a transformative tors. The secession of South Sudan in 2011 and
impact on poverty and inequality in the country. the cross-border tension resulting in the disrup-
Sanctions imposed on Sudan since 1997 are a major tion of oil flows certainly influenced the changes to
stumbling block for the country to reach HIPC debt the business environment in Sudan (Figures 1.8.1
relief (see next section on the impact of sanctions and 1.8.2).
on economic activity). Sudan lags behind the comparators in get-
ting credit and protecting investors, resulting
c. Ability to regulate economic activity in a lower rank for the ease of doing business.
Sudan ranked at 170 for getting credit and 157 for
Finally, the ability to regulate economic activi- protecting investors in the Doing Business indica-
ties refers to the Government’s capabilities to tors (2014). When it comes to starting a business,
establish and nurture a business-enabling envi- Sudan’s performance is similar to the compara-
ronment. The Sudanese business environment has tor countries. Sudan ranked at 131 for starting a
stagnated or is even slightly deteriorated since 2008, business while Kenya was at 134 and Ethiopia at
a key factor holding back private activities in sup- 166, respectively (Figure 1.8.3). The difficulties of
port of the Government’s diversification agenda. The running a business in Sudan lie more in the lack
picture here is also being complicated by the eco- of support to investors and business people than
nomic and financial sanctions imposed on Sudan. administrative procedure. The strength of the inves-
tor protection index is relatively low at 3.3 out of
Business enabling environment 10 (Figure 1.8.4).
The business environment in Sudan remains Compared to other indicators of doing busi-
challenging. The 2014 Doing Business (DB) report ness, the tax regime in Sudan is relatively favor-
ranks Sudan 149 out of 189 economies; it is ranked able to enterprises. A new tax law since 2009 has
marginally lower in comparison with some of its reduced the tax burden on business by reducing
regional neighbors (Kenya at 129, Uganda at 132, the corporate tax rate by an average of 15 percent,
and Ethiopia at 125). Enabling Sudan to benefit and the capital gains tax by an average of 5 per-
more fully from the export and growth opportuni- cent. Moreover, the tax on labor has been abol-
ties offered by both the regional and global econ- ished (Doing Business, 2014). Corporate tax rates
omy requires improving the business environment,
facilitating trade and regional integration within
14
The number of economies for DB reports varies from year to year;
COMESA and the GAFTA, making credit more therefore, this drop in ranking cannot be explained assertively due to
available and affordable, especially to smallholders’, the deterioration of the Sudanese business environment.
36 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
in Sudan differ, depending on the business activi- businesses may be registered as a sole trader, partner-
ties of the company,15 which effectively discrimi- ship, a limited liability company (private or public),
nates against the sectors with the relatively higher special concession, or branch of a foreign registered
tax rates and distorts the allocation of investment company (U.S. State Department 2013).
(Figure 1.8.5). Under the 2013 law all service sectors are, in
The standard Value Added Tax (VAT) is also principle, open to foreign ownership. However,
comparable with the neighboring countries. The existing government monopolies and other licensing
standard VAT rate is 17 percent in Sudan, with a requirements effectively limit the opportunities for
special 30 percent rate imposed on telecommunica- private investment in the transportation, media, and
tion services. The VAT rate is similar to its neigh- communications sectors. More precisely, railway
bors; in Uganda, the standard rate is 18 percent and freight transportation, airport operation, television
in Kenya 16 percent (COMESA 2009) respectively. broadcasting, and newspaper publishing continue to
A wide range of activities and services are be effectively closed to foreign capital participation.
exempt from VAT. Activities related to agriculture New legislation aims to reduce red tape for
(agricultural products, seeds, and fertilizer), medi- investors, both domestic and foreign. The High
cines, bread and locally produced wheat flour, ani- Council for Investment was established 2011 with a
mals, meat, fish, chicken and chicken products, and mandate to facilitate investment procedures and fol-
milk and dairy products are all exempt. Financial, low up on implementing the incentives (Africa Legal
insurance, education, and medical services as well Network 2013). In addition, a new National Agency
as the rental and sale of real estate for residential for Investment is to be established with financial and
purpose are also exempt from VAT (Africa Legal administrative independence under the new law in
Network 2013). 2013. It will act as the administrator for licensing,
Sudan has encouraged private sector invest- granting investment projects, and the preparation of
ments, aiming at diversifying its economy with investment plans. This Agency will also manage the
foreign direct investment. Sudan had attracted “investment single window” with the membership
substantial amounts of foreign direct investment of the commissioners of the ministries and other
(FDI) after the signing of the CPA in 2005, but agencies concerned with investment.18
most of the investment was probably destined for Sudan has succeeded in reducing the number
the oil and petroleum sector. Therefore, following of days to import and export with the introduc-
the secession of the South Sudan, the amount of tion of automation; however, the operational
FDI has dropped.16 The government has established procedures to import and export have not
incentives to encourage investment. The president changed much (Figure 1.8.6). The beginning of
signed the new National Investment Promotion Law
(provisional decree) on March 2013. This law pro-
hibits discrimination against foreigners and allows 15
Zero percent for agricultural activities; 10 percent for industrial
activities; 15 percent for commercial and service activities, real es-
both domestic and foreign investors to have access to tate rental companies, and banks, insurance and fund management
incentives described in the law and the regulation,17 companies; 30 percent for cigarette and tobacco companies; and 35
percent for companies engaged in the exploration, extraction and
such as licensing, tax exemption, and land access. distribution of oil and gas, and their subcontractors (Deloitte 2013).
Foreign private entities can establish and own busi- 16
FDI inflows to Sudan were US$2,894 million in 2010 and US$2,692
million in 2011 (COMESA 2012).
ness enterprises, and repatriate capital and profits, 17
The earlier Investment regulation 2000 (amended in 2003) is avail-
on the condition that investors open an investment able at http://www.sudanembassy.ca/Docs/Investment%20regulations.
pdf (Sudanese Embassy for Canada).
account at the Central Bank of Sudan (CBS) before 18
National Investment Promotion Law of 2013, National Agency for
entering into business. Foreign and domestic private Investment (English Translation)
What kind of growth and diversification suits Sudan? 37
FIGURE 1.8: Business Enabling Environment
2) Doing Business 2012 and 2014:
1) Doing Business ranking for Sudan Ease of Doing Business Ranking
Enforcing contracts Mongolia
Trading across borders Indonesia
Paying taxes
Ghana
Protecting investors
Uganda
Getting credit
Ethiopia
Registering property
Starting a business Kenya
Ease of doing business rank Sudan
0 25 50 75 100 125 150 175 0 25 50 75 100 125 150 175
DB2014 (out of 189 economies) Ease of DB ranking 2012
DB2011 (out of 183 economies) Ease of DB ranking 2014
DB2008 (out of 178 economies)
3) Starting a business in Sudan and
comparators in Doing Business 2014 4) Doing Business 2014: Ranking by component
60 180
Mongolia
50
130 Indonesia
40 Ghana
Days
30 80 Uganda
20 Ethiopia
30 Kenya
10
Sudan
0 –20
SDN KEN ETH UGA GHA IND MON 0 25 50 75 100 125 150 175
Procedure (No.) Time (days) Starting a businesss (rank) Paying tax (rank) Protecting investors (rank)
Getting credit (rank)
5) Profit tax (%) in Doing Business 2014 6) Trading Across Borders indicator for Sudan
28.2
26 25.2 Time to import (days)
22 Documents to
18.1 18.4 import (number)
16.1
13.8 Time to export (days)
10.2
Documents to
export (number)
0 10 20 30 40 50 60
ETH GHA IND KEN MON SDN UGA SSA OECD DB2014 DB2011 DB2008
(continued on next page)
the introduction of ASYCUDA World coincided with documents remained largely unchanged. The
with the reduction of time to import and export. relatively long time required for importing and
While cooperation between the related agencies exporting are indicative of high trade costs. Indeed
has improved through the ASYCUDA system, the the time taken for clearances may be converted into
Doing Business indicators imply the procedure an ad valorem equivalent (Nathan 2007).
38 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 1.8: Business Enabling Environment (continued)
7) Trading Across Borders indicator, 8) Cost to Import and Export (US$ per containers),
Sudan and selected countries Sudan and selected countries
MON SDN
IND UGA
GHA MON
UGA KEN
ETH IND
KEN GHA
SDN ETH
0 25 50 75 100 125 150 175 $0 $750 $1,500 $2,250 $3,000
Rank Cost to export (US$) Cost to import (US$)
Source: World Bank staff own calculations, based on data from Doing Business various years.
For a country with sea access Sudan has a a variety of goods to Sudan subject to a regime
relatively low ranking on the trade facilitation of export controls related to military or dual-use
component of the Doing Business indicators goods. In 2004, the United Nations imposed an
(Figures 1.8.7). The Doing Business (2014) rank- arms embargo on non-governmental actors in the
ing for Sudan (155th) on trading across borders is three provinces of Darfur, including the Janjaweed.
closer to the ones for landlocked countries and In 2005, under UNSCR 1556, the United Nations
slightly worse than the regional average for SSA imposed a travel ban and asset freezes on specified
(141). Landlocked countries, such as Uganda and individuals, “those impeding the peace process in
Ethiopia in the comparators, often have more pen- Darfur.” From 2005 onwards, specific sanctions have
alties than non-landlocked ones in trading across been imposed by the European Union, including
borders (Alvis et al. 2010). Sudan, with relatively individual sanctions by the Netherlands and United
good port infrastructure, does not appear to be tak- Kingdom; Switzerland, Canada, Australia, New
ing full advantage of its geographic location. It is Zealand, and Singapore. These sanctions may have
notable that the cost to import is close to the price constrained the supply of foreign exchange to Sudan.
for the neighboring comparator landlocked coun- But there are also examples of sanction
tries (Figures 1.8.8). related easing and tightening—in the area of gum
arabic trade and financial sector transactions—
Impact of sanctions regime on Sudan that do not arise from Executive Orders. To
The United States imposed economic sanc- illustrate, gum arabic is not exempt from sanctions,
tions on Sudan in 1997 through a United States but trade is permitted with traders that hold spe-
Executive Order. This order, taking the form of a cial licenses. In November 2000, the U.S. Congress
national emergency and originally consisting of a adopted legislation to require the Secretary of the
comprehensive ban on bilateral trade, as well as spe- Treasury to consider approving licenses for the
cific sanctions relating to the arms trade and certain import of gum arabic from Sudan. As a result, gum
financial transactions, has been relaxed over time. arabic became an exception to the comprehensive
Annex 3 provides a timeline of sanctions between trade restrictions imposed by the Executive Branch
1997 and 2014. Over the years, the trade sanctions (World Bank, 2015a). On the other hand, a multi-
have been relaxed. The United States now exports billion ruling against BNP Paribas in June 2014 for
What kind of growth and diversification suits Sudan? 39
facilitating foreign exchange transactions between fleet, which requires spare parts from western
Sudan (and other countries under sanctions) with countries.
the rest of the World led to a de facto and significant At the Customs Authority there are indica-
tightening in financial sector restrictions. In effect, tions that important technical infrastructure and
that led to a breakdown in the foreign corresponding resources (e.g., scanners) are not being used to
bank network of Sudanese banks and brought for- their full potential because of on-going support
eign exchange transactions with Sudan to a virtual and maintenance issues. The investment in such
standstill for much of 2014 (IMF 2014b). technical infrastructure needs to be accompa-
The largest, yet most difficult to assess nied by on-going support and maintenance
impact of the sanctions regime on Sudan is trans- contracts, which are sometime not possible due
mitted through the financial system. Financial to the sanctions.
sanctions create difficulties for non-U.S. companies The national airline, Sudan Airways is not
in trading with Sudan, partly due to the fact that able to maintain its whole fleet; some aircraft
US$ transactions are routed through the U.S., and are grounded due to lack of spare parts. Some
partly due to the fact that many non-U.S. banks have international airlines are also not able to repa-
very significant dealings with the U.S. and want to triate their profits due to the non-availability
avoid the appearance of being involved in trade with of foreign currency through official channels.
Sudan (World Bank, 2015a). To illustrate: although The latter is one of the reasons given for the
Sudan quotes gum arabic prices in US$, all purchase January 2014 withdrawal of Lufthansa from the
transactions have to be made in Euros; but despite Sudanese market.
this many banks refuse to be involved in the trade, The Tourism Sector is restricted by the lim-
especially after the BNP Paribas ruling. In Germany, ited technology available and the inability to
it was reported that Commerzbank was one of the use credit cards in Sudan. The U.S. embargo
few that would still accept transactions involving has had a negative impact on tourism to the
Sudan. In the UK, it was reported that Barclays country, both in terms of creating a much more
had refused to accept transactions with Sudan. In challenging business environment for operators
a similar way, it was also reported that the Gum as well as creating a major inconvenience for
Arabic Board (GAB) of Sudan had not been able to tourists. Tourism businesses face major chal-
take a stall at the 2013 Food Ingredients Europe lenges when trying to obtain essential equip-
trade show, the major European trade show for the ment such as commonly used front desk and
food ingredients business, as it is organized by an restaurant management systems. Without the
American company. ability to use credit cards, they must spend time
Sanctions have also a direct impact on the and money to obtain licenses in order to make
real economy through restrictions on sourcing international transfers of funds. The embargo
of inputs and replacement parts. Over the years, also results in high transaction costs for tour
a great deal of anecdotal evidence of the negative operators and hotel owners to receive funds
impact has emerged, much of which are men- sent by international tour operators via non-
tioned in discussions with representatives of the commercial banking systems such as Western
Government of Sudan. Specific examples include Union or wired through third-party accounts
(World Bank 2014e): in neighboring countries.
Sudan Railway Corporation has explicit The absolute level of real economy impact
problems in maintaining their locomotive of sanctions remains unknown. For instance,
40 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Sudan’s non-oil exports are concentrated in a small reduces export sales to the U.S. market directly. Both
number of markets, but this is likely not solely a foreign exchange shortages and U.S. export controls
consequence of economic sanctions against Sudan on specific goods could prevent Sudan from import-
(World Bank 2014e). In fact, it appears that Sudan ing intermediate goods used either for production
is isolated even within Africa. However, sanctions in the domestic economy, or for export.
have exacerbated the isolation through increasing
the difficulty in settling cross-border payments, Lessons for Sudan: Growing
D.
which affects trade with all partners including their Endowments and the Production Base
African neighbors. The United Arab Emirates has
always been a key trading partner for Sudan; Canada This initial chapter reviewed recent key litera-
was a particularly important partner in 2009 but has ture on growth and diversification with a view of
declined; and since 2010 Saudi Arabia has steadily defining a suitable approach for Sudan. Looking
become an important market for Sudanese exports. into the future to 2030, the sectoral structure of
Yet, there is reason and evidence to believe Sudan’s economy shows a growing importance of
that a normalization of relations with the rest of agriculture, less importance of extractives, and rela-
the world, including a lifting of economic sanc- tive stability of other sectors (manufacturing, ser-
tions, could promote export diversification. The vices). The simulation presented also shows that the
simulations presented in chapter 1.A confirm this strongest growth rates are coming from sectors that
view. Over the years since 1997 the trade sanctions are capable of producing internationally competi-
have been relaxed. But sanctions on financial trans- tive tradables. Simulations thus suggest that in the
actions limit the ability of Sudan to engage in inter- absence of dominant resource-based exports, growth
national trade, both its ability to finance imports in in the future must be centered on sectors producing
general and to engage in some export transactions tradables that are exported and/or replace imports.
that require the intermediary of a foreign bank. There appears to be a case for Sudan to
While all systems of government foreign exchange approach growth through diversification from
allocation are likely to impose inefficiencies, these two angles: the production and the endowment
inefficiencies are likely to be greater when sanctions base. Figure 1.9 distinguishes both approaches into
make foreign exchange particularly scarce. The U.S. a direct and an indirect one and provides illustra-
embargo on all Sudanese exports except gum arabic tive examples. Taken together the direct and indi-
rect approach define a coherent way for Sudan to
FIGURE 1.9: Two Approaches to Diversify an diversify that takes into consideration the current
Economy and future sectoral structure of the economy, exist-
ing sectoral policies of the Government, as well as
Goal
Structural Transformation / Diversification the need for long-term institution building as a
foundation for diversification through broadening
‘Direct Approach’ ‘Indirect Approach’
the national endowment base.
Approach
Interventions in Foundation for any economic
The CEM therefore uses a sectoral focus and
economic sectors activity to flourish looks at agriculture as sources for diversification,
but also makes the case that trading of goods and
Export Macroeconomic Human capital
Tax holidays services—especially of the higher value-added
Examples
promotion policies and infrastructure
Fertilizer Targeted import Business kind—could be a means to grow the endowment
subsidies substitution enabling environment
base of the country. It is from this framework that
Source: World Bank staff own visualization, based on World Bank (2014d). the remainder of this CEM unfolds with a detailed
What kind of growth and diversification suits Sudan? 41
analysis of agriculture and trade of goods and ser- the population would be instrumental for devel-
vices, and concludes with an analysis of the extrac- opment in Sudan. This is not only important for
tive sectors (oil, gold) in search of fiscal support for the productive sector as in important input, but
the diversification agenda of the future. also for financing trade activities where foreign
currency is needed. The economic and financial
a.
Macroeconomic management crucial for sanctions implemented since 1997 play a role
economic growth in this, and in fact have recently even tightened
due the BNP Paribas court ruling, bringing trade
From the Growth Report come a number of clear financing activities to a virtual standstill.
macroeconomic policies that were underlying Macroeconomic stability: The macro economy
economic growth periods in other countries that was stabilized as part of the oil economy in the
are of relevance for Sudan (World Bank 2008a). 2000s, but had started to show vulnerabili-
Reviewing Sudan’s record vis-à-vis those policies ties even before the secession of South Sudan.
indicated a number of important policy areas where Inflation has been (and remains) high and vola-
Sudan has scope to improve its emphasis: tile since 2008. Budget deficits have always been
high, which is reflected in the high indebtedness
Investment and savings: High rates of invest- of the country.
ment and savings were driven by the oil econ-
omy of the past. In the post-secession Sudan, Careful management of the real exchange
efforts are needed to increase the investment rate will be particularly important for Sudan’s
rate to past levels supported by domestic sav- economy in the future for an overall low infla-
ings. Key will be to rely less on public resources, tion environment. Sudan’s real exchange rate of the
which were much driven by the oil economy, past decades was significantly overvalued and still is
and encourage private investment and a combi- so today, despite several rounds of nominal depre-
nation of domestic and foreign savings. ciations that took place in 2012 and 2013. Those
Technology and know-how transfer: FDI into depreciations were consumed by similarly high
Sudan was high during the oil economy, but inflation rates, and, as a result the overvalued real
focused on the natural resource sector. Going exchange rate of the past is much a thing of the pres-
forward, a new kind of FDI—that brings in ent. But a more competitive exchange rate would be
technology and know-how for a diversified instrumental for boosting agriculture exports, which
economy—is needed. are currently largely unprocessed in nature. Chapter
Export promotion and diversification: Driven 2 will analyze this in detail, preceded by empirical
by oil discoveries Sudan’s exports-to-GDP ratio evidence on the extents of structural transformation
expanded significantly starting in 2000 with oil being visible in Sudan’s labor market.
constituting around 90 percent of exports at
that time. The challenge ahead will be to find Agriculture and livestock: important for
b.
new export sources and export markets, prob- inclusive growth
ably in agriculture, initially for raw materials,
but then also for processed agricultural goods Given that poverty in Sudan is deep and largely
to pave the way for a higher value-added activi- a rural phenomenon the agriculture sector is cru-
ties in the future. cial for efforts to reduce poverty. About one in two
Financial sector development and openness: Sudanese, close to 14 million people, lived in pov-
A more open and accessible financial sector for erty in 2009, each consuming less than the national
42 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
poverty line (consumption of the poor is about 65 Both products have shown a remarkable recovery,
percent of the national poverty line). The incidence which will be described in detail in Chapter 3. In
of poverty in urban areas, particularly Khartoum, is each case the Government had, in the past, insti-
significantly lower than that of the rural areas. Rural tuted monopolized marketing structures (monop-
areas are more than two and half times as poor as sonies) in the form of parastatal companies. As is
the capital and almost twice as poor as the rest of often the case with such companies, paying farmers
the urban areas. While rural areas account for a less and less for their products (independent of the
little over 60 percent of the Sudanese population, world price) seems an easy path to profitability, until
they account for almost for 80 percent of Sudan’s the farmers stop harvesting or even planting their
poor. For the rural population, any poverty reduc- crops. That this happened can be seen in low yields
tion strategy needs to build on agricultural growth, in both gum arabic and cotton, as well as many
while at the same time looking into the creation of other agriculture products. As the monopsonies
off-farm employment opportunities there. were eventually relaxed and competition provided,
In addition, agriculture in Sudan is by-and- prices received by farmers increased substantially,
large a story of low productivity, which indicates and with them so did areas cropped and especially
the potential to realize quick wins. Chapter 3 will yields. Cotton yields tripled nation nationwide in
show that low crop yields are associated with low one year (2010/11), and in three years increased
fertilizer usage in the country. In 2009 the average by five and a half times, with no improvements in
fertilizer use per hectare of cropland was 7.3 kg, irrigation or varieties. Such remarkable increases
which ranked Sudan at 129 among 155 countries, in agricultural yields show that poor agriculture
far behind Ethiopia, Sudan’s poorer neighbor. To performance is not only a product of low fertilizer
illustrate, sorghum and millet yields are low and usage or weak varieties due to often local breeds of
generally on a downward trend, yet more so in the seeds, but also, and possibly most importantly, a
rain-fed production areas than in irrigated regimes, lack of incentives for the producers.
where yields are more stable or slightly increased over Livestock production and exports are a
the past decade. Wheat, of which the government remarkable success story of agriculture in post-
encourages production even though it is not a crop secession Sudan. Livestock showed a fantastic
native to Sudan, has yields that are among the lowest recovery after virtually no exports in 2008 due to an
in the world, if not the lowest. Similar developments imposed export ban and quarantine measures, and
are seen in the main oil seeds, groundnut and sesame. which grew to a multi-million business and earned
Two notable exceptions to the decreasing production more than US$670 million in 2013. The backbone
and yield trends are gum arabic and cotton, which of this success is pastoral livestock production,
currently realize a renaissance of production over which is superior to any other form in Sudan. But
the past years with particularly strong production in pastoralism is under pressure due to uncertain land
2013. Low yields in Sudan indicate that by adjust- tenure and land rights that effectively diminish the
ing key levers in agriculture in Sudan there could be historical grazing grounds of pastoral farmers.
potential to quickly realize large productivity gains. Given the unique performance of the livestock
Low productivity is not only related to input sector in Sudan and the fact that pastoralism is
usage, but also distortive centralized market- so successful, there is surprisingly little policy
ing and distribution arrangements that eroded attention on the sector. More attention on the sec-
producer incentives. This is now starting to tor will be important in part due to the interlinked
change, and the experiences of gum arabic and issues of land tenure and land policy, which need to
cotton could pave the way for more such reforms. be solved to sustain pastoral livestock production into
What kind of growth and diversification suits Sudan? 43
the future. But there are also other issues, such as the to enhance productivity and increase technology
inherent volatility of the sector and the risk due to and skills transfers through significant positive
droughts and diseases and the negative affects they spillover effects throughout the economy. Services
entail. Hence there is a need for more policy focus sectors can help Sudan diversify its economy and
on a better, forward-looking management of the sec- reduce poverty. For example, while the agricultural
tor. Chapter 3 will provide an in-depth analysis of sector is viewed as an important engine of growth, it
livestock to inform such a new policy focus. has remained far below its potential and the country
has stayed a net importer of agricultural products.
c.
Goods and services trade to build The productivity of farms will have to improve to
endowments increase agriculture production. That means better
transport infrastructure, agricultural technology,
To support growth and diversification in the and support services including financing.
longer-term, trade can be used as a vehicle to
build a broader endowment base in the Sudanese Extractive industries: still important, but
d.
economy. World Bank (2014) argues that global less dominant
and regional integration are key to leverage trade
effects for a country. Trade will not only build on a The natural resource sector is still significant in
broader endowment base, which would both change Sudan and recently had new impetus from the
the composition of trade and the profile of produc- discovery of gold, but it is likely to be temporary.
tion World Bank (2014d), but trade can also be used Lessons from other countries show that growth in
as driver to build endowments through its network the natural resource sectors is not necessarily “pro-
effects and the ability to connect the Sudanese poor” due to if there are insufficient spillovers to the
economy with the world. Chapter 4 provides an rest of the economy. The sector, however, could pos-
analysis of goods and services trade. sibly provide—through its power to generate fiscal
Advancing trade also means to putting due revenues—financial means to advance policies for
emphasis on the necessary groundwork for “pro-poor” growth in other sectors. Chapter 5 pro-
higher value added activities through manu- vides an in-depth analysis of the extractive sector.
facturing. Such groundwork will be especially The diminishing effects of both oil and
important so that the rural population, as it devel- gold on Sudan over the next 10 to 15 years are
ops through improved agriculture productivity, obvious. Yet, revenues are still important and a
has an opportunity to move to the non-agriculture source for financing capital-intensive diversifica-
sector. Currently Sudan is primarily exporting tion activities. Examining oil projections to 2030
raw agriculture materials and livestock. Through shows that the level will decrease over the next one
a process of basic value addition on agriculture or two decades; this finding is important especially
products (for example such as machine flaying of as the base case considered in this analysis applies
animal skins) existing exports can be increased in oil projections that are significantly lower than the
value and basic structures for light manufacturing Government’s own projections). In either case, it
can be established. However, the current imposition seems inevitable that oil production will decrease
of sanctions on Sudan plays a constraining role for to below 100,000 bpd, but the question is whether
export diversification (see also Section 1.C). this will happen now or in three, five, or ten years.
Services and trade-in-services have an impor- Hence, direct domestic oil-related revenues will
tant role in economic diversification. Services are likely be around 10 percent of total revenues, and
essential intermediate inputs and have the potential if fees and TFA are included around 20–30 percent.
44 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
These could be used to finance capital-intensive The contribution of mining to Sudan’s econ-
diversification activities such as investment in edu- omy over the medium term could be positive,
cation and building of infrastructure. however, the scale of the sector is very unlikely
The outlook for gold is slightly more opti- to rival that of the oil sector in its heyday and its
mistic, and Sudan is projected to produce fiscal impact may be substantially lower. These
between 18 to 28 tons annually over the next considerations will be elaborated on in Chapter 5.
five years—worth about US$750 million to There are numerous scenarios that could unfold
US$1,130 million annually. But the fiscal contri- regarding gold mining in Sudan, including much
bution of gold mining is minimal. The traditional less positive ones, in which a lower gold price envi-
sector will continue to be the source of most gold ronment coupled with continuing constraints on
produced in this period, although the ability to sus- financing of major mineral projects means that the
tain this contribution beyond this five-year period is recent gold mining boom will wane. Any sustained
increasingly doubtful. A more likely pattern is that program of reforms to make the industrial mining
industrial mining will become the main source of sector more competitive and to strengthen regula-
domestic mined gold after 2020. It is unlikely that tory institutions would require strong leadership
production after 2020 would be significantly higher and probably external support to enhance institu-
than 18 to 28 tones estimates for the next 5 years. tional capability and effectiveness.
STRUCTURAL CHANGE AND
THE ROLE OF THE REAL EXCHANGE RATE
FOR EXPORTS AND GROWTH
Successful economic development has typically been accompanied by structural transformation in which
manufacturing and industry’s share of output and employment rises at the expense of agriculture. At pres-
ent, however, the agriculture and services sectors account for the vast majority of employment in Sudan,
2
with manufacturing providing an almost negligible number of jobs.
A more competitive real exchange rate could support export and output growth and hence help attract
much-needed FDI. Sudan’s real exchange rate is overvalued, which is similar to other African oil exporting
countries, most of which experience Dutch disease symptoms. Empirical evidence presented here sug-
gests that a 10 percent lower real exchange rate (RER) could raise economic growth by 0.9 percentage
points in Sudan. Given that Sudan’s exports of non-natural resource and agriculture products comprise
mainly low-value, raw, and unprocessed products, which compete primarily on prices, the historic and
current RER overvaluation was and is a major inhibiting factor for export development in the country.
A major determinant of the RER is the level of inflation. And since 1999 inflation in Sudan has a history of
high rates and increased volatility. But inflation became also a key symptom of the post-secession economy
with rates above 40 percent in 2012 and 2013. A major driver of the upsurge was the approach to mon-
etize the budget deficit by the Central Bank of Sudan through granting direct loans to the government.
A. Structural Change: Evidence from Illustration of Structural Change
FIGURE 2.1:
the Labor Market in an Economy
Structural change in Sudan Low High
Goal
productivity Structural Change productivity
activities activitiesy
Structural change shifts economic activities
and employment from low to high productivity Traditional Non-Traditional
Process
activities. Figure 2.1 illustrates the process and Agriculture → Agriculture →
Within sectors
Firm → Firm
distinguishes a traditional and a non-traditional Manufacturing Services Informal → Formal
definition of structural change. In the traditional East Asian Model
India, Bangladesh,
Example
definition of structural change manufacturing and (Korea, China,
Mozambique, Most countries
Hong Kong,
industry’s share of output and employment rises Rwanda
Vietnam)
at the expense of agriculture. This is the type of Source: World Bank staff own visualitzation, based on McMillian et al.
development model often associated with East Asia (2014); Zeufack et al. (2015); and Ghani & O’Connell (2014).
46 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
where there was a strong rise in manufacturing sec- lack of structural transformation in Sudan from the
tor shares in the economies of China, Korea and perspective of the labor market.
Vietnam, to name a few. The non-traditional view
of structural change increasingly also acknowledges Demographics and education
the role of the services sector for structural trans-
formation and productivity increases within sectors Sudan has a very young, relatively rural popula-
and within firms. Given Sudan’s early days in struc- tion, with a low level of education attainment.
tural transformation, and the illustrative character Table 2.1 shows a simple breakdown of the Sudanese
of the traditional definition of structural change, population by gender and rural/urban location.
the focus in this chapter is primarily on the (lack The total population of 29.2 million is largely rural
of) shift from agriculture to manufacturing activities (64.3 percent) and approximately gender-balanced
in the economy. (49.3 percent female). Rural areas are considerably
But Sudan still stands at the beginning younger on average than urban areas: 49 percent of
of structural transformation, while others the urban population is younger than 20 compared
advanced. Looking at the sector decomposition of to 55.7 percent of the rural population. The gender
GDP, Figures 2.2.1 and 2.2.2 show Sudan’s situa- ratio also differs across cohorts: women constitute
tion in 1980 and 2013. With the exception of a rise 48.4 percent of the population younger than 20
in industry that is related to the oil economy and and 50.4 percent of the population aged 20 or older
extractives, the sector shares are rather constant (Figures 2.3.1 and 2.3.2). This partly reflects the leg-
in the period covered. This is in stark contrast to acy of the civil war, which led to disproportionately
Vietnam, where the importance of agriculture has high male mortality, and may also be a reflection of
decreased from 40 to 18 percent both on account of male migrant workers to the Gulf states.
rising shares for services and industry (incl. manu- The age distribution of the population leads
facturing). Kenya’s structural transformation over to a dependency ratio that is very high by global
the same period was less pronounced, and driven standards but comparable to some other African
primarily by the services sector. The remainder of countries. The dependency ratio is the ratio of
this section will provide further evidence of the young and elderly to working-age people. The exact
FIGURE 2.2: Structural Change through Sector Decomposition of GDP
1) Sudan from 1980 to 2013 2) Sudan and selected other countries
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
Sudan Sudan Kenya Kenya Vietnam Vietnam
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
(1990) (2013) (1980) (2013) (1980) (2013)
Agriculture Industry Manufacturing Services Agriculture Industry Manufacturing Services
Source: World Bank staff own calculations, based on data from World Development Indicators (2015).
Note: (2)Industry’s rise in Sudan (2013) is associated to extractives and not indicative of structural change.
Structural change and the role of the real exchange rate for exports and growth 47
Table 2.1: Age Composition of the Table 2.2: Dependency Ratios in Sudan
Population in Sudan Working age group Rural Urban Both
Total Rural Urban 10–59 years 0.61 0.47 0.56
Total 29,154,357 18,775,152 10,379,205 10–65 years 0.56 0.43 0.51
Female 14,380,529 9,302,234 5,078,295 15–59 years 1.04 0.78 0.94
Male 14,773,828 9,472,918 5,300,909 15–64 years 0.96 0.72 0.87
Source: World Bank staff own calculations, based on data from National 20–59 years 1.61 1.23 1.46
Benchmark Household Survey (2009).
20–64 years 148 1.13 1.34
Note: Calculated using NBHS household weights.
Source: World Bank staff own calculations, based on data from National
Benchmark Household Survey (2009).
Note: Calculated using NBHS household weights.
value depends on the definition of “working age”
and Table 2.2 shows dependency ratios for several
possible definitions. Using a standard definition of substantially higher levels of education: one in ten
working age, there are approximately six people has some post-secondary education and a further
aged 15–64 for every five people aged younger one in three has some secondary education.21 The
than 15 or older than 64. An alternative defini- gender gap in education is smaller in young cohorts
tion includes youths aged 10–14 in the potentially than older cohorts but this is driven almost entirely
working-age population (see following paragraphs), by urban areas. In rural areas, the gender gap in
in which case there are approximately two working- education is approximately stable over cohorts and
age people for each young or elderly person. The may in fact be widening slightly. Secondary school
dependency ratio is consistently considerably higher access appears to have increased more for younger
in rural than urban areas, reflecting the relatively men than younger women (relative to older men
young rural population.19 and older women respectively).
Half of the population in Sudan has never
attended a formal school and only a tiny portion Employment and labor force participation
has some post-secondary education. Only 15.8
percent of the population has at most secondary Sudan’s labor force participation rate is relatively
school education, and only 3.8 percent have some high and formal unemployment is moderate.
post-secondary education shows the distribution of Figure 2.4.1 shows the labor force status for all indi-
education attainment for the Sudanese population.20 viduals aged 10 or older, the youngest age at which
Education levels are substantially lower in rural than the NBHS work module is administered. Across
urban areas and substantially lower for women than the entire population, 36 percent are employed
men. The gender gap in schooling is slightly smaller
in urban than rural areas.
Older parts of the population have lower edu- 19
This comparison should be interpreted with some degree of cau-
tion, as rural areas may face a much lower effective dependency ratio
cation than younger parts and the gender gap in if households are supported by remittances from urban migrants.
education is smaller in younger cohorts than in 20
This report omits Islamic khalwa schooling from the analysis, which
cannot be easily classified into a conventional primary, secondary,
older ones. Figure 2.3.4 shows the percentage of tertiary division. Approximately 2 percent of the population report
the population with each level of education attain- attending khalwa schools and this fraction is higher for men, in rural
areas, and for older cohorts.
ment for five-year age brackets. Older cohorts have 21
This cohort difference in years of completed education reflects ris-
substantially lower education attainment: fewer than ing education enrollment and spending through time, documented
in World Bank (2012). Despite the recent rise in education spend-
30 percent of individuals aged 60 or older have ing, Sudan still spends a substantially smaller fraction of its GDP on
any formal schooling. Individuals aged 20–29 have education than most North African countries.
48 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 2.3: Demographics and Education in Sudan
1) Rural population pyramid (female on left-hand) 2) Urban population pyramid (female on left-hand)
75+ 75+
70–74 70–74
65–69 65–69
60–64 60–64
55–59 55–59
50–54 50–54
45–49 45–49
40–44 40–44
35–39 35–39
30–34 30–34
25–29 25–29
20–24 20–24
15–19 15–19
10–14 10–14
5–9 5–9
0–4 0–4
2,000,000
1,500,000
1,000,000
500,000
0
500,000
1,000,000
1,500,000
2,000,000
800,000
600,000
400,000
200,000
0
200,000
400,000
600,000
800,000
3) Education levels by gender and location 4) Education levels by cohort
10,000,000 100%
9,000,000
8,000,000 80%
7,000,000
6,000,000 60%
5,000,000
4,000,000 40%
3,000,000
2,000,000 20%
1,000,000
0 0%
Rural Urban Rural Urban
20–24
25–29
30–34
35–39
40–44
45–49
50–54
55–59
60–64
65+
men men women women
No education At most primary At most secondary Post-secondary
Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009).
and 6 percent are unemployed.22 Of the remaining this as work. Figure 2.4.7 shows employment and
58 percent of the population, approximately half labor force participation for five-year age cohorts.23
report attending school and the other half are clas- Non-participation for females rises sharply across
sified as neither studying nor participating in the
labor force. Both unemployment and labor force 22
Respondents are defined as employed if (1) they worked at least
one hour in the past week for pay, profit-share, in-kind payment,
non-participation are higher in rural than urban or without pay; or (2) they did not work in the past week but have
areas. Non-participation is far higher for women some form of job in which they normally work. This definition of
employment is quite inclusive. A substantial fraction of respondents,
than men, a pattern discussed in more detail below. particularly women, are classified as working under this definition
While both wage work and self-employment but are not paid. Respondents are defined as unemployed if they are
not currently working but report that they are available for work.
are common, labor force non-participation is far 23
The remainder of the analysis focuses on individuals aged 10–64.
higher for women than men. Many women are Sudanese life expectancy is only 61 and labor force participation is low
for older individuals, so omitting the older tail of the distribution has
engaged in home production and there appears little effect on the analysis. Respondents aged younger than 10 are not
to be some variance in whether they self-report asked questions about work and so must be omitted from the analysis.
Structural change and the role of the real exchange rate for exports and growth 49
cohorts. This pattern may reflect a life-cycle expla- Sudan. Almost 750,000 working-age respondents
nation in which many women complete education are not employed, not studying, and report that they
and do not transition into the formal labor force. perceive job search as useless. This accounts for a
It may also reflect a cohort explanation in which large majority of non-participation by men and by
younger women are obtaining more education women who are not homemakers. The pattern is
than their predecessors and will go on to enter the visible for both men and women and in both rural
labor force. These explanations cannot be separately and urban areas. Discouragement is concentrated
tested until additional waves of household survey amongst respondents below median age, in line
data become available. The same pattern is not vis- with a global phenomenon of falling youth labor
ible for men, most of whom are either in schooling market engagement.
or in the labor force. Younger men are slightly more The majority of men in both rural and
likely than older men to be neither studying nor in urban areas are paid employees or own account
the labor force workers, while this is not the case for women.
Child labor is not uncommon in Sudan but Figures 2.4.4 and 2.4.5 show the type of employ-
most working children are concurrently enrolled ment for different population groups. A relatively
so this does not represent completely foregone small fraction are employers and most of these are
educational opportunities. One in ten youths in older cohorts.24 Unpaid employment within the
aged 10–16 is employed and another one in thirty household is relatively common in rural areas and
is available to work but not currently working. The concentrated in the agricultural sector. The pattern
rate of child employment is considerably higher is very different for women. Unpaid work within
in rural than urban areas (13.5 and 4.3 percent, the family is the most common type of employment
respectively) and slightly higher for men than in rural areas, particularly for younger women.
women (12.9 and 7.7 percent, respectively). The Own account workers are slightly more common
gender gap may, however, be considerably smaller if than paid employees and very few women are
female youths are engaged in time-consuming home employers.25
production but do not report this as work. Most The regularity of employment differs across
working children are concurrently enrolled (67.8 gender and location. 12.4 percent of workers
percent), so much of this child labor does not repre- report working less than five days in the past week,
sent completely foregone educational opportunities. but this is higher for women than men (11.6 and
The overwhelming majority of women that 16.7 percent, respectively) and in rural than urban
are labor force non-participating report that they areas (15.3 and 8.2 percent, respectively). This is
are full-time homemakers or housewives, which a crude measure of underemployment but sug-
is not an uncommon reporting Figures 2.4.2 and gests that the extensive margin employment data
2.4.3 show the reasons given for not participating in
the labor force by respondents who are not studying. 24
The NBHS survey defines an employer as anyone whose main em-
ployment status is operating their own business, profession or trade
Reporting by women reflects a common phenom- and who employs at least one employee, who presumably need not
enon in which formal labor force participation rates work for them fulltime. This differs from an own account worker who
does not employ anyone.
substantially understate female economic activity 25
The employment analysis by gender suggests a complex picture of
because they do not measure home production. female labor force participation and home production. More than 4
million women report that they did not work because they are fulltime
But there is a high number of discouraged homemakers or housewives, while another 700,000 report that they
job seekers that show labor force non-partici- worked without pay in the family. This may reflect heterogeneity in
respondents’ understanding of work. But it is also important to realize
pation. This pool of untapped potential workers these dimensions to try to understand whether non-participating women
represents both a challenge and opportunity for do or do not represent a pool of potential workers outside the home.
50 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 2.4: Employment and Labor Force Participation in Sudan
1) Employment and labor force participation 2) Reasons for labor force non-participation
by gender and location by female non-students
7,000,000 1,800,000
6,000,000 1,600,000
1,400,000
5,000,000
1,200,000
4,000,000 1,000,000
3,000,000 800,000
600,000
2,000,000
400,000
1,000,000 200,000
0 0
Rural men Urban men Rural men Urban men Young Young Older Older
rural women urban women rural women urban women
Employed Unemployed Discouraged job seekers Other income source
Studying Not studying or in labor force Retired / too old Disabled / too sick Homemaker
3) Reasons for labor force non-participation
by male non-students 4) Type of female employment
350,000 900,000
300,000 800,000
700,000
250,000
600,000
200,000 500,000
150,000 400,000
300,000
100,000
200,000
50,000 100,000
0 0
Young Young Older Older Young Young Older Older
rural men urban men rural men urban men rural women urban women rural women urban women
Discouraged job seekers Other income source Paid employee Employer Own account worker
Retired / too old Disabled / too sick Homemaker Unpaid within family Unpaid outside family
5) Type of male employment 6) Employment by sector
2,000,000 350,000
1,800,000
300,000
1,600,000
1,400,000 250,000
1,200,000 200,000
1,000,000
800,000 150,000
600,000 100,000
400,000
50,000
200,000
0 0
Young Young Older Older Rural men Urban men Rural women Urban women
rural men urban men rural men urban men
Paid employee Employer Own account worker Agriculture & Foresty Other industry
Unpaid within family Unpaid outside family Manufacturing Services
Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009).
Notes: (6) Sector classifications are based on the jobs held by survey respondents, rather than the sector in which their employer is located. This measures
the distribution of workers across sectors rather than the distribution of firms across sectors.
(continued on next page)
Structural change and the role of the real exchange rate for exports and growth 51
FIGURE 2.4: Employment and Labor Force Participation in Sudan (continued)
7) Employment and labor force participation by cohort
A: Rural men B: Urban Men
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
10–14
15–19
20–24
25–29
30–34
35–39
40–44
45–49
50–54
55–59
60–64
10–14
15–19
20–24
25–29
30–34
35–39
40–44
45–49
50–54
55–59
60–64
A: Rural Women B: Urban Women
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
10–14
15–19
20–24
25–29
30–34
35–39
40–44
45–49
50–54
55–59
60–64
10–14
15–19
20–24
25–29
30–34
35–39
40–44
45–49
50–54
55–59
60–64
Employed Unemployed Studying Not studying or in LF
Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009).
(continued on next page)
discussed above may understate the total female- significant. The education gap in labor force par-
male and rural-urban employment differences.26 ticipation is considerably larger than the education
In sum, and perhaps not surprisingly, gap in unemployment. These patterns are visible
employment and labor force participation differs for men and women and in rural and urban areas.
by education level. Table 2.3 shows that respon-
dents with no education are least likely to participate Employment by economic sectors
in the labor force and, conditional on participation,
are more likely to be unemployed. Respondents Employment is dominated by agriculture in
with post-secondary education are at the opposite rural areas and by services in urban areas.
extreme, with the highest rates of participation and
lowest rates of employment. People with primary
and secondary education fall in between these 26
The comparison should be interpreted with particular caution be-
cause 34 percent of respondents report that they worked more than
two extremes but the differences between these seven days in the past week. This suggests that many respondents
two groups are not themselves large or statistically misunderstood this question.
52 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 2.4: Employment and Labor Force Participation in Sudan (continued)
8) Employment by sector cohort
A: Rural men B: Urban Men
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
10–14
15–19
20–24
25–29
30–34
35–39
40–44
45–49
50–54
55–59
60–64
10–14
15–19
20–24
25–29
30–34
35–39
40–44
45–49
50–54
55–59
60–64
A: Rural Women B: Urban Women
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
10–14
15–19
20–24
25–29
30–34
35–39
40–44
45–49
50–54
55–59
60–64
10–14
15–19
20–24
25–29
30–34
35–39
40–44
45–49
50–54
55–59
60–64
Agriculture & Foresty Manufacturing Other industry Services
Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009).
Education and Employment Status, Percent of Total
Table 2.3:
Employed Unemployed Not in labor force
No education 41.2 50.9 7.9
At most primary 56.1 35.9 7.9
At most secondary 54.9 38.2 6.9
Post-secondary 63.4 25.5 11.0
Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009).
Note: Calculated using NBHS household weights. Includes all respondents aged 10–64 years who are not currently enrolled in school. Excludes respon-
dents with khalwa education.
Figure 2.4.6 shows the breakdown of employ- 34.3 and 51.7 percent of employment, respectively.
ment across sectors for men and women in rural Manufacturing provides only 1.8 percent of employ-
and urban areas. Agriculture and services almost ment and other industries account for the remaining
completely dominate employment, accounting for 12.2 percent.
Structural change and the role of the real exchange rate for exports and growth 53
Employment patterns differ significantly post-secondary education. Workers in the remain-
between rural and urban areas. In particular, ing three sectors—manufacturing, non-manufactur-
agriculture accounts for 50 percent of rural employ- ing industry, and services—have relatively similar
ment and 5.5 percent of urban employment. Services levels of education.
account for most urban jobs (74.6 percent) but are There is a substantial skill differential and
also important in rural areas (39.1 percent). Both gap across sectors, which are slightly decreas-
manufacturing and industry are more common in ing in the younger population. The ratio of
urban areas (3.1 and 16.8 percent, respectively) but workers with secondary or post-secondary edu-
still present in rural areas (1.1 and 9.8 percent, cation to workers with no or primary education
respectively). Overall, however, manufacturing and is highest in manufacturing (0.94), followed by
mining account for extremely small shares of employ- services (0.96) and non-manufacturing industry
ment in both young and old cohorts (Figure 2.4.8). (0.73), with agriculture scoring far lower (0.12).
Prime-age cohorts are more likely to work This has clear implications for economic trans-
in services and industry than younger and older formation. Raising employment in the manufac-
cohorts. There is limited evidence that employment turing and non-manufacturing industry sectors
sectors vary by cohort. The only clear pattern is that is likely to require substantial increases in aggre-
prime-age cohorts are more likely to work in services gate education levels. While education levels
and, to a much lesser extent, industry than younger are indeed higher in younger than older cohorts
and older cohorts. There is no trend toward greater (Figure 2.4.7) but this is not (yet) reflected in
employment in manufacturing or industry amongst higher youth employment in industry and manu-
younger cohorts, which is sometimes an indica- facturing (Figure 2.4.8).
tion of an economy’s movement toward structural
transformation. But there is no evidence for such a Labor productivity and wages across
demographic structural change happening. sectors
The sector that employs most people in
the economy—agriculture—is also the sector Both productivity and wages differ sharply
that employs most people without education. across sectors: Workers in the agricultural sec-
Table 2.4 shows the distribution of education levels tor have low productivity and earn low wages;
across sectors. Agriculture is a clear low-education workers in manufacturing and industry have
outlier. Almost two in three workers in this sector high productivity and earn high wages; workers
have no education and less than one in fifty has in services have low productivity and earn high
Table 2.4: Education Breakdown of Employment by Economic Sector, Percent of Total
No education At most primary At most secondary Post-secondary
Agriculture 64.1 25.0 9.6 1.3
Manufacturing 30.2 21.5 36.3 12.1
Industry (non-manufacturing) 23.9 33.9 33.1 9.1
Services 29.6 27.3 30.0 13.2
Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009).
Notes: Calculated using NBHS household-level weights representative at the state level. Includes all respondents aged 10–64 years who report working
recently or having a job. Sectors are based on “main activity of work [during] the last 7 days.” Excludes respondents with missing values for work activity
and hence sector of employment (1.6 percent) or highest level of education (1.8 percent). Non-manufacturing industry includes: mining, electricity, water,
construction, transport, and communications.
54 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Table 2.5: Annual Value-Added (VA) Per Worker by Sector (US$)
2009 2010 2012
VA Labor VA Labor VA Labor
Employment (US$ mn) productivity (US$ mn) productivity (US$ mn) productivity
Agriculture 3,114,411 8,473 2,721 8,374 2,689 12,343 3,963
Manufacturing 931,005 8,307 8,923 8,486 9,115 8,107 8,708
Industry 132,440 2,241 16,921 2,643 19,956 2,711 20,470
(non-manufacturing)
Services 3,949,954 14,668 3,713 15,374 3,892 7,242 1,833
Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009); and World Development Development
Indicators (WDI).
Notes: Employment totals use household-level population weights representative at the state level. Employment totals are drawn from all respondents
aged 10 or older at the time of the survey who reported a sector employment. Sectors are based on “main activity of work [during] the last 7 days”, which
may differ from employer’s main activity. Value-added data for 2009 and 2010 include South Sudan, but exclude for 2012. Non-manufacturing industry
includes: mining, electricity, water, construction, transport, and communications.
wages.27 Table 2.5 reports labor productivity by higher 75th percentile. However, the difference is
sector.28 Two patterns are clear. First, labor pro- small and not statistically significantly different
ductivity is highest in manufacturing (>$16,000). from zero.
This is consistent with nearly universal international Wages by sector have a direct implication for
trends and highlights the importance of the manu- poverty rates by sector and a wage gender gap
facturing sector in driving the upgrade of skills. is present in all sectors, but at varying degrees.
Second, labor productivity in non-manufacturing In the agricultural sector, 34.8 percent of workers
industry (which includes mining, electricity, water, earn less than the monthly poverty line of SDG114.
construction, transport, and communications) is This rate drops to 15.3, 12.9, and 12.7 percent in
somewhat lower than manufacturing but still con- the service, industry, and manufacturing sectors,
siderably higher than either agriculture or services. respectively. Shifting employment away from agri-
Hence, labor productivity is inversely proportional culture may thus play an important role in alle-
to employment, with the most productive sectors viating poverty, provided these wage differentials
employing the fewest people. This is partly a natural
consequence of higher capital-labor ratios in these
sectors but also highlights the importance of grow- 27
There are important data limitations in Sudan that may affect the
ing these sectors. accuracy of this analysis, particularly the detailed productivity num-
bers. But reported trends should be unaffected and be a good guide
Daily wages in agriculture are considerably in the analysis. Limitations are that the employment data are drawn
lower than in any other sector, while wages in from a survey of Sudanese households in 2009 while the value-added
data for 2011 and earlier years aggregate Sudan and South Sudan. The
industry, manufacturing, and services are rela- table therefore reports productivity in 2009, which uses value-added
tively similar. Table 2.6 reports summary mea- data for the appropriate time period and incorrect region, and 2012,
which uses data for the appropriate region and incorrect time period.
sures of the distribution of daily wages by industrial Productivity in 2010 is also reported as a mid-point measure. This
sector. Agriculture is a clear outlier, with workers mismatch means that the total value-added in 2009 is generated by
Sudanese and South Sudanese workers, so the average labor productiv-
earning considerably lower wages than in any other ity will be upward biased. Furthermore, employment in manufacturing
sector. Wages in industry, manufacturing, and ser- in the survey is small (237 people, equal to 1.6 percent of the sample)
so results may also reflect some sampling error.
vices are relatively similar to one another. There is 28
Labor productivity is defined as the ratio of total value-added (from
some evidence that wages may be more dispersed the World Development Indicators) to total employment in each
sector. It provides a measure of the average worker’s contribution
in manufacturing, with a lower 25th percentile and to total output.
Structural change and the role of the real exchange rate for exports and growth 55
Table 2.6: Distribution of Daily Wages by Industrial Sector (US$)
25th percentile 50th percentile 75th percentile % missing wages
Agriculture 3.2 5.7 10.0 48.7%
Manufacturing 6.8 10.4 17.5 6.8%
Industry (non-manufacturing) 4.3 10.0 18.3 7.0%
Services 5.7 10.0 15.5 10.2%
Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009).
Notes: Calculated using NBHS household-level weights representative at the state level. Includes all respondents aged 10–64 years who report working
recently or having a job. Sectors are based on “main activity of work [during] the last 7 days.” Excludes respondents with missing values for work activity
and hence sector of employment (6.9 percent) or highest level of education (1.8 percent). Weekly wages are missing for 25 percent of the sample, primar-
ily in the agriculture sector. Non-manufacturing industry includes: mining, electricity, water, construction, transport, and communications.
remain stable as employment composition shifts. Overvaluation was as much as 65 percent in 2008,
However, sectoral shifts alone will alleviate neither during the heyday of the oil economy. The section
poverty-level earnings nor gender differentials in shows that an undervalued RER is associated with
earnings. For example, 35.1 percent of women earn higher real export and output growth, especially for
less than the monthly poverty line, compared to only developing countries today and developed countries
16.5 percent of men. This gender gap is present in the earlier decades. Across all countries and time,
across all four sectors, though to varying degrees.29 on average, for each additional 10 percent RER
Comparing daily wages with the labor pro- undervaluation, the country’s export growth goes
ductivity analysis shows that agriculture is lag- up by 0.6 percentage points and its output growth
ging behind, but also that the services sector goes up by 0.88 percentage points a year.
offers scope for well-paid employment without Empirical results are used to explore the
the capital intensity of manufacturing. On the one question of whether an undervalued exchange
hand, productivity is highest in manufacturing, fol- rate can help boost export and therefore also
lowed by non-manufacturing industry, agriculture, output growth. The issue needs to be addressed
and services. But wages are highest in non-manu- from an empirical perspective since the theoretical
facturing industry, manufacturing, and services, relationship between the real exchange rate and
and lowest in agriculture. Both measures point to exports/outputs is not clear-cut (Annex 4). The anal-
agriculture as the lagging sector (Tables 2.5 and ysis in this report utilizes a cross-country RER mis-
2.6) but they provide mixed evidence on the rela- alignment index. A country’s RER is defined as the
tionship between the other three sectors. Services relative price of the domestic consumption basket
lags industry and manufacturing on productivity and the foreign consumption basket. The domestic
but not wages, which suggests that this sector offers consumption basket includes domestic non-tradable
scope for well-paid employment without the same goods, domestic tradable goods, and some foreign
capital intensity. tradable goods; the foreign consumption basket
B. The Role of the Exchange Rate
29
The analysis of wage distributions has three caveats important
enough to be mentioned: First, the small number of survey respon-
This section utilizes a simple theory-based real dents working in manufacturing means that the wage distribution
exchange rate (RER) Misalignment Index for in this sector reflects substantial sampling error. Second, wages are
missing for a large fraction of the respondents. Third, there are some
countries around the world from 1950–2011, and outliers who report extremely high daily wages, which motivates the
shows that Sudan’s RER has been overvalued. focus on percentiles of the distribution instead of means.
56 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
includes foreign non-tradable goods, foreign trad- may have slightly eased in the years 2012 and 2013
able goods, and some domestic tradable goods. where the nominal exchange rate devalued by
The analysis uses a simple theory-based almost 100 percent (Figure 2.5.2). But the positive
approach first developed by Rodrik (2008) to cal- RER effects of this nominal depreciation, were also
culate the RER misalignment. In his work, Rodrik eaten up again by persistently high inflation rates
has shown that undervalued real exchange rates are of 35.1, 36.3 and 37.4 percent in 2012, 2013, and
associated with higher output growth. Since the origi- 2014, respectively.
nal work does not include export growth this report The historical overvaluation is consistent
will slightly modify Rodrik’s approach to measure with the gaps observed between official nominal
RER misalignment and will present evidence about exchange rates and black market exchange rates
the relationship between undervaluation and export (Figure 2.5.2). If one was to consider the black
growth. Annex 4 provides the details on how the market exchange rate as a de facto market-driven
study measures the RER misalignment index. The key equilibrium value of the nominal exchange rate,
is to establish the RER misalignment index through the official nominal exchange rate was overvalued
controlling for the Balassa-Samuelson effect. Balassa- to the tune of 50 to 70 percent in 2010 and 2011.
Samuelson captures the effect of an economy’s Given data constraints, there is no measure of RER
productivity on its non-tradable goods’ prices. The Misalignment for Sudan after 2011. However, based
empirical results show that the Balassa-Samuelson on the gap between the official and the black market
effect is highly significant with a negative sign. rates, and given the historical relationship between
There are other approaches to calculating the two that reflects the RER Misalignment Index,
RERs and to determine any undervaluation. it is likely that the extent of RER overvaluation
Currently, the most popular one is to regress a remained at a similar level for 2012 and 2014. Such
country’s real exchange rate against a large set of the an overvaluation pattern identified through the mis-
country’s fundamentals to establish a real exchange alignment index is consistent with other estimates.
rate norm.30 The gap between a country’s actual For instance, the IMF Article IV in 2014 estimated
real exchange rate and its norm (i.e. the residual in that the Sudan real exchange rate was about 40 per-
the regression) is considered the “misaligned” part. cent overvalued in 2014 (IMF 2014c).
The most well-known research using this approach Sudan’s RER overvaluation is somewhat
is from the IMF (Lee et al. 2006), which forms the consistent with the experience of other African
basis for the IMF’s work on assessing countries’ RER
misalignment in its Article IV papers. This report
does not rely on the methodology given the com- 30
In the “kitchen sink” approach, researchers throw believed-to-be
plexity of the approach and the difficulty to identify fundamental variables to the right hand side of the regression—often
without a clear theoretical rationale to why they are fundamental—and
“fundamentals.” Instead, Rodrik’s amended meth- hope to find some significance. There are two problems with this.
odology is found to be more intuitive. First, there may be neglected fundamentals that also affect the real
exchange rate, but are not included. Negligence may come from the
Sudan’s RER has been greatly overvalued fact that it is virtually impossible to come up with an exhaustive list
over most of the past 40 years. From 1970 to of factors affecting productivity and consumption and savings deci-
sions. Second, variables considered “fundamentals” might actually
the present, there were only two years when the contain elements that distort the real exchange rate. For example,
RER was undervalued (Figure 2.5.1). For the rest government consumption is considered a “fundamental.” However,
government consumption could be directly affected by an incentive
of years, the RER is greatly overvalued, as much as to lower the real exchange rate. Eden and Nguyen (2012) offer more
65 percent in 2008. In 2010 and 2011 the over- detailed criticism of the current approaches.
31
The data underlying the RER Misalignment Index—Penn World
valuation lessened to 50 percent and 40 percent, Table 8.0—does not have RER data for 2012 and 2013 at the time
still very significant numbers.31 The overvaluation of this analysis.
Structural change and the role of the real exchange rate for exports and growth 57
FIGURE 2.5: Sudan’s RER Misalignment in Perspective of other African Oil Exporting Countries
1) Sudan‘s RER misalignment 2) Sudan's Official and Market Exchange Rate (SDG/US$)
0.2 10
0.1
0 8
–0.1
–0.2 6
–0.3
–0.4 4
–0.5
–0.6 2
–0.7
–0.8 0
1970 1976 1982 1988 1994 2000 2006
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Misalignment Official Exchange Rate Market Exchange Rate
3) Nigeria 4) Angola
1.5 1.0
1.2 0.8
0.9
0.6 0.6
0.3 0.4
0 0.2
–0.3 0
–0.6
–0.9 –0.2
–1.2 –0.4
–1.5 –0.6
–1.8
–2.1 –0.8
–2.4 –1.0
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 1970 1975 1980 1985 1990 1995 2000 2005 2010
Misalignment Export growth
5) Congo 6) Gabon
0.8 1.0
0.6 0.8
0.4 0.6
0.2 0.4
0
0.2
–0.2
0
–0.4
–0.6 –0.2
–0.8 –0.4
–1.0 –0.6
–1.2 –0.8
1962
1966
1970
1974
1978
1987
1982
1986
1990
1994
1998
2002
2006
2010
1962
1966
1970
1974
1978
1987
1982
1986
1990
1994
1998
2002
2006
2010
Misalignment Export growth
Source: World Bank staff own calculations, based on data from PENN World Tables; CBOS; and World Bank World Development Indicators (WDI).
Note: Undervaluation zone is above 0.
oil exporters. Figures 2.5.3 to 2.5.6 show that observed in Sudan. The range is from 30 percent
the magnitudes of overvaluation in other African in Nigeria to 90 percent in Congo. Overall, this is a
oil exporters are somewhat similar to the levels clear evidence of Dutch disease symptoms among
58 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
African oil exporters. But Sudan is not a huge crude enough and its firms already operate at the tech-
oil exporter anymore, and its RER management nological frontier, an undervalued RER might not
needs to be compared to other, more diversified matter anymore for the country’s export. Rather, at
economies. the frontier the country’s firms need to rely on bet-
Comparing Sudan to more diversified econ- ter technology and innovation.
omies, the RER overvaluation is in contrast On average, across all countries and the
to Asian experiences, but in line with Latin full time period considered (1950–2011), for
American experiences. Sudan’s overvaluation each additional 10 percent RER undervaluation
experience is in stark contrast to the experiences a country’s export growth will rise by 0.6 per-
in Asian countries. Figures 2.6.2, 2.6.3 and 2.6.4 centage points per year. Among high-income
show China, India, and Korea. All of them had countries between 1950 and 1980, an additional
undervalued exchange rates during their catching- 10 percent undervaluation boosted export growth
up periods: China between 1981 and 2009, India by 1.26 percentage points. Among low-income
since 1999 until the present, and South Korea dur- countries between 1981 and 2011, that figure is
ing much of the 1960s and 70s. With regard to RER 0.7 percent. A similar exercise for countries’ real
undervaluation, Sudan’s neighbor Egypt followed output growth shows a significant positive impact
the Asian experience (Figure 2.6.1). On the other of an undervalued exchanged rate on real output
hand, Latin American countries adopted a rather growth. The positive impact holds for both high-
different strategy, where RERs were overvalued income and low-income countries: on average
during most of the past decades (see Figures 2.6.5 across all countries and all time, if a country’s RER
and 2.6.6 for Argentina and Brazil). is 10 percent undervalued its real output growth
A regression analysis more definitely con- goes up by 0.88 percentage points per year.
firms the graphical observations of the under- In the case of Sudan, each additional 10 per-
valuation index and export growth plotted in cent RER undervaluation is associated with
Figures 2.5 and 2.6. Annex 4 provides details higher output growth of 0.9 percentage points
about the regression and its results, which are very and a positive relationship is expected also for
intuitive. Overall, undervaluation is associated with undervaluation and export growth. A positive
higher export growth; this phenomenon is true relationship between RER undervaluation and
for both high-income and low-income countries export growth is likely and at least in the order of
(defined as having an annual GDP per capita below 0.7 percentage points as witnessed by the cross-
$6,000 in 2000). Interestingly, the coefficients are country analysis above. But in the case of Sudan’s
significant for high-income countries in the earlier RER Misalignment Index, due to the small sample
decades (1950–1980) and for low-income countries size used for the analysis that is carried out with
in the latter decades (1981–2011). This implies that Sudanese data, no significant relationship between
countries need to be at a certain level of income the two is found (Table 2.7).
to be able to take advantage of the undervalued In turn, RER overvaluation is an important
RER strategy. This is likely to be when a country inhibiting factor for Sudan’s export sector, since
is at the stage of exporting relatively simple, light its non-natural resource and agriculture exports
manufacturing products. In turn, this means that comprise mainly of low-value, often raw and
if a country’s economy is dominated by agriculture unprocessed products, that compete primarily
production and/or only exports commodities, an on prices. In theory, the overvalued real exchange
undervalued RER may not help the exporting firms. rate hurts exports because Sudanese products are
On the other hand, when a country is already rich less competitively priced than identical products
Structural change and the role of the real exchange rate for exports and growth 59
FIGURE 2.6: Undervaluation and Export Growth, Selected Countries
1) Egypt 2) China
0.9 0.6
0.6 0.4
0.3
0.2
0
–0.3 0
–0.6 –0.2
–0.9
–0.4
–1.2
–1.5 –0.6
–1.8 –0.8
1962
1966
1970
1974
1978
1987
1982
1986
1990
1994
1998
2002
2006
2010
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
Misalignment Export growth
3) India 4) Republic of Korea
0.3 0.8
0.2 0.6
0.1 0.4
0 0.2
–0.1
0
–0.2
–0.2
–0.3
–0.4 –0.4
–0.5 –0.6
–0.6 –0.8
–0.7 –1.0
1951
1955
1959
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
Misalignment Export growth
5) Argentina 6) Brazil
1.0 0.6
0.4
0.5 0.2
0
0
–0.2
–0.4
–0.5
–0.6
–1.0 –0.8
–1.0
–1.5 –1.2
1951
1955
1959
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
1951
1955
1959
1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
Misalignment Export growth
Source: World Bank staff own calculations, based on data from PENN World Tables.
Note: Undervaluation zone is above 0.
from other countries, all else being equal. In prac- straightforward. The latter can appreciate as a result
tice, the relationship between competitiveness of an improvement in competitiveness when there
and movements in the real exchange rate is not are gains in productivity of tradable goods relative to
60 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Table 2.7: Effects of Undervalued RERs on Export and Output Growth Sudanese Data
ΔIn (real exports) ΔIn (real exports ex-oil) ΔIn (real GDP)
(1) (2) (3)
In (Initial Real Exports) 0.014
(0.040)
In (Initial Real Exports ex-Oil) –0.27433
(0.201)
In (Initial Real GDP per capita) 0.032
(0.044)
Undervaluation 0.367 –0.673 0.0954**
(0.315) (0.619) (0.045)
Constant 0.067 5.536 –0.175
(0.310) (4.109) (0.316)
R-squared 0.05 0.13 0.06
Adjusted R-squared 0.0 0.05 0.02
S.E. of regression 0.320 0.553 0.07
Note: Newey-West HAC Standard Errors in parenthesis.
*** p<0.01, ** p<0.05, * p<0.1.
that of non-tradable goods. Competitiveness is lost countries are not optimal. If every country deval-
when there is a misalignment from the equilibrium ues to take advantage of the lower RER, countries
RER. In particular, the agricultural commodities that might undercut each other’s export (i.e., a race to
are primarily behind Sudanese non-natural resource the bottom), and the end result might be that no
exports tend to be affected by real appreciation exporting country will benefit from their exchange
because import content in these sectors is generally rate devaluations. In other words, from the point
lower than in manufacturing. of view of a specific country such as Sudan, main-
Potential changes in the exchange rate would taining an undervalued exchange rate is beneficial
need to be considered in the context of the for its export and growth. However from the point
overall macroeconomic policy mix, which may of view of the developing world as a whole, com-
also need adjustment. There are macro-economic petitive devaluation (recently dubbed as currency
trade-offs to consider. Nominal currency deprecia- wars) from many developing countries may not be
tion increases import prices and thus contributes optimal. An international exchange rate coordina-
to inflation, especially if imported food inflation is tion system could play a role in this regard, but this
already a problem as it is in Sudan. There are also is beyond the scope of this paper. In the long run
balance sheet effects through a rise in external pub- what really matters is that exports strive for produc-
lic debt when expressed in local currency. Some of tivity and product quality.
these trade-offs can be addressed by adjusting other But how to change the RER? In a situation
policies. A tighter monetary and/or fiscal policy can where the RER is off the equilibrium rate and
help contain the inflationary impact, for instance, there is a gap between the official nominal
which is needed more than ever with core inflation exchange rate and the black market rate, nominal
at its historic high in 2014 (Figure 2.6.1). devaluation can lead to RER devaluation. Sudan
The analysis is silent on the equilibrium is off the equilibrium rate since its official nominal
effect and notes that, from an international per- exchange rate is below the black market rate and
spective, competitive devaluations from many the Misalignment Index showed an overvaluation
Structural change and the role of the real exchange rate for exports and growth 61
of the RER over the past. In this situation a devalu- In Sudan, in the short term it is important
ation of the nominal exchange rate to bring about to bring the official exchange rate back to closer
RER devaluation is likely indicated. to the black market exchange rate. The authori-
When a country’s exchange rate is in equi- ties had only limited success thus far, even though
librium, depreciating the RER is more challeng- two large nominal depreciations brought about a
ing. In such a situation, changes to the nominal nominal depreciation of about 100 percent in 2012
exchange rate will potentially create disequilibrium and 2013. In December 2014 the gap between the
transitional problems, and then nominal changes two rates was just below 30 percent. So the case
are not effective in the long run. So in this case, for further devaluating the currency is convincing,
any devaluation strategy would need to focus on based on the black market exchange rate data and
factors that affect real fundamentals. The follow- the RER Misalignment Index.
ing examples show some potential channels that There are two approaches toward large deval-
affect the RER: uations: big bang vs. gradual. The first approach
is to do a one-off devaluation. However, a problem
Reduce import restrictions: Reducing import of a large sudden devaluation is that it will bring
restrictions (tariff for example) would increase about economic disruptions, for instance to trade
spending on import and therefore reduce the and debt services, and inflation. And in a way Sudan
demand on domestically produced goods. This already tried the approach twice in 2012 and 2013,
would help lower wages. Export would be more with limited success thus far. The second approach
competitive due to lower imported input and is to devalue gradually and credibly (see for instance
lower wages. In fact, Sudan suffers from high Sutela, 2010). The upside to this approach is that
tariff and non-tariff barriers as shown in the the economy will only have to deal with incremen-
2014 Update to the Diagnostic Trade Integration tal changes. The downside is that the depreciation
Study (DTIS). Sudan’s simple average tariff and expectations would put pressure on the central bank
trade weighted tariff rates of 20 and 22 per- to devalue earlier than planned. For this reason,
cent, respectively, are among the highest in the credibility is key. Given the ever-changing black
world and are substantially higher than most market rate and the earlier attempts in 2012 and
countries in Africa and the Middle East (World 2013, gradual but ongoing devaluation may be the
Bank, 2014e). approach of choice for Sudan.
Increase domestic savings: a reduction in domes- In the medium to long term, and after the
tic demand would lower both the RER and the official and market exchange rates have been
price of export. The reasoning is as follows: successfully unified, the question arises for what
reduced domestic demand would lower the exchange rate regime may serve the country
prices of both the domestic non-tradable and best. The choices are between pegged and flex-
tradable goods. This implies that wages are ible exchange rates, and a case could be made for
lower and the domestic tradable goods become the former for the following reasons: (1) A pegged
relatively cheaper compared to the foreign trad- exchange rate provides stability that is needed for
able goods, which implies cheaper exports. the export sector. This is especially important if the
Reducing domestic demand also enables the country would like to promote exports. (2) A peg
government to spare the scare resources for provides an inflation anchor. Developing coun-
importing foreign technology and know-how. tries with low technical and institutional capability
Sudan’s savings rate is rather low as was shown often choose to peg their exchange rate as a way to
in the preceding section 2.C. anchor inflation expectation. Sudan may not be an
62 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
exception to this. (3) A slightly undervalued, rather A major driver of the upsurge in inflation
fixed exchange rate, will help the government to since 2011 was the approach to monetize the
accumulate foreign reserves to bolster the exchange budget deficit by the Central Bank of Sudan
rate regime and protect against economic volatility. through granting direct loans to the government.
Finally, a crawling peg arrangement may This resulted in rapid monetary expansion that
be the preferred choice for a pegged exchange triggered the growth of prices. Another significant
rate regime as it combines the advantages of a measure that contributed to the upsurge in inflation
peg but can also avoid real appreciation. A hard since June 2012 was the adoption of a reform pack-
peg (i.e. fixed exchange rate) runs the risk of real age that resulted in steep devaluation of the official
appreciation if the domestic inflation is high. When nominal exchange rate, an increase in taxes, and a
the nominal exchange rate is fixed, an increasing gradual elimination of fuel subsidies. All of these
domestic price level means that the dollar price of measures resulted in prices increases, especially the
the domestic goods is more expensive compared announced elimination of subsidies of petroleum
to the foreign goods, an RER appreciation. With a products. The latter affected the expectations for the
crawling peg, the nominal exchange rate is allowed economic agents about higher prices for petroleum
to gradually devalue if domestic inflation is high. products in near future that had spillover effects on
Since Sudan’s inflation is rather high in the post- other prices in the economy.
secession world, a crawling peg may be the preferred The structural components of the CPI show
arrangement. that since 2011, inflation in Sudan was driven by
food prices and services such as prices of trans-
C. Volatile and High Inflation: Important port, recreation and culture, and health services.
determinant of the Real Exchange What is most striking in Sudan is that core inflation
Rate follows closely the movement of overall inflation;
this is more pronounced since 2010. The rise in
Inflation in Sudan has a history of high rates and core inflation actually suggests that price pressures
increased volatility for decades. Since the advent are persistent, requiring strong, long lasting, and
of oil, the average annual inflation in Sudan has credible policy actions for reducing the core infla-
been around or above 10 percent with the exception tion because it is tied with inflationary expectations
of the 2003 to 2006 period. The persistently high of the economic agents in the country.
inflation was also accompanied by high volatility. The monetization policy by the Central Bank
As one of the key symptoms of the 2011 secession of Sudan32 resulted in a substantial increase in
shock the Sudanese inflation rate has significantly the volume of money in the economy (an upsurge
increased since 2011, and has been beyond 30 per- of the currency in circulation). The significant
cent since 2012 (annual CPI rate, period average). upsurge affected the broad money aggregate (M2),
(Figure 2.7.1). Analyzed with monthly frequency, which increased by 40 percent in 2012 compared
inflation was even higher over certain periods to 17.7 percent in the previous year (Figure 2.7.2).
(exceeding 40 percent) such as in the second half An additional contribution for the sharp rise of the
of 2012 and the first quarter of 2013 when inflation broad money was that the nominal value of foreign
reached a monthly peak of 47.9 percent in March
2013, after which the price level growth started to 32
The monetization of the budget deficit was done mostly through
decelerate. There was another peak of inflation with long-term loans to the government whose nominal value more than
doubled for the period December 2011–December 2013 and tempo-
46.8 percent in July 2014, which relaxed to 25.7 rary advances to the government whose nominal value tripled during
percent in December 2014. the same period.
Structural change and the role of the real exchange rate for exports and growth 63
currency deposits more than doubled for a period Structure of the Financial Sector
Table 2.8:
of one year from 2011 to 2012. Consequently, the in Sudan
share of the foreign currency deposits in M2 aggre- Number of Percent of
gate also rose from 12 percent in 2011 to 19.1 per- institutions total assets
cent in 2012. The significant increase of the foreign Banks
currency deposits in Sudan is a result of a loss of Government-owned 4 13%
confidence in the Sudanese currency that was trig- Joint venture 25 77%
gered by the unstable macroeconomic environment Foreign-owned 6 8%
such as high inflation, unstable nominal exchange Insurers n/a 1%
rate and non-credible central bank authorities. Source: IMF 2013.
Note: Does not include the small finance houses that operate.
The level of broad money in the economy,
measured as share of GDP, is low in Sudan.
Broad money was only 21.0 percent of GDP in 2013, by the Central Bank of Sudan (CBOS)/government
compared to 48 percent on average for low-income and the private sector, and six foreign-owned banks.
countries, and the share of currency in broad money Ninety percent of banking system assets are those of
is high (Figure 2.7.3). This indicates that Sudan is a banks owned fully or jointly by the CBOS/govern-
low monetized economy that relies more on tradi- ment. The dominance of state-owned banks presents
tional real currency transactions compared to other apparent conflicts of interest with the supervisory
countries with more modern financial systems. role by the CBOS.
Solid but volatile credit growth to the private Sudan’s banking system is characterized by a
sector in the past decade resulted in the continual lack of financial instruments and excess liquid-
increase of credit-to-GDP-ratio, but financial inter- ity. The Islamic principle does not allow short-
mediation remains low. The credit-to-GDP-ratio term liquidity products, resulting in the absence
increased by 11.9 percentage points as share of GDP of an active interbank market. The absence of an
from 2000 to 2006 and since then it has remained interbank market, as well as a cap on commercial
stable around that level. However, looking at growth bank holding of government and central bank
rates of private sector credit, one can see large vola- securities, have led to persistent excess reserves
tility. At times credit growth to the private sector is (Figure 2.7.7) and budget financing by the Central
high (in nominal terms), which is both a symptom Bank of Sudan (CBOS).33
of high inflation rates and also a reinforcing factor Although still weaker than its SSA peers,
(Figure 2.7.4). Growth of credit to the private sector Sudan’s banking system showed a sign of
reached its maximum of 12.8 percent in 2012 and improvement in 2013. The capital adequacy ratio
went down to 10.5 percent in 2013 (Figure 2.7.5). increased to 16.6 percent in December 2013, above
However, despite the growth of private sector credits the required adequacy ratio of 12 percent (Figures
the level of financial intermediation in Sudan is still 2.7.8 and 2.7.9). The ratio of liquid assets to total
very low (Figure 2.7.6). This suggests that there is assets increased to 39.5 percent. Bank profitabil-
significant space for future development of the finan- ity, measured by return on assets and equity, has
cial sector as one of the key ingredients for growth. gradually recovered since the lows reached in 2008,
Sudan’s banking sector is based on Islamic although it is still well below the inflation rate.
finance principles, and is currently composed
of 35 banks (Table 2.8). As of 2013, the sector
33
Banks can only invest up to 20 percent of their investable funds in
consisted of four government-owned banks, twenty government securities, short-term murabaha investments, and central
five domestic mixed-ownership banks jointly owned bank certificates.
64 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 2.7: Inflation, Monetary and Financial Sector Developments
1) Average annual inflation in Sudan, 1999–2014
50% 40%
40% 30%
30% 20%
20% 10%
10% 0%
0% –10%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Overall inflation Food inflation Core inflation Non-tradables/Tradables Tradables Non-tradables
2) Broad money, base money, and money multiplier 3) Broad money in Sudan and selected countries, 2013
50% 2.5 90
80
40% 2.0
70
Percent of GDP
30% 1.5 60
50
20% 1.0
40
10% 0.5 30
20
0% 0
10
–10% –0.5 0
2008 2009 2010 2011 2012 2013
Egypt
Kenya
Botswana
Malawi
Nigeria
Tanzania
Ghana
Ethiopia
Zambia
Uganda
Sudan
Money multiplier (right axis) Base money (left axis)
Broad money (left axis)
4) Annual credit growth to private sector 5) Private sector credit to GDP in Sudan, 2001–2013
40% 14
12
30% 10
Percent of GDP
8
20%
6
10% 4
2
0% 0
2008 2009 2010 2011 2012 2013
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: World Bank staff own calculations, based on data from CBOS 2014; IMF 2012; IMF 2013; IMF 2014a; IMF 2014b; IMF 2014c; and World Bank
World Development Indicators (WDI).
(continued on next page)
Nonperforming loans continued to fall to 8.4 per- percent in 2012 to 53.6 percent in 2013 (Figures
cent in December 2013 from 11.8 percent in 2012, 2.7.10 and Figures 2.7.11). Annex 5 contains a full
leading to provision ratio increasing from 33.5 set of financial soundness indicators.
Structural change and the role of the real exchange rate for exports and growth 65
FIGURE 2.7: Inflation, Monetary and Financial Sector Developments (continued)
6) Private sector credit to GDP selected countries, 2013 7) Reserve ratios in Sudan, 2008–2013
35
Congo, D.R.
30
Chad 25
Percent of GDP
Sudan 20
15
Uganda
10
Egypt
5
Kenya 0
2008 2009 2010 2011 2012 2013
0 10 20 30 40 50
Required reserve to deposit ratio
Percent of GDP Excess reserves to deposit ratio
8) Capital adequacy ratio in Sudan 9) Capital adequacy ratios, selected countries, 2013
25 Seychelles
Rwanda
20 Zambia
Swaziland
Required ratio Kenya
15 Burundi
Percent
Nigeria
Tanzania
10 Mauritius
South Africa
Namibia
5 Congo, Rep. of
Sudan
0 Cameroon
2006 2007 2008 2009 2010 2011 2012 2013 0 5 10 15 20 25 30
Percent
10) Non-performing loans in Sudan 11) Non-performing loans, selected countries, 2013
30 Cameroon
Sudan
25 Swaziland
Seychelles
Percent of gross loans
20 Burundi
Zambia
15 Tanzania
Rwanda
Kenya
10 South Africa
Mauritius
5 Nigeria
Congo, Rep. of
0 Namibia
2006 2007 2008 2009 2010 2011 2012 2013 0 2 4 6 8 10 12 14
Provisioned Unprovisioned Percent
Source: World Bank staff own calculations, based on data from IMF 2012; IMF 2013; IMF 2014a; IMF 2014b; IMF 2014c; and World Bank World Develop-
ment Indicators (WDI).
AGRICULTURE AND LIVESTOCK:
KEY FOR ECONOMIC DIVERSIFICATION
3
Rising agriculture trade since 2008 is the visible testament to a starting recovery in Sudan’s agriculture
economy, albeit from a low level. The rising trend is also only driven by a small number of products, most
notably livestock, gum arabic, and cotton. Livestock may be the most remarkable of these with a remark-
able recovery after virtually no exports in 2008 due to an imposed export ban and quarantine measures,
which grew to a multi-million business and earned more than US$670 million in 2013. The backbone of
this success is pastoral livestock production, which is superior to any other form in Sudan. But pastoral-
ism is under pressure due to uncertain land tenure and land rights that effectively diminish the historical
grazing grounds of pastoral farmers.
Gum arabic and cotton have shown a remarkable recovery. In each case the Government had instituted
monopolized marketing structures in the past (monopsonies) in the form of parastatal companies. As is
often the case with such companies, paying farmers less and less for their products (independent of the
world price) seems an easy path to profitability, until the farmers stop harvesting or even planting their
crops. That this happened can be seen in low yields in both gum arabic and cotton, but also many other
agriculture products. As the monopsonies were eventually relaxed and competition provided, prices
received by farmers increased substantially, and with them so did areas cropped and especially yields.
Cotton yields tripled nation nationwide in one year (2010/11), and in three years increased by five and
a half times—with no improvements in irrigation or varieties. Such remarkable increases in agricultural
yields show that poor agriculture performance is not only a product of low fertilizer usage, weak variet-
ies due to often-local breeds of seeds, but also, and possibly most importantly a lack of incentives for
the producers.
There is no comparative advantage for wheat production in Sudan, which needs more seasonality
than most of Sudan provides. This is why Sudan’s average yield is half of Chad’s, one quarter that of
Ethiopia, and 1/14 that of Egypt. Sugarcane is somewhat different, in that areas of Sudan have achieved
good yields in international terms. But sugarcane is the second highest water-consuming field crop in
the world, after rice. Meanwhile, Sudan’s irrigation schemes are deteriorating rapidly, and the largest,
Gezira, is almost to the point of collapse in terms of delivering water. Sudanese farmers know this, and
they have turned against sugar as decisively as they have turned against wheat. As for government sup-
port of wheat production, this study follows World Bank (2015b) in its recommendation to first shift the
focus of subsidies to domestically produced wheat and then, second, to gradually reduce the extent of
subsidies on domestic production.
(continued on next page)
68 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Some critical public goods must be provided by public investment. Two such encountered by the study
team are the rehabilitation of the Gezira Scheme, and establishment of a system of regional grain stores.
The Gezira Scheme, the centerpiece of Sudan’s crop agriculture for the past 90 years, is now approaching
total collapse in terms of water delivery, though long ago its drainage systems became hopelessly clogged.
Sudan’s President has declared the Scheme a failure in 2014. Yet the natural advantages which led to its
construction and expansion still exist: slopes permitting gravity irrigation, decent soils, good climate, and
now a knowledgeable workforce from among the three million residents of the area. A thorough yet quick
feasibility study would be needed to determine if rehabilitation of the scheme is economically beneficial
and what needs to be done differently to again make it a success.
Food security in the modern world has more to do with efficient storage capacity than with attempted
self-sufficiency in production, whether of wheat or anything else. As Sudan produces very little wheat and
imports most of its needs, there is considerable modern storage capacity on the Red Sea around Port
Sudan, both to buffer incoming shipments and as a working reserve for flour mills. These represent around
two months of wheat consumption—not a comfortable reserve but tolerable with good management of
procurement and the silos themselves. Aside from traditional peasant reserves of the sorghum and mil-
let they produce (mainly in the west), there are only 20 days of those two commodities in government
stores, and this is probably inadequate, especially given that the consumers of these grains are far from
the port. In event of crop failure, a serious humanitarian emergency may arise. Thus the study proposes
an innovative approach to a series of modern silos.
A. Overview is, in principle, suitable for agricultural production.
Reliable statistics about how much of the arable land
Agriculture is a key sector of the Sudanese is currently used are not available, but staff esti-
economy contributing about one-third to mates are that about 30 percent of that area is under
GDP and value added creation every year (see exploitation.35 Approximately 52 million feddan
Figure 2.18). Agriculture provides a livelihood to are forestland and 118 million feddan rangeland.
about 65 percent of total population, employment This section will show that the agricultural sector in
to about 35 percent of the labor force in the coun- Sudan operates below its true productive potential,
try, 50 percent in rural areas (NBHS 2009), and is even though a great potential for further develop-
responsible for the supply of basic staple foods and ment exists through vertical (productivity) and
animal products, in addition to the supply of raw horizontal (land area) expansion. Agriculture in
material to the food industry. Agricultural exports Sudan is paramount for sustained future national
are returning to prominence as ab important source economic growth, poverty reduction, food security,
of foreign exchange earnings after the decline of oil and foreign exchange earnings. At present, Sudan’s
exports. Their share rose from 8 percent in 2011 to
about 23 percent of total export earnings in 2012,
with livestock alone reaching 19 percent. 34
1 hectare = 2.4 feddan
35
This does not mean that the other 70 percent of the 134 million
About one-third of Sudan’s area is suitable feddan of land are readily arable land that is basically wasted. In fact,
for agriculture production. The total land area of anecdotal evidence points to the facts that there is often significant soil
degradation, that semi-mechanized farming has displaced pastoralism,
Sudan after secession of South Sudan is estimated at and then when soils are exhausted, the area cannot be used either for
446.4 million feddan34 of which 134 million feddan further crops or for grazing.
Agriculture and livestock: key for economic diversification 69
main agricultural products are sorghum, cotton, the year. Aside from being suited to Sudan’s resource
groundnuts, sesame, millet, wheat, sugar cane, gum base, this mode of production is attractive to Sudan’s
arabic, and livestock, particularly live sheep and major importer, Saudi Arabia, as reminiscent of how
camels, and hides and skins. meat used to be produced there.
There are three main agriculture sub-sectors The major problem of pastoralism today,
active in Sudan: pastoral livestock, cropping, and which has been building for decades, is the loss
fish production.36 Figure 3.1.1 shows the aver- of rangeland to mechanized dryland and irri-
age share of these agriculture sub-sectors in GDP gated farming. A study in Gedaref State (Babikir
between 2006 and 2009.37 Animal husbandry and 2011) reported that grazing lands reduced from
cropping are similar in relative importance, both 78.5 percent of the State’s total area in 1941
with shares just below 50 percent of GDP (Animal (28,250 km2), to 18.6 percent in 2002 (6,700 km2).
husbandry: 46.9 percent; cropping: 46.4 percent). Meanwhile the mechanized farming sector in the
This is followed at a long distance by forestry/fish- State increased by 725 percent in the same period:
ery, which accounts for 6.3 percent of GDP. In terms from 3,150 km2 in 1941 to 26,000 km2 in 2002. In
of employment, cropping accounts for 25.9 percent other areas, center pivot irrigated farming is used.
of total employment, followed by animal husbandry The old tradition of allowing herds to graze crop
with 6 percent and forest/fishery with 2.4 percent residues, while they simultaneously fertilize the
(NBHS 2009). land, is now increasingly forgotten. Instead, farm-
ers sell their residues for cash and clashes between
Pastoral livestock production pastoralists and farmers are now much more com-
mon than ever before. Box 3.1 provides for a short
The pastoral livestock system has evolved in accor- analysis of land policies and land tenure.
dance with Sudan’s harsh climate. Sudan’s climate
makes movement of herds a necessity to optimize Cropping
volatile and adverse weather conditions. In addition,
pastoral livestock has a relatively higher economic Cropping in Sudan is just short of livestock’s
potential than any other form of livestock production importance in GDP, but employs more people.
in this climate. Much more, it shows good prospects It is generally broken down into three main sys-
for resilience in response to climate change, largely tems, differentiated by the ways rain and irrigation
due to real-time, informed decision-making by a large are used in the sector: 1) the irrigated system; 2) a
corps of herders who move herds around the country traditional rain-fed approach; and 3) a mechanized
in response to real-time weather (mainly precipita- rain-fed one. Figure 3.1.2 shows the relative impor-
tion) conditions and resulting available forage. tance of the three different systems, where the irri-
Sudan’s livestock sector is fairly unique in the gated one is by far the most important one, and the
world, but perhaps comparable to Mongolia’s. It mechanized rain-fed is almost insignificant.
is not a sector based on feed brought to animals in The traditional rain-fed sector occupies the
sedentary settings, but rather one where seasonality majority of farmland in Sudan and employs
demands movement of the herds to places where about two-thirds of the agriculture population
rain is present, and with it grass and other vegeta-
tion. Feed is used in feedlots, at markets and transit 36
Fish production is of small scale and is almost totally focused on
depots, where grazing is an impossibility. Even sed- local markets. Important fishing sites in Sudan are either suffering
from overfishing (e.g., Jebal Awlia Reservoir) or nearly unexploited
entary producers must have members of the family (e.g., Lake Nuba and Red Sea).
or trusted hands move the flocks at various times of 37
Later data is not available.
70 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
BOX 3.1: Land Tenure and Land Policy
Competition over land and natural resources has long been a source of tension among pastoralists and between pastoralists
and farmers in Sudan. The expanding investments in mechanized farming, oil industry-related development, and other land-based
investments under conditions of the rapid transition to market economy, along with the increasing tendency towards climatic change,
and large-scale environmental degradation have become new sources of tensions through appropriation of customary land rights,
creation of landless rural groups, and blocking of stock routes.
Scarcity of resources has also contributed to the increase in intra-community competition and conflict over land and natural
resources. The social landscape of present-day Sudan is littered with land-related and resource-based conflicts that have become a
major cause of poverty, food insecurity, population instability, and a general rupture of the rural economy. Land issues are also widely
regarded as being at the heart of conflicts in Eastern Sudan, Nuba Mountains, Blue Nile, and Darfur. Of the six recognized and agreed
upon “root causes” of the war in Darfur mentioned in the 2011 peace accord between the government and one set of the Darfur rebel
factions, three deal explicitly with land rights issues.
Land tenure in Sudan is either traditional (historically derived tribal territorial rights initially constituted during the successive
indigenous kingdoms of pre-colonial Sudan) or modern under which land is registered. Young et al. (2013) argue: “Aspects of the
traditional model remain in place and continue to function, although there is a consensus in the literature that the Native Administration
has been weakened, in part because of the development of a local civil government framework and administration, which was first
introduced in 1932.”
Since independence of Sudan in 1956 a whole series of legislative changes were introduced that affected the authority and
responsibilities of the tribal administration. The most pertinent elements of those reforms include: (1) De facto abolition of customary
land use rights: This was the outcome of the shift to a property regime in 1971 with the Unregistered Land Act, which placed all
unregistered land as “property of the government.” (2) Strengthening of subnational government: The 1971 Local Government Act
started the process of a shift in power to state authorities, which replaced the Native Administration and abolished the jurisdiction and
administrative authority of the tribal leaders. The Native Administration was revived with the Native Administration Bill in 1987 (but
with a more limited role) and strengthened further with the 1998 Local Government Act. (3) Further shift in authority from customary
land use rights to authorizations by the state: The Civil Transaction Act of 1984 allowed the state authorities to impose restrictions on
grazing as to time and place, and also allocate land for grazing.
Still, the tribal administration maintains a strong presence throughout the Darfur and Kordofan regions. It particularly maintains
its role and importance as the principal local-level governance mechanism, connected through a hierarchical leadership structure
which interfaces with systems of state-level government at all levels; hence the tribal leadership continues to wield considerable
power and influence.
The legal framework for land tenure is perhaps the most complex natural resource legislation and governance in Sudan. The 1971
Unregistered Land Act, a de facto nationalization by the state, denies any formal legitimacy or juridical status to customary property
rights. In effect, this implies the cancellation of all rights relating to land, water, and grazing as well as the suppression of any future
income related to such rights (Egemi 2006). The Act was implemented indiscriminately over all the rain-fed agricultural lands of the
country, even in places that had no previous system of land registration such as Darfur, Kordofan, and the East. The 1984 Act legalizes
elements of Sharia (Islamic) Law while confirming the role of the state as landowner and manager. According to the Act “No court of
law is competent to receive a complaint that goes against the interest of the state.”
in the country. Traditional rain-fed agriculture is fed crop residues in the field. Farmers involved in
mostly subsistence farming, which occupies more this sub-sector usually have Acacia Senegal for gum
than 60 percent of the total cultivated land (about arabic production in their fields.
22 million feddan) and employs about 65 percent Traditional rain-fed methods are primarily
of the agricultural population. Private small-scale utilized in the Western areas of Sudan (Kordofan
farms dominate the sector with access to consider- and Darfur states) as well as White and Blue Nile
able communal grazing areas that support extensive states. Primary crops are sorghum, sesame, millet,
livestock production. Crop residues are used as ani- and pasture species. The sector is characterized by
mal feed, and the animals are taken to grazing areas low crop productivity, in particular due to one of
when the land is cropped. Farming methods include the lowest usage rates of chemical fertilizers in the
animal traction, and use of animal manure for the world: The overall average fertilizer usage for Sudan
fields through animals grazing stubble and being is half of Ethiopia’s, where the peasant community
Agriculture and livestock: key for economic diversification 71
BOX 3.1: Land Tenure and Land Policy (continued)
Other pieces of legislation impacting land governance are the Local Government act (1990), Forest and Renewable Natural
Resources bill (2002), and the Investment Encouragement act (1999) and its amended version of 2007. (1) The Sudan Interim
Constitution 2005 includes provisions that relate directly to land and natural resource management, and stipulates that: The regulation of
land tenure, usage and exercise of rights thereon shall be a concurrent competence, exercised at the appropriate level of government.
(2) All levels of government shall institute a process to progressively develop and amend the relevant laws to incorporate customary
laws, practices, local heritage, and international trends and practices. (3) Persons enjoying rights in land are entitled to equitable
compensation on just terms arising from acquisition or development of land for the extraction of subterranean natural resources.
(4) The communities in whose areas development of subterranean natural resources occurs have the right to participate, through
their respective states, in the negotiation of contracts for the development of those resources; and (5) The entitlement of the states
for raising revenue or collecting taxes from different sources including state land.
Still, the present legal framework for land tenure is not able to overcome the apparent dichotomy between the statutory and
customary rights. Specifically, it is not clear at all whether statutory or customary rights have legal status in terms of who owns, who
controls, and how access to land can be made, remade, legitimated, and contested. As a consequence there is an apparent legislative
gap to sanction the right of entitlement of pastoralists and small farmers to land and natural resources. In its present form and practice
customary law is manifestly discriminative with apparent violation of the rights of large populations who have been for centuries living
within the domains of the existing tribes without recognizable or legitimate rights to land. The migrants in Blue Nile and Gadarif States
and the many Arab camel herders in Darfur provide typical examples. The rights of such groups seem to depend on the generosity
of Native Administration leaders and their will.
Despite the importance of land to women, they are still largely discriminated against in customary and statutory laws in regard
to their land rights. In addition, lack of title to land has denied traditional farmers and pastoralists the right to access public resources,
namely formal credit, creating them as highly disadvantaged and marginalized groups. Women are particularly vulnerable within this
group. Much more, the Investment Encouragement Act of 1990 and its amended version of 2007 do not cover the social dimensions
and conflict sensitivity in relation to land. Finally, the land-related legal framework created during the past century has been rendered
manifestly inadequate by the tremendous changes in the social, political, economic, and cultural circumstances of the country since then.
In sum, the existing land law and land policies have the following drawbacks for agricultural development. First, they limit access to
credit especially for small farmers and women; second, they constrain sustainable and efficient agriculture and pastoral development, with
no incentive for capital and land development, resulting in severe environmental degradation and low yields; third, they deprive a large
number of small traditional farmers from access to their land as a result of government policies of leasing large holdings to investors in
semi-mechanized agriculture, and (most recently) long term leases for foreign investors; and fourth, they create a source of tension and
civil conflict between settled farmers and pastoralists. In turn, there is an urgent need for clear-cut land tenure and policy reforms with
the objectives of providing secured tenure for farmers, reducing civil tensions, and protecting small farmers and foreign investor rights.
While reforms in land tenure would benefit all sub-sectors of agriculture it is important to note that reform in land tenure are
difficult to manage. This study therefore follows the recommendations in World Bank (2015b), which proposes a gradual approach
to reform in this area and to start in a few, easier to reform areas first. This is important since land tenure is a well-known and multi-
dimensional policy issue that is also closely interlinked with conflict. Tensions over land polices are one driver of conflict, and it is very
difficult to solve land issues in the midst of conflict (World Bank 2015b).
is much poorer than in Sudan. This is reflected in for most crops. The pastoralists and small farmers
the low average contribution of this sector to GDP in the traditional sector are the most vulnerable to
of only 14 percent during the 2006 to 2009 period poverty.
(Figure 3.1.1). Still, the per ha yield for crops in this The mechanized rain-fed sector coverings
sector is slightly higher than in mechanized dryland large parts of the former grazing land of Sudan
farming; on the other hand, there is a declining and cover about 14 million feddan. The sector was
trend in productivity due to loss of soil fertility. originally promoted by the former colonial power,
The traditional rain-fed sector receives few support similar to, for instance, groundnut schemes in the
services such as credit, research, and extension. Gambia and Tanzania to supply Great Britain with
Public investments in basic infrastructure for rural oil seeds and grain during the Second World War.
and agricultural development are also negligible. Large-scale semi-mechanized rain-fed farming sys-
The result is low and declining or stagnating yields tems cover an area of about 14 million feddan in the
72 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 3.1: Overview of Agriculture in Sudan
1) Agriculture subsectors in Sudan 2) Three different types of cropping
6.3
14.3
46.4
29.3
46.9
2.8
Cropping Livestock Forestry/Fisheries Irrigated Mechanized rain-fed Traditional rain-fed
4) Percentage of population living in households
3) Main household livelihood by poverty quintile whose main livelihood is agriculture by state
100%
90%
80%
70%
60%
50%
40%
30%
20%
10% Population in
0% agriculture
Poorest Second Third Fourth Wealthiest 1
26
50
Agriculture Wage and salaries Others 74
5) Main household livelihood by urban, rural and nomad
Urban Rural Nomad
Subsistence crop farming Subsistence animal husbandry Wage and salaries Others
Source: World Bank staff own calculations, based on data from Sudan Ministry of Livestock and Fisheries; Sudan Ministry of Finance and National
Economy; Central Bank of Sudan, the Sudan Population and Household Census (2008), and the National Benchmark Household Survey (2009).
states of El Gadaref, Blue Nile, White Nile, Sennar, during the 2006 to 2009 period (Figure 3.1.2). Its
and South Kordofan. Crops such as sorghum, ses- share is declining because of low yields resulting
ame, and recently sunflower are produced in this from levels of input usage. Regular plowing has
farming system. The semi-mechanized farming sys- made the fragile sandy soils in the Savannah belt
tem accounted for only about 2.8 percent of GDP even more prone to wind erosion, and has changed
Agriculture and livestock: key for economic diversification 73
BOX 3.2: Studying the Rehabilitation of the Gezira Scheme
The Gezira Scheme is commonly regarded as the centerpiece of Sudan’s agriculture but it is at the verge of collapse. The Gezira
scheme was once the pride of Sudanese given the enormous size of the irrigation system (900,000 ha), close to both the capital (and
metropolis) of an arid country (Khartoum), and its major port (Port Sudan). With its 90 years of history, three million inhabitants, and
certain natural advantages (much of the scheme could be irrigated by gravity with proper infrastructure maintenance), it is obviously
the heart of Sudan’s agriculture. But over time its natural advantages encouraged many unsustainable shortcuts stretching back to
the colonial days, in areas as diverse as repeated abrogation of landholders’ rights, command cropping plans, exploitation of farmers’
interests, skimping on spending both for routine maintenance (e.g., silt removal), and redesign of works to reduce maintenance needs.
Most of those needs have accumulated in recent years to the point of virtual collapse of the Scheme’s irrigation and drainage functions.
In 2014 the head of Gezira’s Board of Directors resigned, while the President of Sudan has publicly declared the failure of the
scheme. Almost all of the scheme staff, which once numbered 10,000, have been terminated and portable assets sold off. To turnaround
its fortune, and to avoid a major loss to Sudan and its agriculture sector in particular, it would seem wise to design and implement a
technical feasibility study of rehabilitating Gezira, including an initial benefit-cost analysis of rehabilitation of the scheme. Rehabilitating
the scheme would no doubt be a large project, since it would have to compensate for decades of deferred maintenance.
While it is too early to provide any details of a rehabilitation program, there are a number of priorities emerging from the analysis
in this study. On the engineering side, rehabilitation seems to require mechanized or hydraulic silt exclusion mechanisms at the inlets
from the Nile. This may be less difficult than in the past, as, due to construction of the Renaissance Dam on the Blue Nile in Ethiopia,
that reservoir will act as a giant upstream silt trap for decades, thus markedly facilitating silt exclusion at Gezira.
From an organizational perspective any rehabilitation would have to consider the following principles:
• Land tenure: Secure (and transferable) land tenure would have to be assured to all farmers in the scheme, with no differentiation
based on when ancestors joined the scheme. The past allocation of land (8 ha equivalent to each family) was too large for intensive
irrigated agriculture by peasant families. Under intensive conditions, a much smaller farm would produce good incomes to any
family, as evidenced by experiences in countries like Indonesia, Thailand, Malaysia, where farm allocations are much smaller. This
reduction in farm size would permit all existing residents (many of whom have been landless laborers for generations) to have
their own farms.
• Allow farmers free choice of crops: Experience shows that farmers know best what crop to use to maximize yields and income.
Thus rehabilitation should be built on a complete abandonment of coercion in cropping patterns. On the other hand, the scheme
management would have to have the ability to schedule water deliveries internally to suit river flows and the needs of most farmers.
Farmers would then simply have to plan cropping patterns to fit pre-announced water delivery schedules.
• Principle of cost recovery: Real cost recovery would have to be agreed upon by all farmers. The recovery rate could be based
on accounted operation and maintenance costs. Collection of charges and distribution of water at field levels should be handled
by to-be-established Water User Associations (WUAs). Areas where farmers do not form WUAs would receive water last. Such
mechanisms have proven very effective in managing water in a sustainable way.
vast former rangelands into basically a stand of irrigated land within the Nile basin—in River Nile,
weeds and some crop residues. The latter is only of Khartoum, Gezira, Sennar, Blue Nile, and White
little use for livestock production. Also, the seces- Nile States. The Gezira Scheme (2.1 million fed-
sion of South Sudan and gold mining has had a seri- dan), Rahad, Suki and New Halfa are historically
ous impact on availability of seasonal labor that led managed by the Central Government, but currently
to a decline in the semi-mechanized farming areas, some effort toward privatization has taken place,
especially for sesame. The sector does not include especially in the Gezira scheme. But overall the
substantial livestock production. Gezira scheme is in urgent need for comprehen-
The irrigated farming system is the dominant sive rehabilitation to reach similar successes as in
force of agricultures’ share in GDP. Irrigated the past. Box 3.2 provides a short analysis of the
farming is practiced along the river Nile and its possibility for rehabilitation of the Gezira scheme.
tributaries and is considered one of the pillars In total, the irrigated sector accounted for about
of Sudan’s strategy for agricultural development. 29 percent of agricultural GDP over the 2006 to
There are between four and five million feddan of 2009 period.
74 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Irrigation schemes started in the colonial Nomads rely almost exclusively on agriculture with
time for smallholders (such as Gezira) and some 19 percent involved in crop farming and 76 percent
large sugar cane plantations set up by govern- engaging in animal husbandry.
ment. The number and size of sugarcane plantations A renewed growth of the agricultural sector
are now rapidly increasing in the form of joint ven- can lift many households out of poverty. As most
tures between government and foreign investors. In poor households engage in agriculture, policies
the last 10 years large concessions have been given supporting higher productivity will also improve
out to yet another group of foreign investors for the livelihoods of the poor. In addition, increased pro-
establishment of forage production farms. These duction will reduce food imports improving Sudan’s
cover now large areas of the Nile and Ak Bara val- trade balance. In the medium-term, a flourishing
leys. Wheat, cotton, sorghum, and groundnuts were agricultural sector can regain market shares in the
the most important crops in irrigation areas during regional and global market. Thus, tapping into the
the 1990s. More recently, reductions in the areas of agricultural potential of Sudan can lead to shared
the traditional crops have led to opportunities for prosperity and sustainable growth.
production of other crops such as vegetables, and a
substantial increase in the production of livestock. B. Production
In the irrigated schemes agricultural services are
provided and supported by the government through Cropping
facilitation of credit, input supply, and extension
services. Irrigation schemes often suffer from man- The story of cropping in Sudan is by and large
agement inefficiencies especially related to water a story of low productivity. This section will
supply, low productivity, and large debt burdens. highlight some facts on various types of cropping,
including cereals, oil seeds, gum arabic, and cotton.
Poverty in the agriculture sector Cereal grains are the most important calorie source
in Sudanese diets. Sorghum, millet, and wheat are
Sudan’s poor are predominantly active in the agri- the main cereals in Sudan. This section shows that
cultural sector. More than 60 percent of households yields are low in Sudan, particularly if compared to
in the poorest quintile rely on agriculture as their other countries with harsh climates.
main livelihood in contrast to only 20 percent of Low crop yields are associated with low fer-
households in the wealthiest quintile (Figure 3.1.3). tilizer usage in the country. In 2009 the average
This disparity is linked with a geographical concen- fertilizer use per hectare of cropland was 7.3 kg,
tration of agricultural livelihoods in the rural south- which ranked Sudan at 129 among 155 countries.
ern parts of Sudan (Figure 3.1.4). In the same year, Ethiopia, Sudan’s poorer neigh-
Most rural households rely on agriculture. bor, used 17 kg (ranking 115). Available statistics
About 58 percent of the population in Sudan lives indicate that Sudan used as much as 80 kg/ha in the
in rural areas (excluding nomads). And more than mid-1970s, and 70 kg/ha in the 1980s. While it is
every second rural household (58 percent) lives not entirely clear how the low fertilizer usage came
below the poverty line compared to only one in four about, it is clear that the decline in agriculture is
urban households (27 percent). Thus, three out of associated to fertilizer usage. Raising the bar of agri-
four poor people live in rural areas. At the same culture again in Sudan, therefore, requires efforts to
time, rural areas rely predominantly on agriculture stimulate fertilizer usage. All hindrances to fertilizer
as the main livelihood with almost 65 percent com- import and distribution, for whatever reasons, need
pared to 8 percent in urban areas (Figure 3.1.5). to be lifted, and indeed current policy needs to be
Agriculture and livestock: key for economic diversification 75
replaced by government encouragement, and pos- The declining productivity under rain-fed
sibly even subsidization at first, of fertilizer usage, farming systems is attributed mainly to low and
to restart the basic ingredient of modern agriculture; fluctuating rainfall (Figure 3.2.5). Natural resource
without this, yields of wheat and every other crop mismanagement problems without a counteracting
will remain at unacceptable levels. action on crop management practices such as the
use of drought-tolerant varieties, water-harvesting
Cereals techniques, or appropriate crop rotations add to the
problem. There is also some impact from land and
Sorghum is the main staple crop grown in Sudan, soil fertility degradation. This is to be expected due
covering about 40 percent of the whole cultivated to the expansion of the cultivated area at the expense
area of the country. The average area under sor- of natural vegetation cover and mono-cropping
ghum cultivation was 21.2 million feddan between practices, especially under mechanized farming in
2008 and 2014, occupying about 40 percent of the Eastern Sudan.
total cultivated area. The average annual production Millet is the main staple food in Western
between 2008 and 2014 was around 3.4 million Sudan and has an average area under production
tons with an average yield of 160 kilograms per of about 8 million feddan located mostly in the
feddan (Figure 3.2.1). The irrigated farming system lighter soils of Western Sudan. Millet production
produced 20 percent of total output of sorghum in in 2014 is estimated at 359 thousand tones, which
Sudan, while the mechanized rain-fed system and is very low compared to previous seasons, primarily
traditional farming systems produced 45 and 35 per- due to low rainfall (Figure 3.2.6). Around 93 per-
cent respectively. The production of the sorghum cent of the millet crop is produced by the traditional
crop experienced continued fluctuations in area and rain-fed sector, of which 66 percent comes from
yields due to dependence on unpredictable rains, Darfur states and 24 percent come from Kordofan.
recurrent occurrences of droughts, pest infestation, These states have large sandy areas that are classi-
and the general lack of application of fertilizer and fied as marginal lands with low rainfall creating an
other inputs (Figure 3.2.1). environment unsuitable and unfavorable for the
Sorghum yields are generally on a downward cultivation of crops other than millet.
trend, however, farmers were able to slightly Millet production is particularly low yielding
increase the yields for irrigated sorghum between in Sudan. The main problem related to millet is low
2002 and 2014. Irrigated sorghum has had some productivity, which is averaging less than 100 Kg/
improvement in productivity from 887 to 918 kg/ feddan per year. Low productivity is a result of low
fed (+3.5 percent; Figure 3.2.2), but mechanized inputs, which is not only a practice in Sudan but the
rain-fed sorghum yields decreased from 195 to 166 entire Sahel region. Usually, there are no purchased
kg/feddan (–15 percent; Figure 3.2.3). Traditionally inputs used (such as fertilizers) and also labor inputs
produced sorghum yields decreased also from for millet production are limited. The main determi-
256 to 151 kg/feddan (–41 percent; Figure 3.2.4). nant for production in such an opportunistic system
Productivity of sorghum in the irrigated sector is far is rain. Millet is one of the few crops that can thrive
better than in mechanized and traditional systems with such low levels of inputs, hence the practice
due to use of improved varieties and plant nutrition has developed. However, under a program called
technologies developed by the Agricultural Research “millet genetic sources,” the ARC has developed new
Corporation (ARC) and fertilizer supply by produc- improved varieties of millet characterized by higher
tion schemes, obviously in addition to the effects of yields; extending them to farmers could improve
water availability. yields significantly.
76 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 3.2: Agriculture Yields in Sudan, Sorghum and Millet
1) Sorghum area, production and yields 2) Sorghum yields (kg/fed) by irrigated production
30,000 250 1,000
25,000 200 950
20,000 900
150
15,000 850
100
10,000 800
5,000 50 750
0 0 700
2008 2009 2010 2011 2012 2013 2014 Gezira Rahad New Halfa River Nile Average
Area ('000 fed) Production ('000 tons) Av. 2002–2008 Av. 2009–2014
Yield (kg/fed) (right-hand axis)
3) Sorghum yields (kg/fed) by mechanized rain-fed production 4) Sorghum yields (kg/fed) by traditional rain-fed production
350 350
300 300
250 250
200 200
150 150
100 100
50 50
0 0
Sennar
W. Nile
B. Nile
Gadarefe
S. Kordofan
Average
Sennar
Gezira
W. Nile
N. Kordofan
S. Kordofan
N. Darfur
S. Darfur
W. Darfur
Average
Av. 2002–2008 Av. 2009–2014 Av. 2002–2008 Av. 2009–2014
5) Rainfall rate and sorghum and millet yields 6) Millet area, production and yields
500 10,000
150
400 8,000
150
300 6,000
100
200 4,000
100 50
2,000
0 0 0
2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 2014
Average rainfall (mm) Sorghum yield (Kg/fed) Area ('000 fed) Production ('000 tons)
Millet yield (Kg/fed) Yield (kg/fed) (right-hand axis)
Source: World Bank staff own calculations, based on data from the Central Bank of Sudan; and the Sudan Ministry of Agriculture and Irrigation
Notes: (2), (3), and (4): Average 2008–2014 does not include 2011 and 2012 due to a lack of data.
Agriculture and livestock: key for economic diversification 77
Wheat is a crop that is not native to Sudan, in nominally irrigated areas like Gezira are indica-
but the government encourages its production tive of serious deficiencies in irrigation effective-
to reduce imports and reliance on foreign sup- ness. Groundnuts were exported in large quantities
pliers. The wheat production area is small (with in the past but their relative importance in export
only 440,000 feddan), as is production and yields trade has declined substantially due to increase of
(Figure 3.3.1). In fact, it is clear that Sudanese wheat local consumption and demand. In addition there
yields are among the lowest in the world, if not the are strict quality standards required by importing
lowest (Figure 3.3.2). Pavlodar in Kazakhstan is countries because of the Aflatoxin problem.38 Any
on the Siberian border with winter temperatures inability to meet those standards damages Sudan’s
below –40 Centigrade and a very short growing sea- reputation in the international market.
son. Farmers there use almost no fertilizer, like the Sesame is produced under both mechanized
Sudanese, but their yields exceed Sudan’s. Kyzlorda and traditional production systems, but yields
in southern Kazakhstan is a desert province, with are low and fluctuating in both systems. The vast
irrigation; wheat is nominally irrigated in Sudan majority of sesame fields (about 80 percent) are
as well. The problem behind low yields for wheat about 5 feddan in area. In these fields, sesame is
in Sudan is most likely lack of day-length varia- grown under the traditional farming system with
tion. Given those constraints to wheat production little or no use of machinery or modern inputs.
in Sudan, the government may want to rethink its Figure 3.3.4 shows that mechanized sesame yields
policy emphasis on the crop. varied from 86 to 121 kg/fed compared with 80
to 112 kg/fed for traditionally produced sesame
Oil seeds during the period 2002 to 2014. While yields of
mechanized rain-fed sesame production are declin-
The major oil seed crops in Sudan are sesame, ing in most areas, overall mechanized production
groundnuts, and sunflower, which are produced has still an average of 107 kg/feddan as compared
under irrigated and rain-fed conditions. Sesame with an average of 96 kg/feddan for the tradition-
production and exports are very important for ally produced crop. Very low and fluctuating yields
Sudan’s economy. Other oil seed crops, namely, under both systems are largely due to lack of water
groundnuts and sunflower are important for local and fertilizer.
consumption and processing; groundnuts share in Sesame yields in Sudan compared to other
total export in recent years is negligible, and most major producing countries are very low.
of the production is consumed domestically. The Productivity is equivalent to 18, 27, 58, and 51 per-
same is true for sunflower. Oil seeds are produced cent of productivity in China, Ethiopia, India, and
under irrigated and rain-fed conditions but the bulk Nigeria, respectively. Enhancement and stabiliza-
of production is rain-fed. tion of yields in both production systems would
Groundnut is grown under irrigated and rain- significantly improve the welfare of rural Sudanese.
fed systems and its yield patterns are indicative Sesame is a relatively high value crop, with a stable
of the significant differences between irrigated world market in which Sudan plays a relatively
and rain-fed productivity. The average yield under strong role. It is thus important that yields be lifted,
irrigation was 1,072 kg/fed compared with 187 kg/ first through higher fertilizer applications, then
fed through rain-fed in 2014. However, productiv- through supplemental irrigation where possible.
ity is fluctuating, and during the period 2002 to
2014 evidenced a declining tendency under both 38
Naturally occurring mycotoxins that are produced by Aspergillus
farming systems. Indeed the wide swings in yield flavus and Aspergillus parasiticus, species of fungi.
78 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 3.3: Agriculture Yields in Sudan, Wheat, Oil Seeds, Gum Arabic, Cotton and Livestock
1) Wheat area, production and yields 2) Sorghum yields (kg/fed) by irrigated production
1,200 1.0 8,000
7,000
1,000 0.8 6,000
800 5,000
0.6 4,000
600 3,000
0.4 2,000
400
1,000
200 0.2 0
Sudan
Ethiopia
Egypt
Libya
Chad
Kazakhstan
Pavlodar
Kzylorda
0 0.0
2008 2009 2010 2011 2012 2013
Area ('000 fed) Production ('000 tons)
Yield (kg/fed) (right-hand axis) 2012 2013
3) Ground nut yields (kg/fed) irrigated vs. rain-fed 4) Sesame yields (kg/fed) mechanized vs. rain-fed
1,600 140
1,400 120
1,200 100
1,000
80
800
60
600
400 40
200 20
0 0
Irrigated Rain-fed Mechanized Rain-fed
Av. 2002–2008 2009 2010 2013 2014 Av. 2002–2008 2009 2010 2013 2014
5) Gum arabic production (’000 tons) 6) Cotton yields (kg/fed) by irrigated production
80 10,000
70
8,000
60
50 6,000
40
30 4,000
20
2,000
10
0 0
2008 2009 2010 2011 2012 2013 Gezira Rahad New Halfa Suki Tokar Average
Hashab Talha Total Av. 2002–2008 Av. 2009–2014
Source: World Bank staff own calculations, based on data from the Central Bank of Sudan; the Sudan Ministry of Agriculture and Irrigation; and selected
World Bank Agriculture Country Reports.
Notes: (6): Average 2009 – does not include 2011 and 2012 due to a lack of data.
(continued on next page)
Gum arabic borders with Chad and Central Africa, covering an
area of 500 thousand square kilometers. Gum ara-
The gum arabic belt extends from the eastern bic extends over 12 states in Sudan, with some areas
borders of Sudan with Ethiopia to the Western more productive than others, namely the traditional
Agriculture and livestock: key for economic diversification 79
FIGURE 3.3: Agriculture Yields in Sudan, Wheat, Oil Seeds, Gum Arabic, Cotton and Livestock
(continued)
7) Cotton yields (kg/fed) by traditional rain-fed production 8) Population and exports of animal species, 2012
600 40 39.5 500
35
500 30.8 400
30 29.8
400
25 300
300 20
15 200
200
10
100 100
5 4.8
0 0 0
Sennar Blue Nile S. Kordofan Average Sheep Cattle Camel Goats Hides/skins Meat
Av. 2002–2008 Av. 2009–2014 Population (mn) (left axis) Exports (USD mn) (right axis)
9) Livestock production, 2011–2012 (’000 tons)
1,500 1,427 1,456 4,350
4,318
1,000
4,300
500 4,273
40 38 78 45 40 80
0 4,250
2011 2012
Meat Poultry Eggs Hide and skins Milk (right-hand axis)
Source: World Bank staff own calculations, based on data from the Central Bank of Sudan; the Sudan Ministry of Agriculture and Irrigation; and the Sudan
Ministry of Livestock and Fisheries.
Notes: (7): Average 2009–014 does not include 2011 and 2012 due to a lack of data.
farming areas in Northern and Western Kordofan, and to 50,000 tons per year, providing 80 percent of
parts of the Blue Nile state. There are an estimated five global supply. Back then, the remainder was sup-
million people directly involved in forestry activities plied by Nigeria and French West Africa each pro-
such as gum picking, gum collection, and charcoal viding around 5 to 10 percent of supply (3,000 to
and firewood collection. Sudan produces high qual- 6,000 tons). Sudanese gum arabic supply declined
ity (hashab) which comes from Acacia Senegal, and a from the 1970s to the 1990s, falling into the range
lower grade (Talha) harvested from Acacia seyal but of 15–25,000 tons, with parallel increases in sup-
with the same unique properties as an emulsifier. ply from West African origins, primarily Nigeria
Sudan is the world’s largest producer of gum and Chad, which increased their export capacity to
arabic, but its domination has declined from once 10,000 tons (World Bank 2015a). In the mid-2000s,
more than 80 percent of world production in the annual production of Sudan started to recover, bring-
1960s to about 50 percent now. In the 1960s and ing it closer to the averages of the 1960s and 70s.
70s production and supply was dominated by Sudan Estimated production of Sudanese gum arabic
with annual production typically in the range of 40 has seen a renaissance since 2008. Staff estimates
80 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
suggest that production exceeded the 30 thousand Sudan, and in the Nuba Mountains area of Western
ton mark in 2008, and further increased to 50 thou- Sudan. The bulk of Sudan’s cotton production is in
sand tons and beyond between 2009 and 2012 the irrigation schemes, especially the Gezira Scheme.
(Figure 3.3.5). Latest estimates available for 2013 After a number of years with declining yields
suggest that production reached 75 thousand tons. and production of cotton, cotton production has
And this is probably still far below potential output been on the rise again since 2010. In the years
of gum arabic in Sudan: The production potential 2006–2010 area, yields, and production of cotton
with current gum arabic trees (hashab and talha), sharply declined (Figure 3.3.6). There has been
as speculated by Abdel Gadir39 in 2013, can reach a remarkable recovery of cotton yields, area, and
about 200 thousand tons, so there is considerable production in the years 2010 to 2014, which coin-
scope to expand production. cides with the break-up of the monopolized (and
There is considerable scope to increase pro- extortionate) marketing of cotton by the Sudan
ductivity in gum arabic, and potentially to move Cotton Company. There is reason to believe that
towards a higher level of processing within the the recovery was triggered by the break-up of the
country. Farm research results have shown that pro- monopoly, particularly since there were no other
ductivity per tree can be considerably increased by noticeable improvements in irrigation performance,
47–60 percent, while quality can also be improved for instance, or agricultural credit, extension, and
through better tapping methods. Improving the research/breeding. Still, national average yields
productivity of other crops will also be conducive to doubled from 500 kg/fed in 2009 to 1,014 kg/fed in
boosting gum arabic production due to the poten- 2014. Both the experiences of cotton and gum arabic
tial for longer rotations and expanded areas. With suggest that no technical improvements will make
better technology and marketing policies, gum ara- a difference until incentives to farmers are right.
bic production and export supply can be raised to
its former levels in a sustainable manner. Box 3.3 Livestock production
provides some lessons from recent experiences in
policy changes in Sudan on gum arabic production. Livestock are raised in almost all parts of Sudan,
In addition, gum arabic is one of the few current but mostly concentrated in western Sudan
agriculture products that potentially could be used (Kordofan and Darfur states) and owned by
to advance agriculture processing for higher value nomadic tribes. There are three systems of livestock
addition (World Bank 2015a). Chapter 4 of this production in Sudan; 1) animal production under
report will look into this in more detail. natural range systems; 2) animal production in the
irrigation schemes and riverine farms; and 3) animal
Cotton production under commercial systems, e.g., ranches,
dairy and poultry farms, and feedlots. However, most
The commercial cotton industry in Sudan dates of the livestock population in Sudan is raised on the
back to the colonial period, where cotton was natural range, which is hence the focus of this section.
grown to provide ginned cotton to the British There are three main livestock species raised
textile industry. Cotton is grown under various and marketed in Sudan with a total of over
topographical and environmental conditions, uti- 100 million heads. The pastoral system of animal
lizing various methods of irrigation and using dif- production is no longer a quaint residual of the dis-
ferent applications of chemical inputs. The major tant past, but a serious economic business well worth
producing areas in Sudan are Gezira, Rahad, New
Halfa, Suki, Blue Nile, White Nile, Tokar of Eastern 39
Secretary General of the Gum Arabic Council
Agriculture and livestock: key for economic diversification 81
BOX 3.3: Recent Policy Changes in Gum Arabic and Their Impact
Over the past decade gum arabic trade was successfully liberalized. The gum arabic trade was liberalized with the removal of the
Gum Arabic Company (GAC) concessions on the marketing and export of raw gum arabic and the suspension of the floor price
system. The Gum Arabic Board (GAB) was established to coordinate reform measures and support the regeneration of the sector.
The main objectives of the GAB are similar to the former GAC, without monopoly power or concessions. GAB is responsible for
promoting gum arabic exports, opening new markets, and providing finance services and quality control. Further reform measures
have eliminated 13 taxes and charges that had been levied on gum arabic (World Bank 2014e). Following these reforms there is a
sign of production recovery with production estimated to have reached 75 thousand tons in 2013 (Figure 3.3.5). The key incentive
for the farmers was their ability to get a more significant share of the final FOB export price when selling at central market auctions.
This said, there is still a concern that profitability is reduced through individual States levying taxes and other charges without
providing a service.
A Government project to provide microfinance and technical assistance to the poorest gum arabic producers was established
in 2010. The Government in 2010 established the Gum Arabic Project, known as “Revitalizing the Sudan Gum Arabic Production &
Marketing Project.”a This project aims to improve the earning capacity of the poorest gum producers through providing microfinance
and technical assistance. The main purpose of the Project is to support members of Gum Arabic Producers Associations (GAPAs) in
five states (South Kordofan, North Kordofan, White Nile, Sennar, and Blue Nile). The project adopted the strategy of building up GAPA
members’ technical, managerial, and financial capabilities to increase production through access to new markets, micro-finance, and
more opportunities for up-to-date knowledge via exchange visits and cross fertilization of ideas. About 130 associations in five states
are participating in the project, with a membership of 11,346 farmers, 25 percent of whom are women.
Preliminary results of the project show that it has been very successful and the income levels of beneficiary households have
increased by 65 percent. The percentage of the gum price received by small gum producers has increased from 15 to 50 percent
due to the exclusion of middlemen from the chain. Other positive impacts include higher production levels and better gum prices.
The project also enhances the knowledge and skills of gum producers, resulting in well-organized GAPAs with active members. All of
this is leading to a noticeable improvement in the living conditions of producers and their families, as well as the crucial reforestation
of the gum belt.
The question now is how to replicate the activities of the 2010 project in other states in order to reach the highest possible number
of potential gum arabic producers. In 2014, the government signed for a new agreement with the French development agency to
finance activities similar to the projects. But more is needed to maximize impact across states. Another avenue of support also comes
through the Gum Arabic Council, which has many programs and efforts to develop gum arabic production and trade. Support includes:
the formation of export finance portfolios (export finance increased from SDG50 million in 2009 to SDG250 million in 2013); promotion
of quality assurance through symposia, local media and printed materials; promotion of the use of gum arabic in local industry (local
consumption increased from 500 tons in 2008 to 10 thousand tons in 2013); opening-up of new international markets such as China
and Malaysia; and support of gum arabic research. The Gum Arabic Council has also followed-up the implementation of a presidential
decree of planting 10 percent area in each rain-fed agricultural project with gum arabic trees. The program is progressing in Gedaref
state as 50 thousand feddan was covered, and another 50 thousand feddan is expected to be covered in 2014. The council is working
to promote the implementation of the decree in other states.
a
The project is financially supported by World Bank (Multi Donor Trust Fund (MDTF)) and International Fund for Agricultural Development (IFAD).
being preserved and nurtured. Figure 3.3.8 shows Contrary to commonly held belief the ratio-
the three main species sheep, cattle, and camels and nale for pastoral livestock is less grounded in sat-
Figure 3.3.9 shows the associated output from them. isfying basic needs, such as searching for water
Together with the smallest and easiest to manage to drink, and more due to the unique economic
small ruminants (goats), the total population is over benefits of engaging in pastoral production. The
100 million head of live animals. A few unique trends basic reason for the existence of pastoralism that
emerge from Figure 3.3.8: First, there is an enormous drives herders to take their herds to different regions
export of live sheep with an export value of almost is less absolute necessity, in terms of water to drink
US$500 million in 2012. Somewhat lower, but still and vegetation to eat, simply to keep them alive. The
impressive are the exports of camels and hides and reality is more complex than that, at least according
skins, together worth almost US$175 million. to a study several decades ago (Wilson and Clarke
82 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
1976), but in the same Darfur region which still pastoralism is so successful there is surpris-
figures as one of the heartlands of Sudanese pastoral- ingly little policy attention on the sector. This is
ism. These results, reported by the Tufts University important in part due to the interlinked issues of
team in 2013, include the following (Tufts, 2013): land tenure and land policy (Box 3.1), which need
to be solved to sustain pastoral livestock production
a. The animal calving rate was 65 percent in migra- into the future. But there are also other issues, such
tory herds and 40 percent in sedentary herds; as inherent volatility of the sector and the possibil-
b. Sixty-five percent of all migratory heifers calved ity that it could be negatively affected by droughts
at under four years of age, while only 29 percent and diseases. Hence there is a need for more policy
of sedentary heifers did so; focus on a better, forward-looking management of
c. Total mortality was 15 percent per annum in the sector (World Bank 2015b).
migratory herds and 35 percent in sedentary A large source of value-added from pastoral-
herds, while calf mortality was 11 percent in ists, which is generally unaccounted for, is the
migratory and 49 percent in sedentary herds; and usage and trade of surplus milk. Surplus milk
d. Meat production per kg of migratory breed- arises from the fact that there is milk that is beyond
ing females was about twice that of sedentary the needs of the calves of the herds. Anecdotal evi-
breeding females. dence suggests that this milk is carried out primarily
by women and used not only for family subsistence.
In other words, pastoralism is an effort to It is also sold, or exchanged with farmers, often for
maximize, rather than merely survive, and in grain. Informal estimates of the economic value of
this it appears to be successful. The superiority this trade suggest that this activity is worth beyond
of pastoral livestock in Sudan appears to be in that US$1 billion a year.
pastoralists consistently use natural resources more Processing of meat and meat products for
intensively and hence are able to produce more live- exports would be desirable as a higher-value
stock products per unit of land area. Later studies added activity, but with only four large slaugh-
replicated similar findings to the ones reported by terhouses in Sudan and none of them certified
Wilson and Clarke (1976) for Sudan and the rest to international standards, exporting meat is
of Africa. Superiority of pastoralists over sedentary impossible. There is also likely that there is
farming may be due to the constant optimization by insufficient current foreign demand for meat. The
experienced herders of the pasture forage their herds lack of certified slaughterhouses is one important
graze. Behnke (2012) found that fenced pastures factor behind the fact that most of Sudan’s livestock
south of Nyala (now in South Darfur) lost 75 percent exports are exported live. Exports consist primarily
of their feed value (largely due to consumption by of sheep to Saudi Arabia and camels to Egypt. But
termites and loss of digestible protein due to volatil- an important other factor is also that a large share
ization) if left ungrazed from September to the end of the exports have to be live, since they are used to
of the dry season in May. Similar findings are avail- fulfill the religious obligation for families to sacrifice
able for Mali, Ethiopia, Kenya, Botswana, Zimbabwe, a sheep for Eid ul Adha. Many of the sheep will also
and Uganda. As a result, pastoralists consistently use be slaughtered for the Hajj season, for the millions
natural resources more intensively and produce more of pilgrims to Saudi Arabia’s west coast. So there
livestock products per unit of land area than do sed- is considerable uncertainty about the size of the
entary farmers, indeed even commercial ranchers. potential export market for meat, at least when con-
Given the unique performance of the sidering the current two main destinations: Saudi
livestock sector in Sudan and the fact that Arabia and Egypt.
Agriculture and livestock: key for economic diversification 83
C. Markets and Trade shows that the average size of live animals export-
ers grew from US$500 thousand in 2008 to US$2.6
Agriculture trade has increased significantly million in 2012, almost doubling between 2011 and
between 2008 and 2013. After many years of decline 2012. Most of the growth in exporter size was due
(World Bank 2009b), agricultural exports are regain- to the size of incumbents, i.e. existing exporters,
ing their position after the large decline of oil exports rather than growth of new active exporters. This sug-
since 2011. Agricultural exports values showed an gests that new entrants may find it difficult to enter
increasing trend from US$329 million in 2008 to the market, possibly due to market entry barriers
US$1,626 million in 2013 (Figure 3.4.1), and its and costs associated with getting into the livetsock
share in total export rose from only 3.3 percent export business.
in 2008 to almost 23 percent in 2013 (the relative The international markets for Sudanese live-
increase is of course also a consequence of declining stock exports are concentrated in Arab countries.
total exports since oil’s fall). This improvement is Most of live sheep exports go to Saudi Arabia, which
mainly led by good performance of major agricultural accounts for more than 50 percent of livestock
export products like livestock, sesame, gum arabic, exports from Sudan. Egypt is the main destination
and cotton. However, the agricultural trade balance of live camel export (primarily as beasts of burden),
remains negative due to the high food imports bill, primarily through border trade. Meat is destined
which mainly goes for imports of wheat and wheat mainly for the United Arab Emirates, Egypt, Qatar,
flour, sugar and vegetables, and animal oil. and Jordan, but with a downward trend due to high
competition, especially from Australia and Brazil.
Livestock exports Hides and skins are sold to a wide range of coun-
tries including United Kingdom, China, United Arab
Livestock exports have rapidly become an impor- Emirates, Turkey, and Saudi Arabia.
tant part of Sudan’s foreign trade and reached a The fact that there is no recent registered
total export volume in excess of US$670 million ban imposed on the import of sheep and goats
per year in 2013. Figure 3.4.2 summarizes Sudan’s from Sudan by Saudi Arabia reflects progress.
recent export values of livestock products. There Bans on Sudanese exports were in place prior to
has been more than a tenfold increase by 2013 2007, but not since (World Bank 2014e). This is
compared with 2008 (which was an outlier due to an achievement of the health program adopted by
an imposed export ban and quarantine measures). the Government of Sudan and recognized by the
Live sheep exports dominate the picture, represent- Government of Saudi Arabia regarding vaccina-
ing more than 70 percent of livestock export. Next tion and inspection for exported sheep (Table 3.1).
in importance is the export of live camels and hides Recognition of the programs extends to the 17
and skins, which both are about 14 and 10 per- GAFTA markets (World Bank 2014e).
cent, respectively, of livestock export. Meat export But a number of major constraints to live-
fluctuate greatly which is largely a reflection of the stock exports persist (Tufts 2013; and World
inability of Sudanese meat to compete with other Bank 2014e). First, numerous animal migration/
suppliers especially to the Gulf region, due to high transport routes are blocked by allocations of land
cost, lack of modern export facilities, quality con-
siderations, and unsustainable supply.40 40
No cold or frozen meat is exported from Sudan because of inad-
Livestock exports is a growing business for equate abattoirs, handling, and transport facilities for chilled meat.
existing exporters. An examination of statistics Small assignments of whole carcasses of sheep and goats and quarter
carcasses of beef are exported through special arrangement between
from the World Bank’s Exporter Dynamics Database exporters and importers.
84 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Table 3.1: Vaccination and Inspection Regime for Sheep Exports
Location/timing Activities
Inspection and vaccination close to First veterinary inspection and vaccination. Animals held in an inspection center under observation for
production area 7–10 days.
Entry into a quarantine area Second inspection at inland quarantine station by veterinarians. Blood sample taken from every
animal for brucellosis testing. Animals held for 7–10 days.
Inspection on the way to the port Third animal inspection in quarantine area by veterinarian. The group of animals receives three
certificates: for number of animals, free from infectious and noninfectious diseases, and for animals in
good health.
Prior to loading on ships Fourth inspection seven days prior to shipment. Animals are held in quarantine and inspected to
verify that they have no evidence of infectious or noninfectious disease and not generally weak.
Source: World Bank (2008b); and World Bank 2014e.
to mechanized farming, which is often unprofitable. in 2014 are US$2,135/ton for sesame from Sudan
Second, the reliance on local breeds lowers relative compared to US$2,050/ton for sesame from Ethiopia
productivity and increases cost. However, these and US$1,900/ton for sesame from Nigeria.41
local breeds are also in great demand in importing Sesame exporting, like any other oil seed, is
countries. Third, multiple charges and fees imposed a business dominated by large existing export-
by local authorities also raise cost of production in ers; new entrants into the markets are facing real
Sudan. Fourth, weak services for transportation, difficulties. Sesame accounts for about 50 percent
storage and cooling, packaging and technology for of Sudan’s oil seed exports. Looking at the World
meat processing. Fifth, there is a shortage of skilled Bank’s Exporter Dynamics Database shows that not
human resources and administrative capability to only the number of entrants into oil seed exports
provide extension and veterinary services to reduce declined between 2009 and 2012 but the entrants’
the spread of diseases that may affect exports. Sixth, share in total oil seeds exports also fell dramatically
domestic marketing is inefficient and there is only from 78 to 28 percent. This implies that entrants in
a handful of international markets. The domestic 2012 were fewer and substantially smaller than in
market is dominated by broker’s men who impose 2009. This indicates—similar to the livestock sec-
multiple fees and charges, while international tor—that new entrants may find it difficult to enter
markets are concentrated in few countries in Gulf the market, possibly due to market entry barriers
region. Seventh, the availability and access to finance and costs associated with getting into the oil seed
for small producers is not sufficient. and sesame export business.
Sudan’s export markets for sesame are
Sesame exports relatively well diversified and Ethiopia may be
considered the major competitor for Sudan (for
Sudan exports about two thirds of its sesame exports of African sesame producers). Sudanese
production, and is among the main exporters sesame has penetrated China, Europe, and African
of sesame seeds worldwide. Sesame exports in countries as well as traditional markets in the Gulf
2008–2013 accounted for about 32 percent of agri- and Arab countries (Figure 3.4.4). Gulf and Arab
cultural exports and about 3.3 percent of total export
(Figure 3.4.3). Sesame exported from Sudan received
favorable prices compared to other African export- 41
The Sudanese sesame crop is distinguished for its high quality
compared to the sesame produced by other countries due to the
ing countries because of high quality and grading country’s suitable environment and climate. Sudanese sesame seeds
e.g., world prices declared by Sudan Trade Point are characterized by higher oil content and less acidity.
Agriculture and livestock: key for economic diversification 85
FIGURE 3.4: Sudan’s Agriculture Exports: Livestock, Sesame, Gum Arabic, Wheat and Cotton
1) Agriculture trade performance (US$ mn) 2) Livestock export value by subsectors (US$ mn)
2,500 2,500 800
2,000 2,000
600
1,500 1,500
400
1,000 1,000
200
500 500
0 0 0
2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013
Export value Food import value Sheep Goats Camels
Agriculture trade deficit Cattle Meat Hides and skins
3) Sesame export value and quantities 4) Key destinations for Sudan‘s sesame exports (US$ mn)
120,000
400 40% 100,000
300 30% 80,000
60,000
200 20%
40,000
100 10%
20,000
0 0% 0
2008 2009 2010 2011 2012 2013 Eu Turkey COMESA ALG + TUN Asia Arab
Quantity (‘000 tons) Sesame (% of total ag export) 2012 2013
Value (US$ mn) Sesame (% of total export)
5) Sudan‘s share in gum arabic trade 6) Cotton export value and quantities
200 50% 150 2,500
40% 2,000
150
100
30% 1,500
100
20% 1,000
50
50
10% 500
0 0% 0 0
2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013
Sudan ('000 tons) Rest of World ('000 tons) Export quantity ('000 Bales) Export value (US$ million)
Sudan share in World Exports (%) Export unit price US$/bale (right-hand axis)
Source: World Bank staff own calculations, based on data from the Central Bank of Sudan; the Sudan Ministry of Agriculture and Irrigation; the Gum
Arabic Council; and UNCTAD.
countries are the major importers of sesame from The marketing of oilseeds from farm gate to
Sudan with a share of more than 34 percent in 2012, the final consumer depends on the Sudanese state
followed by China with a share of 25 percent. of origin. Sesame is produced in different qualities
86 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
and can be sold as grain (usually white sesame) or Gum arabic exports
crushed for oil (usually produced from the lower
quality red sesame). For sesame produced in Sennar, Gum arabic falls under the trade embargo
and in North Kordofan, the majority of sesame grow- imposed by the U.S. sanctions, but trade with
ers sell their seeds within two or three weeks after it is possible through a specific license (World
harvest to an assembler or village collector who is Bank 2015a). While gum arabic is not covered by
also often a trader. Only a small portion of sesame either an exemption or general license, American
growers (large commercial farmers) have storage companies wishing to import gum arabic from Sudan
facilities and can wait for better prices. The village can apply for a specific license. In November 2000,
collector then sells the seeds to local processors of Congress adopted legislation to require the Secretary
sweet sesame paste (Tahania) or to traditional local of the Treasury to consider approving licenses for
oil processors. The rest of the sesame seeds are deliv- the import of gum arabic from Sudan. As a result,
ered to auction markets where traders buy the seeds Gum arabic became an exception to the compre-
to sell it either to the export market or to local oil hensive trade restrictions imposed by the United
and paste processors, or producers of livestock cake. States Executive Branch.
The processed products42 are sold to the wholesal- Gum arabic exports performed strongly
ers or retailers before reaching domestic consumers. between 2008 and 2013. Figure 3.4.5 shows the
Sesame farmers receive about 78 percent good gum arabic export values and quantities since
of the final FOB export price. In Gadarefe the 2008. This was mainly because of increased domestic
sesame farmers receive about 78 percent of the final production stimulated by reform measures (liberal-
FOB export price if they sell to local village assem- ization of gum arabic market and removal of monop-
blers. The major marketing costs between “farm oly) adopted by the Government, and also the increase
gate” and the export point at Port Sudan consist in local processing of gum arabic. The sharp increase
of transport costs (28 percent), various certificate in gum arabic export in 2013 was due largely to the
fees (5.2 percent), state tax (1.8 percent), and port boost in domestic production as a result of a good
charges (3.2 percent). The handling costs at Port rainy season and expanded production and export
Sudan and Gadarefe are about 18 percent of all finance, better world prices and promotion efforts
marketing costs.43 exerted by the Gum Arabic Board via participation
The buying prices at the central market are in international fairs and membership in the AIPG.
very high, allowing farmers to receive about The market for gum arabic trade is domi-
93 percent of the final FOB export price, and nated by a few countries. The European Union
reduce exporter return to only 2.4 percent. This is the biggest importer of gum arabic with France,
is a very specific feature of the Sudanese market, Germany and UK as major importers and re-export-
which potentially affects the overall competitiveness ers of processed gum arabic. The United States is
of Sudanese sesame in the world markets. Imagine the second large importer of gum arabic followed
a situation where the buying price at the central by Japan. There are emerging new markets for gum
market increases by 5 percent above the current arabic in India, China and South Korea. In 2012,
level. This would then exceed FOB price valued at
the official exchange rate (SDG5.9/US$, at time of
42
Local processors (asarat) that cater to local needs are found in
2014 fact finding), hence, negative net return for different regions and states. The rural population usually prefers the
exporter. However, the sesame exporters can com- sesame oil from local sesame processors, because of its higher quality.
43
World Bank staff were able to partly analyze the supply value chain
pensate lower net return by using part of foreign for sesame produced in Gadarefe and numbers reported here are from
exchange to import other commodities into Sudan. this (incomplete) analysis.
Agriculture and livestock: key for economic diversification 87
France was by far the main importer of gum arabic of gum arabic export, opening new markets, and
from Sudan with a share of more than 30 percent providing finance services and quality control. The
(33.6 percent) followed by India 7 percent, Italy adopted reform measures have had positive impacts
6.6 percent and United States of America 6 per- on improvement of production, prices, and income
cent (Central Bank of Sudan, Annual Report 2012). of gum producers as many taxes and charges imposed
There are other small importing countries of gum on gum arabic have been abolished (about 13 out
arabic distributed between Arab countries (Saudi of the 18 taxes and charges) (World Bank 2013c).
Arabia, Emirates), Asian countries (Pakistan) and As a result, gum arabic trade, production,
African countries (Egypt and Algeria). export and domestic prices were greatly enhanced
For decades export marketing of gum arabic after 2009. Liberalization has led to an increase in
was under the sole responsibility of the monopo- production, export, and domestic prices (Figures
lized Gum Arabic Company. From 1969 to 2009 2.3.5 and 2.4.6). Looking at the value chain for gum
the Gum Arabic Company (GAC) had the sole con- arabic marketing from El Obeid to Port Sudan in
cession to export raw gum arabic. The main role of 2012 is informative. In 2012, gum arabic producers
the GAC was to preserve and monitor the quality of received about 84 percent of the final FOB export
raw gum arabic exported and to support producers price if sold at central market (auctions). The major
with production and extension services. The GAC marketing costs from El Obeid to the export point at
had implemented a floor price system for gum at Port Sudan consist of transport costs (48 percent),
buying centers (auctions). However, the monopoly fees (19 percent), and port charges (23 percent).
of the GAC in gum arabic trade was widely regarded These cost ratios have been declining since 2009 as
as the main reason behind the deterioration of gum suggested by anecdotal evidence. As a result, there
arabic production and export in Sudan. Over many is an improvement in the ratio of buying prices to
years, the low prices paid to producers (about 10–15 the FOB prices reflecting higher prices at auctions,
percent of export price) accompanied by poor sup- which has a favorable impact on producers.
port services led farmers to cultivate crops other
than gum arabic. The GAC also faced administrative Cotton exports
problems that led to inadequate international pro-
motion and marketing of gum arabic. In addition The share of cotton in agricultural export sharply
there were other factors outside the company such declined from 15 percent in 2008 to only 1.5 per-
as low involvement of banks in the gum arabic trade, cent in 2012, but 2013 saw a sharp recovery. This
multiplied fees and taxes, and lack of strategic stocks. is a result of a decrease in quantity exported from 139
A decision was made in 2009 liberalizing the thousand bales to only 13.4 thousand bales in 2012,
gum arabic trade and removing the concession despite improvement of world prices (Figure 3.4.6).
that granted monopolistic power to the GAC. In 2013, the cotton export largely recovered. But only
This bold move by the government liberalized the short- and medium-staple cotton is exported despite
marketing and export of raw gum arabic. The floor the fact that Sudan in the past was famous in pro-
price system was also suspended. Meanwhile, a deci- duction and export of extra-long staple cotton. The
sion was taken to establish the Gum Arabic Board sharp decline in export is due mainly to a reduction
(GAB) to coordinate reform measures and support in area and production of cotton, especially in the
the revival efforts of the gum arabic sector. The main Gezira Scheme. The deterioration of cotton produc-
objectives of the GAB were somewhat similar to the tion and export has led to loss of traditional markets
former GAC, but without monopoly power or con- for Sudan’s cotton, especially Europe. Sudan’s current
cession. Since then, GAB is responsible for promotion markets for cotton are concentrated in a few countries
88 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
especially China and Egypt with a 2013 import share away from sorghum and millet to wheat, often
of 33 and 19 percent respectively. imported. This has led to a significant increase in
Similar to the marketing of gum arabic, cot- wheat imports, in quantity and value (Figure 3.5.1).
ton marketing was in the sole hands of one state- Sudan imported 1.9 million tons of wheat on
owned entity—the Cotton Public Corporation average during 2008–2013 with average value of
(CPC)—for many decades. CPC was established US$829 million representing about 43 percent of
in 1970 to undertake marketing of all cotton pro- total food imports. Wheat imports have exerted a
duced in Sudan. In 1986 CPC was closed and the heavy burden on Sudan’s meager and deteriorating
Sudan Cotton Company Ltd (SCCL) was formed. In foreign exchange resources and have worsened its
1993 the ownership structure of SCCL was changed negative trade balance.
to let some private influence in, but the Government In response, the government of Sudan pro-
remained in charge. The then-new mixed sharehold- motes domestic wheat production to reduce
ers were made up of the Ministry of Finance, cotton the reliance on imported food and to reduce
farmer groups from the Gezira, Rahad, and New expenditures on wheat imports.44 See Box 3.4
Halfa irrigation schemes, the Sudan Pension Fund, for a discussion of the interlinkages between food
and the Farmers’ Commercial Bank. security, wheat self-sufficiency, and grain storage.
But the role of central marketing in cotton The government also indirectly subsidizes wheat
exports is declining and the influence of market imports through using the official exchange rate
pricing has become stronger since 2011. Almost (SDG2.9/US$) which is much lower than the offi-
all cotton grown under irrigation over the last cial rate (SDG5.9/US$), let alone the black market
35 years has been sold on the world market by the rate (between SDG8–9/US$). However, the cur-
Sudan Cotton Company or its predecessors. This rent Government policy is intending to gradually
marketing mechanism meant that prices received remove the subsidy and exchange rate distortions
by cotton farmers in irrigated schemes were usu- from imported wheat, which may increase prices
ally one uniform price for each variety, after costs and reduce consumption.
of handling, ginning and marketing had been sub- The gradual phasing out of wheat subsidies
tracted. But pricing policies have now changed and considered by the Government is a good first step.
cotton producers are paid on delivery at the “farm World Bank (2015b) finds that the Government is
gate” according to grade and type of cotton. There not (yet) fully prepared to seize its policies in support
were two triggers for this policy change: 1) the dete- of the wheat sector. While the ultimate goal should
rioration of cotton production; and 2) the changing be to discontinue all subsidies for wheat in place and
environment of production relations especially in the let the market decide whether wheat production is
Gezira Scheme. At the same time, the infrastructure efficient in Sudan, an initial compromise may be
of the cotton industry is largely diminished e.g., the needed. To this end, this study follows World Bank
number of spinning factories is estimated to be 15, (2015b) in its recommendation to first shift the
only five of which are working, and there are 17 tex- focus of subsidies on domestically produced wheat
tile factories, of which only one or two are working. and then, second, to gradually reduce the extent of
subsidies on domestic production.
Agriculture imports and attempts for Sudan currently pays too high a price for
import substitution wheat imports and there are indications that
by changing the import sources the government
Sudan’s food consumption pattern has under-
gone a profound shift over the past decades, 44
See, for instance, the 3-Year Salvation program set-up in 2012.
Agriculture and livestock: key for economic diversification 89
BOX 3.4: Food Security, Wheat Self-Sufficiency, and State-Level Grain Storage
Over much of the past decade, common discussions about food security in Sudan have conflated the concept that wheat self-
sufficiency adds to food security. However, the reality is that the two concepts do not have much to do with each other. Examples
from other countries are illustrative: First, Jordan produces virtually no grain at all, and yet has a high degree of food security, due
to a substantial volume of modern storage (silos) distributed around the country, and efficient and transparent procurement of grain
from the cheapest sources on the world market. Second, Indonesia has long considered itself food insecure, despite the fact that it
is the third largest producer in the world of its staple grain (43 million tons of rice).
Sudan consumers have changed their taste of grain and shifted to an emphasis on wheat. This gradual shift is taking place from
the traditional dryland crops of sorghum and millet to wheat. In 2001 grain consumption per capita was 140 kg: 90 kg of sorghum,
10 kg of millet, and 40 kg of wheat. Now it is closer to 96 kg of sorghum (plus about 10 percent for animal feed) and 54 kg of wheat.
Since wheat production has declined, there is now a noticeable gap between production and consumption, which must be filled by
1.7 million tons of wheat imports. Actually, Sudan was 24 percent self-sufficient in wheat in the 1980s, 49 percent in the 1990s, and
reverted to 25 percent in the 2000s (Data from the Sudan Ministry of Agriculture and Irrigation).
Consumers continue to change their taste (and demand) and grain consumption patterns may be significantly different again over the
next decade. Assuming that the change in taste of the population is permanent, changing the cropping pattern will be a long gradual process,
and indeed may only be partial. So the shift in production will not provide increased security for perhaps 10 years, and perhaps never in total.
The greater part of current modern storage available now in Sudan is for wheat, not for sorghum and millet. In fact, current
storage is usually either attached to flour mills or owned by flour millers at Port Sudan. The nature of the current grain storage is rather
short-term, perhaps a week or two of buffer supplies between arrival of trucks, trains, and ships, and slow steady progress of the mills.
Table 3.2 provides an overview of the known modern storages of Sudan.
Current wheat storage capabilities exceed millet and sorghum and are in the range of two months of wheat consumption. Yet,
since the wheat stores are fully private and are dedicated to the milling of flour for the various companies their effect as strategic
storages is limited. Still, they represent the equivalent of over two months of current consumption. Compare this with the government’s
stores of sorghum and millet, which only represent 20 days of consumption of those two commodities. Much more, they are all in the
far eastern part of the country, whereas consumption is mainly in the west.
Sudan today is more secure in wheat than in sorghum and millet. So food security does not reflect the fact that the wheat stocks
are mainly imported, and the sorghum and millet are mainly produced domestically. The private sector as noted above is already
carrying the capacity for 69 days of reserves of wheat, and it may be prudent to let this continue at no cost to the government. But
there would be a need to add a more strategic look at the current storage. The difficult case involves the traditional crops, where
only perhaps 20 days of modern reserves exist. This would be extremely expensive to raise to international levels, indeed even
just to two months’ reserves status. Both capacity and stock of 490,000 tons would be required, as two months demand would be
740,000 tons in total, 490,000 more than now exist. At a minimum of US$220/ton for new capacity, this would be over US$100 million
for new silos, and probably the same amount for the required sorghum. It is not clear that Sudan will soon have such investment
funds for this purpose.
Although a full-fledged national reserve system for all of Sudan’s residents may not be affordable at present an intermediate
approach to introduce more storage could be designed.
• To begin with a focus on the more vulnerable areas, perhaps in the west, could be selected to balance the current preponderance
of facilities in the east (Port Sudan, Gedaref, etc.).
• Then one could basically design a modern storage facility with the following credentials: Construct a 50,000 ton standard facility,
designed for unloading and loading trucks up to about 25 tons. Assuming a generous daily ration of grain of 1/2 kg per day per
Table 3.2: Modern Grain Storage in Sudan, 2013
Wheat Sorghum Millet
Dal Group Port Sudan Silos 240,000 tons
Port Sudan Silos 50,000 tons
Flour mills (8) Silos 140,000 tons
Gadarif Silos 100,000 tons
New Gadarif Silos 100,000 tons 380,000tons 250,000 tons
Source: World Bank staff estimates, based on data from Dal Group; and the Sudan Ministry of Agriculture and Irrigation.
(continued on next page)
90 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
BOX 3.4: Food Security, Wheat Self-Sufficiency, and State-Level Grain Storage (continued)
person, the facility’s 50 million kg of grain would cover 100 million days rations. If one assumes a ration period of 14 days, or at
least until ships could arrive from other countries, unload, and have new grain distributed around the country, then this silo could
serve 7 million people, or perhaps two states.
• At US$220/ton of new capacity, and US$220/ton of sorghum, this facility could be built and filled for about US$22 million.
• With proper fumigation and ventilation (all modern silos have these capabilities), the grain would last a very long time safely. However,
if normal operations did not move the grain within perhaps six months, and to make sure to keep mechanical systems (and worker
skills) up to par, long-term deals with local traders could be made, which would constantly refill the bins as they emptied.
Apart from capital cost there is no anticipated significant other cost to be budgeted for the silos. As running costs of such silos are
low, and the silo operation has a real opportunity to make a small profit when buying low (e.g., right after harvest) and selling high, it
would be assumed that virtually no budget funds would be allocated after establishment. If the first regional reserve established a good
track record, the government could add others, benefiting region after region, gradually creating a national system of food security.
Operation of the silos could have the following features to maximize the impact of the proposed system: (1) Each silo would be
in business for itself, perhaps with a bonus system through which staff could legitimately earn a small share of the profit. (2) As staff
would be entrusted with a substantial amount (up to US$11 million) of liquid assets, and as those assets are meant for emergency
situations, there would be random lightning audits of their contents. (3) There would be regulations of minimum levels, say 30,000
tons right before regional harvest, but then silos would be expected to fill up and stay full. This is feasible for a truck-served silo, rather
than a port one, which needs to achieve empty space before arrival of a 50,000 ton ship to avoid demurrage. The key point here is
to create space at harvest time, to maximize impact on (slightly) raising harvest prices for the farmers. Similarly, the silo could reduce
peak prices to consumers shortly before harvest.
could reduce the price paid significantly. Wheat with average production of 700 thousand tons.
imports are being carried out primarily through Sugar in Sudan is produced in six sugar factories,
flourmill companies. Examples are SAYGA, Weita, four publicly owned (Sennar, Elgoneid, Assalya, and
and Seen. The main exporting countries of wheat New Halfa Sugar companies) and two joint venture
to Sudan are now Australia, Canada, Germany, (Kenana and White Nile Sugar Co). The gap in
and more recently India (Figure 3.5.2). The cost domestic sugar supply in Sudan on average is about
of wheat imports could be significantly reduced if 600 thousand tons per year. Total consumption is
Sudan imports wheat from other cheaper sources about 1.3 million tons in any given year.
such as Argentina, Russia, Kazakhstan, and the U.S. The goal of self-sufficiency in wheat and sugar
(Figure 3.5.3). to reduce imports is problematic. Foremost is the
Sugar is another important food item for argument that the opportunity cost of producing
Sudan. Figure 3.5.4 shows the development of wheat and sugar are very high. They in fact compete
sugar imports over the period 2008 to 2013. There for the same limited irrigated land (e.g., two million
is an increasing trend of sugar imports during the ha) near the Nile, where farmers also grow the more
last five years: from US$108.9 million in 2009 with traditional crops, such as sorghum. In fact, anecdotal
6.6 percent share in total food imports to more than evidence suggests that farmers know the wheat and
US$645 million in 2013 with a 27 percent share of sugar crops quite well but they have walked away
food imports. This sharp increase naturally seems from producing them over time because there is
due to the increase of local consumption of sugar.45 little profit to make in those crops under current
It is government policy to boost domestic
production of sugar to achieve self-sufficiency
45
Sudanese people consume about 33kg per capita per year, a little less
and become a sugar exporter.46 Sudan is actually than the average citizen of the EU (38 kg/cap) (World Sugar Council).
already one of the biggest African producers of sugar 46
See, for instance, the 3-Year Salvation program set-up in 2012.
Agriculture and livestock: key for economic diversification 91
FIGURE 3.5: Sudan’s Agriculture Imports: Wheat and Sugar
1) Wheat imports: quantity and value 2) Main source countries for wheat imports
2,500 60% 500 40%
2,000 50% 400
30%
40%
1,500 300
30% 20%
1,000 200
20%
10%
500 10% 100
0 0% 0 0%
2008 2009 2010 2011 2012 2013 AUS CAN GER IND UKR TUR
Import quantity ('000 tons) Import value (US $ million) Value (US$ mn)
Share in food imports (right-hand axis) Share in total wheat imports (right-hand axis)
3) Sudan‘s wheat import price in perspective (US$/ton) 4) Sugar imports
30%
500 600
25%
400 500
20%
400
300
300 15%
200
200 10%
100 100 5%
0 0 0%
2010/2011 2011/2012 2012/2013 2013/2014 2009 2010 2011 2012 2013
Sudan import price All US grades Import value (US $ million)
US (Kansas city) US (Texas gulf) Argentina Share in food imports (right-hand axis)
Source: World Bank staff own calculations, based on data from the Central Bank of Sudan; the Sudan Ministry of Agriculture and Irrigation; and the United
States Department of Agriculture (USDA).
conditions. Low yields in wheat are particularly pro- productivity, profitability, and competitiveness
nounced. On the other hand, sugar is a cheap, low of agricultural production. Inputs are products
profit crop, and almost all sugar-procuring countries such as seeds, fertilizer, pesticides, machinery, and
offer some sort of protection to their sugar industry. post-harvest material like packaging. The supply of
To be able to compete on the world market, hence, agricultural inputs depends on the extent that there is
Sudan would likely also have to offer similar levels a market for such products and the degree of govern-
of protection (World Bank 2014g). ment involvement. The current government policy on
agricultural inputs in Sudan is to exempt them from
D. Agricultural Support custom duties and use of the official exchange rate for
their imports, which is a form of indirect subsidy as
Agricultural inputs there is a definite gap between official, commercial,
and parallel market rates.
Availability and access to agricultural inputs is The supply of agricultural inputs is orga-
largely considered one of the main factors affecting nized mainly through the Agriculture Bank of
92 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 3.6: Sudan’s Agriculture Input Imports
1) Agriculture input imports (1) 2) Agriculture input imports (2)
250,000 2,000
200,000
1,500
150,000
1,000
100,000
500
50,000
0 0
Fertilizers (tons) Tractors (#) Jute and sacks (tons) Seeds (tons) Insecticides (tons)
2011 2012 2013
Source: World Bank staff own calculations, based on data from the Central Bank of Sudan.
Sudan (ABS) and the private sector. The federal Improved seed technology is essential for
Ministry of Agriculture and Irrigation is responsible bridging the gap between yields in demonstra-
for qualifying companies for agricultural inputs tion trials and farmers’ fields. In this regard,
imports through tenders. The Ministry also pro- the Federal Ministry of Agriculture and Irrigation
vides services to the farmers through an extension distributed about 3.9 thousand tons of improved
unit, and a subsidy to the small traditional rain-fed seeds, mainly sorghum, millet, groundnuts, and
farmers (in kind), and is responsible for setting agri- vegetables in different states in 2012, in addition
cultural standards for imported and exported com- to 1,500 tons provided by the FAO. Until recently,
modities through its Plant Quarantine Department. seed production and certification were handled
The import of fertilizers, tractors and jute by the central government through the Seed Unit
and sacks constitute the major part of imported of the Extension Department in the Ministry of
input value for agriculture inputs. While there Agriculture and Irrigation. National seed produc-
are many seasonal effects playing a role in agri- tion was limited to field crops, while horticultural
culture input imports, there is a trend emerging crop seeds were usually imported. In a move to
for increased fertilizer inputs (Figures 3.6.1 and improve production of good quality seed and
3.6.2). This is a positive sign given that fertilizer boost the use of improved seed, the Arab Sudanese
usage is among the lowest in the world and urgently Seed Company was formed through public-private
needed to increase yields in the sector (see Section partnership. The government donated physical
B of this chapter). assets and has a share of 42 percent of the com-
The irrigated sector makes the most use of pany’s capital. The remainder was financed by the
improved seed. Local seed, either kept from the Arab Authority for Agricultural Investment and
previous year or bought from local markets, is the Development (AAAID).
main seed source outside the irrigated sector; such Among the main constraints for providing
seed, comprising second generations of improved agriculture inputs in Sudan are the fact that the
varieties, is marketed without quality control other market is distorted and there is a shortage of
than local knowledge of source. Some improved storage capacity. Many constraints face agricul-
seeds are used in the rain-fed sector, notably in tural input supply in Sudan, some of them are the
Blue Nile State. following: First, the distorted agricultural inputs
Agriculture and livestock: key for economic diversification 93
market. One factor is the exchange rate policy The allocation of resources across various
because part of agricultural inputs are imported lines of research is primarily a policy decision.
at official exchange rates (SDG2.9/US$) through In 2008, 28 percent of Sudan’s agricultural research-
the ABS and part at other adopted exchange rates ers were involved in crop research, 25 percent in
(SDG5.9/US$) through the private sector. Also, livestock research, and 8 percent for forestry and
shortage of supply and improper timing of deliv- natural resources (El-Siddig and Stads 2010). The
ery, accompanied by low quality and standards, remaining researchers concentrated on postharvest,
lead to other distortions. The private company socioeconomic, fisheries, and water and irrigation
involved in the import of agriculture inputs gets research, or other matters. Horticultural crops are
the authorization through bids controlled by the the most researched crops in Sudan, accounting for
Ministry of Agriculture and Irrigation. Due to a lack 10 percent of the country’s total crop and livestock
of transparency, real or perceived, this has resulted research. Sorghum accounted for 7 percent, and
in importing lower quality inputs, as happened in cotton, legumes, oil crops, and wheat for 5 percent
season 2012/13 when imported wheat seeds had a each. Sudan’s research on rain-fed crops is relatively
low or zero germination rate in some places. Second, understaffed compared with research on irrigated
the widespread use of deferred payment options crops (El-Siddig and Stads 2010).
increases the cost. Third, there is a real shortage The Agricultural Research Corporation
of storage capacity and unspecialized input stores. (ARC) is, in addition to the universities, the
Fourth, the very low local production of inputs (for principal research arm of the government for
example the local production of seeds covers only agriculture. Despite difficulties, ARC still has a
10 percent of domestic needs). And fifth, delay of staff of 446 researchers (170 PhD), 13 national
inputs supply, lack of substitutes, and high insur- programs, 48 subprograms, 120 research projects,
ance cost. 10 research centers, 3 research units, 25 research
stations and 54 laboratories. The ARC over the last
Agricultural Research year invented, implemented, and tested a number of
technologies dealing with land preparation, irriga-
Agricultural research, which is the respon- tion, cultural practices, plant nutrition, pest control,
sibility of the central government, has been agricultural engineering, range and pasture and
underfunded for decades. The annual budget others. More recently the ARC released high yield-
allocated to Agricultural Research Corporation ing sorghum varieties and breeds for heat tolerant
(ARC), the Animal Resources Research Corporation wheat. However, few of these technologies and the
(ARRC) and universities is only about 0.3 percent many other technologies already “on the shelf” have
of GDP. This level of funding has proven to be been tested under field conditions.
totally inadequate for a country that is so heavily The current arrangement of fully designat-
dependent on agriculture. In fact, Sudan spends ing agricultural and livestock research to the
significantly less per unit of value of agricultural Ministry of Science and Technology needs to
output on agricultural research than the average be revisited. Institutional reform in agricultural
of African countries or developing countries as a research is required. Responsibilities of the Ministry
group. The limited budget has resulted in a decline of Science and Technology should be confined to
in staff numbers, reduced resources for funding policy coordination and frontier research, while
research activities in the field, and a deteriora- the functional responsibility is to be designated to
tion of the research facilities because of a lack of the relevant ministries. Coordination between the
maintenance. agricultural research institutions is very weak. A
94 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
closer collaboration between these research insti- technology to farmers. The TTEA also maintains a
tutions can be achieved through the establishment Technology Transfer Center and relevant Stations
of the National Agricultural Research Systems whose mandate is to transfer technical information
(NARS), an umbrella which determines research to stakeholders including farmers.
themes to be carried out by ARC, ARRC, univer- The government delivery of Livestock and
sities and other relevant research institutes. This Fishery extension services do not appear to be
should lead to a more efficient use of resources contributing to significant increases in produc-
and more relevant technology outcomes, which tivity. For livestock extension services, the General
will in turn increase growth and development of Directorate of Extension, Technology Transfer
the agricultural sector. and Pastoralists’ Development is responsible for
extension matters related to livestock owners,
Extension services pastoralists, and fishermen. The Directorate runs
its grassroots programs based on the needs of pas-
Agricultural extension services in Sudan are toralists, animal owners, producers, and fisher-
provided by the government through the men. It develops strategies and programs of animal
Ministry of Agriculture and Irrigation and the resources sector that concentrates on livestock, and
Ministry of Livestock and Fisheries. Increasing trans-boundary and zoonotic disease control, in
agricultural productivity requires extension ser- addition to the promotion of animal production
vices to be improved. Given the fiscal constraints and fisheries.
facing the Government it is recommended that There is a need to do a better job of involv-
private companies selling inputs (seeds, fertiliz- ing the private sector in the delivery of extension
ers) and major marketing/buying companies be services. In addition to the Federal Government,
encouraged to deliver technical advice through state Ministries of Agriculture and state Ministries
extension services and the increased use of con- of Livestock and Fisheries47 also provide extension
tract farming. services. Some universities make a contribution
The Technology Transfer and Extension to extension mainly through training. Examples
Administration (TTEA) is responsible body for include the Extension and Rural Development
agriculture extension services. The objectives Department at Sudan University of Science and
of TTEA include: the development of agriculture, Technology and Department of Agricultural
improvement in the production quality, enhance- Extension and Rural Development at University of
ment of farmers’ income through rational exploita- Khartoum. Famer based organizations, including
tion of natural resources, comprehensive human the Farmer Union and the Pastoralist Union, play
prosperity via profitable, sustainable agriculture, key roles in farmer-to-farmer extension activities,
and making agricultural products competitive in influencing extension policy, assessing extension
international markets with the aim of assuring performance, and helping in setting extension pri-
food security and increasing agricultural revenues. orities. Extension services remain weak and more
TTEA has four main thematic programs: improv- attention needs to be given to using “tried and
ing crop productivity, promotion of improved tested” approaches with well-trained professionals,
seeds, integrated mechanization, and rural women including the private sector.
development. The TTEA established administra-
tion networks in the state ministries responsible
for agriculture and worked closely with the states, 47
In some states, both ministries have been merged to form a single
ARC, and universities to facilitate the transfer of ministry
A. Goods Trade
GOODS AND SERVICES TRADE
TO BUILD ENDOWMENTS
4
Sudan has a revealed comparative advantage (RCA) in agriculture, meat and dairy, and seafood, as well
as in extractive industries. Although the EU was once the main trading partner, the share of Sudanese
exports destined to the EU has declined significantly over the past 15 years. At the same time, China has
experienced a spectacular increase in its share of Sudanese exports since 2000. Sudan’s export basket is
very concentrated, as shown the large shares of its top three and five export products, but the degree of
product concentration decreases when looking at non-oil export. The lack of product diversification of
Sudanese exports also stands out when compared to peer countries, as evidenced by its comparatively
much higher Herfindahl-Hirschman index. The diversification of Sudan across destination markets is low,
and has remained approximately constant. A few multi-product multi-destination exporters typically amass
the majority of total exports in a country, but less so in developing countries; this is also the case in Sudan.
Services and trade-in-services have an important role in economic diversification. But Sudan’s share of
services Value Added (VA) in GDP is lower than expected for a country at its level of development. Services
export growth remains below that of goods exports and GDP growth. Sudan registers more dynamic
growth rates for other commercial services exports than for exports of travel or transport services, a fact
that suggests the existence of some modern services. But Sudan’s services imports are undiversified in
nature. Ensuring efficient access to a wide range of services is a key determinant in international com-
petitiveness and efficiency.
Diversification today needs to consider the changed competitiveness over time of products Sudan once
produced. And there are a variety of products, including manufactured exports, which Sudan has exported
in significant quantities in the recent past, or in small quantities today. In addition, there are ten “emerg-
ing champions.” products, which are now being competitively exported from Sudan that were not so in
the early 1990’s. Gum arabic, one of Sudan’s most well-known export product of agricultural origin, could
serve as a starting point to showcase how to increase value-addition through both adding new process-
ing steps into the value chain and increasing the value of the raw material through smart production-
enhancing decisions. Reforms in services should focus on the development of framework conditions that
facilitate the growth of professional services and address skills shortages and skills mismatches. In addi-
tion, regional integration and multilateral negotiations offer opportunities for implementing regulatory
reforms and reducing the skill gap through services liberalization.
96 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
a. Overview suggests the existence of a skewed distribution of
exporter size in Sudan, with a heavy presence of
Export growth, base and size small firms combined with a few very large firms.
Sudan enjoyed very strong growth of non-oil Yet, this skew is less so than in other countries.
exports between 2008 and 2012, but this was Please also see the Sudan DTIS Update (World Bank
largely driven by gold. In fact, Sudan’s 2012 total 2014e), a parallel study to this Country Economic
non-oil exports were four times the level in 2008 Memorandum that specifically analyzed trade and
(Figure 4.1.1). Sudan exhibits the fastest growth in trade-related issues in the country. Box 4.1 provides
total non-oil exports relative to its regional com- a short snapshot of the main findings.
parators Ethiopia, Tanzania, and Zambia. While this
is a good development for Sudan, especially since Departure of crude-oil exports after 2011
the non-oil sector is in the spotlight with the 2011 The secession of South Sudan in 2011 signifi-
secession of South Sudan, the rise of non-oil exports cantly and adversely affected exports48 from both
needs to be seen in the context of a very rapid rise the North and the South, and both oil and non-
of gold exports, especially in 2012 and 2013. This oil exports. Non-oil exports of Sudan appear to
will be shown in subsequent sections of this chapter. have originated primarily from the North, and can
Sudan’s number of non-oil exporters is thus be treated as comparable over a long period of
significantly smaller than that of its compara- time.49 In 2012 and 2013, oil exports from Sudan
tors. This is even after controlling for income per and South Sudan together (red plus blue) fell signifi-
capita, size, and time trends. Figure 4.1.1 shows cantly short of pre-partition levels, and in 2013 were
that Sudan has, on average, substantially fewer non- still nearly 60 percent lower than those of united
oil exporters than all of its regional comparators. Sudan in 2011, but still recovering (Figure 4.2.1).
To account directly for country size, Figure 4.1.2 Oil exports from Sudan in 2013 were nearly 80 per-
shows the numbers of exporters per 1,000 people cent lower than those reported for Sudan in 2011.
and Sudan again appears as an underperformer In 2013, non-oil exports were also 52 percent lower
in terms of the number of exporters per capita than their 2011 peak.
(Figure 4.1.3). Sudan experienced an important Sudan’s non-oil exports grew steadily
expansion, though, by 28 percent in the number of through 2010, decreased slightly in 2010 and
exporters from 2008 to 2009—from 660 to 846— then picked up very rapidly in 2012 due to the
(Figure 4.1.4). But between 2009 and 2012 the
number of non-oil exporters declined again, despite
48
Throughout this note, “exports” refers to exports of goods.
Sudan’s consistent total non-oil export growth over 49
Due to lack of reporter data for South Sudan (SSD), South Sudan
that period. is always represented through mirror data sourced from UN COM-
TRADE. The export data used for Sudan come from the mirror as
The average and median non-oil exporter well, except in the case of HS71 which includes gold, for which
in Sudan is relatively larger than in most reporter data from Sudan was preferred. These include data for both
“former Sudan (SDN)” and Sudan (SUD) in COMTRADE. The mirror
regional benchmark countries. Still, the aver- is adopted for several reasons. First, for most years the mirror data are
age size of exporters is not significantly different modestly larger, suggesting more complete coverage. Second, reporter
data from Sudan is missing for several years (1996, 1997, 1998, 2007,
in Sudan (US$2.5 million) from countries like and 2013). Reporter data are used for HS71, including gold, as these
Cameroon (US$2 million) and Tanzania (US$1.6 are more consistent with available data on Sudan’s production of gold.
Given that other countries report receiving very little imports from
million) (Figure 4.1.5). The median size of export- South Sudan except crude oil, one can reasonably attribute exports
ers, however, is much higher than most compara- of other products to the region comprising present-day Sudan. For
further discussion of the issues surrounding measurement of produc-
tor countries in Africa (Figure 4.1.6). This relative tion and exports of oil and gold, see the sections of this document
difference between the average and median sizes pertaining to those commodities.
Goods and services trade to build endowments 97
FIGURE 4.1: Exporter Base and Size, Sudan and Selected other Countries
1) Total non-oil export growth (base year 2008) 2) Number of exporters, selected countries, 2012
4
Kenya 4,610
Ethiopia 1,826
3
Export growth
Tanzania 1,796
Zambia 1,368
2
Cameroon 928
Uganda 910
1
Sudan 787
2008 2009 2010 2011 2012
Year 0 1,000 2,000 3,000 4,000 5,000
Sudan Ethiopia Tanzania Zambia Number of exporters
3) Number of exporters per 1,000 people,
selected countries, 2012 4) Number of exporters in Sudan, 2008–2012
850
Kenya 0.12
Zambia 0.11
800
Number of exporters
Cameroon 0.05
Tanzania 0.04 750
Uganda 0.03
700
Sudan 0.02
Ethiopia 0.02
650
0 0.05 0.10 0.15 2008 2009 2010 2011 2012
Number of exporters per 1,000 People Year
5) Average exporter size 6) Median exporter size
Zambia 4.0 Ethiopia 0.109
Sudan 2.5 Sudan 0.105
Cameroon 2.0 Tanzania 0.026
Tanzania 1.6 Uganda 0.023
Uganda 1.3 Kenya 0.023
Ethiopia 1.2 Cameroon 0.022
Kenya 0.9 Zambia 0.015
0 1 2 3 4 0 0.02 0.04 0.06 0.08 0.10
Average exporter size in millions of USD Median exporter size in millions of USD
Source: World Bank staff own calculations, based on data used for the World Bank Exporter Dynamics Database.
Note: (2), (3), (5), and (6)—the following averages were used: 2008–2012 for Ethiopia and Sudan, 2007–2011 for Tanzania and Zambia, 2007–2010 for Bo-
tswana and Uganda, 2006–2009 for Kenya, and 2007–2009 for Cameroon.
98 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
BOX 4.1: Main Findings of the Sudan DTIS Update
The Diagnostic Trade Integration Study (DTIS) Update of 2014 identified priority Actions in support of the Government’s commitment
to increase trade and diversify the economy. The study built on the earlier 2008 DTIS by identifying the major factors holding back
the increase of agricultural exports and economic diversification.
The DTIS Update found that high tariffs and other trade taxes on imports create incentives to produce for the domestic market
and actively discriminate against exporters and potential exporters. But enabling exporters and potential exporters to obtain their
inputs at internationally competitive prices would stimulate investment and growth and encourage diversification. Reducing trade
costs and increasing trade represent the most powerful policy package available to the Government for reducing poverty and putting
the economy back on a sustainable path.
The DTIS Update recommended to stimulate exports through the implementation of a package of (difficult) reforms that lower
the barriers to trade through reducing trade taxation, simplifying border and regulatory policies, and improving transport and
logistics. Concretely, the following key reforms were recommended to stimulate exports:
• Revise trade policy to simplify the tariff schedule, reduce the proportion of peak tariffs, and adopt a transparent and well-
publicized policy on eligibility for duty rebates. The tariff schedule is characterized by a high proportion of peaks (15 percent
and above), discriminatory excise duties and a Development Tax of 13 percent, which is a para-tariff. A comprehensive tax reform
strategy that reduces reliance on trade taxation and promotes growth and investment should be revenue neutral and in many
cases will results in increased government revenue.
• Simplify and streamline border and regulatory policies. Sudan imposes many Non-Tariff Measures (NTMs) that increase the price of
imports and the ex-factory price of Sudanese products. Many of these result from the high proportion of products that are required
to be tested for mandatory standards. The testing frequently duplicates tests already carried out by qualified laboratories in the
country of origin. Reducing the number of mandatory standards and replacing them with voluntary standards should be a priority.
• Modernize customs clearance procedures. Multiple border agencies undertaking duplicative and redundant checking and repeated
requests for the same information all serve to increase costs and reduce competitiveness. Prioritizing the establishment of a National
Trade Portal will bring together all the information and forms required for moving goods across borders. It is a proven technique
for reducing red tape and increasing transparency. Increased transparency regarding the correct application of trade policies and
administrative procedures would increase the predictability of trade costs and transit times, making it easier for companies to
integrate into regional and global value chains.
• Reduce the price of transport and improve the quality of logistics services. In the short term, improvements in road transport will
bring the highest returns. Priority actions include ensuring 24/7 access to the dry port of Khartoum through either relocation or
constructing a by-pass. Further investment in infrastructure along the Port Sudan-Khartoum route would increase safety and reduce
delays. Modernizing the regulatory framework for logistics services will facilitate increased reliability and reduce transport prices.
Looking specifically at agriculture, the DTIS Update found that high input costs stemming from inefficient marketing and transport
networks, and regulatory restrictions, all contribute to the observed low productivity underperformance of the sector. Sudan
has the potential to be a major producer and exporter of agricultural products to their neighbors, traditional trading partners in the
Middle East and globally. Despite the potential and recent positive growth the sector continues to underperform. Recent positive
reforms in the policy environment, including the removal of the Gum Arabic Commodity Council monopoly, increasing the role of
the private sector, privatizing previously state owned companies, and removing duties on agricultural inputs are all delivering results.
The DTIS Update highlighted three areas where further reforms will reduce trade costs. These include streamlining the procedures
for the registration of seeds and other agricultural inputs, removing the uncertainty over export licenses for staple crops (specifically
sorghum), and improving productivity in the livestock sector.
Finally, the DTIS Update highlighted that Sudan has the opportunity to deliver significant growth in the tourist sector, but that
this requires both supply- and demand-side measures. In the short run the DTIS Update recommended that the Government of
Sudan sends a positive signal that it is open for tourism by reforming the Visa regime, lifting in-country bureaucratic procedures,
and updating the National Tourism Plan. A comprehensive development strategy, on the other hand, would take several years to
evolve and requires improvements in policy and planning, human resource development, transport access, and product development
and marketing. The recently updated National Tourism Plan addresses these issues and provides a useful road map for raising the
profile of the sector and mobilizing resources for implementation. Box 4.2. provides more details on the DTIS update analysis of
the tourism sector.
Source: Excerpt from World Bank 2014e.
Goods and services trade to build endowments 99
FIGURE 4.2: Sudan’s Export Performance Overview
1) Sudan / South Sudan exports of crude oil and 2) Sudan total exports excluding crude oil,
all other products (non-crude oil), 1996 to 2013 1996 to 2013
15,000 3,000
13,000
11,000
2,000
9,000
7,000
5,000
1,000
3,000
1,000
–1,000 0
1996
1998
2000
2002
2004
2006
2008
2010
2012
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Sudan (Crude oil) Natural/cultured pearls, Electrical machinery
South Sudan (Crude oil) precious stone equipment and parts thereof,
Sudan (Non-crude oil) Live animals sound recorder etc
South Sudan (Non-crude oil) Oil seed, oleagi fruits; Meat and edible meat offal
miscellaneous grain, seed, fruit etc Copper and articles thereof
Lac, gums, resins, and Beverages, spirits and vinegar
other vegetable saps and extracts Rest of products
Sugars and sugar confectionery (excluding crude oil)
3) Sudan’s exports excluding crude oil, 2011 4) Sudan’s exports excluding crude oil, 2012
2,250,000 2,250,000
1,750,000 1,750,000
1,250,000 1,250,000
750,000 750,000
250,000 250,000
–250,000 –250,000
Gold, non-monetary
Sheep
Sesame seeds
Refined oil
Gum arabic
Cotton
Copper waste and scrap
Meat of sheep (fresh)
Undenatured ethyl alc.
Other prod. (excl. crude)
Gold, non-monetary
Sheep
Sesame seeds
Gum arabic
Refined oil
Raw sugar
Waste/scrap prim. cells
Copper waste and scrap
Undenatured ethyl alc.
Meat of sheep (fresh)
Other prod. (excl. crude)
Other waste and scrap
Source: World Bank staff own calculations, based on data from UN Comtrade.
expansion of gold.50 Exports of gold increased outcome being driven by the simultaneous drop in
abruptly in 2012 after the secession of South Sudan crude oil exports and the increase in those of non-
the previous year, accounting for most of the expan- monetary gold.
sion of non-oil exports in 2012 (Figure 4.2.2). The
share of crude oil and mineral fuels has been drop- 50
This refers to HS Chapter 71 data from the Harmonized System
ping steadily since 2008, when it peaked at 94 per- (HS) of tariff nomenclature. Because Sudan has not yet reported
export values for 2013, the figures corresponding to that year are all
cent of total exports. Indeed, exports of gold were taken from the mirror, which in the case of HS Chapter 71 are likely
slightly higher than exports of fuels in 2012, this to largely underestimate the real export value.
100 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Comparing Sudan’s export data (exclud- weakness in the country’s export performance. Also,
ing crude oil) before and after the secession of the fact that both the share and the RCA of the cat-
South Sudan shows the main difference being egory comprising agriculture, meat, dairy and sea-
the considerable rise of non-monetary gold in food products increased between 2007 and 2012,
2012. Figures 4.2.3 and 4.2.4 display Sudan’s at the same time that those of extractive industries
exports excluding crude oil, immediately before decreased, reflects the drop in crude oil exports
and after the secession of South Sudan. As can be following the secession of South Sudan, which was
readily seen, the top export products are roughly partially compensated for by the rise in exports of
the same, as well as their export values, with only non-monetary gold. Annex 6, Table 0.14 provides
the exception of non-monetary gold, whose exports an additional more detailed analysis of the RCA at
rise considerably in 2012. Other differences with HS-6 level exports
2011 data include moderate drops in the exports The share of Sudanese exports destined to
of sesame seeds and refined oil. At the same time the European Union has declined significantly
exports of sheep expanded as well, consistent with over the past 15 years. The EU used to receive
the presentation in Chapter 3 of this report. more than half of the country’s exports until 1998,
which then abruptly dropped to very low percent-
b. Export orientation and growth ages, staying below 10 percent since 2003, though
it picked up slightly after 2011. The U.S., the rest
Between 2007 and 2012, Sudan showed a of Europe and Central Asia, as well as the rest of
revealed comparative advantage (RCA) in agri- the world, also decreased their shares as Sudan’s
culture, meat and dairy, and seafood, as well export destinations between 1996 and 2013.
as in extractive industries (Table 4.1). The lack Canada’s share has been negligible until 2005 and
of competitive advantages in other industries, is still very low since then, even though it increased
together with the low complexity and value added substantially after the separation of South Sudan
of these product categories, points out to a structural (Figure 4.3.1 and Table 4.2).
Table 4.1: Change in Sudan’s Shares of Exports by Broad Productive Sectors, 2007–2012
(1) (4)
Exports (2) (3) Exports (5) (6)
2007 Share RCA 2012 Share RCA (7)
Sectors (US$ ‘000) 2007 (%) 2007 (US$ ‘000) 2012 (%) 2012 CAGR
1 Abriculture, meat and dairly, seafood (HS 1–10, 350,292 4.08 1.09 691,607 13.23 4.89 14.57
12–14)
2 Food, beverages, tobacco, wood, paper (HS11, 44,359 0.50 0.09 92,120 1.76 0.49 15.74
15–24, 44–48)
3 Extractive industries (HS 25–27, 68–71) 8,038,058 93.61 5.79 4,290,219 82.07 3.50 –11.80
4 Chemicals, plastics, rubber (HS 28–36, 38–40) 5,021 0.06 0.00 8,589 0.16 0.02 11.33
5 Textiles, apparel, leather, footwear (HS 41–42, 71,782 0.84 0.15 30,799 0.59 0.19 –15.57
50–65)
6 Iron, steel, and other metals (HS 26, 72–83) 50,368 0.59 0.06 55,389 1.06 0.21 1.92
7 Machinery, electronics, transportation equipment 20,644 0.24 0.01 56,293 1.08 0.05 22.22
(HS 84–89)
8 Other industries (HS 37, 43, 49, 66–67, 90–97) 2,852 0.03 0.01 1,308 0.03 0.01 –14.43
9 HS 99 7,241 0.08 0.02 1,269 0.02 0.01 –29.41
Source: World Bank staff own calculations, based on data from UN Comtrade.
Goods and services trade to build endowments 101
Table 4.2: Sudan’s Total Exports Across Aggregate Destinations, 1996–2013
DESTINATIONS
Sudan’s Rest of
Total Exports Europe &
(US$ ‘000) EU28 Central Asia China Rest of Asia MENA USA Canada ROW World
1996 144,379 8,040 38,483 55,467 43 19,635 65 4,113 270,225
1997 194,635 13,610 23,005 70,112 21,590 12,931 52 19,806 355,741
1998 208,384 15,584 1,467 90,987 36,701 3,350 429 15,489 372,391
1999 161,020 9,340 53,294 173,897 181,790 63 92 47,730 627,226
2000 246,569 7,560 731,728 608,550 141,921 1,913 87 24,781 1,763,109
2001 219,306 4,643 938,127 491,311 95,556 3,592 484 32,334 1,785,353
2002 230,910 18,485 1,157,585 434,971 238,962 1,458 154 20,027 2,102,553
2003 243,586 13,498 1,441,821 715,593 226,741 3,061 159 38,216 2,682,674
2004 208,496 14,173 1,705,877 1,633,919 318,436 3,839 11,555 30,552 3,926,848
2005 184,741 9,799 2,614,462 2,073,633 263,425 14,082 66,409 67,086 5,293,637
2006 145,141 13,585 1,943,482 3,466,392 304,680 6,501 63,137 96,519 6,039,436
2007 200,789 19,347 4,171,239 3,712,186 352,068 8,072 60,513 59,569 8,583,783
2008 190,918 24,914 6,325,890 5,940,921 549,862 5,404 64,504 193,158 13,295,571
2009 147,697 11,259 4,684,822 2,285,461 916,546 10,732 60,105 89,371 8,205,993
2010 128,918 6,830 6,671,907 2,137,653 1,700,399 8,801 80,596 135,241 10,870,344
2011 476,714 11,886 9,541,534 2,892,705 2,476,802 11,238 118,343 176,517 15,705,740
2012 190,383 14,306 1,554,267 679,768 516,851 6,991 106,421 92,335 3,161,322
2013 237,749 29,593 2,100,023 949,589 715,081 10,904 70,696 17,003 4,130,638
CAGR 2.98 7.97 26.52 18.18 77.16 –3.40 50.88 8.71 17.40
whole period
CAGR –0.28 11.07 8.45 3.48 13.25 14.32 67.48 –2.86 6.77
since 2000
CAGR –29.38 57.79 –53.09 –42.71 –46.27 –1.50 –22.71 –68.96 –48.72
since 2011
Source: World Bank staff own calculations, based on data from UN Comtrade.
Note: CAGR=Compounded annual growth rate.
Sudan’s level of exports to the EU has been these products have been consistently and histori-
steady but erratic, with some diversification. The cally sold by Sudan to the EU, while undenatured
EU’s reported imports from Sudan have fluctuated ethyl alcohol emerged as a significant product in
in a band from US$100 million to US$250 million 2009. Cotton and raw hides and skins, which were
since 1996. It is significant to note that unlike the a large part of the EU’s exports to Sudan in the late
United States, the EU has not engaged in significant 1990s, have declined in relative importance. Over
import bans but has participated in the financial the period 1997–2001, the largest classification of
sanctions. The variety of imports from Sudan has EU imports from Sudan is “aircraft, spacecraft, and
fluctuated over the years. As of 2013, 90 percent parts thereof” (HS 88), for which the story is not
of the EU’s imports from Sudan have consisted of obvious.
gum Arabic, sugar and sugar products, sesame seeds China has experienced a spectacular increase
and undenatured ethyl alcohol. The first three of in its share of Sudanese exports since 2000. In
102 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
2000 China’s share reached 42 percent, which setter in those areas. In regional markets Sudan plays
increased thereafter—with some fluctuation—until a similar role for sheep and sheep meat, and on an
it reached over 60 percent in the two years preceding emerging basis in waste and scrap of primary cells
the secession of South Sudan. Afterward, its share (Figure 4.3.2).51
decreased moderately, but nevertheless continued Sudan is likely a price taker in its other
to be the destination of over one half of Sudan’s export markets, with market shares small or
exports (Figure 4.3.1 and Table 4.2). The shares of negligible in recent years (Figure 4.3.3). Sudan’s
the rest of Asia and of Middle East and North Africa global market share of crude oil abruptly fell to
have been more variable, though relatively impor- 0.12 percent after the split in 2011. At that time, the
tant throughout the whole analyzed period. Asia share of raw sugar returned to its historic percent-
peaked at 41 percent in 2004 and then slowly got age range it had had since 2003 (around 0.2 per-
back to its lower shares of the initial years (around cent), which even more than doubled and reached
20 percent). In turn, Middle East and North Africa 0.5 percent in 2013. The share of non-monetary
reported its highest share in 1999, when it absorbed gold sharply increased above its historic trend in
29 percent of Sudan’s exports, and then abruptly fell 2009, when it reached 1.2 percent, and after a brief
below 5 percent and remained at around that level fall in the two subsequent years it escalated to 1.3
for ten years. Since 2009 its share slowly picked percent in 2012.
up again, getting to 17 percent in 2013, probably Sudan’s main export products 52 tend to
driven by the increases in livestock exports in that exhibit very low diversification across desti-
region as described in Chapter 3. nations, with only four of them having been
The spectacular rise and recent fall of exported to more than seventeen countries
Sudan’s exports to China is driven by oil. During between 1996 and 2013. These more global prod-
the period 1996 to 1998, and perhaps earlier, the ucts are: gum arabic, which was exported at least
dominant Sudanese export to China—based on once to 87 different markets; sesame seeds, exported
China’s mirror data—was cotton. Sudan’s exports at least once to 75 different markets; refined oil, sold
of oil to China began in 1999, and from 1999 to in 38 markets; and cooper waste and scrap, sold in
2011 exceeded 98 percent of total Sudanese exports 27 markets (Figure 4.3.4). The EU is the primary
to China in most years. Even after the departure of market for gum arabic, MENA for sesame seeds,
Sudan, China’s imports of Sudan were still around and China and the rest of Asia for copper waste
90 percent oil in 2013. The remaining exports and scrap. Most refined oil is destined for “Rest of
of Sudan to China consist largely of oilseeds (i.e. World,” which includes SSA.
sesame seeds), worth US$115 million in 2015, and Meanwhile, the remaining seven top export
cotton (US$44 million), with some role for metal- products were sold in fewer markets, ranging
lic ores (US$17 million) and (very recently) food between three and 17 individual countries.
industry residues and fodder (US$11 million) as Indeed, between 1996 and 2013, crude oil was
well as plastics and plastic products (US$6 million). exported to 17 countries, raw sugar not contain-
Non-oil exports from Sudan to China have recently ing added flavor was exported to 14 countries,
grown dramatically, from around US$40 million in
2009 to US$200 million in 2013.
51
“Waste and scrap of primary cells” refers primarily to used auto bat-
Sudan has significant market power in global teries shipped mainly to South Korea, which likely recycles the lead
export markets for gum arabic and sesame seeds. and other heavy metals to incorporate them, possibly, into batteries
for Korean-made autos.
Sudan’s power in global markets for gum arabic and 52
These are the 11 products with the largest export values in Sudan’s
sesame seeds allude to its role of being a global price export data for year 2012. See Table 4.3 for the list.
Goods and services trade to build endowments 103
Table 4.3: Destinations of Sudan’s Primary Non-Crude Oil Exports
Product # destinations ever sold to (1996–2013) Primary destinations (2012–2013)
Gum arabic 87 European Union 76%
Sesame seeds 75 Middle East/North Africa 51%, China 27%
Refined oil 38 Rest of World 95% (includes SSA)
Copper waste and scrap 27 Rest of Asia 62%, EU 22%, China 16%
Crude oil 17 China 72%, Japan 18%
Raw sugar 14 EU ~100% (Poland, Spain, Romania, Finland)
Waste and scrap of primary cells 10 South Korea 93%
Ethyl alcohol, undenatured 10 EU ~100% (Netherlands, Italy, France)
Gold, non-monetary 8 United Arab Emirates 78%, unspecified 17%
Sheep meat, fresh & chilled 6 Jordan 100%
Live sheep 3 Saudi Arabia 100%
Source: World Bank staff own calculations, based on data from UN Comtrade.
undenatured ethyl alcohol, and waste and scrap of both recently (just 0.8 percent between 2007 and
primary cells to 10 countries, non-monetary gold 2012) and even less further in the past (0.09 percent
to eight countries, fresh or chilled meat of sheep to between 2000 and 2006), evidencing the strong
six countries, and sheep to only three individual recent dependence of the country on oil export and
countries in the gulf states (see also Chapter 3 on the vulnerability associated with lack of diversification
livestock exports). Sudan has exhibited slower growth than the
There is considerable variability in the world’s average in most of its top export products
important destinations for each of Sudan’s in recent years. The notable exception is crude oil
less market-diversified main export products (before 2011), which was by-and-large its main
(Table 4.3). Indeed, whereas sheep and sheep meat export product, and of a few other products, such
are exported mainly to countries in the MENA, raw as cane molasses between 2000 and 2006, and
sugar and undenatured ethyl alcohol are sold pri- non-monetary gold, sheep, sheep meat, and cop-
marily to European Union countries. Crude oil is per waste, between 2007 and 2012. This behavior
exported mainly to South and South-Eastern Asian can be seen from Figure 4.3.7, where the size of the
countries, and the same is true for waste and scrap bubble reflects the share of Sudan’s export value of
of primary cells, especially in recent years. Exports such product in the final year, reflecting its impor-
of non-monetary gold are more geographically tance in Sudan’s export basket. When a bubble is
diversified, even though still concentrated in a small above the red line, it implies that Sudan’s exports
number of targeted markets. of the product it represents have grown faster than
The analysis provides evidence of the strong the world exports of the same product, and simi-
recent dependence of Sudan on oil export and the larly that Sudan has increased its market share for
vulnerability associated with a lack of diversifica- that product. The top panel shows that most of the
tion. As can be seen from Figures 4.3.5 and 4.3.6 main export products of Sudan grew more slowly
the loss of South Sudan and its indirect effects has than world exports of the same products between
brought an end to Sudan’s strong export performance, 2000 and 2006. In the second period (2007–2011),
both in absolute terms and relative to comparator which comprises the split of the country in 2011),
countries. Non-fuel exports have grown very slowly sheep, sheep meat, copper waste, and especially
104 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 4.3: Export Growth and Orientation
1) Evolution of Aggregate Destinations’ shares 2) Sudanese products with larger world
in Sudan total exports, 1996–2013 market shares, 2013
100% 40%
80%
30%
60%
20%
40%
10%
20%
0% 0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
1996
1998
2000
2002
2004
2006
2008
2010
2012
EU28 Rest of ECA China Rest of Asia Sheep Sesame seeds Gum arabic
MENA USA Canada ROW Other meat of sheep, Waste and scrap of
fresh or chilled primary cells
3) Sudanese products with larger world 4) Shares of destinations in Sudan’s exports,
market shares, 2013 2006–2007 and 2012–2013 averages
2% 100%
1%
50%
1%
0% 0%
06–07 12–13 06–07 12–13 06–07 12–13 06–07 12–13
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Gum Arabic Sesame Refined oil Copper waste
Crude oil Non-monetary gold Refined oil seeds and scrap
Raw sugar not containing added flavor EU28 Rest of ECA China Rest of Asia
Copper waste and scrap Undenatured ethyl alcohol MENA USA Canada Rest of World
5) Export growth around the world, 6) Export growth around the world,
all products including oil, 2013 all products excluding oil, 2013
23 24 24 23
19 22
17 16 19
13 12 12
10 10 8 11 17 16
8
5 5 15
12 11
10 10
9 8
8 8 8
6 6
5
4
–18
2000–2006 2007–2012 2000–2006 2007–2012
Sudan Kenya Ethiopia Uganda Egypt Morocco Gahna Indonesia Mongolia
Source: World Bank staff own calculations, based on data used from UN Comtrade.
Note: (4) and (5): Data for Sudan in the second period were built by appending 2012 data for the new definition of Sudan (SUD). Data for Mongolia in the
second period only span 2007–2010 due to lack of export data covering 2011 and 2012.
(continued on next page)
Goods and services trade to build endowments 105
FIGURE 4.3: Export Growth and Orientation (continued)
7) Growth of former Sudan’s exports to 8) Growth of former Sudan’s exports to
its top 10 products relative to World exports its top 10 destinations relative to World exports
30 30 CHN ARE
Crude oil
20 20 JPN
Cane molasses
Sheep Gum arabic 10 IDN
10
Cotton EGY SAU
Sesamum seeds Gold 0
0
Other vegetables SYR
–10 GRB
–10 Sheep meat
Other oil seeds –20 SGP
–20 ITA
–20 –10 0 10 20 30 –20 –10 0 10 20 30
Sudan Growth (2000–2006) 45 degrees line Sudan Growth (2000–2006) 45 degrees line
40 ARE
Sheep meat Gold 60
Sheep
30 ITA
40 ETH
20 Cooper waste
20 SAU CHN
Sesamum seeds CAN
10 Crude Refined oil IND
oil Other waste THA
0
0 Gum arabic JPN
Cotton –20
–10 IDN
–10 0 10 20 30 40 –20 0 20 40 60
Sudan Growth (2007–2011) 45 degrees line Sudan Growth (2007–2011) 45 degrees line
Source: World Bank staff own calculations, based on data used from UN Comtrade.
gold improved their growth performance outpacing United Arab Emirates, and Japan between 2000 and
the global average, at the same time that exports of 2006, between 2007 and 2011 its exports to seven
crude oil slowed down, performing approximately of its top ten destinations grew faster than the world
par to the world average. average, thus expanding Sudan’s market share in all
On the other hand, Sudan has shown a rela- of them. It is worth noting that exports to China,
tively better performance in terms of market which is by far Sudan’s most important destination
diversification, which has markedly improved in both sub-periods, have always grown faster than
in recent years. This is shown in Figure 4.3.8, the world average, even though this advantage is
where the size of each bubble reflects the share of less marked in more recent years.
Sudan’s export value to such destination in the final
year, accounting for its relative importance. When a c. Export diversification and survival
bubble is above the red line, it implies that Sudan’s
exports to that destination have grown faster than Export diversification
the world exports to it, and similarly that Sudan has Sudan’s export basket is very concentrated,
increased its market share in such market. Whereas as shown the large shares of its top three and
Sudan’s world market share only increased in China, five export products, but the degree of product
106 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
concentration decreases when looking at non-oil 2010 and 2012 (Figure 4.4.5). This confirms the
exports. Even though these measures have tended conjecture suggested by the indicators on exporter
to decrease after the split of the country, especially size that the concentration among Sudanese export-
in the case of the top three products, the figures still ers is increasing substantially during this period (see
evidence a severe dependence of Sudan upon few the previous discussion of Figure 4.1).
commodities. However, the degree of product con- The diversification of Sudan across desti-
centration decreases considerably when only non- nation markets is also low, and has remained
fuel products are considered (compare Figure 4.4.1 approximately constant (Figure 4.4.6). It is also
with Figure 4.4.2). As figure 4.4.2 also shows, the much lower than that of most of its comparators,
measured concentration of non-fuel exports has with only Mongolia exhibiting a worse performance
increased markedly in the last few years. This is than Sudan in this respect. Together with the low
explained by the emergence of gold exports, which product diversification of the country, this evidences
became Sudan’s second largest export in 2009 (and a highly vulnerable situation of the country in its
largest non-oil export). This implies that after the integration into global markets.
secession of South Sudan, the country may have Using exporter-level data confirms both find-
been forced into a path of higher product diversifi- ings of low diversification in product and des-
cation, which could work to its advantage in future. tination markets. In fact, it shows that the degree
Even though the share of the top three and five non- of diversification of Sudan’s non-oil exporters is
oil products have increased after the secession of low in absolute and in relative terms. Firm-level
South Sudan, they are still relatively low. However evidence suggests that most exporters have a very
the number of products, which always had been limited portfolio of products and destination mar-
low, showed a mild increase between 2006 and kets. Interestingly, Sudan’s non-oil exporters are
2011, but fell again after the split of the country. quite homogenous in their low product diversifi-
The lack of product diversification of cation as the standard deviation of the number of
Sudanese exports also stands out when com- products per exporter in the country is 3 compared
pared to peer countries, as evidenced by its com- to standard deviations of 6 and 9, respectively, in
paratively much higher Herfindahl-Hirschman Ethiopia and Tanzania. In terms of destination mar-
index.53 This has furthermore increased in recent ket diversification, most of the African comparators
years, while in many of its comparators it has actu- are similar, with a median number of destination
ally decreased. This points out to a comparatively countries per firm of 1 and a standard deviation of
disadvantaged position, both static and dynamic. close to 3. Sudan falls closely within those ranges
Figure 4.4.3 presents the index comparing Sudan (World Bank Exporter Dynamics Database).
and some comparator countries. A few multi-product multi-destination
Using exporter-level data and calculating the exporters typically amass the majority of total
Herfindahl index confirms the observed high exports in a country, but less so in developing
level of concentration. The Herfindahl index of countries including Sudan. Large firms often
exporter market shares is similar to Figure 4.4.3 and define exports from one country; well-known exam-
shows that in Sudan is significantly higher than in ples include Nokia in Finland, Samsung in Korea,
other countries (Figure 4.4.4). Indeed, again, Sudan
exhibits the highest level of concentration among
its regional comparators. In addition, there is actu- 53
The Herfindahl-Hirschman index is calculated as the sum of the
squared market shares for all products. Higher values indicate in-
ally an observable increase in the Herfindahl index creasing concentration, with a maximum score of 1.0 when there is
of Sudanese exporter shares particularly between a single product.
Goods and services trade to build endowments 107
FIGURE 4.4: Export Concentration and Survival
1) Export concentration in terms of all products, 2) Export concentration in terms of all products,
including oil excluding oil
1.00 150 0.60 150
0.50
0.95
100 0.40 100
0.90 0.30
50 0.20 50
0.85
0.10
0.80 0 0.00 0
2006 2011 2012 2006 2011 2012
Share of top 3 products Share of top 5 products Share of top 3 products Share of top 5 products
Number of products Number of products
3) Herfindahl-Hirschman Index at the products level, 4) Herfindahl index of exporter shares,
Sudan and selected countries Sudan and selected countries
1.0
Sudan 0.16
Zambia 0.14
Tanzania 0.06
0.5 Cameroon 0.03
Uganda 0.02
Ethiopia 0.01
Kenya 0.01
0.0
Average 2000–2006 Average 2007–2012 0 0.05 0.10 0.15
Egypt, Arab Rep. Ethiopia Gahna Indonesia Herfindahl index of exporter shares
Kenya Morocco Mongolia Uganda Sudan
5) Herfindahl index of exporter shares, 6) Sudan‘s export concentration in terms of
change over time, Sudan destination markets
0.4 1.0 127
Herfindahl index of exporter shares
0.90 0.94 0.93
0.8 0.88 126
0.3
126 125
0.6
0.2 124
0.4 123 0.40
0.35
123
0.1
0.2 122
0 0.0 121
2008 2009 2010 2011 2012 2006 2011
Share of top 3 markets Share of top 5 markets
HH market index Number of markets
Source: World Bank staff own calculations, based on data used from UN Comtrade; and the World Bank Exporter Dynamics Database.
Note: (4) and (5) is based on exporter level data. It shows the same trend as UN Comtrade data.
(continued on next page)
108 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 4.4: Export Concentration and Survival (continued)
7) Decomposition of Sudanese export growth 8) Export survival rates of Sudan compared to
along margins of trade in recent years peer countries (2000–2011)
126
125 100
112
105 90
80
85
70
65 60
45 50
25 40
0.1 0.5 0.6 4.0 0.1 1.0 0.5 1.9 30
5
20
–15 –6 –11 10
–14 –15
0
Export growth decomposition Export growth decomposition
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2000–2006 2007–2012
1 Increase of existing products in established markets Sudan Ghana Egypt
2 Decrease in existing products in established markets Indonesia Ethiopia Morocco
3 Extinction of exports of products in established markets Kenya Mongolia Uganda
4 Introduction of new products in new markets
5 Introduction of new products in established markets
6 Introduction of existing products in new markets
7 Product diversification in established markets
Source: World Bank staff own calculations, based on data used from UN Comtrade.
and Intel in Costa Rica (Freund and Pierola 2012). new destination markets. Indeed, not only has
But Sudanese exporters are poorly diversified both the country had almost no other export increases
in terms of products and destinations. They exhibit beyond those attributed to the expansion of existing
significantly lower numbers of HS 6-digit products products to established markets, but also has even
exported per firm and significantly lower number of experienced decreases and even the extinction of
destination markets per firm than comparable coun- such traditional products in traditional markets.
tries. This poor diversification performance is also Furthermore, these last indicators have worsened
explained by the absence of a few highly diversified in recent years (Figure 4.4.7).
multi-product multi-destination export superstars When compared to peer countries, the sur-
dominating exports, a phenomenon commonly vival rates of Sudan are almost always the lowest
observed in other countries. In Sudan in 2012, only since the early 2000s (Figure 4.4.8). This shows a
2 percent of Sudanese exporters sold more than ten very fundamental weakness of the country and fol-
products and surprisingly they accounted for just 3 lows naturally from the low performance it has shown
percent of total non-oil exports. See also Annex 6, in all the indicators that have been evaluated so far,
Table 0.15 for details on the distribution of export- both in absolute terms and compared to its peers.
ers across products and destination.
B. Services Trade
Export survival
The analysis of Sudan’s exports across the exten- a. Overview
sive and intensive margins of trade evidences
the lack of capacity of the country to expand Services and trade-in-services have an important
its range of exported products and to explore role in economic diversification. Services are
Goods and services trade to build endowments 109
essential intermediate inputs and have the poten- constraints to the provision of adequate professional
tial to enhance productivity and increase technol- services in Sudan. The section shows the importance
ogy and skills transfers through significant positive of both exports and imports of high-value added,
spillover effects throughout the economy. Services sophisticated services and professional skills for
sectors can help Sudan diversify its economy and export diversification and increased competitive-
reduce poverty. For example, while the agricultural ness. The chapter also illustrates how regulatory and
sector is viewed as an important engine of growth, it trade policy reforms can be coordinated as part of
has remained far below its potential and the country regional and multilateral negotiations. Policy recom-
has stayed a net importer of agricultural products. mendations call for action in four areas: education,
The productivity of farms will have to improve to regulation of professional services, trade policy,
increase agriculture production. That means better and labor mobility at both the national and inter-
transport infrastructure, agricultural technology, national level.
and support services including financing. There is also potential for Sudan to develop its
Sudan’s economy faces numerous challenges Tourism sector based on its rich history, but there
that hamper the development of the services sec- are also great challenges. Box 4.2 describes the
tor. While services such as transport and logistics, potential, but also the great challenges for tourism.
financial services, or energy are addressed in the From the analysis, which was originally carried out
context of various World Bank or other develop- for the DTIS Update in 2014, it is clear that develop-
ment partner projects, higher-value knowledge- ing the tourism sector is a long-term endeavor that is
intensive services such as business services remain closely linked to the country image of Sudan and the
largely neglected. fact that sanctions imposed on Sudan prevent tour-
Weak regulatory frameworks characterize ism technology to facilitate the sector’s development.
most business services sectors. While regulatory
self-assessments by ministries and regulators seem b. Trade-in-Services in Sudan
to suggest that the frameworks in place are adequate,
the private sector points to numerous regulatory Sudan’s share of services Value Added (VA) in
weaknesses. Also, stakeholders from both the pub- GDP is lower than expected for a country at its
lic and the private sectors mentioned the absence level of development. A comparative assessment
of adequate regulations and standards. There seems of the share of services VA in GDP for Sudan and
to be a strong interest in developing the necessary selected Sub-Saharan African countries reveals that
regulatory framework using “good practice” from Sudan’s falls below the fitted curve in 2000–2 and
the region or elsewhere as guidance. Additional 2010–12, implying a smaller services sector than
constraints in business services sectors are skills expected for the country’s level of development
shortages and mismatches. (Figure 4.5.1).
This section focuses on professional ser- Services export growth remains below that
vices, a set of higher-value knowledge-intensive of goods exports and GDP growth. Sudan stands
services sectors that are characterized by high in stark contrast with most neighboring countries
regulatory intensity and are crucial for skills regarding growth of services exports compared to
generation, which in turn are essential for diver- that of goods exports and GDP. While most Sub-
sifying the human capital endowment of a coun- Saharan African countries register more dynamic
try. A diagnostic of professional services markets growth rates for services as compared to goods
in Sudan based on a recent World Bank Survey on exports or GDP growth, Sudan’s services exports
Professional Services highlights the demand and the performance remains below potential (Figure 4.5.2).
110 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
BOX 4.2: Tourism in Sudan: Great Potential, Great Challenges
Rich history and great potential
Sudan has an opportunity to become an important global tourism destination. While largely unknown, Sudan has compelling
attractions that could be of strong interest to tourists that seek out culture, adventure, wildlife, and scuba diving opportunities.
Realizing this potential requires the removal of regulatory and policy constraints, ensuring stability and security, and improving the
country’s image in international markets. Addressing these issues will provide the foundation for a productive and dynamic tourism
sector in Sudan that can make significant contributions to economic growth, employment generation, cultural and environmental
preservation, and social inclusion.
Sudan is home to a number of world-class tourism attractions based on its unique cultural and natural resources. However, the
reality of a country rich in natural and cultural resources has been overshadowed by the negative consequences of a lengthy civil war
and social conflict culminating in the secession of South Sudan in July 2011. Even after South Sudan’s secession in July 2011, Sudan
continues to suffer from insecurity, be it the conflicts in the states border South Sudan (South Kordofan, Blue Nile), the Darfur areas,
or Red Sea states, which all, at various intensities show some level of conflict.
In terms of culture, the country is well endowed with temples, monuments, and tombs dating back to the time of ancient Egypt, with
which the Sudanese lands were closely connected. In fact, Sudan hosts a collection of pyramids that even outnumbers those found in Egypt.
The influences of Christianity (6th century) and Islam (7th century) are also reflected in churches, mosques, and numerous religious antiquities.
The country has a diversity of natural attractions in line with its varied ecosystems. The West is characterized by semi-desert
conditions, the North is dominated by the arid Nubian Desert, the East contains over 700km of Red Sea Coast, and the South contains
forested mountains, swamps, and rainforest. The country has eight national parks, two of which are marine-based. Some of the land-
based parks have pockets of terrestrial wildlife that attract tourists interested in safaris. There is also a small hunting market. Yet the
country’s top nature tourism product is scuba diving along the well-preserved coral reefs that line the Red Sea Coast.
Great challenges ahead
But issues related to the Sudan’s country image prevail as the key obstacle to further development of the tourism sector. Addressing those
issues requires a demonstrable commitment to tourism by enacting key policy changes. Image problems are particularly prevalent among
post-conflict countries. Yet many countries, particularly in Africa, have seen success in their post-conflict tourism development efforts. Sudan
needs to take some critical initial steps, firstly reducing the bureaucracy and red tape required for obtaining visas, permits, and licenses.
Sudan needs to show that it is open to tourism and truly work towards its facilitation. Without stability and security, tourist development
efforts will yield limited returns. With them, and in combination with effective sector stewardship, the country’s image will improve.
The current visa regime is not conducive to tourism. Unlike most other export sectors, tourism depends upon the customer coming
to the place where the products and services are supplied. As this entails cross-border movements of tourists, immigration and entry/
exit control regulations play an important role in the sector. Travel to Sudan is bureaucratic, time consuming, and expensive for the
tourist. Unlike nearly every other country in Africa, no tourists are eligible to obtain visas on arrival in Sudan. Instead, all tourists need
to procure visas prior to arrival (or work with a registered local tour operator who can arrange for a counter visa for an additional
cost). This process is not only expensive (approximate visa cost is US$100) but also requires the additional logistical burden of having
to acquire a letter of invitation/introduction. Those not living in cities with a Sudanese consulate must bear the additional costs of
sending application materials to a Sudanese consulate through a courier service.
In-country bureaucratic procedures are an impediment to the free flow of tourists. Visitors are required to register with the Ministry
of Interior within three days of entering the country. Registration costs US$60 in Khartoum and can consume the better part of a day.
Alternatively many hotels will complete the registration on behalf of the tourist, but this still entails the tourist spending at least 24 hours
in Khartoum before proceeding to the desired destination. Registration can be also done at the Red Sea for tourists that fly directly
into Port Sudan. Additionally, tourists are required to obtain permits from the Ministry of Tourism for land travel and photography of
any kind (at no cost). These extra burdens and costs, for which no parallel can be found within countries trying to promote tourism,
act as a strong deterrent to prospective tourists.
U.S. sanctions against Sudan blocks access to tourism technology and use of credit cards. The U.S. embargo has had a negative
impact on tourism to the country, both in terms of creating a much more challenging business environment for operators as well as
creating a major inconvenience for tourists. Tourism businesses face major challenges when trying to obtain essential equipment such
as commonly used front desk and restaurant management systems. Without the ability to use credit cards, they must spend time and
money to obtain licenses in order to make international transfers of funds. The embargo also results in high transactional costs for
tour operators and hotel owners to receive funds sent by international tour operators via non-commercial banking systems such as
Western Union or wired through third-party accounts in neighboring countries.
Most importantly, international tourists are accustomed to using a credit card to guarantee services prior to arrivals or paying
for services once in the country. Many also rely upon being able to withdraw local currency through ATM machines. Yet, as ATM and
credit cards are not accepted in Sudan, tourists are forced to bring all the funds needed for their trip in cash. For example, a family of
four visiting the country for 10 days (at an average expenditure rate of US$150 per person) would need to carry US$6,000. This is not
only a major inconvenience, but also creates safety concerns. Likewise, it represents an added risk to tourism businesses, which have
to ensure services (accommodations or tours) without a guarantee of being paid in case the tourists do not appear.
Source: Excerpt from World Bank 2014e.
Goods and services trade to build endowments 111
FIGURE 4.5: Trade-in-Services in Sudan
1) Services Value Added and Development in 2000–02 versus 2010–12
100 100
Average services value added
Average services value added
SYC
as % of GDP, 2000−02
as % of GDP, 2010−12
80 80
SYC MUS
MUS
60 RWA ZMB 60 UGA RWA KEN
MOZ KEN MWI
MWI UGA SDN
40 SDN 40 MOZ ZMB
20 20
6 8 10 12 6 8 10 12
Average log GDP per capita PPP, 2000−02 Average log GDP per capita PPP, 2010−12
2) Sudan‘s Exports of Goods, Exports of Services, 3) Exports of Transport, Travel, and
and GDP Growth, 2005–2012 Other Commercial Services, Sudan, 2005–2012
25 25
20 20
Index 2005 = 1
15 Index 2005 = 1 15
10 10
5 5
0 0
2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012
Exports of goods Exports of service GDP Other commercial Transport Travel
4) Services Imports, Sudan and COMESA
COMESA 2012
Sudan 2012
Sudan 2005
0 20 40 60 80 100
Transport Travel Communications Construction Insurance
Financial ICT Royalties OBS Personal recreation
Source: World Bank staff own calculations, based on data from World Bank, World Development Indicators.
Note: (1) The figure shows scatter plots of average services value added as a percentage of GDP against the log of average GDP per capita in purchas-
ing power parity (PPP, current international US$) for the periods 2000–2002 (left panel) and 2010–2012 (right panel). The line indicates the fitted values
obtained by a linear prediction of the relationship between share of services in total value added and income per capita.
Sudan registers more dynamic growth rates suggests the existence of some modern services
for other commercial services exports than for (Figure 4.5.3). This suggests that some modern,
exports of travel or transport services, a fact that high-value-added services sectors already contribute
112 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
to export diversification and provide new oppor- the constraints to the development of professional
tunities for export development. Indeed, a recent services, showing how inadequate domestic regula-
survey of providers of professional services carried tions in conjunction with a lack of regional coop-
out by the World Bank shows that about one-third eration holds back the development of the national
of respondents in Sudan reported exports of ser- markets for services, and creates skills shortages and
vices in 2011 (19 out of 60), a higher proportion skills mismatches, all of which have negative implica-
than in most COMESA countries (15.7 percent at tions for competitiveness and limit exports.
the COMESA level). These exports of professional
services concerned, for the most part, regional cli- Professional services matter for Sudan’s
c.
ents, and represented on average a third of exporters’ growth
total revenue. This suggests that there is potential
to develop Sudan’s services exports provided an Professional services contribute directly and
appropriate trade policy and regulatory framework indirectly to economic growth, including low-
are put in place and obstacles faced by profession- ering transactions costs and creating spillover
als are lifted domestically and at the regional level. effects of knowledge to other sectors. For exam-
Sudan’s services imports are undiversified. ple, engineering and IT services are knowledge-
Imports of services can drive Sudan’s competitive- intensive sectors essential to the productivity and
ness. Imports of intermediate inputs such as trans- sustainability of other economic activities, includ-
port services, construction, insurance, and other ing the oil sector. Civil engineering is critical for
business services can improve the productivity of the development and maintenance of a country’s
manufacturing and services firms. Also, services physical infrastructure, while electrical engineer-
can help address shortages in crucial sectors of the ing is important to the operation of public net-
economy. For example, imports of professionals works such as utilities or commercial facilities and
help alleviate Sudan’s skills shortages in health- communication systems (Cattaneo et al. 2010).
care, education, or professional services. However, IT-based services including application services
at this stage Sudan’s services imports are for the (such as application development and maintenance,
most part comprised of transport and travel ser- system integration, IT infrastructure services, and
vices (Figure 4.5.4). Sudan’s access to competitive IT consulting), or IT engineering services (such as
services from which to draw high quality services manufacturing, engineering, and software product
inputs is inadequate. Poor access to such critical development) also have an important impact on
services translates into a competitive disadvan- productivity and growth. Accountancy is critical for
tage in any sector, be it services, manufacturing accountability, sound financial management, and
or agriculture. The fragmentation (by restrictive good corporate governance (Trolliet et al. 2003).
regulatory policies and regulatory heterogeneity) of Users of professional services in Sudan are
regional markets for these services prevents Sudan more productive than non-users. Data from the
from fully benefiting from the potential gains from World Bank Survey of Users of Professional Services
greater trade-in-services. Again, regional coopera- in Sudan show that firms that use accounting ser-
tion to facilitate the movement of various profes- vices—whether externally outsourced or provided
sionals could help address skills shortages or gaps in-house—have higher average labor productivity
in relevant sectors. than firms without such professional services link-
Ensuring efficient access to a wide range of ages (Figure 4.6.1). Also, the labor productivity gap
services is a key determinant in international com- between users and non-users of accounting services is
petitiveness and efficiency. This chapter identifies higher in Sudan as compared to the COMESA average.
Goods and services trade to build endowments 113
Respondents to the World Bank Survey of The high usage of professional services and the
Users of Professional Services listed a number higher productivity of Sudanese firms that use pro-
of channels through which professional ser- fessional services than that of non-users may suggest
vices affect their productivity and performance. that professional services are equally important for
While many respondents indicated that they use the development of the economy as they are in more
accounting services because of statutory require- developed economies.
ments, they also name accounting services as useful Despite demand for professional services
for maintaining and improving existing activities Sudan is characterized by limited availability
within enterprises and as helpful in accessing loans. of professionals and skills mismatches in engi-
Accounting and audit services also help manage neering and accounting services. While detailed
costs, expenses, and income of the firm, disclose data on the exact magnitude of professional skills
the company’s financial health, undertake future shortages in Sudan is unavailable, consultations with
planning, and comply with tax laws and require- practitioners confirmed that the current demand for
ments. Engineering services help firms understand qualified accountants or engineers in Sudan is grow-
technological advancements and how to use them ing and is much larger than the available supply.
effectively to construct, install, and maintain their Supply of professional services is limited by
machinery in normal operating condition. Still, rent-seeking opportunities. Even though profes-
such knowledge-intensive services remain largely sionals in Sudan receive high nominal wages rela-
neglected and their development and export poten- tive to their counterparts in other African countries,
tial remains overlooked. reflecting their scarcity relative to demand for their
The business surveys undertaken in Sudan services, interviews revealed that there are limited
report a high level of demand for professional incentives to become and practice as a professional
services by the surveyed firms. The results of the in Sudan given rent-seeking opportunities in the
user surveys (Figure 4.6.2) suggest that account- public and the oil sectors. A more severe scarcity
ing, engineering, and legal services are important of engineers as compared to that of accountants
intermediate inputs in the production of many sec- in Sudan is reflected by the earnings differential
tors with more than 50 percent of all interviewed between those two types of professionals (compare
enterprises using such services at least once per year. Figures 4.6.5 and 4.6.6).
Demand for these services is expected to increase It is worth noting that discussions with the
with economic growth in Sudan. private sector revealed that Sudan is facing not
There is demand for basic and more sophis- only a shortage of highly skilled professionals
ticated professional services. The surveys show but also middle-level skills shortages. Middle-
that there is demand for all types of services, from level professionals who can provide services to
accounting and auditing, to tax advice and man- underserved client segments and produce large
agement consulting. Financial auditing is the main economic gains are sometimes an underappreciated
source of revenue for accounting and auditing category of professionals. For example, accounting
firms in Sudan, followed by accounting/bookkeep- technicians can provide basic recordkeeping ser-
ing and management consulting and tax advice vices needed by SMEs. Engineering technicians can
(Figure 4.6.3). Engineering firms in Sudan earn, on provide basic or standardized engineering services
average, the largest fraction of their revenues from and are crucial in supporting engineering projects.
providing planning and managing maintenance, Thus, the absence of middle-level professionals in
survey sites, other services related to engineering, Sudan needs to be addressed. In the context of the
and project management services (Figure 4.6.4). shortages of professionals at all levels and given
114 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 4.6: Professional Services in Sudan
1) Average Productivity of Users vs. Non-Users of
Accounting Services, Sudan and COMESA 2) Usage of Professional Services, Sudan
14 100
12
80
10
8 60
6 40
4
20
2
0 0
Accounting – Sudan Accounting – COMESA Accounting Architecture Engineering Legal
Users Non-users Users Non-users
3) Demand for accounting services in Sudan 4) Demand for engineering services in Sudan
Planning and managing 19%
71% maintenance, survey sites 10%
Financial auditing Other services
41% 18%
related to engineering 8%
Project management 17%
Accouting 13% (incl. monitoring of execution) 12%
(incl. bookeeping) 23% Engineering consulting 15%
18%
Design and planning 10%
Management 11% 13%
consulting 12% Constuction cost 6%
management 8%
Tender and contract 6%
5% administration 13%
Tax advice
12% Feasability studies 5%
9%
Environmental assessments 2%
Other services 1% 5%
related to accounting 11% Testing and certification 1%
4%
Sudan COMESA Sudan COMESA
5) Average Gross Monthly Salaries in Sudan: 6) Average Gross Monthly Salaries in Sudan:
Accounting professionals Engineering professionals
1,514 1,552
1,098 1,088 1,033
948
733 732
464 486
417 404
Managers Senior professional Junior professional Managers Senior professional Junior professional
Sudan COMESA Sudan COMESA
(continued on next page)
Goods and services trade to build endowments 115
FIGURE 4.6: Professional Services in Sudan (continued)
7) Top Regulatory Constraints Faced by Professional Services Providers in Sudan
Transparency of public procurement procedures (%)
Requirements to participate in public procurement (%)
Speed of accreditation and qualification procedures (%)
Speed of licensing procedures (%)
Number of ompetiors (%)
Fees/prices (%)
Technical standards (%)
Advertising and marketing (%)
Accreditation and qualification requirements (%)
Licensing requirements (%)
Cooperation between professsionals (%)
Shared exclusive rights (%)
Multidisciplinary activities (%)
– 10 20 30 40 50 60 70 80
Source: World Bank staff own calculations, based on data from World Bank Surveys of professional services in COMESA (2013).
that it is less costly and less time consuming to measures affect the entry and operation of profes-
train middle-level professionals, the development sionals and professional services firms, and can
of middle-level/technical professionals should be undermine competition and constrain the growth
Sudan’s priority in terms of skills formation. of the sector.
Weaknesses in primary, secondary, and ter- Based on the results of a regulatory self-
tiary education limit the ability of students to assessment performed by Sudanese ministries
acquire professional skills. Factors related to edu- and professional associations, Sudan seems to
cation, domestic regulation, trade, and labor mobility have a moderate regulatory framework for pro-
explain skills shortages and skills mismatches in pro- fessional services. Entry requirements, such as pre-
fessional services in Sudan. From a regional perspec- qualification requirements, licensing or membership
tive, enrollment in higher education is higher in Sudan in a professional association, as well as regulations
than in other Sub-Saharan African countries and is affecting the conduct/operations of professional ser-
similar to that in Middle Eastern and North African vice providers such as price regulations, advertising
countries, but the education sector shows weak learn- prohibitions, or restrictions on multidisciplinary
ing outcomes at all levels (World Bank 2012). Given activities, tend to be less stringent in Sudan than in
the relatively high enrollment rate in higher education, neighboring countries. For instance, according to
it is important that students acquire the skills that the interviewed authorities, the range of exclusive
match those needed by the labor market. activities reserved for engineering and legal profes-
A weak regulatory framework can explain sionals in Sudan are among the least restrictive in
the underdevelopment and the segmentation of Sub-Saharan African countries.54 Also, there are no
markets for professional services. Professional
services have traditionally been subject to a high
degree of regulation, as a result of direct governmen- 54
Highly skilled professionals in the different professional services
sectors generally have exclusive rights to perform certain activities
tal regulation and of rules adopted by self-regulatory (e.g., auditing, representation of clients before courts, advice on legal
bodies (professional associations). These regulatory matters, feasibility studies, design and planning).
116 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
price regulations affecting professional services, and services in Sudan include: nationality requirements
advertising prohibitions concern only accounting to provide certain professional services, prohibi-
services. A more detailed description of the regula- tions against using the name of the parent com-
tory frameworks in all examined professional ser- pany, requirements to employ a certain percentage
vices in Sudan is presented in Box 4.2. of nationals, and restrictions on the composition of
The private sector identifies several regu- management of foreign professional firms established
latory barriers affecting professional services in Sudan. Foreign professional degrees are recog-
in Sudan. Additional information on the severity nized on an ad-hoc basis. Similarly, work permits
of regulatory barriers comes from the 2012–13 are allocated and extended on a case-by-case basis.
World Bank business surveys and is presented in The public procurement of government contracts
Figure 4.6.7. This suggests that transparency and for accounting and legal services are also quite rigor-
requirements to participate in public procurement ous in Sudan—foreign providers to the government
as well as the speed of accreditation and qualifica- cannot sell numerous services. There are ownership
tions procedures are among the top regulatory con- and control limits and restrictions on the form of
straints faced by professional services providers in entry for foreign firms in all professional services
Sudan. Restrictions affecting competition such as sectors. In terms of trade restrictions on importing
advertising prohibitions and fees/price regulations professional services through mode 1—cross-border
are also important barriers for business. trade—there is little possibility for a domestic resi-
Trade barriers and immigration regulation dent firm/individual to obtain professional services
can explain the segmentation of markets for directly from a foreign professional services firm or
professional services. Trade barriers can limit office located outside the country.
competition and the efficiency of professional ser- The national markets for professionals and
vice providers. In general, foreign entry restrictions professional services in Sudan remain underde-
include: i) restrictions on the movement of natural veloped. The main priorities relate to coordinating
persons (nationality and residency requirements, the needed regulatory reforms with trade liberal-
quotas, economic needs test, limits on the length of ization, and addressing the skills shortages and the
stay, and recognition of academic and professional skills mismatches affecting professional services.
qualifications); ii) restrictions on the establishment This suggests policy action in the following areas:
of commercial presence (restrictions on foreign education, regulation of professional services,
ownership, limits on the type of legal entry, and trade policy, and labor mobility at the national and
limits on the scope of business); iii) restrictions on regional levels.
cross border trade (entry restrictions and limits on
the scope of business); and iv) restrictions on labor C. Potential for Future Trade
mobility (procedures for hiring a foreign worker). Diversification: Goods and Services
Trade restrictions in professional services
are quite severe in Sudan. Explicit barriers to Successful economic development has typically
trade cover foreign entry restrictions and discrimi- been accompanied by structural transformation,
natory conduct restrictions. Key barriers relate to in which manufacturing and industry’s share of
regulations pertaining to licensing and qualifica- output and employment rises at the expense of
tion requirements. The accounting and legal sector agriculture, but this has not (yet) been seen in
uses the labor market test or economic needs test Sudan (McMillan and Rodrik 2011; and see Chapter
for license application by foreign services providers. 2.A). Manufacturing and industry typically display
Other explicit trade barriers affecting professional higher productivity, higher wages, and faster rates
Goods and services trade to build endowments 117
BOX 4.3: Domestic Regulation in Professional Services in Sudan
In Sudan’s accounting sector there are mandatory continuing education requirements for members of the profession, while for both
the accounting and the legal sector there are additional requirements include passing the professional examinations to become a full
member of the profession. There are practical training requirements to become a full member of the accounting, engineering, and
legal professions: one year for law practitioners, three years for accounting professionals, and five years for engineers. In addition, the
accounting and the legal professions are also subject to other educational or vocational requirements over and above the academic
degree to enter the profession (for example, the legal profession requirement is a one-year post-graduate course).
All three sectors also regulate access to the profession through compulsory licenses or authorization granted by the Sudan Bar
Association in legal services, the Accountancy and Audit Profession Organization in accounting services, and the Engineering Council
for engineering services. Licenses are renewed periodically (for example, every two to five years for engineering).
In the engineering sector, although there are no requirements for passing a professional examination to become a member, there
are requirements pertaining to practical training (a few years for engineering technicians and five years for engineers). All these
requirements are in addition to the mandatory university degree obtained to practice legally.
In Sudan, engineering and legal services are not subject to exclusive rights of practice by engineers or lawyers; the scope of exclusive
rights is broader in accounting services. Highly skilled professionals in professional services sectors have exclusive rights to perform
certain activities (e.g., auditing, representation of clients before courts, advice on legal matters, feasibility studies, design and planning).
The argument in favor of exclusive rights is that they can lead to increased specialization of professionals and guarantee a higher quality
of service. But the negative price and allocation effects of exclusive rights, which act as monopolies, can be substantial, especially if
they are granted for standardized services that can be provided at a lower cost by less-regulated or non-regulated providers, such as
the middle-level professionals in these sectors.
In the accounting sector, except for matters related to management consultancy services, investment advice, legal advice and
representation, and expert witness in accounting, all other accounting type works fall under the exclusive rights domain of certified
accounting professionals. The following activities are specifically provided by accounting professionals only: traditional accounting
(bookkeeping); statutory audit; non-statutory audits; audit of mergers and of contributions in kind; insolvency practice; international
audit; tax advice, and tax representation
Regulation affecting the conduct/operations of professional services providers in Sudan seems to be less severe than in many
neighboring countries. In all professional services, fees tend to be negotiated freely between practitioners and clients, but there is a
Fee Committee at the Bar Association that deals with complaints from clients.
All types of legal entities are permitted in engineering. By contrast, only sole proprietorship and general partnerships are permitted
in accounting. Also, advertising is prohibited in accountancy but seems to be allowed in engineering and legal services.
Source: Regulatory surveys undertaken in Sudan in 2012 and 2014.
of technology adoption, but Sudan’s challenge is manufacturing, non-manufacturing industry, and
to find ways to grow these sectors, and particularly services, have relatively similar levels of education
to shift younger and more educated workers into (see Chapter 2.A).
higher productivity jobs. There is a real lack of educated work force to
At present, however, the agriculture and allow for effective diversification into new and
services sectors account for the vast majority of higher value-added product areas. Half of the pop-
employment in Sudan, with manufacturing pro- ulation in Sudan has never attended a formal school
viding an almost negligible number of jobs. This and only a tiny portion has some post-secondary
is even though both wages and labor productivity education. Only 15.8 percent of the population
are much higher in industry and manufacturing than has at most secondary school education, and only
in agriculture. The sector that employs most people 3.8 percent has some post-secondary education. Not
in the economy—agriculture—is also the sector that surprisingly, education levels are substantially lower
employs most people without education. Almost in rural than urban areas and substantially lower for
two in three workers in this sector have no educa- women than men (see Chapter 2.A).
tion and less than one in fifty has post-secondary But there are higher education levels
education. Workers in the remaining three sectors, in younger cohorts, which represents an
118 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
opportunity for Sudan to shift employment into maps shows that primary products such as sesame
more productive sectors. Older parts of the popu- seeds and live sheep and goats were competitively
lation have lower education than younger parts and exported in the early-1990s, and continued to be
the gender gap in education is smaller in younger exported competitively during 2009–11. However,
cohorts than in older ones. Individuals aged 20–29 in the most recent period there is significantly lower
have substantially higher levels of education: one number of competitively exported goods in more
in ten has some post-secondary education and a “connected” parts of the network, implying a lack
further one in three has some secondary education. of development of capabilities that allow easier
Yet, at present younger workers are no more likely diversification into new products (i.e., in contrast
to work in industry, manufacturing, or services to products in the core).
than their older compatriots, indicating that there But diversification today needs to consider
is little current capitalization on this opportunity the changed competitiveness over time of prod-
(see Chapter 2.A). ucts Sudan once produced. This is possible by
Sudan’s income level is below the expected adding the temporal classifications of products into
income level based on countries that export “classics,” “emerging champions,” “disappearances,”
goods found in Sudan’s export basket. This is and “marginals” (see Box 4.3 for terminology). The
primarily a reflection of Sudan’s past oil richness product space analysis identifies 13 dominant clas-
that only insufficiently led to broader rises in income sic exports, which show sustained competitiveness
levels. But it is also a reflection of Sudan not taking (Figure 4.7.5 and Annex 6, Table 0.16). All of them
full advantage of its export basket to boost export are primary products except for molasses (resource-
growth and income. Figure 4.7.1 shows the cross- based) and leather of other hides (low-technology).
country relationship between EXPY—a measure of It is noteworthy that molasses are also among the
the sophistication of a country exports that repre- products that can be identified as significant export
sents the income level associated with a country’s items back in the 1990s, which do not show these
export basket—and economic growth as well as significance anymore in today’s export basket
the trend in the income potential of national export (Table 4.4).
baskets for Sudan and comparator countries. The There are also ten “emerging champions”,
past dominance of oil is reflected in the increased products, which are now being competitively
value of Sudan’s export basket measured by the exported from Sudan that were not so in the
EXPY measure. See Annex 6 for details on EXPY early 1990’s. The most well-known of these are
and other product space terminology.
Sudan’s concentration of exports has risen
significantly over the past three decades, which
BOX 4.4: Product Space: Classics,
indicates there may be scope for renewed diver-
Emerging Champions,
sification. Figures 4.7.2 and 4.7.3 show a repre- Disappearance, Marginals
sentation of Sudan’s exports in the product space
• “Classics” are products with demonstrated competitiveness
for the time periods 1991–93 and 2009–11, and
over time where it may be less risky to invest.
reflects the country’s transition to a highly con- • “Emerging champions” are products in which Sudan has
centrated export basket. Products manufactured increased its comparative advantage in global markets.
• “Disappearances” are products that were competitive in
competitively (i.e., with RCA>1) are marked in red the past, but have lost that competitiveness more recently.
in Figure 4.7.2 and 4.7.3 and the evolution of the • “Marginals” are products in which Sudan had a low
number of products with an RCA>1 can be seen in comparative advantage in the past and remain with low
comparative advantage.
Figure 4.7.4. Comparison of the two product space
Goods and services trade to build endowments 119
FIGURE 4.7: (Export) Diversification – Past and Present
1) Income level and the export basket: 2) Sudan’s exports in the product space, 1991–1993
Sudan and the rest of the world
SUD 1991–1993 Oil Leather Fruits
Relationship of EXPY and Per Capita Income
10.5 Fishing
Vegetable Oils
Log of EXPY in 2011
10.0
Vegetables
Forest Products
SDN
9.5
Milk
Cereal
9.0 Garments
Mining
8.5 Iron/Steel
8.0
Vehicles
Textiles
6 8 10 12 Electronics
Log of GDP Per Capita PPP in 2011 (Constant USD) Machinery Animal Agriculture Chemicals
3) Sudan’s exports in the product space, 2009–2011 4) Evolution in Sudan’s Exports share and
number of products exported competitively
SUD 2009–2011 Oil Leather Fruits
60 60
Fishing
Vegetable Oils 50 50
Vegetables
Forest Products
40 40
Milk
Cereal 30 30
Garments
Mining 20 20
Iron/Steel
10 10
Vehicles
0 0
1982–84
1985–87
1988–90
1991–93
1994–96
1997–99
2000–02
2003–05
2006–08
2009–11
Textiles
Electronics
Machinery Animal Agriculture Chemicals
Products exported competitively (RCA>1) (LHS)
Export share of GDP (RHS)
5) Combining Sudan’s product space maps of 1991–93 with 2009–11
SUD 1991–2011 Oil Leather Fruits
Fishing
Vegetable Oils
Vegetables
Forest Products
Garments
Cereal
Iron/Steel
Mining
Textiles
Vehicles
Classics Emerging
Electronics
Disappea-
Marginals
rances
Animal Agriculture Chemicals Machinery
Source: World Bank staff own calculations, based on data used from UN Comtrade; and the World Bank Exporter Dynamics Database.
petroleum and gold. Additionally, 28 products that peanut oil. Mechanically, the surge in crude petro-
were competitive in 1991–93 are no longer being leum exports is a large factor in the decline in the
competitively exported, these “disappearances” number of products exported competitively as the
include maize, green groundnuts, oilcake, and share of exports of many of these products are now
120 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
significantly lower given the tripling of the share of advantage (Lederman et al. 2015). Based on the
exports to GDP. In other words, some products that experience of other countries, the presence of a
were once a significant share of the total exports latent export basket can reduce both GDP volatil-
are now a fraction of their original share due to the ity and terms-of-trade volatility, particularly for
massive increase of crude petroleum, which was poor countries with small economies. At least two
zero percent of the basket in 1991 and 94 percent types of shocks could potentially restore com-
of the basket in 2011 (Figure 4.7.4). petitiveness of some of these historical products; a
There are a variety of products (including reduction in the price of oil, such as experienced in
manufactured exports) that Sudan has exported 2014 and 15, and a depreciation of the Sudanese
in significant quantities in the recent past, or in currency, which could accompany a unification
small quantities today. The rise of oil, and then of the exchange rate and could increase overall
of gold, may have entailed a drawing away of labor, competitiveness.
capital, and other resources from the production of
goods that were significant in the 1990s in a type Prospect for value addition in gum arabic
of “Dutch disease” phenomenon. Thus, the lack of
diversification and low survival rates of Sudanese This chapter showed that Sudan has significant
exports may be interrelated. Conversely, the market power in global markets for gum arabic.
reduced significance of oil may allow some of these Since this power is based on the exports of raw,
exports to return in the future (Table 4.4). Molasses undifferentiated products, there could be an oppor-
could be one of them as mentioned earlier; organic tunity to slowly shift to more value addition through
chemicals are currently marginal as identified in some processing. So while Chapter 3 looked at gum
Annex 6, Table 0.16, but could possibly be repre- arabic marketing, the following will analyze the
sent potential for forward integration from crude oil. gum arabic value chain. In order to do so, there is a
Sudan’s historical export products represent need to understand current constraints on process-
a source of latent comparative advantage, which ing products, and how to maximize value addition
could emerge to contribute to macroeconomic through combining processing solutions with smart
stability in the event of shocks. Many countries variations in producing the raw materials. Since
have products in which they had historical compar- value addition would have to come through com-
ative advantage but no longer do so today. These panies and activities carried out by the private sec-
products provide a stock of latent comparative tor, it is also important to look at broader business
Table 4.4: Manufactured Exports of Significance in the pre-Oil Period
Of significance in the late Of secondary significance in Both of significance in the late 1990s and of
1990s 2011–2013 secondary significance in 2011–2013
• Molasses from sugar • Miscellaneous edible preparations • Cotton products—mostly yarn, but also fabrics and apparel
• Organic chemicals (styrene, • Petroleum refining products • Leather and skins
saturated monohydric alcohols) • Plastics, and plastic and rubber products • Vegetable oils, oilseed products, oil cakes
• Essential oils and resins, • Copper and copper products • Aluminum, iron and steel products (structures, bars, etc.
cosmetics • Undenatured ethyl alcohol
• Alfalfa meal
• Interchangeable metal tools
• Wood, wood articles, and wood charcoal
• Paper and paper articles
• Prefabricated buildings
Source: World Bank staff own calculations, based on data from UN Comtrade.
Goods and services trade to build endowments 121
environment constraints to facilitate a shift towards gum arabic trade and Sudan’s dominant place in the
more value addition. trade (World Bank 2015a).
While Sudan is the largest producer of gum Enhancing the raw material production
arabic in the world, it has no significant added directly benefits producers through the potential
value processing, a phenomenon observable in for improved prices, and provides the base for
most producing countries (World Bank 2015a). processors to build value added. While the factors
Hence, a core objective of the sector in Sudan is to that determine quality, and harvest and post-harvest
increase the level of value addition at origin and factors that deliver quality are well established, it is
to increase the share of value-enhanced gum ara- clear that “best practice” is not always implemented
bic products in the overall gum arabic trade from in the field. To illustrate, research in Sudan has
Sudan. This would lead to improved returns and shown that maximum yields are obtained when
resultant increases in the price paid to producers tapping of senegal is done between October 1st and
for the raw material. November 1st, with the Sonke tool (rather than an
The goal for gum arabic value addition axe or other implement), exposing an area about
should be to reach a level in Sudan that can pro- 30cms long, and 5 cm wide. But tapping is often
duce spray dried material with high and defined not done in the optimal period; yet, later tapping
levels of functionality, particularly in emulsions (November 15th to December 15th) can reduce yields
and encapsulation (World Bank 2015a). The pos- by up to 50 percent (World Bank 2015a).
sibility of adding functionality is important as mar- Three additional measures to enhance
gins are still not large for bulk sales of a standard the production and management of gum ara-
processed spray dried gum arabic. Higher margins bic—both raw and spray-dried—could make a
are created through the production of spray dried big difference to increase value addition and
material with high and defined levels of function- hence returns to producers in gum arabic trade
ality, particularly in emulsions and encapsulation. from Sudan (World Bank, 2015a):
World Bank (2015a) argues that this requires man-
agement and development of the raw material sup- Access to pre-harvest crop finance. This is
ply chain to improve the quality of the crude gum frequently quoted as a major requirement for
related to functionality, and to put in place a trace- producers. Buyers will typically pre-finance
ability system to allow maintenance of the identity their agents and other middlemen over whom
and integrity of batches of crude gum selected for, they have control, but the constraint to direct
and defined by their particular quality attributes. pre-finance to producers is a common problem
A strategy to increase the level of value addi- for producers accepting pre-finance from one
tion through the development of spray drying buyer and then selling to a different one. As
capacity must therefore also address the devel- such, buyers without strong linkages exercise
opment of raw material quality and the supply control over the producer. There are alternative
chain. This will also address the perceived quality (traditional) ways to finance through the village
problems with kibbled and powdered material that traders but these are linked to high effective
result in current low levels of demand for these interest rates and low prices for material (World
products and the basic value addition that they offer, Bank 2015a).
and provide a basis on which to build increased Bundling interest to enhance buyer-producer
sales and value addition. Development of the supply links . Gum Arabic Producer Associations
chain will also directly address the issues raised by (GAPA) have already been formed, but they
overseas processors, and so help secure the overall need to be strengthened to effectively establish
122 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
a framework through which buyers can work in a manner that will increase not only the quantity
with producers. This allows buyers to influence but also the quality of offerings.
and improve practices and as therefore quality, Sudan could leverage earlier progress made
price and production volumes, while providing in the education sector. For example, its success at
the necessary interest and security to buyers to increasing enrollment at the primary and secondary
enable them to consider direct pre-financing. levels generates growing demand for vocational and
Support to producer groups—training, aware- higher education. The absence of links between edu-
ness, and management—will be required to cational systems, employers, and users of services
reduce defaults on pre-financing from buyers prevents young graduates from acquiring market-
(World Bank 2015a). relevant skills. Several stakeholders from the private
Establish a simple practical product trace- sector have emphasized the coordination problems
ability system. This is essential to maintain between employers, professional associations, and
the link between product and quality through education institutions in the content of educational
the supply chain. Traceability provides the base programs for engineers and accountants. Policy
for differential pricing by quality, and enables actions to encourage collaboration between uni-
containment and management of any groundnut versities, professional associations, and the private
(or other) contamination issue that might occur. sector (for example through internships) could
Raw material traceability feeds also directly into help students acquire skills and practical training.
processing quality management systems (World Such collaborative actions are required to better
Bank 2015a). understand and strengthen the links between the
curricula and the skills required to support the
Considerations for the development of expansion and diversification of the economy. The
services requirements for medium- and high-level skills in
more sophisticated business services need to feature
Reforms in the area of services need to focus on in Sudan’s Education Sector Plan to mobilize both
the development of framework conditions that internal and external financing.
facilitate the growth of professional services, and Regional integration and multilateral nego-
address skills shortages and skills mismatches. In tiations offer opportunities for implement-
the short term, reforms need to focus on the devel- ing regulatory reforms and reducing the skill
opments of the necessary regulatory framework and gap through services liberalization. Sudan is a
incremental, qualitative improvements in domestic COMESA member and is currently negotiating its
regulations that hamper the growth of the sector. WTO accession. How far and how quickly Sudan
Top regulatory constraints identified by the private will proceed depends on political and economic
sector include regulations regarding participation in considerations. Ideally, liberalization would be non-
public procurement processes, competition issues, preferential so that domestic users of professional
and the qualification and licensing requirements services have access to, and domestic professionals
and registration and other administrative procedures can benefit from, exposure to the best service pro-
that limit the entry and the operation of professional viders in the world. This protects countries from
services firms. The regulatory reform process needs suboptimal regional providers. If, however, recip-
to involve the private sector. In the long term, fac- rocal liberalization at the regional level is politi-
ulties and other training programs must be created, cally more feasible, then Sudan ought to weigh the
improved, and expanded to satisfy professional train- unquestionable benefits of market opening, even
ing needs, but this must be planned and carried out in the narrow regional context, against the possible
Goods and services trade to build endowments 123
costs of giving a first-mover advantage to what may such as the program that is currently being devel-
be a second-best regional service provider. oped by the Inter-University Council for East Africa
Steps need to be taken by Sudan to relax the (IUCEA) in terms of designing university curricula
explicit trade barriers applied to the movement and research, and creating university/industry part-
of natural persons and commercial presence of nerships for fostering knowledge could provide
professional services. Examples of possible reforms guidance for Sudan’s education reforms. Also, col-
include: articulating the economic and social moti- laboration with the IUCEA could contribute to the
vation for nationality and residency requirements; reduction of education-related differences that frag-
minimizing restrictions on the forms of establish- ment the regional market for education and thereby
ments allowed; and developing a transparent and encourage trade in education between Sudan and
consistent framework for accepting professionals neighboring countries.
with foreign qualifications. The reduction of explicit Opening up regional boundaries and
trade barriers also needs to be complemented with establishing Mutual Recognition Agreements
the reform of immigration laws and rules on the (MRAs) would facilitate Sudan’s services inte-
hiring of foreign workers. gration with its African partners. The free move-
Deeper regional integration, through regula- ment of COMESA nationals without work permit
tory cooperation with neighboring partners who requirements would be of great help to increase
have similar regulatory preferences, can use- business opportunities within the region and
fully complement non-preferential trade liber- boost service exports. Sudan could learn from East
alization. Regional integration would also enhance Africa’s experience with MRAs in accounting and
competition among services providers, enable those architectural services. The EAC Common Market
providers to exploit economies of scale in profes- Protocol, adopted by the Multi Sector Council in
sional education, and produce a wider variety of ser- 2009 includes an annex on a framework agreement
vices. Regional integration brings further benefits in on MRAs for academic and professional qualifica-
that a larger regional market is able to attract greater tions. The five EAC countries have already signed
domestic and foreign investment; and regionaliza- an MRA in accounting services and implementa-
tion may help take advantage of scale economies in tion focuses on the following areas: requirements
regulation, particularly where national agencies face for education, examinations, experience, conduct
technical skills or capacity constraints. and ethics, professional development and re-certi-
Regional integration may help Sudan take fication, scope of practice, and local knowledge. To
advantage of scale economies in regulation, par- assist with the preparation of potential MRAs Sudan
ticularly where national agencies face technical countries could benefit from technical assistance in
skills or capacity constraints. Regional initiatives the context of the DTIS implementation.
EXTRACTIVE INDUSTRIES: STILL IMPORTANT
BUT NO LONGER DOMINANT
5
Remaining natural resources in Sudan are likely to provide some limited time-bound support to the efforts
for diversification, but to consider the transient character of natural resources in post-2011 Sudan is pru-
dent. The diminishing effects of both oil and gold on Sudan over the next 10–15 years are obvious. The
constrained outlook for exports and revenues from domestic oil production places the spotlight on fees
that the Government obtains for the handling of South Sudanese transit oil. Notwithstanding the fiscal
benefits obtained from transit fees, these arrangements can only be expected to be transitory. With this
background, the Government’s emphasis on promoting alternatives to the oil sector is well founded, and
there have been early results in the form of the boom in gold exports. Traditional mining may, with suf-
ficient support, provide a source of livelihood in rural areas that may have few other sources of economic
support. Industrial mining may take some time to become established, however, such a development over
the medium to long term would be more likely to provide a more balanced, export and revenue contribu-
tion to the economy than traditional mining. Overall, the contribution of mining to Sudan’s economy over
the medium term could be positive, however, the scale of the sector is very unlikely to rival that of the oil
sector in its heyday and its fiscal impact may be substantially lower. Any more thorough evaluation of the
contribution of the mining sector to economic development in Sudan would have to take into account
negative externalities such as harmful environmental and social impacts. At the very least the remaining
natural resource wealth available through oil and gold could be used to finance three of the more cost-
intensive recommendations developed in this study.
A. Overview producing little more than 100,000 bpd, with less
than half of this exported and the sector contributed
After a decade of heavy dependence on oil to just 2.8 percent of GDP and 27 percent of govern-
fuel its economy, Sudan faced the abrupt loss ment receipts. A further two years have passed and
of two-thirds of its oil production capacity in recent production has fluctuated around 120,000
June 2011. At secession Sudan as a whole was bpd (Ministry of Petroleum 2014; IMF 2013; and
producing some 460,000 barrels per day (bpd) of IMF 2014a). However, oil prices, which at least
crude oil, most of which was exported. As a result, were favorable in 2012, are now a source of con-
export proceeds were the main foreign exchange cern after falling to around US$50 per barrel on the
provider for the economy, the sector contributed international market.
16.3 percent of GDP (2010) and revenues from oil Simultaneously, after the secession, Sudan
were 45 percent of domestic revenues and grants emerged almost overnight as one of Africa’s
(2010). Within a year of secession Sudan was leading gold exporters. Official exports reached
126 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
46 tons in 2012, valued at US$2.1 billion, plac- oil to meet domestic demand and exporting some
ing Sudan fourth behind South Africa, Ghana, and US$11 billion worth of surplus crude annually,
Tanzania and one of the top twenty gold exporters whose upfront installation costs had largely been
in the world. Yet, by the end of 2013, world gold recovered.
prices had dropped sharply. Although export vol- The secession of South Sudan in July 2011
umes and values have been lower than the peak, brought about an immediate and severe rupture
they are nonetheless significantly higher than they in the oil sector, with oil reserves attributable to
had been in the years prior to secession. Moreover, Sudan just 30 percent of pre-secession levels (BP
the Government continues to issue statements sug- 2014; and Wood Mackenzie 2013).55 This meant a
gesting that gold activity remains strong and is, in fall from an estimated 111 barrels to 43 barrels of
fact, rising (for instance, see CBOS 2014). reserves per capita. In addition, the reserves to pro-
The Government sees the gold sector as criti- duction ratio, which had stood at nearly 29 years fell
cal to its plans to mitigate the impacts of the loss to about 26 years, depending on what rate of produc-
of oil exports and revenues. It has followed a bold tion is assumed to be sustainable.56 Since oil is a finite
plan to promote gold exports and encourage devel- resource, all governments must prepare for the day
opment of gold mining. The gold buying policy of when resources become exhausted but in Sudan’s
the Central Bank of Sudan has been central to these case that process was accelerated by secession.
plans and the Government has further invested in Sudan’s trade balance suffered as well since
a domestic gold refinery. Mining, whether done the surplus oil available for export after meeting
traditionally using rudimentary techniques or fully domestic demand for refined petroleum products
mechanized in industrial mining projects is being rapidly disappeared. Domestic needs had been ris-
supported at the policy level both in Khartoum and ing fast and with the loss of production to the south,
at State level. Sudan now needed to import petroleum products to
meet demand that domestic refining capacity alone
B. Sudan’s Oil Sector could not supply.57 Refinery capacity exceeds what
Sudan can supply from its own oil fields, although
Overview of recent developments owing to contractual obligations, a portion of its
crude oil is still exported, meaning that refining
Just before the turn of the century Sudan began
to exploit oil resources first discovered in the 55
BP and Wood Mackenzie report different levels. BP originally
1970s, enabling the economy to double its size reported proven reserves of 6.7 billion barrels of oil at the end of
2010 but the 2014 report puts reserves at the end of 2012 for Sudan
in real terms by 2010. Sudan joined the ranks of and South Sudan combined at 5.0 billion barrels, with 1.5 billion
oil exporting countries in 1999, capitalizing on an barrels (30 percent) attributable to Sudan. Wood Mackenzie, reports
“commercial” reserves, which is a narrower definition of what can
oil market buoyed by rapid Chinese industrializa- be produced. According to these reports Sudan has just 0.52 billion
tion and direct support of China to build the facili- reserves (BP 2014; and Wood Mackenzie 2013).
56
For this calculation, the analysis uses reserves reported by BP and
ties needed to export crude oil. Oil exports quickly assumed that the nominal rate of production that could have been
came to dominate exports, accounting for 86 per- sustained in Sudan after secession (free of any security and technical
constraints) would have been some 160,000 bpd. If the far-lower
cent of exports of goods and services on average reserve levels reported by Wood Mackenzie were assumed, the num-
from 1999 to 2010. The fiscal contribution of the ber of years over which production could be sustained would be
correspondingly less.
sector surpassed all others, accounting for 47 per- 57
Domestic demand for petroleum products in Sudan is estimated
cent of government receipts on average in the same to be reaching close to 120,000 bpd of oil equivalent and based on
elasticity of demand and GDP projections would rise around 175,000
period (IMF 2012). By that time Sudan had in place bpd by 2020, far exceeding the projections of available domestic crude
an extensive and integrated system for refining its oil as reported in various cases in Figure 5.1.4.
Extractive industries: still important but no longer dominant 127
operates at below capacity. Data for the first half of Domestic oil resources and production
2014 indicate petroleum products imports weighing
heavily on the trade balance, continuing the trend Sudan’s oil resources since secession consist
seen in Figure 4.1.1. primarily of oil contained in reservoirs in the
The reduction of production after secession Muglad–Sudd Rift Basin which were the target
led to a sharp fall in Government fiscal receipts. of exploration in the 1970s and 1980s. Only a
Before secession receipts from crude oil stood at small portion of the productive Melut Basin exists in
some 60 percent of total Government receipts but the north (Figure 5.2). Indications of oil resources
are estimated to have been just 15 percent of total in other inland basins have yet to be followed up
receipts in 2013 (IMF 2014a). The level of receipts with exploration drilling, although there are 11
reflects total production volumes, the share that is blocks for which exploration rights were awarded
transferred domestically for refining at controlled in 2012. Over the years non-associated natural gas
prices and global oil prices. The precipitous fall of has been found in two of the other inland basins
the latter in late 2014 will feed into government oil and in the Red Sea but in each case has been con-
receipts, as discussed further below. sidered sub-commercial to exploit, although the
The fiscal position has also been influenced Ministry of Petroleum is evaluating how to make
by developments in South Sudanese production, use of this resource.
since Sudan levies fees for the use of oil pro- The aggregate amount of oil reserves reported
cessing facilities, pipelines, and port facilities vary according to the reserves definition used.
located in Sudan. Within six months of secession The reserves reported by BP in their annual global
an inability to settle boundary disputes and terms review are associated with oil fields that were already
under which Sudan would handle oil shipments in production in 2012 and amounted to 1.5 billion
from the south resulted in oil production being barrels by year end (including proven and prob-
suspended for some 18 months. Eventually pro- able reserves but not possible reserves: BP 2014).
duction resumed once terms were agreed between Only one additional field has commenced opera-
the two countries in the Bi-Lateral Agreement on Oil tions since 2012, for which reserves data are not
and Related Matters. In 2013, receipts under these reported. Additions to reserves would result either
arrangements are estimated to have been nearly from the re-evaluation of reserves at existing fields
7 percent of total receipts (IMF 2014a).58 These were or new discoveries once appraised.
forecast to increase in significance in 2014 after the Sudan’s oil fields are of varying age and
resumption of South Sudanese output, however, the productivity, with several having reached their
outbreak of civil war there in December 2013 has decline phase. The Greater Nile (North) oilfields
resulted in lower than projected receipts. and processing facilities are contained in Blocks
The outlook for oil exports and govern- 2a, 2b, and 4 in the Muglad Basin. GNPOC is
ment oil revenues is difficult to predict. The the Joint Operating Company and supplies Nile
Government has projected rising domestic oil pro- Blend crude oil via the Heglig-Bashair Pipeline.
duction and is also relying on South Sudan’s out- Production peaked in Greater Nile (North) at over
put to both increase and continue to be exported 100,000 bpd (Wood Mackenzie 2013). Block 6,
through Sudanese facilities. The following analysis also in the Muglad Basin, is operated by Petro-
evaluates each of these elements and provides some Energy and supplies Fula Blend crude oil via the
preliminary projections over fifteen years to 2030.
The flows of oil that will be examined can be rep- 58
World Bank staff estimates based on IMF (2014c); this comprises tran-
resented as shown in Figure 5.1.2. sit fees and the transitional payments under the Bi-lateral Agreement.
128 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 5.1: Sudan’s Oil Sector: Production, Trade and Flows
1) Petroleum product share of imports (value terms) 2) Flow of oil in Sudan (schematic)
20%
Oil Domestic
18% refinery market
16%
14%
12% GRSS profit oil
10% South Pipeline Port Sudan Crude
8% Sudan JOC cost & transport terminal oil exports
6% oil fields profit oil
4%
2%
GOS profit oil
0%
2010 2011 2012 2013 2014 1H Sudan
oil fields JOC cost & profit oil
3) Recent crude oil production, bpd 4) Projected domestic crude oil production, bpd
140,000 180,000
117,342 116,959 160,000
120,000
140,000
100,000
120,000
80,000 100,000
60,000 80,000
60,000
40,000
40,000
20,000 20,000
0 –
2013 2014 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Blocks 2 & 4 Block 6 Block 17 Total Base High Low
5) Output and consumption of refined products, million tons 6) GOS Sources of Oil Revenues, US$ millions
(2014 production and EIA central oil price)
6 1,000
900
5 800
4 700
600
3 500
400
2 300
1 200
100
0 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Domestic oil GRSS fees TFA JOC-south fees
Output Consumption
Source: World Bank staff own calculations and visualizations, based on data from CBOS 2014; Ministry of Petroleum 2014; IMF 2012; IMF 2013; and IMF
2014c Wood Mackenzie 2013; and the U.S. Energy Information Administration (EIA).
Note: (5) 120,000 bpd in Sudan; 160,000 bpd in South Sudan. The TFA payment shown is pro-rated by year rather than linked to production level.
Al Fula–Khartoum Pipeline. It is estimated to be Star Oil from the al-Barasaya field. Figure 5.1.3
producing close to its peak rate. Since 2012 pro- shows the composition of crude oil production in
duction has started up in Block 17 operated by 2013 and 2014.
Extractive industries: still important but no longer dominant 129
The Government has been working with the FIGURE 5.2: Key Oil Infrastructure in Sudan
Joint Operating Companies (JOCs) on plans (and South Sudan)
under which production could eventually be
lifted to 175–200,000 bpd and has based its
medium term economic projections on such
plans. These plans include improvements in the rate
of recovery from existing oil fields through a mixture
of de-bottlenecking, improved oilfield practices, and
enhanced oil recovery technologies.59 An agreement
was recently signed by the Government with CNPC
in respect of the Greater Nile (North) and Block 6
oil fields, under which it is reported investments to
increase oil production will take place to help reach
the Government’s production target. Details of the
nature, scale and timing of these investments were
not reported, though the Ministry of Petroleum’s
target for 2015 is 140,000 bpd (EIU 2015).
On an unusual note, the Government’s
medium term plans also rely on expectations
that successful exploration will add to produc-
tion. In December 2014, the Minister of Petroleum
announced that operators plan to drill 253 wells in Source: EIA September 2014.
2015, without specifying what kinds of wells these Note: The Thiangrial refinery is located near Palougue not as shown.
would be (production, injection, appraisal, explo-
ration). As a result of these wells reserve additions to 100,000 bpd after five years and to 45,000
amounting to 65.4 million barrels (equivalent to bpd after fifteen. The base case draws on avail-
two and a half years of output at present rates) are able information about the reserve base and pro-
expected (Reuters 2014). While there is reason to duction profiles of existing oil fields only as well as
expect that some proportion of exploration wells installed processing and pipeline capacity (Wood
will strike oil, not only is the success rate of explora- Mackenzie 2013). It assumes that no significant
tion drilling difficult to predict but so too is the size investment in enhanced oil recovery takes place at
of discoveries made, until they are fully appraised.60 existing fields and that there are no oil reserve addi-
It is very unusual for governments to include such tions made through discoveries. Until information
expectations in projections that are used for wider is available that would confirm significant invest-
economic planning and budgeting. ments in Enhanced Oil Recovery (EOR), this study
considers this conservative base case to be justified.
Three scenarios for future oil production: Projections are subject to growing levels of uncer-
base, high, and low tainty as the time horizon increases (Figure 5.1.4).
This analysis argues that the base case projection 59
In Block 6 a pipeline is being built to tie in previously unexploited
oil production can be sustained only at around fields to the processing facilities and main pipeline (Sudan Tribune
2014).
120,000 bpd and only for a year or two before 60
BMI (2014) also casts doubt on the ability to contract such the large
a gradual decline takes hold, with output down number of drilling rigs implied by the official report.
130 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
The high case assumes that large investments bpd and can produce 2 million tons of heavy fuel
in enhanced oil recovery proceed soon, thereby products (for instance, heavy coke and petroleum
enabling oil production to rise to a peak rate of coke) each year, mostly for electricity production.
156,000 bpd before beginning its decline.61 While The El Obeid Refinery has a capacity to refine
it is reasonable to assume that, given a favorable 15,000 bpd of Nile Blend and produces gasoline,
security and commercial environment, substantial diesel, and fuel oil, with the latter—again used pri-
investment would take place to enhance oil recovery marily for electricity generation—accounting for
and find more oil, there remains considerable uncer- the largest share (IMF 2012). Refinery production
tainty about when this will in fact take place.62 With is shown in Figure 5.1.5.
regard to exploration, the long lead time needed to Although domestic refineries have been built
bring any significant new discoveries into produc- and expanded over the years, domestic demand
tion probably means that the impact on total pro- for refined petroleum products now equals domes-
duction would only occur after 2025, so this upside tic supply capacity. Although the pace of demand
possibility has not been considered (Figure 5.1.4). growth has slowed since secession, Sudan’s consump-
The low case assumes that additional risks tion is likely to rise at rates exceeding average GDP
to oil production result in output declining growth. The supply-demand balances vary across the
earlier and more sharply than in the base case, range of petroleum product markets depending on the
with output reaching just 22,000 bpd after 15 type of the crude oil supplied and configuration of oil
years rather than 45,000 bpd. A significant source refineries. Gasoil, diesel, jet oil, and LPG are imported
of uncertainty concerning the production outlook to cover the shortfalls in domestic production. On
stems from the technical standards used to oper- the other hand, gasoline (mogas) output exceeds
ate oil fields and the constraints imposed by the consumption and the surplus has been exported to
difficult security situation. Though not possible to neighboring countries (IMF 2012).
confirm from available data there is a possibility that The Government has long supplied its share
oil fields have been “over-produced” in the inter- of profit oil to the oil refineries at controlled
ests of short-term cash generation at the expense prices and may call on JOCs to supply oil refin-
of overall oil field recovery (implying shorter field eries as well to meet domestic requirements. The
life) (Figure 5.1.4). refineries receive Government crude oil at a fixed
price of US$49 per barrel and JOC crude oil at nego-
Domestic supply and exports of crude oil tiated prices linked to international market prices.
The differential between export and controlled
Government policy has been geared towards domestic prices has narrowed with the precipitous
meeting domestic demand for petroleum prod- fall in global oil prices in recent months. This may
ucts and exporting surplus crude oil. Two refiner- limit the incentives to smuggle refined products to
ies—the main Khartoum refinery and its extension, neighboring markets that have until recently faced
and the El Obeid Refinery—refine domestic crude higher product prices.
oil to produce a wide range of fuels. The main
Khartoum refinery can refine up to 50,000 bpd of 61
Based on IMF (2014c) which reflects discussions with the authorities
Nile Blend crude and produces 2.5 million tons of for the period to 2019; the projection of output from 2020–2030 in
this high case is based on World Bank staff estimates.
fuel products per year, almost entirely for domes- 62
The objective of investment in EOR is to increase the proportion of
tic consumption. The extension to the Khartoum oil in place that is recovered by stimulating well productivity through
the injection of water, gas, steam or chemicals into the reservoir.
refinery was constructed in 2004 to process the According to SUDAPET there are plans to lift the recovery factor at
highly acidic Fula blend. It has a capacity of 40,000 existing fields from an average of 27 to some 35 percent.
Extractive industries: still important but no longer dominant 131
Exports of crude oil are now confined to the quantity has to be allocated to meet eligible JOC
JOC share of production less any domestic sup- costs. The value used in the model is based on the
ply obligation. There are understood to have been export price of Sudanese crude oil FOB Port of
some inconsistencies in official reporting of exports Sudan. The export price is specific to the crude oil
but adjusted data for 2013 shows export of 43,000 type, in this case Nile Blend, or Fula Blend. This
bpd (about 37 percent total domestic output; IMF analysis uses the simplifying assumption that the
2014c). This amount would imply that the JOCs export price is that of Brent crude oil less a discount,
are exporting only a portion and not all of their oil reflecting the quality differential between Brent and
entitlement under the EPSAs. Since domestic refin- Nile Blend. The second step is to allocate the balance
ery capacity imposes a ceiling on how much crude of crude oil after cost oil has been deducted accord-
oil could be supplied domestically, any significant ing to the profit oil splits in the EPSAs.
increase in domestic oil production, as in the high The export value of crude oil is derived from
case projection, would contribute to a significant projections of Brent crude prices issued by the
increase in crude oil exports. Conversely, any deci- U.S. Energy Information Administration (EIA),
sion to expand refinery capacity in view of the growth with adjustment for the price discount.63 The
of domestic demand for petroleum products could be central EIA forecast is for oil prices, in real terms,
expected to result in diminishing crude oil exports. to remain slightly below US$100 per barrel over the
next six years before rising gradually again. Recent
Fiscal revenues from domestic oil sharp falls in the price of oil on international markets
production has forced a re-think of the short-to-medium term
outlook for oil prices. Rather than modifying the
Under the Exploration and Production Sharing central price forecast, which covers a long period,
Agreements (EPSAs) that govern the allocation this analysis instead used high and low scenarios to
of oil, the Government receives crude oil remain- test the sensitivity of the Government share of oil to
ing after the JOC takes cost oil and its share of external market shocks.
profit oil. The amount of cost oil is subject to a The Government’s share of crude oil produc-
50 percent ceiling in all the EPSAs, ensuring that tion in the base case scenario ranges between
in each year some oil is allocated to profit oil and 40–45 percent in the period to 2030. It is assumed
shared by the parties. Greater Nile (North) oil fields that the entire share is transferred to domestic oil
are mainly mature and their capital costs have been refineries at the controlled price. If it is further
largely recovered, so the amount of oil allocated to assumed that the transfer price is US$49 per bar-
the JOC as cost oil is relatively low (i.e. lower than rel, the Government’s oil reaches a peak value of
the ceiling would allow). In the case of Block 6 US$970 million in 2016. By 2025 the amount drops
the recoverable costs are high enough that all cost to US$550 million. Production bonuses are also pay-
oil will be allocated for a few more years. All oil able by the JOCs to the Government on the basis
remaining after cost oil has been allocated is shared of cumulative production from individual blocks;
between the Government and the JOCs. In aggre- however, the amounts are not significant compared
gate, the Government is currently entitled to some to revenues obtained from its oil entitlement.
62–68 percent of profit oil depending on the EPSA.
Each of the EPSAs has been modeled to 63
The price information is based on EIA Brent forecast (short-term
determine the amount of oil available to the for 2014 and 2015); long-term thereafter, discounted based on real
and nominal price forecasts provided by the EIA as of June 2014.
Government and then aggregated. This involves Since recent price development has been downward, the central price
first valuing oil production to determine what scenario, at least in the short term may be too optimistic.
132 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Higher or lower international oil prices This is equivalent to US$875 million a year if pro-
affect Government oil revenues not through rated evenly across the 3 ½ year period during which
the transfer price, which is fixed, but through the TFA is in force. This payment is supplementary
increases or decrease in the Government’s oil to the processing, transportation, and transit fees
entitlement. With recent oil prices sharply lower, described above. The arrangement is based on an
there is expected to be an increase in cost oil allo- assumed supply rate of 152,000 bpd of GRSS oil
cated to the JOCs (subject to limits imposed by the over the term of the agreement but if these volumes
cost oil ceiling) and a commensurate decrease in the are not adequate to allow Sudan to recover the full
Government’s oil entitlement. US$3.028 billion prior to the expiration of the agree-
ment in December 2016, GRSS is required to pay
Fiscal receipts from fees charged on South GOS the outstanding TFA balance 60 days prior to
Sudanese crude oil the expiration of the term of the Bi-Lateral Agreement
(IMF 2014c). Given output constraints due to the
So long as South Sudan relies upon processing shut-in of fields in Unity State, this arrangement
and transportation facilities in Sudan to export is likely to result in a large shortfall payment. It is
its crude oil it will pay fees to the Government of unknown at this stage if the Bi-Lateral Agreement
Sudan (GOS). Moreover, the level of fees payable will will be succeeded by one with a similar payment
reflect the degree to which Sudan exercises monopoly guarantee or be tied only to actual exports of GRSS
over such exports. There are two sets of arrangements entitlement oil. Nor is it known at what level tariffs
under which fees are payable to GOS. The first is for processing and transportation will be fixed since
the Bi-Lateral Agreement on Oil and Related Matters this will all need to be negotiated between the parties.
(Bi-Lateral Agreement) between the two governments. In 2014, it is estimated that on average some
This agreement was only reached in mid-2013, some 70,000 bpd of GRSS entitlement oil has been
18 months after oil production in South Sudan had exported through Sudan, generating US$233
been suspended. The second is a series of agreements million annually in processing and transporta-
negotiated by GOS directly with the JOCs in South tion fees (excluding the TFA transit payment).64
Sudan (JOC-South) as recently as mid-2014. Predicting future levels of South Sudanese crude
The Bi-Lateral Agreement requires the oil exports and the impact on payments to GOS is
Government of the Republic of South Sudan complicated by uncertainties as to i) the resumption
(GRSS) to pay GOS fees on GRSS crude oil pro- of output from Unity State and the level at which
cessed in Sudan and transported to Port Sudan output in Upper Nile State can be sustained, ii) the
for export. The agreement specifies separate pro- profit oil share allocated to GRSS under the EPSAs,
cessing, transportation, and transit fees totaling iii) what portion of crude oil produced in the south
US$9.10 per barrel supplied from Blocks 3 and 7 would in the future be refined in South Sudan; and
(the two blocks in Upper Nile State from which iv) at what point South Sudan may have alternative
regular deliveries have been possible since produc- routes to export crude oil by pipeline.65 Output in
tion resumed in 2013) and US$11.00 per barrel South Sudan is running some 30 percent lower than
from Blocks 1, 2, 4 and 5a in Unity State, where
wells remain shut-in. 64
This calculation is based on total crude oil output of 160,000 bpd
and a GRSS entitlement of 40 to 45 percent of this.
Under the Bi-Lateral Agreement GRSS is also 65
South Sudan hosts two small oil refineries that have yet to operate
required to pay US$15 per barrel up to a maximum but are understood to have capacities of 10,000 and 5,000 bpd of
crude oil, respectively. It is not clear what arrangements have been
of US$3.028 billion as a Transitional Financial made for them to obtain crude oil supplies from processing facilities
Arrangement (TFA) ending in December 2016. located in Sudan.
Extractive industries: still important but no longer dominant 133
projected in preparing the GRSS Budget for July oil valued at the controlled transfer price to
2014–June 2015 and, as in the north, substantial domestic oil refineries. This is significantly lower
investment in EOR and exploration is needed to than the value that would have been obtained had
avert a gradual production decline. entitlement oil been valued at the export price.
In July 2014 the JOC of Blocks 3 and 7 in Other sources of revenue include net proceeds of
South Sudan agreed with GOS to pay a combined SUDAPET, for which information is unavailable,
processing and transportation tariff of $19.80 per and minor production bonus payments.67
barrel retroactive to June 2013 (the date when Payments received from GRSS and JOCs-
oil supplies resumed) up until December 2016. South represent a significant additional revenue
With falling oil prices, this means that Sudan is stream estimated to have been nearly US$1.8
able to obtain a growing share of the market value billion in 2014. The composition of GOS oil rev-
of any South Sudanese oil it handles on behalf of enues in 2014 is shown in Figure 5.1.6 and is based
the JOC destined for export. Assuming that these on current production levels in both countries, the
terms apply to all JOC entitlement oil estimated central EIA price forecast for 2014, and calculations
to be currently produced in Blocks 3 and 7 these based on the EPSAs and other agreements. This
obligations would amount to US$650 million a only shows gross receipts of fees before GOS pays
year.66The same agreement provides for a reduced tariffs to the owners of processing and transporta-
tariff of US$12.10 per barrel for the period from tion facilities out of fees collected from GRSS and
January 2017 to March 2022. A similar agreement JOCs-South. On the other hand it does not show the
is in place for the oil fields in Unity State, albeit with supplementary payments due to GOS from JOCs-
different tariffs. So if production were to resume, South for arrears in relation to the period from June
the total amount payable by JOCs in the south to 2013 to July 2014.
GOS would, of course, increase. An interesting feature of Government oil rev-
An interesting feature of the arrangements enues is the limited direct impact that interna-
for charging tariffs on transit oil is that they are tional oil prices have on revenue levels. Revenues
based on agreements with GOS, not the opera- from domestic production are largely price insensi-
tors of the facilities being used by suppliers from tive since all of the Government’s oil entitlement is
the south. GOS has indemnified the suppliers for transferred to domestic refineries at a fixed price.
any claims for payment by operators of the Central Revenues from South Sudan’s oil exports depend on
Processing Facilities and transportation infrastruc- fixed tariffs per barrel of transit oil for the periods
ture for their use. Out of its receipt of fees GOS pays specified in relevant agreements. This insulates a
the owners of the processing and transportation significant share of Sudan’s total oil sector receipts
facilities at the rates that apply generally for crude from the direct impacts of varying oil prices. There
oil handling services and the net balance is retained are, nonetheless, secondary effects of changes in
by GOS. Although the data necessary to quantify it international oil prices through adjustments in the
precisely is not available, it would be reasonable to
assume a margin over tariffs of some 3:1.
66
Total South Sudanese production in 2014 is estimated to be on
average 160,000 bpd.
Aggregate fiscal revenue position in 2014 67
The national oil company SUDAPET is a member of the JOC under
each EPSA and, as such, receives cost oil and profit oil in proportion
to its participation interest in the JOC. For purposes of this analysis, it
It is estimated that GOS oil revenue from domes- is assumed that the proceeds of its share of oil are used to meet costs
and the profit element is not Government revenue. In practice, as an
tic oil production in 2014 reached some US$860 owner of SUDAPET the Government may receive revenue in the form
million based on 48,000 bpd of entitlement of a transfer of net proceeds from SUDAPET.
134 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
amount of oil that needs to be allocated to cover the loss of oil revenues is about $4 billion. If our
cost oil of the JOCs both north and south of the gold is not smuggled, it can provide this amount of
border. Recent sharp falls in oil prices will result in money (...). So our policy now is to concentrate on
the volumes of oil allocated to both governments closing the gate through which the gold is smuggled”
falling as a result. (Martelli 2011). The main measures used were to
Finally, that portion of transit fees cov- launch a Central Bank’s gold buying program and to
ered by the shortfall provision in the Bi-lateral construct a national gold refinery. The Central Bank
Agreement is also insulated from production has established a network of gold buying centers and
changes in South Sudan. Notwithstanding this agents to offer competitive prices to the traditional
significant level of protection, the current level of mining sector. Until 2012 unrefined gold purchased
tariffs is only fixed for the period up to December this way would then be officially exported for refin-
2016 when the Bi-lateral Agreement with GRSS ing abroad. However, once the refinery was installed
expires and the transit agreements with the JOCs- in September 2012 this gold could be refined into
South provide for a reduced tariff rate starting in pure gold bars before being exported69 Furthermore,
January 2017. a ban was placed on exports of unrefined gold and
informal gold refining in December 2012 (Sudan
C. Sudan’s Gold Sector Tribune 2012).
Official exports had begun to increase in the
Overview of recent developments run up to secession but, soon after, they surged
to over US$2 billion in 2012 (Figure 5.3.1).
Only in the wake of the loss of oil resources at Although exports were sharply lower the next year,
secession, has the Government of Sudan turned they increased somewhat in 2014 and are, in any
to minerals as part of a policy to diversify the case, far in excess of the levels seen before seces-
economy. Although the country draws on a rich sion. Moreover, the dramatic growth of exports
history of mining going back millennia, until very was not simply the result of a rise in international
recently Sudan had been only a minor producer of
gold, chromite, iron ore, a number of non-metallic 68
Other than gold, Sudan produces only modest quantities of miner-
als, although copper is set to emerge as a significant mineral export.
minerals, and construction materials. The geology Trade data lists only chromium among Sudan’s mineral exports aside
of Sudan had always suggested potential that far from gold; however, the values have been insignificant compared to
gold. There is very little information about the mines producing these
exceeded both ancient and more recent levels of minerals, though it is understood the main source is Blue Nile State
activity. Yet private sector investment to modern- (Ingessana Hills). The U.S. Geological Survey reports sporadic output
of chromium and manganese ores and a variety of industrial minerals,
ize traditional mining practices, or to identify and principally feldspar, gypsum, and kaolin. Within the next few years,
measure viable deposits through targeted explora- however, the Hassai mines will begin exploiting a large copper orebody
and plan to produce some 50,000 tons annually. At US$5,000/ton
tion activities had been scarce. Most activity was revenue of US$250 million would result. There is some early stage
taking place only on a small scale, much of it was exploration ongoing that suggests that, as at Hassai, copper may be
hosted in a series of Volcanic Massive Sulphide deposits. Eventually,
unregulated, and the sector made a very limited these could form the foundation of an industrial mining sector on a
contribution to the national economy.68 significantly larger scale. Insufficient information is available to project
other mineral production even though geological studies over the
As part of its strategy to promote the mineral decades have detected mineralization in multiple areas. Aside from
sector since 2011, the Government has made minerals produced for export there are considerable quantities of
low-value construction minerals produced for domestic consumption.
a concerted effort to encourage the mining of 69
It is possible that short term differences between refinery production
gold and divert hitherto illicit gold flows into and exports would take place due to inventory changes. Moreover,
since gold is also held officially in reserves as “monetary gold” it is pos-
the formal export economy. In 2011 the Minister sible that releases or additions to such reserves would temporarily af-
of Mines stated that “[t]he gap in the budget from fect export volumes and values and not be reflected in refinery output.
Extractive industries: still important but no longer dominant 135
gold prices. As can be seen in Figure 5.3.2, export in independently building up a picture of mine
volumes have grown at the same time and, indeed, production. The Ministry of Mines issues state-
have been closely correlated with movements in the ments about total annual gold production (not
international price of gold. specifically refined gold) from time to time. There
The strong performance of official gold are no publicly available breakdowns of this total
exports has given the Government confidence by month, quarter, or by composition. Moreover,
that its policies have been working and that gold the statements are difficult to reconcile with official
exports can eventually replace the role previ- export data. The two data series are compared in
ously played by oil exports. To better understand Figure 5.3.4. The low level of production reported
why gold exports boomed after secession and how in 2011 might reflect its limitation to production
likely it is that exports can grow further, it is impor- reported by the few industrial mines then in opera-
tant to identify the sources of the gold that is being tion. Thereafter, however, the picture changes and
exported. Figure 7 shows the possible sources of official statements of production are at first similar
gold that flow to the gold refinery in Khartoum. to but later well in excess of exports. It is thought
The Minister of Mining has announced that gold likely that the official statements of production
output reached 73.3 tons in 2014, which would are based on a mix of records from the Central
place Sudan as Africa’s third biggest producer after Bank’s gold buying operations, gold refinery out-
South Africa and Ghana and 12th in the world over- put (since September 2012), and estimates of gold
all (Sudan Vision 2015a). Only 15 percent of this is that is produced traditionally and marketed out-
reportedly attributable to industrial gold mining.70 side Central Bank channels. Since refinery output
There is no official data to indicate the composition could include gold recovered from foreign sources
of the remainder, although official statements refer of gold ore and old gold, this would be an unreli-
to it all being supplied by the traditional sector.71 able measure of gold mined in Sudan. In view of
However, in the absence of detailed data it is pos- the limitations of official data this analysis builds up
sible that some of the gold that is supplied is either
i) privately held “old” gold attracted by high gold
prices;72 or ii) gold smuggled into Sudan for refining 70
Industrial gold mines are those that employ modern high volume
mechanized mining and processing methods needing significant
and re-export.73 Most of the focus in the subsequent upfront capital investment.
analysis is on domestically mined gold since it is 71
The traditional gold mining sector refers to mining using mainly
non-mechanized and small-scale methods of excavation and low
likely to be the primary driver of Sudan’s ability to technology methods of gold processing to produce unrefined gold.
continue to export significant amounts of gold into 72
Old gold (also referred to as “broken” gold) is refined gold that is
in circulation mainly as jewelry and other ornaments but could also
the future. Nevertheless, the ability of the Sudanese include gold bars that have been in storage. Such refined gold may,
authorities to benefit from and, indeed, to promote if prices are attractive, or if the holder needs access to cash, be sup-
plied for re-melting. For the most part this gold supply comes from
supplies of old gold and smuggled gold to its refin- private individuals.
ery may continue to be an important factor, so some 73
Newly mined gold may take several forms prior to refining into pure
gold. It can take the form of lumps (nuggets), grains, and powder with
discussion of these sources also follows. The flows high gold content and impurities. These would typically be extracted
of gold mentioned above are shown in Figure 5.3.3. from rich alluvial deposits or rich near-surface vein systems. Or is
can take the form of gold-bearing ore excavated from an ore-body in
which gold may barely be visible with the eye. The latter is typical of
Mine production of gold industrial mines that rely on high volumes and efficient technology
to extract the gold content profitably. Sometimes this ore has varying
mixed metallic content (e.g. gold mixed with silver and copper) and
Determining the level of gold that is mined in impurities that are liberated from host minerals at the initial process-
ing stage. All of these forms of gold are marketable and traded on the
Sudan is complicated by the limited statistics basis of the amount of pure refined gold that can be recovered, with
available from official sources and difficulties allowances made for the costs of refining and losses.
136 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 5.3: Sudan’s Mineral Sector: Production, Trade and Flows
2) Export volumes of gold correlated
1) Official gold exports (US$ ‘000) with price (Index 2004 = 100)
2,500,000 800
700
2,000,000
600
1,500,000 500
400
1,000,000 300
200
500,000
100
0 0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Gold price index Export volume index
3) Flow of gold in Sudan (schematic) 4) Official reports of gold production and exports, tons
80
Mechanized Foreign
mines refinery 70
60
50
Central Khartoum Gold buying 40
Old gold
Bank refinery centers 30
Foreign
sources 20
10
Traditional Foreign 0
2011 2012 2013 2014
mines refinery
Production Exports
5) Comparison of estimated gold production from traditional mining,
selected countries (tons per year)
70
60
50
40
30
20
10
0
Sudan Ghana Tanzania DRC Mali Ethiopia CAR Niger
Source: World Bank staff own calculations and visualizations, based on data from CBOS 2014; Ministry of Mining and Natural Resources 2014; Sudan
Tribune (2012 and 2014); Sudan Vision (2014a-b and 2015a); and World Bank Mining Assessments (various country issues)
an independent picture of production by its prob- comprehensive and regular surveys of gold mine
able source, for which it relies on publicly available sites, it is not possible to place complete reliance
company reports, interviews, field visits, and third on this data either.
party accounts. However, short of undertaking
Extractive industries: still important but no longer dominant 137
It is clear that new investments in industrial Gagaba area in the northern Nubian Desert that
mining are not the main reason that gold activity signaled a new period of heighted activity (Africa
has risen so sharply since the secession of South Confidential 2012). Rushes to these extensive des-
Sudan. Indeed, the contribution of industrial mines ert areas, in which surface gold outcrops had been
to national gold production cannot have exceeded detected, seem to have gathered pace thereafter.
10 tons per annum, a conclusion confirmed by But traditional mining is not restricted just to the
recent official statements (Sudan Vision 2015a).74 northern desert areas. A large gold rush took place
Ariab Mining Company at Hassai in Red Sea State at Jebel ‘Amer in North Darfur in March 2012, evi-
has operated the main industrial mines since 1992. dence of which was captured in satellite imagery
Output peaked in 2003 at 5.7 tons; but in the (Ismail and Kumar 2013). Other reported areas
absence of significant new investment recent pro- of traditional gold mining have included sites in
duction has been no more than two to three tons per Northern, Nile, North and South Kordofan, Blue
annum. Other industrial gold mines include those Nile, and Kassala States. Indeed, one source cites
operated by Managem (Morocco), Tahe (Turkey), 150 locations found in 80 localities. A North
and Rida (Sudan). These have come into operation Kordofan State official recently referred to 29 min-
in the past five or so years but none matches the size ing sites being worked (Sudan Vision, 2014a). The
of the Hassai mines. The World Bank estimates that Minister of Mines visited sites in the Kadugli and
between them these mines could not have produced Ghadeer districts of South Kordofan in October
more than 5 tons of gold per annum, although there 2014 (Sudan Vision, 2014b). No publicly avail-
is some evidence that output is being supplemented able consolidated map or comprehensive register
by low-grade material discarded by traditional min- of sites exists.
ers which is re-treated to extract gold and mercury. Indeed, notwithstanding a lack of official
This analysis projects gold production from data on traditional gold mining, there is a large
industrial mines to increase gradually to some body of physical evidence of gold mining and
8–12 tons within five years based on an exten- processing taking place at multiple sites. This
sion of mine life at Hassai and the commission- includes evidence of mining, and especially process-
ing of several new mines. The Hassai mines are ing, taking place in a highly organized manner. For
partly owned by the Government but together with example, field visits confirmed that gold-bearing
its private partners financing is being sought to first mineral is transported in sacks after mining to a
sustain output by recovering gold contained in tail- number of processing centers where crushing and
ings and then to begin mining of a large copper-gold amalgamation of gold takes place. Such centers
ore body, whereupon the mine will produce gold as are confined within perimeter fences with guarded
a by-product of copper. Managem’s Qbgbih Mine entrances and are overseen by local authority offi-
began operations in 2013 and plans to produce cials and police. Sophisticated trading systems have
some 3 tons of gold annually. Expansions at the evolved involving miners, processors, gold buyers
mines operated by Tahe and Rida plus projects being and suppliers of equipment and inputs (Ministry of
advanced by Orca, Qatar Mining, and others could Mining and Natural Resources 2014).
eventually contribute additional output after 2020. National surveys done on employment in the
Traditional mining has proliferated very mining industry do not disaggregate employment
rapidly to account for the bulk of Sudan’s
mined gold. Though traditional mining has a long
74
The Minister of Mines stated that 63 tons out of the 73.3 tons
history it was the reports in 2009 of a gold rush reportedly produced in 2014 is sourced from the traditional sector
attracting tens of thousands of people to the Wadi rather than industrial mines (Sudan Vision, 2015).
138 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
BOX 5.1: How Many Artisanal and Small Scale (ASM) Gold Miners are There?
Estimates of the number of people involved in ASM often provide large numbers but these are generally not based on reliable census
work. If a country has both a formal and an informal gold sector, then the difference between the official production by companies,
and the total gold produced, is used to estimate the number of artisanal miners. An often-used method to estimate the number of
ASM miners is based on the supposition that a typical artisanal gold miner produces, say, 0.5–1g gold per day. If a miner works 200
days/year then 1kg gold produced corresponds to 5–10 miners. For example, in 2009 in Tanzania, total gold produced was about 40
tons, of which 36 tons derived from formal mines. If the “missing” 4 tons are apportioned to ASM activities, then this corresponds to
20–40,000 miners. Problems and uncertainties with these types of estimates include the fact that artisanal miners may work only part
time as miners, whereas their main occupation could be, for example, subsistence agriculture; and that gold deriving from undisclosed
sources may be apportioned to ASM activities, thereby legitimizing its origins.
by mineral mined, making it difficult to estimate picking of gold nuggets located by metal detectors,
the numbers of people engaged in traditional and shallow excavation of vein systems to obtain
gold mining alone. It has been suggested that the gold-rich ore. Due to the nature of the vein systems,
figure for gold miners may vary from as low as outcrops at the surface can be followed only to a
250,000 to as high as one million. Numbers quoted certain depth before heavy excavation equipment
usually do not distinguish between those directly and reinforcement of walls and shafts is needed.
engaged in mining, processing, and trading in gold. Investments in mechanization are seldom made in
A ratio of 1:5 (direct vs. processing/trading) or this regard, although some pits as deep as 40 meters
more would not be unusual. Another approach to are nonetheless being worked.75
assessing the size of the sector is to consider the Regrettably, this type of mining is not techni-
productivity of the traditional gold miners. Box 5.1 cally sustainable in the long term, therefore rais-
discusses the numbers of “artisanal” miners attribut- ing the question as to the longevity of Sudan’s
able to certain amounts of production, drawing on present traditional mining boom. Artisanal gold
experience from around the world. However, even mining is typically not sustainable for long periods
if reliable numbers of miners were available, one at any single site, especially if not well planned.
would have to be careful not to impute the total Indeed, there is evidence of many initially prolific
amount of gold produced in view of varying richness sites having played out. Although low labor costs
of gold mineralization and mining techniques used. can justify the heavy use of laborers to scavenge
If the numbers engaged in traditional gold mining and dig for gold, eventually such operations run
in Sudan are indeed as high as some sources have out of exploitable gold. It is possible for two or
suggested, then this might be expected to have had three good years to be followed by a collapse—and
a considerable impact on the overall labor market. falling gold prices can exacerbate this process.
This is discussed further later in the chapter. Moreover, since the extent of resources is unlikely
The recent surge in traditional mining can to be properly tested and measured before exploita-
be explained in part by the low barriers to entry tion takes place, unless organized on a larger scale,
into the sector, especially in the excavation and mining methods tend to be sub-optimal.76 Without
primary processing phases. Traditional mining a comprehensive survey of traditional gold mining
relies on access to surface and near-surface concen-
trations of gold that can be accessed with little need 75
In many other countries such depths would be unattainable owing
for mechanization. The methods that appear to pre- to friable soil and rock, and flood risk.
76
One example of this would be indiscriminate stripping of the surface
dominate are hand digging of surface gold alluvial by bulldozers uncovering only targets obvious from the surface but
sources, surface stripping by bulldozers followed by further burying or impeding access to less obvious targets.
Extractive industries: still important but no longer dominant 139
sites one cannot confidently infer that, in aggregate, Sudan is projected to produce between 18–28
output of gold has been falling.77 However, there tons annually over the next five years, worth
is evidence that many of the most prolific sites are US$750–US$1,130 million annually at a gold
unable to be sustained. Such evidence includes price of US$1,300/oz. The contribution of indus-
abandoned mine sites, the presence of scavenging trial mining will probably be greater than in the
where more methodical mining had taken place past few years, as expansions take place and new
previously, abandoned or under-used facilities at mines become operational. The traditional sector
gold processing centers, and accounts by traders of will continue to be the source of most gold pro-
falling activity, all of which were observed during a duced in this period, although the ability to sustain
field visit in May 2014 and have been corroborated this contribution beyond this five-year period is
by others familiar with the sector.
Comparisons of gold produced by the tra- 77
The Ministry of Mines has launched a program of fieldwork to survey
ditional sector in other countries rich in gold mining sites across the country, however, the findings will take some
time to be assessed and reported upon.
resources suggest that the huge scale of non- 78
Gold smuggled into Sudan for export appears to explain at least part
industrial mining officially reported to be tak- of the gap between official gold exports and the estimates of domestic
mine production in this analysis. The Central and East African region
ing place in Sudan is anomalous. Countries such is rife with illicit movements of gold and anecdotal evidence is that
as the DRC, Ghana, Tanzania, in which there is a gold has traditionally moved both in and out of Sudan (Radio Da-
banga 2014). Unrecorded and illicit movements of gold within and
thriving traditional gold mining sector, report levels between neighboring countries has reached particularly high levels
of output that are no more than one quarter of the in recent years, with a disproportionate share of the gold ending up
in the U.A.E., which is now a major gold trading hub. Unfortunately
level implied by official statements. Figure 5.3.5 gold import data from the U.A.E by country is unavailable after 2011,
illustrates this point. The number of people engaged reducing the ability to detect discrepancies that might imply unofficial
exports from Sudan (PAC 2014). The U.A.E. records show a total of
in such mining is similar to those numbers cited in 834 tons of gold imported in 2011, of which roughly one tenth was
Sudan; all three reportedly engage one million or sourced from the Great Lakes region, which includes Sudan (i.e. about
80 tons). This includes raw mined gold, old gold (scrap and re-melt),
more. Moreover, if gold is indeed being mined on and refined gold. Sudan’s official exports of gold to the U.A.E in 2011
the scale claimed, it is difficult to see how that level were 30 tons. The Ministry of Trade of the U.A.E. is reported to have
stated that imports from Sudan in 2011 reached US$1.98 billion which
could be sustained for very long.78 is far in excess of Sudan official exports of US$1.14 billion (Africa
Drawing on the available evidence, it is pro- Confidential 2012). This discrepancy might point to significant illicit
flows on top of official flows. It is assumed that until Sudan’s gold
jected that the traditional mining sector could refinery was commissioned in September 2012, all Sudanese exports
support production of some 10–15 tons of gold to the U.A.E were of raw mined gold and old gold. In 2012 and 2013
the U.A.E. accounted for 96 percent and 88 percent of Sudan’s official
per annum over the next five years if gold prices exports of gold respectively. Supplies of old gold are the only other
remain at current levels and new surface depos- source, aside from gold smuggled into Sudan for re-export, that could
account for the gap between official gold exports and the estimates
its of gold continue to be located as others are of domestic gold production presented here. Evidence of such sup-
played out.79 The downside risk is that fewer sur- plies is available from traders in the local gold markets, especially at
Omdurman, where it is customary for individuals to sell gold jewelry
face deposits can be worked at current prevailing to raise cash. This takes place, for example, when school fees are due
international gold prices, which are some 30 percent or when money must be raised for special events or pilgrimage. It is
assumed that direct selling to the Central Bank and the gold refinery
lower than at peak in 2012. Another limiting factor may also take place. Other possible sources of old gold are antiquities
is the growing distance of exploitable deposits from that are illicitly traded to be re-melted. A Dubai TV broadcast in May
2014 made this allegation.
roads and sources of water. The upside potential is 79
Forward projections are necessarily subject to a wide margin of error,
that if gold prices increase in the near future, it will especially when reliable and comparable data is scarce. Among the
factors taken into account in generating projections are the nature of
potentially prompt more people to go to gold min- gold mineralization that is being exploited, economics of conducting
ing areas made more attractive to exploit. operations in the various locations where gold is found, the techniques
and technologies used to locate and exploit gold, limitations imposed
Combining projections of gold produc- by geography, infrastructure and access to water and business con-
tion by industrial and traditional mining, straints, including security issues.
140 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
increasingly doubtful. A more likely pattern is that The Central Bank of Sudan (CBOS) has been
industrial mining will become the main source of executing a gold buying policy since 2011 with
domestically mined gold after 2020. the expressed intent to generate hard currency
through the export of gold. CBOS is understood to
Government policies and institutions be able to outbid other buyers of gold through the
price it offers and by waiving royalty, which would
The Government’s drive to promote the min- otherwise be payable by licensed exporters. CBOS
ing sector and divert smuggled gold into formal is reported to pay traders in Sudanese Pounds but
channels demands close consideration of the role at the parallel market rate of exchange. In order to
of public policies and institutions. Although the sustain such a policy in a fiscally constrained context
sharp rise in gold exports coincided with a sharp and with limits to access of debt financing it has had
escalation of gold prices, which no doubt encour- to print money, which has been one factor driving
aged supply, it also coincided with deliberate poli- domestic inflation (Africa Confidential 2012). In
cies of the Government to encourage gold activity 2014, for example, the overall annual inflation was
to address the macro-economic dislocation that running at over 40 percent compared to the tar-
resulted from South Sudan’s secession. Aside from geted annual inflation rate of 29 percent. The IMF
launching an active gold buying policy and building has called on the authorities to rein in gold buying
a state-owned gold refinery, the Ministry of Mining and other quasi-fiscal operations undertaken by
has also been actively promoting the acquisition CBOS on behalf of the Government (IMF 2014c).
of exploration rights over large tracts of land. This See Box 5.2 for some more details about gold buy-
has resulted in a marked increase in the number of ing programs in general.
mining agreements signed with a diverse range of In 2012 the Government opted to finance con-
companies. Finally, in certain States the local admin- struction of a large gold refinery to take advantage
istration has become active in the organization and of supplies of gold purchased by CBOS. The refin-
oversight of gold processing and trading linked to ery was initiated with a capital of SDG100 million
the rise in traditional mining. as a partnership between the Central Bank of Sudan
BOX 5.2: State-Sponsored Gold-Buying Programs
State-sponsored gold buying programs have been used as one means to promote and bring order to traditional gold mining and
to combat smuggling. The practice has grown in importance since the 1990s among Central Banks in a number of gold producing
countries (e.g., the Philippines, Ethiopia), though such programs have had various degrees of success or failure. Buying programs
typically comprise a mix of measures such as i) providing the Central Bank with a monopoly on gold buying and export; ii) establishing
networks of state agents with the legal authority and financial resources to buy from mining sites and traders; and iii) contracting a
third-party to buy on behalf of the government who, in exchange, provide certain financial and technical services to miners. In all
models, the ability of the state to establish itself as the dominant buyer in the domestic gold market is critical.
Many buying programs have failed, principally due to the following factors:
• Insufficient liquidity held by the government to purchase gold on a timely and sustained basis.
• Inability of government to compete with prices offered by non-licensed traders and buyers.
• Constraints in broader mineral governance that place obstacles between sellers and buyers.
• Bearing in mind these factors, in order to succeed a government may consider the following:
• Create incentives to sell to official buyers by coupling buying with technical or financial services rendered to miners.
• Reduce or eliminate fees charged by official buyers.
• Establish revenue-sharing arrangements with local government and communities, thereby motivating them to promote and
encourage the sale of gold to the Government.
Extractive industries: still important but no longer dominant 141
(70 percent), Ministry of Mines (15 percent) and While overall management of the mining
Ministry of Finance (15 percent). The refinery has a sector is a Federal function, responsibility for
current capacity of 150 tons of gold annually and 30 regulating traditional mining has been delegated
tons of silver, which makes it Africa’s second largest to State level, giving rise to mutual dependency
refinery after the Rand Refinery in Johannesburg. but also considerable complexity. The Regulation
No data about its economic performance has been of Traditional Mining for Gold provides that States
available for the research for this CEM. In particular, may issue licenses for traditional mining and
it would be necessary to know the composition of supervise the sector through the offices of the State
the intake of the refinery, output, and any inventory Minister of Mines.80 Moreover, the State authori-
held, to be able to better identify sources of gold ties may group individuals practicing traditional
(either mined or “old” gold) and both the value and mining into specified locations to locate grinding
timing of gold exports. mills and other processing facilities. Among other
With strong backing of the Government, things, these provisions raise questions about how
the Ministry of Mines has actively promoted effectively and consistently mining, health, safety,
development of the industrial mining sector to and environmental practices are regulated.
supplement the traditional sector. The Ministry Along with delegated responsibility for regu-
has offered tracts of land for mineral exploration lating traditional mining the States have respon-
demarcated into blocks, which are then the subject sibility for levying taxes. The same Regulation
of negotiation with interested companies. Well over mentioned above provides for a 5 percent levy on
a hundred of these blocks have been allocated and the value of gold the proceeds, which is divided
mining agreements signed. As a result, there are now 50/50 between the Federal Ministry and the State.
a large number of foreign and Sudanese companies If the States are able to collect such levies this would
holding mineral exploration rights. The work being represent a significant source of revenue in view of
carried out by these companies ranges from very the scale of traditional mining taking place in recent
preliminary exploration programs to locate potential years, however, it remains unclear how effectively
mineral sites through to more detailed evaluation of revenue would be collected. Since royalties are cur-
promising mineral deposits. As identified in an earlier rently waived under the CBOS gold buying program
section, the progress of some advanced gold explo- no revenues are being raised through this channel.
ration projects suggests that new gold mines may On the other hand the State’s appear to have been
become operational in the next five or more years. levying a variety of fees at local sites.
The Ministry’s efforts to promote the mining
sector have included offering fiscal incentives. Economic impact of gold
These have been used in part to overcome major
obstacles linked to limited knowledge of opportu- The rapid emergence of the gold sector will
nities and perceptions of high country risk among have important direct and indirect effects on
potential foreign investors. The mining legislation the economy. At the national level gold exports
empowers the Minister of Mines, working with the have generated large foreign exchange inflows at a
Mining Committee, to set policy, issue licenses, time when the country has been struggling to adapt
and sign negotiated contracts. These powers appear to the loss of oil export earnings and a rise in oil
to be exercised independently of the Investment product import dependency. While the contribution
Authority, with which all foreign investors must
register. The scope and efficacy of fiscal incentives is 80
Available at: http://www.minerals.gov.sd/eng/Regulation_tradi-
addressed in a later section on government revenues. tional.htm.
142 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Table 5.1: Main Elements of the Mining Fiscal Regime for Industrial Mines
Royalty Profits Tax Government Free Share Tax Exemptions
Gold: 6–7 percent (negotiable) 10 percent in one example seen, but according Negotiable (indicatively 20–30 Import duty and VAT during
Base Metals: 5 percent to the National Investment Encouragement percent) exploration
Act 2013, may be exempted
Source: Company disclosures and interviews with government agencies.
to the trade balance is clear, the impact of gold on inputs and infrastructure, and non-fiscal elements
investment inflows and government finances is far of the investment climate.
harder to measure. The following assesses the con- Flows of investment into the traditional min-
tribution of the industrial and traditional mining ing sector are insignificant at the individual site
sectors separately. level; however, the aggregate amount of cash
Flows of investment into the industrial min- and short-term credit flowing into this sector
ing sector appear to have increased in recent must have increased sharply in recent years. No
years as the number of mining companies records of investment levels have been available. The
engaged in mineral exploration and launching presumption is that investment is largely obtained
new mines has grown. However, no records of in the domestic market. Field visits and other
investment levels have been available in prepara- accounts suggest that domestic entrepreneurs have
tion for this CEM. The Ariab Mining Company been willing to invest in earth-moving equipment
has substantial investment needs in order to con- and transportation in order for new excavations to
tinue to exploit gold and develop copper deposits, be launched. Moreover, at some processing sites
amounting to some US$500 million over the next entrepreneurs have installed banks of grinding mills
few years. Other companies with advanced explora- run by on-site generators. These too would require
tion projects will need to raise funds to move into a considerable upfront outlay.
mine construction and commissioning, probably of Revenues generated by traditional mining
the order of some US$50–100 million each. In all are generally constrained by the limited extent
cases, raising finance is constrained by limited access to which operations are licensed and subject to
to the main international mining finance centers, taxes. Regulations issued by the Ministry of Mines
which may tend to slow the pace of investment.81 make provision for State level regulation and tax
Revenues generated by industrial mining collection. The proceeds of a 5 percent levy on pro-
could be significant once mines are brought into duction are supposed to be split evenly between the
production and reach profitability. On the other State authorities and the Federal Ministry. However,
hand, the use of tax incentives reduces, or at least it is unclear how widely this is enforced. In place
delays, likely receipts. Moreover, mines built with of direct imposition on miners, the State authorities
large capital outlays typically take time to reach prof- can impose the levy on licensed gold traders and
itability. The fiscal regime is subject to negotiation of dealers, who would factor this into the price paid to
several key terms. Key elements of the fiscal regime sellers. It is unclear, however, how this arrangement
are set out in Table 5.1. The use of fiscal incentives to
attract mineral investment is not unusual, however,
81
The presence of companies such as Qatar Mining in Sudan suggest
the World Bank has observed that very few min- that those willing to take on projects in Sudan have access to sources
eral investments are simply tax driven, principally of capital that are neither impacted by sanctions or perceptions of
high country risk. It is also observed that some Sudanese trading and
because the conditions necessary for investment construction firms have obtained mineral rights, suggesting that they
to take place depend on geology, access to critical are more likely to be able to mobilize funds than others.
Extractive industries: still important but no longer dominant 143
works in practice, especially since a large amount of respondents declared having no qualification in the
buying is now done by the CBOS through its agents. sector, a further 8 percent declared having com-
The fact that the CBOS seeks to obtain gold from pleted primary education, and 7 percent having
sellers and traders who would otherwise smuggle completed secondary. However it is important to
gold out of Sudan, means that the 5 percent levy note that of the total 781 respondents, 57 percent
is being waived by the CBOS. Some States are could not identify their education level within the
understood to be levying other fees (Sudan Vision categories offered by the National Census, making
2015b) However, without having seen relevant rev- the data on education difficult to extrapolate.
enue reports at Federal and State level it remains Mining is spread across the country, with no
unclear what revenue flows are associated with the clear relationship between levels of activity and
traditional gold mining sector. poverty rates at the district level. For instance, the
districts of Abu Hamed and Berber, both of the Nahr
Profile of miners and relationship to poverty el Nir State of the Northern region, report having
21 and 12 percent, respectively, of the active work-
Most miners work in informal arrangements, ing population engaged in mining activities. Yet,
a common characteristic of artisanal min- these two districts have some of the lowest poverty
ing around the world. In the National Census rates in the country: that is 27.3 and 29.0 percent,
(2008), of the 3.5 million respondents only 781 respectively. Indeed the national poverty rate per
self-identified as miners, all of whom identified as district, according to the National Census (2008) is
part of the working population (age 15–65). Of 49.8 percent. Consider on the other hand, Giesan
these 781 self-reported miners, 84.8 percent were district in Blue Nile State of the Central region which
male and 15.3 percent were female. 64.3 percent reports a mining population of 9 percent and a pov-
of the same 781 respondents reported working erty rate of 77.4 percent; or Alrasad and Abu Jibieha
for their own account, meaning these individu- districts of South Kordofan State in the Kordofan
als work as day laborers. A further 27.7 percent region, who report 11.1 and 14.7 percent of their
respondents reported being paid employees and working populations to be in mining, with poverty
3.6 percent reported being an employer within the rates of 49.8 and 53.3 percent, respectively.
mining industry. It is likely that those who identi- There has been a doubling of mining employ-
fied as paid employees are working for some of the ment statistics in certain districts since 2008.
larger exploration and processing operations in the The Population and Housing Census (2008) had
country. It is therefore important to note that the reported the highest levels of mining activities in
vast majority of respondents are working likely in Bahri and Abu Hamed districts: that is 10.0 and
informal arrangements, a common characteristic for 8.7 percent of the working population aged 15–65.
other artisanal mining environments globally. Of Since that time Abu Hamed has doubled its per-
those self-identified miners, 56.7 percent declared centage of the mining workforce to 20.9 percent,
their role as the prime earner in the household, with as stated above. Other districts with significant
an average mean age of 37. Though not disaggre- percentage increases include Berber (from 4.9 to
gated for gender, it is most likely that these heads 12.0 percent), Giesan (from 3.6 to 9.0 percent),
of households are male. A further 21 percent of the Abu Jibieha (from 5.9 to 14.7 percent), and Alrasad
self-identified miners were either sons or daughters (4.4 to 11.1 percent). These statistics would seem
of the head of household with an average age of 23. to suggest a rise in the level of activity, predomi-
Education levels of people active in the min- nantly in traditional gold mining areas. It is how-
ing sector appear to be very low. Ten percent of ever difficult to conclude whether these increases
144 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
in employment are made up of residents of the area the depth to which some excavations are dug and
who are taking further interest in the sector since minimal use of support structures. Furthermore,
the government put in place its buying policies. rudimentary health precautions are taken at min-
Data from the National Census on migration does ing sites and processing centers, where water and
however suggest that cross-districts migration is hygiene conditions are poor and do not appear to
almost non-existent, with 99.4 percent of the total be subject to routine monitoring and inspection.
surveyed population (3.5 million) reporting no Of note is the liberal use of mercury in the
district migration. Hence it is plausible to assume recovery of gold at processing centers. During
that rises are coming from within the available labor field visits it was evident that mercury is widely
pool in the respective districts. Further investiga- available and traded. It is used in the traditional way
tions are required to understand why levels have for amalgamation but it was also observed being
increased and whether this employment is full-time used in grinding mills to assist with the liberation of
or seasonal. gold, prior to washing and amalgamation.82 Mercury
is therefore found in tailings generated during crush-
Environment and social impact ing and grinding and seems to be deposited without
containment. Tailings at some sites are collected
The rapid expansion of gold mining has without for sale to those that have the facilities to re-treat
doubt impacted local environments and com- them to obtain both residual gold and contained
munities in a variety of ways. The pace at which mercury. Unfortunately, it is not possible to assess
gold activity grew after secession in 2011 and the the scale of mercury used in traditional gold min-
largely unmanaged proliferation of traditional min- ing as a whole. Nevertheless, given the amount of
ing operations is bound to have generated multiple gold being recovered at sites like the ones visited,
environmental and social challenges for which it can be inferred that the amounts are significant.
regulatory institutions are typically ill-prepared. The Ministry of Mining seems to be aware
In the absence of firm enforcement of labor stan- of the environmental and social consequences
dards or environmental regulations, miners face of widespread traditional mining and has taken
both physical and social vulnerabilities. However, some measures to deal with them. The Ministry
given the economic attractiveness offered by min- of Mines is issuing licenses to companies able to
ing compared to farming or other rural productive recover mercury from tailings and other discard
activities, miners may consciously choose to take material and it has banned mercury imports other
on these risks in pursuit of better economic welfare. than by a state trading company. There is also a
Traditional mining sites are predominantly Directorate within the Ministry charged with envi-
away from heavily populated and cultivated ronmental monitoring and enforcement. It has
areas along the Nile but nonetheless generate participated in teams sent to inspect mining and
a variety of harmful impacts. Aerial images bear processing sites. It has information that has been
witness to the dramatic impacts of gold rushes with disseminated on the safe handling of chemicals and
closely spaced excavations over extensive areas and technologies to help reduce likely contamination by
shanty town-type development to support the influx mercury. How effective these measures are is dif-
of people. Field visits provided evidence of the ficult to assess without careful survey of sites. Such
widespread use of bulldozers to excavate topsoil to
expose gold bearing rocks with little or no reclama-
82
tion of land as mining plays out. There appears to Amalgamation is a mineral processing method that extracts gold
from mined ore using mercury to create amalgam, which is then
be little attention to safety hazards, exemplified by decomposed leaving gold.
Extractive industries: still important but no longer dominant 145
surveys are beginning to be undertaken, according will decrease. Even in the high case scenario for oil
to the Ministry. Moreover, early in 2015 the Ministry production (Figure 5.1.4), this evolution is merely
announced that it had secured the support of the slowed rather than changed. The same would be
African Development Bank to help finance these true of a higher oil price environment; however, at
and related activities. least in the short term, the oil price is unlikely to
Anecdotal evidence of positive and nega- provide much support.
tive impacts on livelihoods of the traditional The constrained outlook for exports and rev-
gold mining boom in the communities in which enues from domestic oil production places the
activity has been concentrated needs to be sup- spotlight on fees that the Government obtains for
plemented by rigorous data collection. Positive the handling of South Sudanese transit oil. The
impacts are reflected in the level of activity among analysis shows that this now has become at least as,
trades that provide inputs into the mining and pro- if not more, important than the domestic oil sector
cessing value chain. On the other hand, negative in terms of exports (almost all South Sudanese oil
impacts on the availability of seasonal labor in the is presently exported) and government revenues. In
agricultural sector have been reported. One report Figure 5.4 this manifests as the red line circle that
spoke of this reducing the harvest of the sesame crop is somewhat between the oil position of 1999/2010
in some areas. There were several informal reports and 2025. Under present arrangements, the GOS
of school students joining the gold rush in 2012–13, obtains fees from both the Government of Sudan
either as child labor or accompanying their families. and the JOCs-South at levels that yield a consider-
able fiscal surplus (after meeting tariffs charged
D. Combined Implications of Oil and by the operators of processing and transportation
Mining facilities in Sudan). Although the data necessary to
quantify it precisely is not available, it would be
While it appears inevitable that the contribution reasonable to assume a margin over tariffs of some
of oil to Sudan’s economic development will 3:1. Moreover, this source of fiscal revenues is not
decline over time it is by no means certain that linked to oil prices, so it is largely protected from
the mineral sector will be a full substitute for present oil price uncertainties. An additional factor
it, even though the mineral sector is quite likely is that the TFA provides for a shortfall payment to
to make a bigger contribution than it has in the be made by GRSS to GOS in the event that produc-
past, most notably in terms of exports. Figure 5.4 tion in South Sudan does not meet expectations.
shows how the contribution of the two sectors to These arrangements effectively eliminate two of the
Sudan’s economy might evolve in the medium term. principal sources of fiscal risk to Sudan.
The oil sector was the mainstay of the economy for Notwithstanding the fiscal benefits obtained
over a decade, whether measured in terms shares from transit fees, these arrangements can only be
of GDP, exports, or government revenues (See expected to be transitory, a fact acknowledged
Figure 5.4, red large circle on the right upper side). by the expiration dates of relevant agreements.
Due to the reduced scale of reserves and production So while the current fiscal benefits, when com-
and limited scope for reversing this, at least in the bined with revenues from the domestic oil sector
medium term, the contribution is already shrink- help sustain the contribution of oil to the Sudanese
ing and is likely to shrink even further by 2030. In economy, there are medium terms risks relating to
Figure 5.4 this is characterized by a move towards i) an uncertain outlook for South Sudan’s produc-
the lower left side, which shows that both the share tion rate (as well as uncertainty over TFA volumes
in sports and the share in Government revenue if conflict in South Sudan persists for another year);
146 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Contribution of Oil and Minerals
FIGURE 5.4: not been readily available. Conservative expecta-
to Sudan’s Economy tions of the fiscal contribution of the traditional
mining sector are reflected in Figure 5.4 (green
Gold’s contribution is growing circles for gold) in which the estimated contribution
but has been mainly to exports 1999–2010
of gold in 2014 is weighted heavily towards exports
Share of exports
2025? 2014
rather than to government revenues.
2014
Traditional mining may, with sufficient sup-
2014 2025? port, provide a source of livelihood in rural areas
2025?
Oil’s contribution is declining that may have few other sources of economic sup-
but transit fees lessen the impact
1999–2010 port. Traditional mining can create direct, indirect,
Share of government revenue
and induced demand for labor, goods, and services
Share of GDP: Oil Including transit fees Minerals
in areas where few alternatives exist. Field visits
Source: World Bank staff own visualization.
provided ample evidence that in localities in which
traditional mining has been taking place, market
and ii) the incentives created for South Sudan’s oil opportunities had been opened up for vendors
to be used either domestically or exported via an of equipment and suppliers of support services.83
alternative route. Figure 5.4 shows the combined With sufficient mapping and resource evaluation
contribution of the oil sector diminishing over the it is likely possible to identify areas that are suffi-
medium term both in terms of exports and govern- ciently rich in gold so that traditional mining could
ment revenues. be sustained for more than a few years. Experience
The Government’s emphasis on promoting from around the world suggests that this planned
alternatives to the oil sector is well founded, approach is only likely to take place if traditional
and there have been early results in the form of mining takes place on a formalized basis, since this
the boom in gold exports. A policy of encourag- provides a basis for miners to obtain legal title and
ing gold produced domestically to be exported offi- hence finance. Policies for supporting artisanal and
cially so that foreign exchange could accrue to the small-scale mining, such as in Tanzania, place an
Government seems to have had success, at least in emphasis of formalization and the reservation of
the short term, even though a major driver of gold areas considered to have high potential after tech-
activity has been the gold price and the main sup- nical investigation.
ply response has been from the traditional mining Industrial mining may take some time to
sector, not the industrial mining sector. The main reach its potential; however, such a develop-
policy concerns about this strategy is how long will ment over the medium to long term would be
it be sustainable in the face of lower gold prices more likely to provide a more balanced export
and/or diminishing scope for exploitation of gold and revenue contribution to the economy than
by traditional methods. traditional mining. The Government has made
Whereas the increase in traditional gold promotion of industrial mining a priority and taken
mining has fueled a gold export boom, its fiscal a number of measures to encourage investment in
contribution has been less significant. It is unclear mineral exploration. There are positive signs that
how much of a fiscal contribution this sector can the technical conditions on which industrial mining
sustain given policies that i) devolve fiscal power to could develop are in place, backed by efforts of the
State level; and ii) depend on offering competitive
prices to sellers of gold who would otherwise avoid 83
This was so in Abu Hamed, for example, in which one section of
official channels. The data needed to assess this has town was dedicated to the sale of mining and processing equipment.
Extractive industries: still important but no longer dominant 147
Ministry of Mines to enhance the geological database. over the medium term could be broadly positive,
The mineral rich Arabian Nubian Shield straddles however, the scale of the sector is very unlikely
Sudan and several of its neighbors and has been host to rival that of the oil sector in its heyday and
to mining activity over millennia owing to an abun- its fiscal impact may be substantially lower.
dance of accessible surface and near-surface deposits These considerations are reflected in Figure 5.4 by
of gold and other valuable minerals. Large-scale gold the modest increase indicated in export contribu-
and copper-gold mines developed in neighboring tion and low increase indicated in the contribution
Egypt, Eritrea, and Saudi Arabia provide reason for to government revenues. There are numerous sce-
optimism. However, the degree to which Sudan has narios that could unfold, including much less posi-
been explored using modern techniques to establish tive ones, in which a lower gold price environment
the viability of mechanized mining and to detect coupled with continuing constraints on financing of
deeper lying deposits remains very limited. major mineral projects means that the recent gold
For investment in industrial mining to take mining boom wanes. Any sustained program of
place on a consistent basis there will need to be reforms to make the industrial mining sector more
proof that projects can be brought to commercial competitive and to strengthen regulatory institu-
fruition, notwithstanding financing challenges tions would require strong leadership and probably
and a limited track record in the implementation external support to enhance institutional capability
of contracts through all investment phases. In and effectiveness.
this regard the financing by Ariab Mining Company Any more thorough evaluation of the contri-
of the expansion plans at the Hassai mines and of bution of the mining sector to economic develop-
progress of some of the more advanced gold explo- ment in Sudan would have to take into account
ration projects would send a very positive signal to negative externalities such as harmful environ-
the international mining community. Analysis car- mental and social impacts; neither is captured in
ried out for this CEM in 2014 found that several Figure 5.4. At this stage, impacts of this kind arise
aspects of the mining law and contracts, as well mainly in the context of traditional gold mining,
as regulatory arrangements could be improved. though adequate regulatory care will be needed to
Moreover, it was found that some of the non-fiscal ensure that further development of the industrial
conditions necessary to attract and retain large-scale mining sector does not generate an excessive environ-
investment through the full cycle from exploration mental and social burden. There is already evidence
to production are not in place, such as early disclo- that traditional gold mining places the environment,
sure of right-holdings and clarity as to how surface as well as the health and safety of laborers and their
access is obtained. That being the case, the value dependents, at some risk, given its very rapid and
of tax incentives, which have been used to induce widespread proliferation. It will be important for
investment, may be questioned. such risks to be managed carefully to ensure that a
In view of the uncertainties addressed above, good balance is achieved between economic oppor-
the contribution of mining to Sudan’s economy tunity and environmental and social threat.
ANNEXES
Annex 1: MAMS Model: Structure, Data MAMS includes three core institutions: house-
and Assumptions holds, government, and the rest of the world.
Structure of MAMS Households (an aggregate domestic private
institution) earn incomes from factors, trans-
Figure 0.1 summarizes the payment flows that are fers, and interest from the government (with
captured by MAMS in any year. Activities produce, the interest due to loans from the households to
selling their output at home or abroad, and using the government), and transfers from the rest of
their revenues to cover their costs (of intermediate the world, net of interest on household foreign
inputs, factor hiring, and taxes). Their decisions debt.84 These are used for direct taxes, savings,
to pursue particular activities with certain levels and consumption. The savings share depends
of factor use are driven by profit maximization.
The shares exported and sold domestically depend
84
on the relative prices of their output in world and The household may lend to the government and borrow from the
rest of the world; given this, it may receive interest payments from
domestic markets. the government and make interest payments to the rest of the world.
FIGURE 0.1: Aggregate Payment Flows in MAMS
Factor domestic wages and rents private investment financing
Households
Markets
private consumption
trnsfr+interest
dir taxes
lending
factor demand
indir taxes
trnsfr-interest
gov cons and inv Government Private
interm input demand Capital
trnsfr-interest
Account
lending
Activities
lending
Domestic
FDI
Commodity Rest of
Markets imports World
domestic demand
exports
foreign wages and rents private investment
150 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
on per-capita incomes. Their consumption deci- faces exogenous world prices—Sudan is viewed
sions change in response to income and price as a small country in world markets without any
changes. By construction (and as required by the impact on the import and export prices that it
household budget constraints), the consump- faces. Domestic demanders decide on import and
tion value of the households equals their income domestic shares in their demands on the basis of
net of direct taxes and savings. the relative prices of commodities from these two
The government gets its receipts from taxes sources. Similarly, domestic suppliers (the activi-
and transfers from abroad; it uses these for ties) decide on the shares for exports and domestic
consumption, transfers to households, and supplies on the basis of the relative prices received
investments (providing the capital stocks in these two markets.87
required for production of government ser- Factor markets reach balance between demands
vices), drawing on domestic and foreign bor- and supplies via wage (or rent) adjustments. Across
rowing for supplementary investment funding. all factors, the factor demand curves are down-
To remain within its budget constraint, it ward-sloping reflecting the responses of produc-
either adjusts some part(s) of its spending tion activities to changes in factor wages. On the
on the basis of available receipts or mobilizes supply side of the labor market, unemployment
additional receipts of one type or more in order is endogenous—the model includes a wage curve
to finance its spending plans. (a supply curve) that is upward-sloping until full
The rest of the world (which appears in the employment is reached, at which point it becomes
balance of payments) sends foreign currency to vertical (see Figure 0.2; its supply curve assumes
Sudan in the form of transfers to Sudan’s gov- a minimum unemployment rate of 5 percent).
ernment and households (net of interest pay- Unemployment is defined more broadly than in
ments on their foreign debts), FDI, loans, and official statistics to include un- and under-employ-
export payments.85 Sudan uses these inflows to ment. In the simulations, a broad definition of
finance its imports. The balance of payments
clears (inflows and outflows are equalized) via
adjustments in the real exchange rate (the ratio 85
Sudan’s economy is treated as fully dollarized.
86
For example, starting from a balanced situation, a balance of pay-
between the international and domestic price ments surplus could arise from increases in foreign exchange receipts
levels in domestic currency), which take place (perhaps due to an increase in foreign aid or the world price of an
export). The resulting increase in domestic demands (be it from the
when the balance is in surplus or deficit.86 government or other agents) would not change international (export
and import prices) in foreign currency but reduce their prices relative
to domestic prices (the prices of domestic output sold domestically,
Private investment financing is provided from via an appreciation of the model exchange rate and/or an increase in
domestic private savings (net of lending to the domestic prices, in both cases representing an appreciation of the real
exchange rate. This relative price change would encourage domestic
government) and foreign direct investment (FDI). producers to switch part of their outputs from exports to domestic
It is assumed that private investment spending will sales and induce domestic demanders to switch part of their demands
from domestic sources to imports. This process would continue until
adjust in response to changes in available funding the balance of payments surplus is eliminated. The opposite would
or that private savings will adjust to finance a pre- happen in the case of a balance of payments deficit.
87
An individual production activity does not respond to changes in
determined private investment level. relative prices for exports and domestic sales if its output only has
In domestic commodity markets, flexible prices one destination, either exported in full or sold domestically in full. By
the same token, domestic demanders do not have a choice between
ensure balance between demands for domestic imports and domestic output for commodities if only one source is
output from domestic demanders and supplies available. In the case of Sudan, some commodities do not enter trade
(including government services) while others are only traded in one
to the domestic market from domestic suppliers. direction (like the output of gold mining, which only is exported).
The part of domestic demands that is for imports Such structural features reduce the flexibility of Sudan’s economy.
Annexes 151
unemployment increases the scope for the existing FIGURE 0.2: The Labor Market in MAMS
labor force to generate a larger (smaller) amount 5
of effective labor if the incentives to work were to 4
improve (deteriorate) without any change in the
3
labor-force participation rate; typically, this seems
Wage
realistic. Over time, the labor force grows due to 2
demography. For non-labor factors, the supply 1
curves are vertical in any single year (the supply
is fixed) but switch over time as supplies change 0
85 90 95
(see next point). 100 – unemployment rate (%)
The above discussion refers to the functioning of Supply Demand
model economy in a single year. In MAMS, growth
over time is endogenous. The economy grows due to
accumulation of capital (determined by investment
and depreciation), labor (determined by demogra- Table 0.1 shows the disaggregation of the data-
phy), and other factors (following exogenous growth base for this analysis. The database consists of a
trends), as well as because of improvements in TFP. Social Accounting Matrix (SAM), data on stocks
Apart from an exogenous component, TFP depends (of factors of production and debts), elasticities (in
on the levels of government capital stocks. production, consumption, and trade), and miscel-
The disaggregation of MAMS varies widely laneous other data.88 The SAM was constructed
across different applications depending on data on the basis of a 2004 SAM for Sudan (Siddig
availability and the kinds of questions the model 2009) and data for 2012 that reflect the post-
is called upon to analyze. For the Sudanese appli- secession macro, trade, and sector value-added
cation, the database is disaggregated into some 60 structure of Sudan’s economy, parts of which was
accounts (see Table 0.3), indicative of the aspects used to build a macro SAM (Table 0.2). The 2012
of Sudan’s economy that the model is able to con- information is primarily based on IMF (2014a,
sider. Among other things, the database includes 2014b, 2014c), and CBOS (2014). In order to
11 production sectors. The factors of production ensure consistency with minimal adjustments, a
are split into labor, capital (private and govern- matrix estimation program was applied to the SAM
ment), and 4 natural resource factors (land for (Robinson et al. 2001).89
crops, land for livestock, oil, and gold), which
are specific to individual sectors and thereby help
making sure that their output growth respects
88
A SAM is a square matrix that that provides a comprehensive, con-
natural constraints. sistent economy-wide summary of the payments in an economy during
one year. It links institutions, factors, and production sectors. The
latter are split into activities (which carry out production) and com-
MAMS Database modities (representing activity outputs or imports without domestic
production). Given the consistency requirement, each account must
be balanced—its receipts must equal its outlays. The accounts of the
Any analysis of Sudan’s economy faces severe data Sudan SAM closely match the disaggregation of MAMS (Table 0.1).
challenges, severely aggravated by the 2011 seces- 89
More concretely, on the basis of 2012 data and structural features
of the 2004 SAM (such as household consumption shares and the
sion. Most available data apply to pre-2011 Sudan. input structure of production activities), an initial unbalanced 2012
In this situation, it is important to strive to make was constructed. The estimation program generates a balanced SAM
subject to constraints that subset of cells exactly or approximately sum
the best possible use of what is available in order up to observed 2012 data while otherwise minimizing deviations from
to satisfy analytical needs. the structure of the initial SAM.
152 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Table 0.1: Disaggregation of Sudan MAMS see Annabi et al. (2006). For the oil sector, it is
Category Item assumed that imports are near perfect substitutes
Sectors Crops for domestic products (in effect permitting a smooth
Livestock substitution of imports for domestic products as
Gold and other mining the latter decline in importance) whereas, output
Oil and products** is allocated in near fixed proportions between
Manufacturing
exports and domestic sales (reflecting that a rela-
Construction
tively inflexible part of the output is refined and
Electricity and water
sold domestically. Given the consistency features
Trade, restaurants and hotels
of an economy-wide model like MAMS (in markets
Transport and communications
for factors and commodities, quantities demanded
Government services
and supplied must be equal and all agents live under
Other services
budgetary constraints) most elasticities tend to play
Factors Labor
a qualitatively minor role as long as they stay within
Capital – private
accepted bounds.
Capital – government
Foreign and domestic debts stocks are based
Natural resource of gold and other mining sector
on the above-mentioned IMF and World Bank
Natural resource of oil sector
sources. The growth rates for utilization of the
Land for crop production
stocks of natural resources (oil and gold), which
Land for livstock production
are exogenous, were defined to match recent
Institutions* Household (domestic non-government institution)
trends and projected production growth for
Government
these sectors up to 2030. Private capital stocks
Rest of the World
were defined on the basis of cross-country data
Financial institution (holds foreign reserves)
on stocks and profit rates, and adjusted to ensure
Auxiliary Taxes – direct
plausible capital stock growth and rents for the
institutional
Taxes – domestic indirect
base scenario (Arslanalp et al. 2010; Nehru and
accounts
Taxes – value added
Dhareshwar 1993). Data on population (total and
Taxes – imports
in labor force age), and labor (stock, employment,
Subsidies
and unemployment) are based on UN (2014),
Interest – dometic
UNCTAD (2014), and IMF (2013).
Interest – foreign
The poverty results are generated by a module
Investment Investment – private
that draws on the simulated evolution of household
Investment – government
per-capita consumption, a Gini coefficient (which
*Household government, and rest of the world have current and capital
is exogenous), and an initial poverty rate, assum-
accounts. ing that consumption is log-normally distributed.90
**The oil sector covers both crude production and refining.
Using 2009 data for the then Northern provinces,
90
It is widely accepted that a log-normal distribution provides a good
The elasticities that are used are displayed in approximation for within-country income and consumption distribu-
tions (Bourguignon 2003; Easterly 2009). Inter alia, as noted by East-
Table 0.3. They were defined on the basis of the erly (2009, pp. 28–29): (i) empirical cross-country analysis indicates
literature and author assessments, drawing on a that the higher the initial poverty rate, the lower the poverty elasticity
of growth; and (ii) the absolute value of the simulated poverty-elasticity
combination of econometric evidence and experi- of growth with a log-normal distribution is inversely related to the
ence from similar country applications; for a survey, initial poverty rate and positively related to per-capita income.
Annexes 153
Table 0.2: Macro SAM for Sudan, 2012 (% of GDP)
tax- tax- tax- tax- tax- int- int- cap- dcap- cap- cap- inv- inv-
act com fac hhd gov row dir imp exp act va sub dom row hh gov fin row prv gov total
act 97.2 97.2
com 83.6 5.7 8.8 1.8 17.2 1.5 118.6
fac 94.9 0.0 94.9
hhd 93.8 3.0 0.9 1.4 99.1
gov 0.0 1.7 0.4 9.8
row 16.8 1.1 0.0 0.0 0.7 2.1 0.0 2.3 2.6 2.8 20.6
tax-dir 0.7 0.7
tax-imp 2.1 2.1
tax-exp 0.0 0.0
tax-act 2.3 2.3
tax-va 2.6 2.6
sub 1.8 1.8
int-dom 1.4 1.4
int-row 0.1 2.7 2.8
cap-hhd 13.0 5.4 4.6 22.9
cap-gov –4.8 2.2 1.3 2.8 1.5
cap-fin 7.5 7.5
cap-row 10.5 0.9 11.3
inv-prv 13.2 3.9 17.2
inv-gov 1.5 1.5
total 97.2 118.6 94.9 99.1 9.8 20.6 0.7 2.1 0.0 2.3 2.6 1.8 1.4 2.8 22.9 1.5 7.5 11.3 17.2 1.5
Notation
act production activities tax-exp taxes – exports cap-fin capital account – financialsystem
com commodities tax-act taxes – activities cap-row capital account – restofworld
fac factors tax-va taxes-value-added inv-prv investment – private
hhd household (domestic non-government) sub subsidies inv-gov investment – government
gov government int-dom interest on domestic government debt
row rest of world int-row interest on foreign debt
tax-dir taxes – direct cap-hhd capital account – household
tax-imp taxes – imports cap-gov capital account – government
the Gini coefficient is set at 0.353 and the initial is broadly consistent with recent World Bank and
poverty rate at 46.5 percent (World Bank 2011a, IMF projections, including the analysis of Sudan’s
p. 2; World Bank 2014b). mineral sectors in Chapter 5 of this CEM. It serves
as a benchmark for comparisons with alternative
Scenario Assumptions simulations. However, given that it is generated
with the help of a more disaggregated model than
The base scenario is designed to provide a plausible those used for these World Bank and IMF projec-
picture of Sudan’s development up to 2030 that tions, the simulations offer additional detail on
154 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Table 0.3: Value-Added, Consumption, and rates in recent decades.91 Given projected popula-
Trade Elasticities tion growth of 2.2 percent per year, average annual
VA LES Armington CET growth in GDP at factor cost per capita is around
Crops 0.70 0.56 2.00 2.00 1.8 percent.
Livestock 0.70 0.76 2.00 2.00 Among other assumptions, it is important to
Gold 0.08 take note of the following:
Oil 0.08 1.23 18.00 0.38
Manufacturing 0.70 1.10 0.90 0.90 Government. Domestic payments to and from
Construction 0.70 1.50 the government evolve on the basis of IMF/
Electricity-water 0.70 1.60 WB projections, imposed either as exogenous
Trade 0.70 0.90 real growth rates (for consumption and invest-
Transportation 0.70 1.23 0.50 ment) or as exogenous GDP shares (for import
Government services 0.30 1.38 tariffs, domestic borrowing, domestic transfers,
Other services 0.70 1.60 0.50 and subsidies. Payments received from abroad
Notation: —foreign grant aid and foreign borrowing—
VA = value added (elasticities of factor substitution in CES VA function); are exogenous in foreign currency, set at levels
LES = Linear Expenditure system (elasticities of household consumption
with respect to total consumption spending); that are consistent with IMF/WB projections.
Armington = CES aggregation function for domestic demand (elastici- Domestic and foreign interest payments depend
ties of substitution between imports and domestic output);
CET = Constant Elasticity of Transformation function for domestic output on exogenous interest rates and the level of
(elasticities of transformation between exports and domestic supply). foreign and domestic debt stocks; it is assumed
that, starting from 2015, foreign interest is paid
in full. Domestic taxes (direct and indirect) are
developments up to 2030 that are consistent with scaled to clear the government budget. Given
these macro projections. that all other major payments are defined to be
The simulations start in 2012, the base-year for close to projections, the GDP shares for tax pay-
the SAM and the bulk of the database. Coverage of ments are also close to projections.
the base scenario starts with the key assumptions, Savings-investment. Government investment is
followed by a presentation and analysis of selected financed within the government budget. FDI is
simulated results. exogenous in foreign currency. The GDP share
In order to generate a base scenario that satisfies of domestically financed private investment is
the criteria specified above, it is crucial to specify exogenous while the private savings rate adjusts
appropriate rules and values for growth in GDP at to generate needed financing—domestic private
factor cost and various payments (involving the gov- savings net of lending to the government is allo-
ernment, the household, and the rest of the world), cated to investment.
as well as mechanisms for the clearing of macro bal-
ances (the government budget, the balance of pay-
ments, and the private savings-investment balance).
91
Technically, the level of GDP is fixed, removing one variable from
For the base scenario (but not for the other the model for each solution year. At the same time, a variable that
scenarios), annual growth in GDP at factor cost is introduces a uniform adjustment in TFP in each production activity is
flexed, assuring that the exogenous GDP level is reached and that the
exogenous, in the ranges of 3–4 percent up to 2016 model continues to have an equal number of equations and variables.
and 4–5 percent in subsequent years, generating an Among production activities, TFP is not adjusted for petroleum and
other mining since production growth for these two sectors is based
average of 4.1 percent for the period 2013–2030, a on exogenous projections. For all non-base scenarios, the GDP level
figure that is slightly below Sudan’s average growth is flexible whereas the TFP adjustment variable is fixed.
Annexes 155
Table 0.4: Definitions of Non-Base Scenarios
Name Description
Crop+ TFP growth for crop agriculture increased by 2 percentage points during the period 2015–-2030.
Rem– Zero growth in private transfers, including worker remittances, from abroad, 2015–2030.
Crop+rem– Combining the changes for Crop+ and Rem–
Rexrdepr Series of simulations with real exchange rate depreciation in conjunction with withdrawal of foreign exchange to build up reserves
TofT+ Stepwise* 10% decrease in foreign-currency import prices (excluding oil) in 2016–2018; stepwise* 5% increase in foreign-currency
export prices (excluding gold and oil) in 2016–2018. Rationale: Normalized relations with RoW
Aid+ Stepwise* increase in foreign grants to government in 2016–2018, in 2018 and subsequent year at $150 mn; stepwise* increase in conces-
sional government foreign borrowing in 2016–2018, in 2018 and subsequent year at $600 mn. Rationale: Normalized relations with RoW.
Debt– Stepwise* foreign debt relief in 2016–2018, by 2018 having removed 75% of Sudan’s 2016 debt. Rationale: Normalized relations with RoW.
Normal Combining the changes for TofT+, Aid+ and Debt–
*Stepwise = 25% of change in 2016, 62.5% in 2017, and 100% in 2018. New levels of prices, grants and borrowing stay in place 2019–2030.
Balance of payments. The government-related an annual rate of 6.7 percent; for gold, a recent
items and FDI were described above. Among production decline is projected to continue until
other non-government items, on the inflow 2016 after which production will stabilize with
side, net private transfers and net private foreign a resumption of growth for 2019–2030 at an
borrowing (which is small) are both exogenous annual rate of 3.4 percent. After the precipitous
in foreign currency; among the outflows, net decline in 2015, oil (and oil product) export and
additions to foreign reserves are exogenous in import prices (in constant US$) are projected to
foreign currency while private interest payments increase gradually up to 2025 after which they
(like their government equivalents) depend stabilize, with an average annual growth rate of
on private foreign debt. The balance clears via 3.4 percent for the period 2016–2030. For gold,
adjustments in the real exchange rate, which export prices are projected to continue their
influences export and import quantities and gradual decline up to 2025 after which they also
foreign currency values.92, 93 stabilize, for the full period 2013–2030 falling
Oil and gold price and production data. For at a rate of 0.9 percent.
both commodities, production data is based
on Chapter 5 of this CEM whereas interna-
tional prices (in constant US$) are based on
IMF (2014c), and World Bank (2015a, 2015d); 92
The real exchange rate is defined as follows: PW•EXR/PD where
PW is an index of export and import prices in foreign currency, EXR
in the absence of World Bank price projec- the nominal exchange rate (local currency units per foreign currency
tions after 2025, prices are assumed to stay at unit), and PD an index of prices of domestic output sold domestically.
93
For example, a real depreciation raises the prices in local currency
the 2025 level during the period 2026–2030. of exports and imports, for exports inducing domestic suppliers to
The information is shown in the main text, increase quantities and foreign currency values and, for imports,
inducing domestic demanders to decrease quantities and foreign
Figure 2.2.1. For oil, production is projected to currency values, with the result being a surplus (or reduced deficit)
peak in 2015 after which it declines gradually, at in the balance of payments.
156 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Scenario Results
Table 0.5: Real Macro Indicators by Simulation (%annual Growth 2013–2030)
2012 Base Crop+ Rem– Crop+rem– TofT+ Aid+ Debt– Normal
Absorption 243.1 3.1 3.9 2.2 3.2 3.5 3.2 3.4 3.8
Consumption – private 188.3 2.9 3.9 2.0 3.2 3.3 3.0 3.2 3.7
Consumption – government 12.8 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7
Fixed investment – private 38.6 2.7 3.5 1.6 2.6 3.2 2.9 3.1 3.7
Fixed investment – government 3.5 8.8 8.8 8.8 8.8 8.8 8.8 8.8 8.8
Exports 19.8 6.0 7.6 6.7 8.2 6.2 6.0 5.9 6.1
Imports 37.7 3.4 4.7 2.5 4.0 4.1 3.6 3.8 4.5
GDP at factor cost 213.6 4.1 5.0 3.7 4.8 4.3 4.2 4.3 4.6
Total factor employment (index) 3.0 3.3 2.8 3.1 3.2 3.1 3.2 3.4
Total factor productivity (index) 1.1 1.7 1.0 1.7 1.1 1.1 1.1 1.2
GNI 216.5 3.9 4.9 3.5 4.7 4.2 4.0 4.2 4.5
GNDI 219.5 4.1 5.1 3.5 4.6 4.4 4.2 4.4 4.7
GNI per capita 5.8 1.7 2.6 1.3 2.4 2.0 1.8 2.0 2.3
GNDI per capita 5.9 1.9 2.8 1.3 2.4 2.1 2.0 2.1 2.4
Real exchange rate (index) 4.4 3.7 4.8 4.0 4.2 4.3 4.3 4.1
Unemployment rate (%) 20.0 10.8 5.0 12.5 6.0 6.9 9.8 8.5 5.0
Headcount poverty rate (%) 46.5 38.4 29.4 47.2 35.8 34.2 37.4 35.8 31.4
Note:
1. Unless otherwise noted, column for initial year shows data in mn 2012 SDG.
2. For the unemployment and poverty rates, the base-year and simulation columns show base-year rate and simulation-specific final-year rates, respectively.
Annexes 157
Table 0.6: Macro Indicators in 2012 and by Simulation in 2013 (% of GDP)
Indicator 2012 Base Crop+ Rem– Crop+rem– TofT+ Aid+ Debt– Normal
Absorption 108.0 104.7 103.3 96.3 96.6 104.2 105.5 106.951 106.9
Consumption – private 83.6 81.7 80.4 74.7 75.0 81.3 82.3 83.446 83.5
Consumption – government 5.7 5.2 4.7 5.5 4.9 5.0 5.2 5.113 4.9
Investment – private 17.2 14.3 14.9 12.4 13.3 14.6 14.5 14.913 15.3
Investment – government 1.5 3.6 3.2 3.7 3.4 3.3 3.5 3.479 3.2
Exports 8.8 26.0 27.1 33.0 32.7 25.8 25.6 24.7 24.1
Imports 16.8 30.7 30.3 29.3 29.3 30.0 31.1 31.6 31.0
GDP at market prices 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Net indirect taxes 5.1 9.0 8.2 9.8 8.7 8.5 8.3 6.8 5.8
GDP at factor cos 94.9 91.0 91.8 90.2 91.3 91.5 91.7 93.2 94.2
GNI 96.2 93.6 94.5 92.9 94.0 94.0 93.2 96.2 96.0
GNDI 97.5 103.6 102.4 95.0 95.6 103.2 103.3 105.8 105.0
Foreign savings 10.5 1.1 0.9 1.3 1.0 1.0 2.1 1.1 1.9
Gross national savings 8.2 16.7 17.2 14.9 15.7 16.9 15.9 17.3 16.7
Gross domestic saving 10.7 13.1 14.8 19.8 20.1 13.7 12.6 11.4 11.6
Foreign government deb 81.4 113.8 89.8 127.9 97.7 103.9 126.5 37.0 46.2
Foreign private debt 2.6 3.7 2.9 4.1 3.1 3.3 3.6 3.5 3.2
Domestic government debt 12.9 16.3 13.6 17.4 14.3 15.1 16.1 15.7 14.4
Table 0.7: Government Receipts and Spending in 2012 and by Simulation in 2030
(% of Nominal GDP)
Final year
Indicator 2012 Base Crop+ Rem– Crop+rem– TofT+ Aid+ Debt– Normal
Receipts Direct taxes 0.7 1.1 1.0 1.2 1.1 1.1 1.0 0.7 0.6
Import tariffs 2.1 2.7 2.7 2.5 2.6 2.6 2.7 2.7 2.7
Other indirect taxes 4.9 6.9 6.0 7.8 6.7 6.5 6.1 4.5 3.7
Private transfers 1.7 2.9 2.9 2.7 2.7 2.9 2.9 3.0 3.0
Foreign transfers 0.4 0.4 0.3 0.5 0.3 0.4 0.7 0.4 0.6
Domestic borrowing 3.5 1.7 1.4 1.8 1.5 1.6 1.7 1.7 1.5
Foreign borrowing 2.8 0.9 0.7 1.0 0.8 0.8 1.9 0.8 1.7
Total 16.1 16.6 15.0 17.5 15.6 15.8 16.9 13.9 13.7
Spending Consumption 5.7 5.2 4.7 5.5 4.9 5.0 5.2 5.1 4.9
Fixed investment 1.5 3.6 3.2 3.7 3.4 3.3 3.5 3.5 3.2
Private transfers 3.0 3.6 3.6 3.6 3.6 3.6 3.6 3.6 3.6
Commodity subsidies 1.8 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5
Domestic interest payments 1.4 0.4 0.3 0.4 0.3 0.3 0.3 0.3 0.3
Foreign interest payments 2.7 3.4 2.6 3.8 2.9 3.1 3.8 0.8 1.2
Total 16.1 16.6 15.0 17.5 15.6 15.8 16.9 13.9 13.7
158 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Table 0.8: Balance of Payments in 2012 and by Simulation in 2030 (% of Nominal GDP)
Final year
Indicator 2012 Base Crop+ Rem– Crop+rem– TofT+ Aid+ Debt– Normal
Outflows Imports 16.8 30.7 30.3 29.3 29.3 30.0 31.1 31.6 31.0
Factor income to RoW 1.1 2.8 2.7 3.1 2.9 2.7 2.8 2.8 2.6
Net interest income to RoW 2.8 3.6 2.8 4.0 3.1 3.2 4.0 1.0 1.3
Change in foreign reserves 0.9 0.9 0.7 1.1 0.8 0.9 0.9 0.9 0.8
Total 21.5 38.1 36.6 37.5 36.1 36.8 38.8 36.4 35.8
Inflows Exports 8.8 26.0 27.1 33.0 32.7 25.8 25.6 24.7 24.1
Private transfers from RoW 0.9 9.6 7.6 1.7 1.3 8.8 9.5 9.3 8.4
Official transfers from RoW 0.4 0.4 0.3 0.5 0.3 0.4 0.7 0.4 0.6
Private borrowing 4.6 0.1 0.1 0.2 0.1 0.1 0.1 0.1 0.1
Government borrowing 2.8 0.9 0.7 1.0 0.8 0.8 1.9 0.8 1.7
FDI 3.9 1.1 0.8 1.2 0.9 1.0 1.1 1.0 0.9
Total 21.5 38.1 36.6 37.5 36.1 36.8 38.8 36.4 35.8
Table 0.9: Real GDP at Factor Cost in 2012 and Growth by Simulation (% Annual Growth)
2012 Base Crop+ Rem– Crop+rem– TofT+ Aid+ Debt– Normal
Aggregate sectors
Agriculture 60.8 5.7 7.0 5.7 7.1 5.9 5.7 5.7 6.0
Industry 47.4 1.9 2.5 1.3 2.0 2.2 2.0 2.2 2.5
Mining 19.7 –3.4 –3.5 –3.4 –3.4 –3.4 –3.4 –3.4 –3.4
Manufacturing 15.9 4.3 5.1 3.6 4.5 4.6 4.4 4.6 5.0
Other 11.9 3.5 4.2 2.8 3.6 3.9 3.7 3.9 4.3
Services 105.4 3.8 4.6 3.2 4.2 4.1 4.0 4.1 4.5
Private 94.6 3.9 4.7 3.2 4.2 4.2 4.0 4.2 4.5
Government 10.8 3.7 4.0 3.3 3.7 3.8 3.7 3.8 4.0
Disaggregated sectors
Crop agriculture 32.3 6.1 8.3 6.4 8.6 6.3 6.2 6.2 6.3
Livestock agriculture 28.6 5.1 5.1 4.9 4.7 5.4 5.2 5.2 5.5
Gold 7.7 –2.3 –2.5 –2.3 –2.4 –2.4 –2.3 –2.3 –2.4
Petroleum 12.0 –4.2 –4.2 –4.2 –4.2 –4.2 –4.2 –4.2 –4.2
Manufacturing 15.9 4.3 5.1 3.6 4.5 4.6 4.4 4.6 5.0
Construction 8.5 3.7 4.3 2.9 3.7 4.1 3.8 4.0 4.5
Electricity-water 3.3 3.1 3.9 2.5 3.5 3.4 3.2 3.4 3.7
Trade services 56.5 3.9 4.7 3.3 4.3 4.1 4.0 4.2 4.5
Transportation services 20.9 3.8 4.7 3.0 4.1 4.1 3.9 4.1 4.5
Government services 10.8 3.7 4.0 3.3 3.7 3.8 3.7 3.8 4.0
Other services 17.2 3.9 4.9 3.1 4.3 4.3 4.1 4.3 4.8
Total 213.6 4.1 5.0 3.7 4.8 4.3 4.2 4.3 4.6
Annexes 159
Table 0.10: Sector Structure in 2012 and by Simulation in 2013 (% of GDP)
EXP-shr VA-shr EMP-shr IMP-shr EXPOUT-shr IMPDEM-shr
2012
Agriculture 15.6 28.5 63.6 16.9 3.7 7.7
Crop 11.6 15.1 35.8 15.2 4.4 10.8
Livestock 4.1 13.4 27.8 1.7 2.6 2.2
Industry 76.8 22.2 8.7 64.0 8.3 14.5
Mining 75.3 9.2 2.1 8.9 37.3 11.9
Gold 38.9 3.6 0.9 100.0
Petroleum 36.4 5.6 1.2 8.9 22.3 11.9
Manufacturing 1.5 7.4 3.6 54.1 0.3 17.2
Other 0.0 5.6 3.0 1.0 0.0 1.8
Services 7.5 49.3 27.7 19.1 1.0 4.9
Private 7.5 44.3 22.6 19.1 1.2 5.5
Government 5.0 5.0
Total 100.0 100.0 100.0 100.0 4.8 9.8
2030
Agriculture 75.2 38.9 73.0 3.3 38.9 3.3
Crop 55.3 23.0 45.2 3.0 41.7 4.6
Livestock 19.9 15.8 27.8 0.3 32.7 0.9
Industry 12.7 17.7 5.8 82.0 4.4 27.9
Mining 10.3 6.0 0.7 48.2 31.7 72.2
Gold 5.3 1.5 0.3 100.0
Petroleum 5.0 4.5 0.3 48.2 18.4 72.2
Manufacturing 2.4 7.0 3.0 33.5 1.1 18.4
Other 0.0 4.6 2.2 0.3 0.0 1.2
Services 12.1 43.4 21.2 14.7 5.4 7.7
Private 12.1 38.9 17.3 14.7 6.2 8.7
Government 4.5 3.9
Total 100.0 100.0 100.0 100.0 14.1 17.5
Δ (2030–2012)
Agriculture 59.5 10.4 9.4 –13.6 35.1 –4.4
Crop 43.8 7.9 9.4 –12.2 37.2 –6.2
Livestock 15.8 2.5 0.0 –1.4 30.1 –1.4
Industry –64.2 –4.5 –2.9 18.0 –3.9 13.4
Mining –65.0 –3.2 –1.5 39.3 –5.5 60.3
Gold –33.7 –2.1 –0.6
Petroleum –31.4 –1.1 –0.9 39.3 –3.9 60.3
Manufacturing 0.9 –0.4 –0.7 –20.6 0.8 1.2
(continued on next page)
160 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Table 0.10: Sector Structure in 2012 and by Simulation in 2013 (% of GDP) (continued)
EXP-shr VA-shr EMP-shr IMP-shr EXPOUT-shr IMPDEM-shr
Other 0.0 –0.9 –0.8 –0.6 0.0 –0.5
Services 4.6 –5.9 –6.5 –4.4 4.4 2.8
Private 4.6 –5.4 –5.4 –4.4 5.0 3.2
Government –0.5 –1.1
Total 0.0 0.0 0.0 0.0 9.3 7.7
Notation Share in
EXP-shr exports
VA-shr value added
PRD-shr production
EMP-shr employment
IMP-shr imports
EXPOUT-shr sector output to exports
IMPDEM-shr domestic demand from imports
Annexes 161
Annex 2: Determinants of Savings in youth dependency ratio fell from 82 percent of
Sudan working-age population in 2000 to 75 percent
in 2012. The literature finds strong negative cor-
The main text showed that national savings in realtion between youth dependency ratio and
post-secession Sudan fell sharply and is low given saving. In this period, however, Sudan’s private
its income level. Low savings further can translate savings rate fell from 17.5 percent in 2000 to
into lower growth through lower investment. This 10.1 in 2012. This inconsistency can be attrib-
annex provides a short analysis of the determinants utable to Sudan’s high and unchanged youth
of savings from both macro and micro perspectives. unemployment. Youth unemployment effectively
In doing so, the analysis uses estimates from World adds burden of youth dependency. Sudan suf-
Bank (2013), which modified estimations by Loayza, fers from particularly high youth unemploy-
Schmidt-Hebbel and Servén (2000) by incorporat- ment: new labor market entrants, those around
ing nonlinearity of macroeconomic stability. See 20 years of age, face an unemployment rate of
Figure 0.3 for results. around 24 percent. Comparison with the peer
Sudan’s private savings behavior is mostly group countries shows that Sudan’s youth
attributable to three determinants: macroeconomic unemployment rate is the second highest after
instability, income level, and youth dependency: Egypt. Consequently, even as the young-age
population bulge came of age and entered the
i. Macroeconomic stability significantly affects labor market, the effective youth dependency on
Sudan’s private saving.94 The sharp decline in income earners did not decline much.
inflation in the late 1990s raised private sav-
ing, whereas the skyrocketing inflation since The increase in private savings in the early
the secession of South Sudan lowered private 2000s was accompanied by an increase in public
saving. The above analysis found a negative savings. Before the advent of oil, public savings
relationship between inflation and savings rate, was in the range of 0 to 1 percent of GNDI. Public
which suggests that skyrocketing inflation dis- investment remained low and overall fiscal deficit
courages households to save by depleting real was improving from the poor macroeconomic per-
value of household assets and purchasing power formance in the early 1990s. Public savings started
of household income. In such a case, households to rise following a rise in public investment in the
dis-save to fill in consumption gap or to save in early 2000s. Because fiscal balance remained close to
non-monetary form by increasing inventory of zero until the mid-2000s, public savings was mostly
goods or save in foreign currency. driven by public investment. Large fiscal deficit was
ii. The increase in income level since the advent registered in 2009 when the global financial crisis
of oil in the 2000s boosted Sudan’s private sav- hit the Sudanese economy and in 2012 when Sudan
ing. The literature suggests that households start lost nearly 55 percent of its fiscal revenues after the
to save when their income exceeds subsistence secession of South Sudan. Public saving, in turn, is
levels. The advent of oil accelerated economic recently driven by large fiscal deficit given public
growth in the 2000s, leading to increase in pri- investment is declining.
vate saving. Sudan’s per capita GDP stagnated
in the 1980s and the 1990s but started to rise
since the mid-1990s. 94
Balassa (1986) claims that stable and substantial level of domestic
savings can be achieved by keeping the real interest rate stable and
iii. The decline in youth dependency ratio, in gen- sufficiently high. Alternatively, Balassa proposes that low and stable
eral, contributes to rising private saving. Sudan’s inflation, supported by a small budget deficit, encourages saving.
162 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
FIGURE 0.3: Savings Rates in Sudan, 1991–2013
1) Correlation between Inflation and Private 2) Correlation between Income and Private
Savings in Sudan (1992–2012) Savings in Sudan (1992–2012)
20 30
Private saving, percent of GDNI
Private saving, percent of GDNI
10 20
10
0
0
–10
–10
–20
–20
–30 –30
–40 –40
0 20 40 60 80 100 120 140 400 500 600 700 800 900
Inflation, percent GDP per capita (constant at 2005 US$)
3) Private Savings in Sudan (2000–2012) 4) Youth Unemployment: Sudan and its peer
20 50
18
Private saving, percent of GDNI
45
16 40
14 35
12
30
Percent
10
25
8
6 20
4 15
2 10
0 5
80 81 82 83 84 85 86 87
Tanzania
Uganda
Ethiopia
Kenya
Morocco
Indonesia
Algeria
Sudan
Egypt
GDP per capita (constant at 2005 US$)
Average 90s Average 00s Average 10s
5) Sudan’s Public Savings (1991–2013)
10
5
0
-5
–10
–15
–20
–25
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013p
Public saving Overall fiscal balance Public investment
Source: World Bank staff own calculations, based on data from World Bank World Development Indicators; and IMF World Economic Outlook.
Note: (1) “p” denotes preliminary.
Annexes 163
Annex 3: Timeline of U.S. Sanctions or petrochemical industries, including, but not
Against Sudan limited to, oilfield services and oil or gas pipeline.
The President of the United States signs into law
1997, 3rd November – Executive Order 13067 the Darfur Peace and Accountability Act of 2006
(blocking Sudanese Government property and (imposing sanctions against individuals respon-
prohibiting transactions with Sudan) issued sible for genocide, war crimes, and crimes against
2002, 21st October – OFAC added names of indi- humanity, to support measures for the protec-
viduals and firms to its specially designated tion of civilians and humanitarian operations,
nationals list including Sudanese Petroleum and to support peace efforts in the Darfur region
Corporation of Sudan). The two pieces of law also provided
2004, 5th April – OFAC issued an interpretative rul- relief to Southern Sudan and the Government of
ing on publishing activities involving manuscripts Southern Sudan as well as select areas of Sudan
from sanctioned countries including Sudan including Southern Kordofan/ Nuba Mountains,
2004, 2 nd August – OFAC added Farmers Blue Nile State, Abyei, Darfur and marginalized
Commercial Bank in the specially designated areas in and around Khartoum (Specified Areas of
nationals list for Sudan Sudan) by exempting them from some of the pro-
2004, 16th December OFAC issued a general license hibitions sets forth in the Executive Order 13067
pertaining to certain publishing activities in Sudan 2006, 17 th November – OFAC issued an
2005, 29 th March United Nations Security Interpretative Guidance regarding the appli-
Resolution 1591 of 2005 passed a resolution cation of Executive Order 13412 to trans-
obligating all United Nations members to sub- shipments of goods and financial transactions
ject to asset freeze and travel restrictions indi- conducted through certain areas of Sudan
viduals who are determined to have inter alia 2006, 3rd April – OFAC amended the Sudanese
impeded the peace process, constituted a threat Sanctions Regulations to permit the exportation
to stability in Darfur and the region, commit vio- or re-exportation, from the United States or by
lations of international humanitarian or human a U.S. person, of any goods or technology to a
rights law or other atrocities third-country government, or to its contractors
2005, 13th June OFAC issued amendments to the or agents, for shipment to Sudan via a diplo-
Sudanese Sanctions Regulations to authorizes matic pouch
inter alia (a) the operation of accounts in U.S. 2007, 29th May – OFAC added names of indi-
financial institutions under certain circum- viduals and firms to its specially designated
stances for individuals ordinarily resident in nationals list pursuant to Executive Order
Sudan; and (b) U.S. persons to process transfers 13400 of April 26, 2006 as contributing to the
of funds constituting noncommercial, personal conflict in the Darfur region. These include
remittances to or from Sudan or for or on behalf Sudan Telecommunications Company Limited
of individuals ordinarily resident in Sudan (SUDATEL), Sudan Gezira Board, Azza Air
2006, 26th April – Executive Order 13400 (block- Transport Company Ltd and Giad Motor
ing property of persons in connection with the Industry Company Limited
conflict in Sudan’s Darfur Region) issued 2007, 31st October – OFAC amended the Sudan
2006, 13th October – Executive Order 13412 block- Sanctions Regulations to implement Executive
ing property and prohibiting transactions with Order 13412, provide interpretative sections in the
the Government of including all transactions Regulations and introduce general licenses which
by U.S. persons relating to Sudan’s petroleum expands the exemption relating to official business
164 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
of the U.S. Government and the United Nations transfer and transportation of human remains
to include transactions and activities not only of to or from Sudan
employees but also of contractors and grantees of 2011, 13th October – OFAC issued general licenses
the U.S. Government and United Nations or any of authorizing the exportation or re-exportation
the United Nation specialized agencies, programs, food to individuals and entities in an area of
and funds (including, e.g., the World Bank Group Sudan other than the Specified Areas of Sudan
and International Monetary Fund). 2011, 8th December – OFAC issued general licenses
2009, 10th June – OFAC amended the Sudan which inter alia authorizes related financial trans-
Sanctions Regulations to expand the authoriza- actions and the activities supporting transship-
tion of select imports for diplomatic or official ment—through Sudan to or from South Sudan—of
personnel to include the provision of goods or goods, technology, and services for South Sudan’s
services in the United States to the diplomatic petroleum and petrochemical industries
missions of the Government of Sudan to the 2013, 15th April OFAC issued General License 1
United States and the United Nations, and to permitting certain academic and professional
the employees of such missions exchange activities between the United States
2009, 9th September – OFAC issued a general license and Sudan, which are otherwise prohibited by
authorizing the exportation and re-exportation of the Sudanese Sanctions Regulations including
agricultural commodities, medicine, and medical establishment and operation by U.S. academic
devices to the Specified Areas of Sudan institutions of academic exchange programs
2010, 10th March – OFAC issued a general license with academic institutions in Sudan
authorizing the exportation from the United 2014, 11th August – OFAC issued General License
States or by U.S. persons of certain limited 1A which modify the scope of authorization per-
services and software related to the exchange mitted on April 15, 2013 and expands the defi-
of personal communications over the Internet nition of “U.S. academic institutions”, permits
2010, 20th October – OFAC issued a statement such institutions to engage in activities involving
on licensing policy that seeks to establish a Sudanese nationals and authorizes U.S. financial
favorable licensing regime through which institutions to process money transfers inci-
U.S. persons can request from OFAC specific dental to participation of Sudanese nationals in
authorization for the commercial exportation or academic and professional exchange programs
re-exportation of U.S.-origin agricultural equip- organized by U.S. academic institutions.
ment and services to an area of Sudan other than 2015, 18th February – In order to advance free flow
the Specified Areas of Sudan of information and to facilitate communica-
2011, 12th April – OFAC issued an Interpretative tions by the Sudanese people, OFAC issued an
Guidance regarding the application of the amended general license pertaining to certain
Sudanese sanctions regulations to the new state software, hardware, and services incident to per-
to be formed by the secession of Southern Sudan sonal communications (essentially expanding
2011, 17th June – OFAC issued a guidance clarifying the scope of ICT devices, software and services
that donations of food and medicine to non-Spec- for personal communication that can be made
ified Areas of Sudan, when intended to be used to available in Sudan by U.S. persons).
relieve human suffering, are exempt from the pro-
hibitions of the Sudanese Sanctions Regulations Source: World Bank staff own compilation, based
2011, 12th October – OFAC issued general licenses on data from the U.S. Office for Foreign Asset
authorizing processing of consular funds Control (OFAC).
Annexes 165
Annex 4: Additional Details on Measuring a country’s RER misalignment
RER Calculations and Theoretical
Considerations The first step, measures an RER misalignment index
after controlling for the Balassa-Samuelson effect.
Examples of the theoretical relationship The Balassa-Samuelson effect captures the effect of
between the real exchange rate and an economy’s productivity on its non-tradable goods’
exports prices. In detail, this can be explained as follows:
usually it is observed that the prices of services (like
Two examples show the theoretical impact of RER a haircut) are higher in developed countries than in
adjustments on exports: developing countries because wages are higher in
developed countries. But why are wages are higher in
First, a reduction in domestic demand would developed countries? It is because the tradable sector
lower both the RER and the price of export. This of developed countries has higher productivity than
is because the reduced domestic demand would that in developing countries. Given the law of one
lower the prices of both the domestic non-trad- price on tradable goods, this implies that wages paid
able and tradable goods. Since the price of the to tradable-sector workers in developed countries
foreign tradable good does not change (much), have to be higher to commensurate their high pro-
this implies that the domestic tradable good ductivity. In other words, low productivity explains
would become relatively cheaper compared to a large part why the tradable/non-tradable good
the foreign tradable good. This in turn would price ratio (i.e. the real exchange rate) in developing
imply cheaper exports. countries is larger than that in developed countries.
In addition, since both the prices of the After the Balassa-Samuelson effect is captured, the
non-tradable good and tradable good decline remaining residual is considered the misaligned part.
compared to the foreign goods, the relative price The Balassa-Samuelson effect is captured as
of the domestic consumption basket becomes follows:
lower, implying a depreciated RER. So there
would be cheaper export and a depreciated RER. si,t ∗ lnRERiW,t = βsi,t ∗ (lnyi,t – lnyW,t) + ui,t
Second, consider a policy that would subsidize
the production of domestic tradable goods. As It is a weighted regression (to take into
a result, production of the domestic tradable account the fact that larger countries have heavier
goods would expand and they would become weights in the regression). A country’s pro-
cheaper compared to the foreign tradable good, ductivity is proxied by its output per capita.
implying cheaper export. On the other hand,
the unsubsidized domestic non-tradable goods Yi ,t
si ,t =
∑
N
would become relatively scarce and hence more Yj ,t
j =1
expensive. The increase in the non-tradable
goods’ prices could outweigh the decline of the is the weight of country i at time t. Yi,t is country
tradable goods’ prices, thus possibly making i’ nominal output;. lnRERiW,t is the log of the real
the price of the domestic consumption basket exchange rate of country i relative to the world; lnyi,t,
to go up compared to that of the foreign con- lnyW,t are country i and world average output per
sumption basket. The RER would appreciate. capita at time t. Coefficient β captures the Balassa-
So the subsidy makes export cheaper, but the Samuelson effect with an expected negative sign. The
RER appreciates. idea is that according to the Balassa-Samuelson effect,
166 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
a country’s RER, at any given time, is larger if its out- is larger, beyond the explanation of the Balassa-
put per capita (a proxy for productivity) is smaller Samuelson effect.
compared to the world’s output. This is slightly dif-
ferent to Rodrik’s approach, in the sense that he only Measuring the impact of undervalued RERs
regresses a country’s RER with its absolute output per on export and output growth
capita. Since RER is a relative concept, the decision To examine econometrically the relationship
was made to add the world average output to the between a country’s RER undervaluation with its
right hand side of the equation to generate output export and output growth using international data
differential, which is a relative concept as well. the following regression is used:
Notice that there is no constant in the regression
u
and no time and country fixed effects. The regres- growthratei ,t = α + γ i ,t + ft + fi + ε i ,t
si ,t
sion is designed that the sum of the right hand side
exactly equals the sum of the left hand side every where growth rate is calculated for both real exports
period (i.e. sum of ui,t equals 0 for all t). What it and real GDP, u s is the undervaluation measure,
i ,t i ,t
means is that at any given time, on average, the and ft, fi are country and time fixed effects. The time
world RER is exactly aligned. fixed effects is to control for global macroeconomic
The results show that Balassa-Samuel effect is factors that affect all countries’ export in the same
highly significant with a negative sign. It shows that way at a given time. The country fixed effects is to
for each additional 1 percent output differential, control for country’s time-invariant characteristics.
Balassa Samuelson effect on average explains 0.317 Essentially, with the country fixed effects, the follow-
percent of RER appreciation. What this means is that ing question is asked: how does a real export growth
for each 1 percent output differential, the produc- change within a country, given its RER undervalua-
tivity differential accounts for 0.317 percent of the tion index relative to the rest of the world? The ini-
RER differential between countries. tial value of export and output levels are controlled.
s will be the RER misalignment vari-
u The expected sign of γ is positive: it implies that a
i ,t i ,t
able of country i where u is the residual of the more undervalued exchange rate (a larger u s ) is
i ,t i ,t i ,t
regression. A positive ui,t implies an undervalued associated with higher export and output growth.
RER. That is, the RER is larger beyond the expla- Two results are derived and shown in Tables
nation of the Balassa-Samuelson effect. In other 0.12 and 0.13. Simple descriptions of the results
words, the tradable/non-tradable good price ratio are in the main text.
Table 0.11: Panel Estimation Effect on Exports Growth of Undervaluation
First-Stage
Balassa-Samuelson
Weighted relative GDP growth –0.317
***(0.0117)
Time Fixed Effect no
Country Fixed Effect no
Observations 8,184
R-squared 0.804
Notes: Robust standard errors in parentheses.
*** p<0.01, ** p<0.05, * p<0.1
Annexes 167
Table 0.12: Undervalued RERs and Export Growth
Second-Stage
All Countries High Income Low Income
∆ln(real exports) ∆ln(real exports) ∆ln(real exports)
Full Sample Full Sample 1950–1980 1981–2011 Full Sample 1950–1980 1981–2011
(1) (2) (3) (4) (5) (6) (7)
ln(Initial Real Exports) –0.0999*** –0.0847*** –0.137*** –0.127*** –0.127*** –0.388*** –0.128***
(0.0225) (0.0151) (0.0233) (0.0187) (0.0437) (0.0631) (0.0250)
Undervaluation 0.0598*** 0.0811*** 0.126*** 0.0497 0.0502** –0.0375 0.0699***
(0.0131) (0.0188) (0.0379) (0.0336) (0.0211) (0.0708) (0.0258)
Constant 0.778*** 0.547*** 1.163*** 1.199*** 0.771*** 2.431*** 0.934***
(0.148) (0.104) (0.174) (0.168) (0.273) (0.401) (0.173)
Time Fixed Effect yes yes yes yes yes yes yes
Country Fixed Effect yes yes yes yes yes yes yes
Observations 7,139 3,561 1,444 2,117 3,578 1,305 2,273
R-squared 0.139 0.159 0.157 0.209 0.148 0.334 0.159
Number of country id 156 75 63 75 81 63 81
Notes: Robust standard errors in parentheses.
*** p<0.01, ** p<0.05, * p<0.1
Low Income countries: if the real GDP per capita was below US$6,000/year in 2000.
Table 0.13: Undervalued RERs and Output Growth
Second-Stage
All Countries High Income Low Income
∆ln(real exports) ∆ln(real exports) ∆ln(real exports)
Full Sample Full Sample 1950–1980 1981–2011 Full Sample 1950–1980 1981–2011
(1) (2) (3) (4) (5) (6) (7)
ln(Initial Real Exports) –0.0916*** –0.141*** –0.215** –0.294** –0.0830*** –0.182*** –0.135***
(0.0204) (0.0450) (0.0983) (0.114) (0.0128) (0.0372) (0.0171)
Undervaluation 0.0884*** 0.138*** 0.195*** 0.183** 0.0764*** 0.121*** 0.114***
(0.0204) (0.0496) (0.0731) (0.0828) (0.0123) (0.0248) (0.0184)
Constant 0.743*** 1.205*** 1.984** 2.722** 0.601*** 1.322*** 1.042***
(0.156) (0.370) (0.924) (1.059) (0.0925) (0.267) (0.132)
Time Fixed Effect yes yes yes yes yes yes yes
Country Fixed Effect yes yes yes yes yes yes yes
Observations 8,020 3,925 1,570 2,355 4,095 1,579 2,516
R-squared 0.140 0.219 0.295 0.297 0.129 0.182 0.175
Number of country id 165 80 68 80 85 73 85
Notes: Robust standard errors in parentheses.
*** p<0.01, ** p<0.05, * p<0.1
Low Income countries: if the real GDP per capita was below US$6,000/year in 2000.
168 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Annex 5: Financial Soundness Indicators for the Banking Sector, 2006–13
Dec Dec Dec Dec Dec Dec Dec Mar Jun
2006 2007 2008 2009 2010 2011 2012 2013 2013
Capital Adequacy
Regulatory capital to risk-weighted assets 1/ 19.7 22.0 10.5 7.1 10.0 13.0 12.0 — 14.9
Regulatory Tier I capital to risk-weighted assets 1/ 17.4 20.0 8.7 6.1 8.9 11.0 10.5 — 13.6
Asset composition and quality
Loans to nongovernment to total assets 46.3 50.7 51.1 52.3 51.8 — — — —
Gross NPLs to gross loans 19.4 26.0 22.4 20.5 14.4 12.6 11.8 11.3 10.4
NPLs net of provisions to gross loans 17.0 22.0 17.9 17.9 10.4 7.6 7.5 7.5 5.8
NPLs net of provisions to capital 63.7 85.0 71.0 74.8 43.7 33.3 33.5 30.5 25.5
Loans provisions to NPLs 14.0 15.0 20.0 23.9 31.7 39.8 36.5 33.3 43.7
Foreign currency loans to total loans 26.0 13.2 15.8 20.4 13.7 9.0 15.7 13.2 11.8
Deposits and investment accounts to total assets 60.0 55.5 57.4 63.2 63.9 63.5 63.4 64.5 65.1
Foreign currency deposits to total deposits 22.0 21.4 21.2 19.2 22.0 18.7 27.0 26.9 24.9
Off-balance sheet commitments to assets 33.0 32.5 34.4 28.0 31.5 29.8 32.2 29.9 28.9
Earnings and Profitability
ROA (before tax) 3.6 3.7 3.0 3.8 3.9 4.2 4.4 1.0 1.3
ROE (before tax) 35.4 26.5 23.3 25.5 26.5 27.8 36.4 7.6 10.0
Liquidity
BOS deposits to total assets 8.0 8.6 9.1 12.7 10.8 13.1 17.5 17.3 18.1
Required reserves to total assets 4.0 3.0 2.9 2.1 3.2 3.5 5.5 5.6 5.6
Required reserves to total reserves 39.0 34.8 26.0 14.5 25.5 23.9 28.6 28.9 28.0
Cash in vault to total assets 1.0 2.5 2.2 2.0 1.9 2.1 2.0 2.6 2.6
Liquid assets to total assets 25.0 25.6 28.0 34.2 35.3 36.3 41.7 39.6 39.8
Liquid assets to total short-term liabilities 75.0 75.0 85.0 97.0 98.2 93.8 102.5 96.3 96.7
Source: Central Bank of Sudan.
Annexes 169
Annex 6: Additional Information for
Export Performance Analysis
Tables and figures
Change in Sudan’s Shares of Exports, Main Export Products at HS-6 Level, 2007–2012
Table 0.14:
(1) (2) (3) (4) (5) (6)
Exports 2007 Share RCA Exports 2012 Share RCA (7)
Product Product Description (US$ ‘000) 2007 (%) 2007 (US$ ‘000) 2012 (%) 2012 CAGR
710812 Gold, non–monetary 197,391 2.32% 6.62 2,167,423 41.85% 40.11 61.48
10410 Sheep 61,456 0.72% 102.67 333,084 6.43% 770.21 40.22
120740 Sesame seeds 99,042 1.16% 163.84 147,845 2.85% 215.50 8.34
130120 Gum arabic 78,194 0.92% 486.43 92,291 1.78% 870.24 3.37
271000 Refined oil 63,746 0.75% 0.18 56,673 1.09% 0.19 –2.32
170111 Raw sugar not containing 19,550 0.23% 4.42 37,179 0.72% 6.86 13.72
added flavor
854810 Waste and scrap of primary 608 0.01% 0.89 36,258 0.70% 130.24 126.55
cells
740400 Copper waste and scrap 12,478 0.15% 1.00 26,070 0.50% 3.27 15.88
220710 Undenatured ethyl alcohol 0 0.00% 0.00 23,328 0.45% 10.09 n/a
20421 Other meat of sheep, fresh 5,134 0.06% 64.10 22,154 0.43% 252.30 33.97
or chilled
Other (Total exports minus 254,466 2.99% 0.03 180,812 3.49% 0.04 –6.61
top 11 export products)
Source: World Bank staff own calculations, based on data from UN Comtrade.
Table 0.15: Joint Distribution of Sudan’s Exporters Across Products and Destinations
Panel A. Distribution of Exporters in 2008
Number of destinations per firm
1 2 3 4 to 10 11 to 20 20 or more Total
1 52% 8% 3% 2% 0% 0% 65%
2 5% 7% 2% 2% 0% 0% 15%
Number of products
3 1% 2% 3% 2% 0% 0% 8%
per firm
4 to 10 1% 2% 2% 5% 0% 0% 11%
11 to 20 0% 0% 0% 0% 0% 0% 1%
20 or more 0% 0% 0% 0% 0% 0% 0%
Total 59% 19% 10% 10% 1% 0% 100%
(continued on next page)
170 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Table 0.15: Joint Distribution of Sudan’s Exporters Across Products and Destinations (continued)
Panel B. Distribution of Total Merchandise Exports in 2008
Number of destinations per firm
1 2 3 4 to 10 11 to 20 20 or more Total
1 28% 6% 4% 7% 8% 0% 54%
2 2% 1% 1% 3% 0% 0% 7%
Number of products
3 0% 2% 4% 4% 2% 0% 12%
per firm
4 to 10 0% 2% 3% 17% 3% 0% 25%
11 to 20 0% 0% 0% 0% 2% 0% 2%
20 or more 0% 0% 0% 0% 0% 0% 0%
Total 31% 11% 11% 32% 15% 0% 100%
Panel C. Distribution of Exporters in 2012
Number of destinations per firm
1 2 3 4 to 10 11 to 20 20 or more Total
1 36% 11% 3% 2% 0% 0% 52%
2 6% 9% 3% 2% 0% 0% 20%
Number of products
3 1% 3% 3% 3% 0% 0% 10%
per firm
4 to 10 1% 2% 2% 9% 1% 0% 15%
11 to 20 0% 0% 0% 1% 1% 0% 2%
20 or more 0% 0% 0% 0% 0% 0% 1%
Total 44% 25% 11% 17% 2% 0% 100%
Panel D. Distribution of Total Merchandise Exports in 2012
Number of destinations per firm
1 2 3 4 to 10 11 to 20 20 or more Total
1 3% 66% 1% 2% 0% 0% 71%
2 0% 3% 0% 1% 0% 0% 5%
Number of products
3 0% 1% 1% 2% 1% 0% 5%
per firm
4 to 10 0% 0% 1% 13% 1% 0% 15%
11 to 20 0% 0% 0% 2% 0% 0% 2%
20 or more 0% 0% 0% 0% 1% 0% 1%
Total 4% 70% 3% 19% 3% 0% 100%
Source: World Bank staff own calculations, based on data used for the World Bank Exporter Dynamics Database.
Annexes 171
Product Space Concepts basket, and it is calculated as a weighted average of
PRODYs of the products exported by the country,
Revealed Comparative Advantage (RCA): where the weights are the shares of the products in
RCA for a product i in country j is calculated fol- the country’s export basket:
lowing Balassa (1977), as the ratio of the share of
x ji
product i in total exports of country j, to the share EXPYj = ∑ i ∗ PRODYi
of world exports of product i in total world exports Xj
x ji
Product and Economic Complexity:
Xj
RCA ji = Complexity of a product is a function of the capa-
∑ j x ji bilities it requires, while the complexity of a country
∑j Xj is given by the number of locally available capabili-
ties. To provide a numerical measure of product
Country j will be competitive in exporting good i
and economic complexity, Hidalgo and Hausmann
if RCAji>1, which means that the share of product
(2009) first define Diversification of a country as
i in country j exports will be higher than the share
the number of products that a country exports with
of the same good worldwide.
RCA>1, and Ubiquity of the product as the number
of countries that export the product with RCA>1:
PRODY:
Ni
To capture the income earning potential of any
k j,0 = ∑ M ji ( Diversification )
particular product and sophistication of products,
i =1
Hausmann et al. (2007) introduce concepts of
Nj
PRODY and EXPY. Income-earning potential of a
k i,0 = ∑ M ji (Ubiquity )
product, PRODY, is calculated as a weighted aver- i =1
age of the income per capita of the countries that
where i denotes a product, j denotes a country, and
export the given product. Weights are ratios of the
Mji=1 if a country j exports product i with RCA>1.
share of the commodity i in the countries overall
Using a method of iterations, authors compute rela-
export baskets and aggregated value-shares across
tive positions of each country and product, com-
all countries exporting the good:
pared to other countries and products.
x ji The method of iterations calculates iteratively the
Xj average value of the measure computed in the preced-
PRODYi = ∑ ∗ GDPPC j ing iteration, starting with a measure of a country’s
j x
∑ j ji diversification and a product’s ubiquity. Each suc-
Xj ceeding iteration takes into account the information
The denominator in the RCA equation is not the from the previous iteration. These are given by:
same as the denominator in the PRODY weights. In 1 i
N
RCA, denominator is the share of product j in world k j ,n = ∑M k
k j,0 i=1 ji i,n−1
trade, while in the PRODY computation, denomi-
nator is a sum of product i shares across countries. N
1 j
ki,n = ∑M k
ki,0 j=1 ji j,n−1
EXPY:
Sophistication of country exports, EXPY, represents where n corresponds to a number of iterations.
the income level associated with a country’s export Last two equations are computed until rankings
172 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
of countries and products stop changing between Open Forest:
iterations. In this paper, we used kj,16 to measure Measures of density can be used to obtain an overall
economic complexity, and ki,17 to measure product measure of the location of the country in the product
complexity. space, and this indicator would measure the con-
nectedness of existing export basket to the rest of
Proximities of Products: the product space. Open forest provides a measure
To measure the inter-relatedness of different prod- of the (expected) value of the goods that a coun-
ucts, Hausmann et al. (2007) compute a probability try could potentially export (among the products
that a country exports one product with a Revealed that it currently does not export with comparative
Comparative Advantage (RCA)>1 given that it exports advantage).
some other product with an RCA>1. Thus, two prod- Open forest is calculated as the weighted aver-
ucts will be close to each other, and require similar age of the PRODY’s of all potential (currently non-
capabilities, if countries which export product i tend exported) exports of a country, where the weights
to also export product j with RCA>1, and vice versa: are country densities in these products. Therefore,
the value of “open forest” depends on country’s ease
ϕij = min (P(RCAi>1 | RCAj>1), P(RCAj>1 | RCAi>1)) of diversification into unexported products—and
a country that exports products in the core of the
which provides “proximity” as a numerical measure product space will have higher densities for unex-
of relatedness of products i and j. ported products, and thus higher value of the open
forest:
Country Densities in Products:
Probability of a country being able to export prod- open_forestj =∑idensityji ∗ (1 – xji) ∗ PRODYi
uct i with RCA>1 is measured as a weighted sum
of proximities of product i and all other products where xi = 0 for products i with RCAi<1, and xi = 1
in country’s export basket that are exported with otherwise.
RCA>1. Hence, if a country exports large numbers
of goods which are close (high proximity) to product Strategic Value of Unexported Products:
i, there is a large probability that the country will be The strategic value of every good that is not cur-
able to be competitive in exports of i. Probability w rently exported with comparative advantage can
of exporting product i by a country j is measured be measured using open forest. This is done by
by density of product i: calculating what would happen to open forest if a
country started exporting that good with compara-
∑ i RCAiϕ ij tive advantage. If a product is closely connected to
wi =
∑ i ϕ ij a wide range of other valuable products not cur-
rently exported, it would result in a large increase
Note: the density w of product i in country j can in open forest, and therefore have high strategic
be interpreted as the “ease” of diversification into value because it would greatly expand the country’s
product i. options for successful diversification.
Annexes 173
Table 0.16: Sudan Exports in Product Space Framework, 1991–2011
Exports Exports
RCA RCA 1991–93 2009–11
SITC2 Trade 1991–93 2009–11 avg avg
Code Product Tech Density Path Complexity Volatility avg avg (‘000) (‘000)
Classics
9710 Gold, non-monetary ST 0.08 84.05 742 1.68 1.79 7.78 3,545 742,469
2225 Sesame seeds PP 0.10 71.38 765 2.35 661.78 108.77 23,885 163,489
12 Live sheep and goat PP 0.06 96.82 658 2.34 345.85 109.14 41,563 105,314
2922 Natural gums, resins, PP 0.08 92.14 763 1.99 1,747.19 148.36 55,018 81,947
lacs and balsams
2631 Raw cotton PP 0.09 75.97 768 2.64 150.93 3.78 114,222 37,081
2924 Flora in pharmacy PP 0.07 100.84 744 0.83 49.89 11.61 6,411 19,156
112 Sheep and goat meat PP 0.05 90.38 701 0.70 8.91 3.84 1,970 16,823
2879 Other non-ferrous RB2 0.07 95.32 736 3.76 2.89 1.44 444 14,874
base metals
611 Raw sugar beet and RB1 0.06 85.64 752 1.68 1.68 1.22 722 12,434
cane
548 Fresh and dried PP 0.08 88.94 734 1.54 66.45 5.30 13,785 12,088
vegetables, roots and
tubers n.e.s.
6115 Sheep and lamb LT1 0.08 107.39 757 1.83 8.09 5.98 944 6,625
leather
459 Unmilled buckwheat, PP 0.05 103.06 696 2.49 190.08 2.88 27,161 5,709
millet and other cere-
als n.e.s.
615 Molasses RB1 0.06 113.38 720 1.62 176.58 6.45 11,228 5,063
6116 Leather of other hides LT1 0.08 104.65 751 1.51 3.29 1.83 407 3,133
or skins
9410 Live animals, n.e.s. ST 0.07 96.93 708 1.33 20.45 3.95 640 3,068
(zoo animals, pets,
insects, etc)
812 Bran, sharps and other PP 0.06 116.73 709 1.75 5.28 1.62 256 1,767
cereal residues
2238 Oil seeds and fruits PP 0.06 118.10 699 1.44 3.41 1.91 91 1,573
n.e.s.
2112 Raw calf skins PP 0.06 125.72 653 2.93 16.66 3.99 640 1,355
2117 Raw sheep skin with PP 0.09 82.99 766 2.17 48.71 5.22 2,623 1,022
wool
2119 Hides and skins n.e.s. PP 0.07 111.50 721 1.80 30.87 1.47 549 620
2911 Bones, horns, corals PP 0.06 104.01 711 0.89 21.75 1.71 987 516
and ivory
Emerging Champions
3330 Crude petroleum PP 0.10 45.42 762 2.47 0.00 9.32 0 9,307,506
2472 Sawlogs and veneer RB1 0.07 90.37 724 1.53 0.00 1.57 0 8,991
logs of non-coniferous
(continued on next page)
174 COUNTRY ECONOMIC MEMORANDUM – REALIZING THE POTENTIAL FOR DIVERSIFIED DEVELOPMENT
Table 0.16: Sudan Exports in Product Space Framework, 1991–2011(continued)
Exports Exports
RCA RCA 1991–93 2009–11
SITC2 Trade 1991–93 2009–11 avg avg
Code Product Tech Density Path Complexity Volatility avg avg (‘000) (‘000)
Disappearances
2882 Other non-ferrous RB2 0.04 122.64 568 2.80 1.26 0.57 713 19,711
base metals
811 Green or dry hay PP 0.04 101.98 542 1.09 1.38 0.99 189 2,068
4236 Sunflower seed oil RB1 0.03 135.23 580 2.01 1.00 0.19 120 1,261
579 Fresh or dried fruit PP 0.06 110.79 712 0.75 4.69 0.06 3,441 1,229
n.e.s.
6851 Unwrought lead and PP 0.05 126.35 659 2.43 3.20 0.19 295 800
alloys
2111 Raw bovine and PP 0.05 139.02 574 1.74 8.09 0.18 2,551 654
equine hides
2221 Green groundnuts PP 0.05 91.71 761 1.41 30.93 0.37 3,153 572
2925 Planting seeds and PP 0.03 128.98 555 0.74 5.39 0.14 964 567
spores
542 Dried or shelled PP 0.07 97.74 754 0.91 2.27 0.08 575 504
legumes
2929 Vegetable origin PP 0.04 126.87 535 1.04 3.88 0.13 781 406
materials
8741 Non-electrical HT2 0.02 103.37 145 0.69 1.02 0.03 472 389
navigating devices,
compasses
2116 Raw sheep skin with- PP 0.06 117.04 660 3.35 84.37 0.68 2,669 247
out wool
440 Unmilled maize PP 0.03 115.37 650 1.87 2.76 0.01 2,444 201
813 Oilcake PP 0.04 105.80 666 1.64 9.00 0.01 7,235 153
4239 Other soft vegetable RB1 0.02 138.00 264 2.46 6.58 0.03 742 135
oils
752 Spices other than PP 0.06 112.62 704 0.93 1.66 0.04 172 93
pepper
7233 Road rollers MT3 0.03 109.32 534 1.74 1.15 0.04 65 50
2731 Building stone PP 0.05 117.11 694 0.98 1.45 0.01 213 28
572 Fresh or dried citrus PP 0.04 114.79 615 1.15 1.24 0.01 165 22
n.e.s
6582 Textile camping goods LT1 0.03 109.52 634 1.03 1.02 0.00 88 6
7439 Centrifuges machinery MT3 0.01 155.53 43 0.93 1.40 0.00 476 3
parts n.e.s.
2732 Gypsum, plasters, PP 0.04 134.76 641 1.05 3.35 0.00 208 0
limestone flux and
calcareous stone
2224 Sunflower seeds PP 0.02 124.70 503 2.30 15.18 0.00 1,260 0
4234 Peanut oil RB1 0.02 69.72 629 1.91 235.96 0.00 7,120 0
(continued on next page)
Annexes 175
Table 0.16: Sudan Exports in Product Space Framework, 1991–2011(continued)
Exports Exports
RCA RCA 1991–93 2009–11
SITC2 Trade 1991–93 2009–11 avg avg
Code Product Tech Density Path Complexity Volatility avg avg (‘000) (‘000)
612 Refined sugar RB1 0.04 140.95 594 2.20 6.95 0.00 1,702 0
2634 Cotton PP 0.06 112.03 750 2.36 10.30 0.00 40 0
2114 Raw goat skins PP 0.02 45.82 405 4.41 317.08 0.00 1,904 0
6513 Cotton yarn LT1 0.05 105.02 730 1.18 2.67 0.00 1,476 0
2632 Cotton linters PP 0.05 75.93 759 2.62 79.80 0.00 1,189 0
2633 Cotton waste PP 0.05 99.87 741 2.11 16.59 0.00 476 0
2232 Palm nuts and kernels PP 0.02 31.30 644 4.07 112.24 0.00 221 0
6113 Calf leather LT1 0.01 35.02 591 6.87 2.93 0.00 185 0
751 Pepper PP 0.04 103.87 714 1.48 1.93 0.00 118 0
576 Figs PP 0.03 70.69 551 0.72 1.30 0.00 17 0
2640 Raw processed jute RB1 0.05 38.64 764 2.14 1.17 0.00 12 0
and other fibres
Marginals with large export value in 2009–11 (>$1 million avg)
2820 Iron and steel waste RB2 0.04 111.39 490 2.65 0.18 0.77 147 27,854
5121 Acyclic alcohols and MT2 0.04 101.61 643 2.03 0.00 0.38 0 14,387
derivatives
3354 Petroleum bitumen RB2 0.03 130.33 485 1.74 0.00 0.89 0 14,272
n.e.s.
3413 Liquified hydrocar- PP 0.06 56.06 740 2.16 0.00 0.06 0 7,638
bons
7781 Batteries HT1 0.02 137.97 243 1.02 0.03 0.23 18 7,246
1223 Tobacco, extract, es- RB1 0.03 140.18 546 0.66 0.01 0.90 1 2,641
sences and manufac-
tures
11 Live bovines PP 0.04 141.36 474 1.06 0.00 0.44 0 2,158
573 Fresh or dried banana PP 0.06 62.71 767 0.68 0.02 0.19 9 2,058
and plantains
6114 Bovine and equine LT1 0.05 127.40 664 1.24 0.26 0.15 147 1,637
leather
7649 Parts of telecom and HT1 0.01 107.31 170 1.20 0.08 0.01 254 1,614
sound recording
equipment
6821 Unwrought copper PP 0.04 103.41 685 2.57 0.00 0.02 0 1,296
and copper alloys
4242 Palm oil RB1 0.04 58.95 729 2.19 0.00 0.04 0 1,263
6353 Builders` carpentry RB1 0.02 163.48 366 1.12 0.11 0.08 52 1,250
and joinery
7929 Aircraft equipment HT2 0.01 103.47 135 0.98 0.44 0.02 993 1,155
parts n.e.s.
6415 Paper and paperboad RB1 0.02 162.94 163 1.26 0.00 0.05 1 1,136
in rolls or sheets
Marginals with large drop in export value (>$1 million avg exports in 1991–93)
111 Bovine meat PP 0.03 131.27 530 0.87 0.91 0.01 1,416 315
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