Sudan's economy risks paralysis

Khartoum - Across Khartoum, normally crowded foreign exchange counters have been quiet for over a week, pharmacies are running low on medicine and half-built office blocks stand abandoned - all testament to an economy lurching toward paralysis.

Sudan's heyday, when billions of oil dollars poured into government coffers, ended abruptly when South Sudan seceded a year ago, taking most of the country's petroleum output and leaving rocketing inflation and a huge budget gap in its wake.

Faith in the Sudanese pound, which shed half its value over the last year, has since plummeted, pushing businesses to hold off on transactions until the exchange rate stabilises, business owners and currency traders say.

Government austerity measures announced last month to contain the crisis have won praise from economists but have so far failed to restore confidence in the faltering economy.

Instead, they ignited a spate of anti-government protests that pose yet another challenge to President Omar Hassan al-Bashir, already facing multiple rebellions and wanted by the International Criminal Court at The Hague for war crimes.

Many Sudanese analysts doubt the austerity measures will work, partly because the government, which spends heavily on defence and security, does not have a strong record of delivering on reforms.

“If everything plays out well, and that's a big if... it will take another two or three years for Sudan to get back on its feet in a more positive tone,” one Sudanese banker said.

Just a few weeks ago, many Sudanese in the capital made regular trips to black market dealers to buy or sell dollars to take advantage of the difference with the official rate.

Now traffic is slower as people hoard dollars and, dealers say, the central bank injects less hard currency into the market. The traders, operating out of dusty grocery stores and other fronts, have become more vigilant in fear of a crackdown.

“Nothing is clear. We aren't buying or selling large amounts of dollars,” one black market currency trader said before counting out a wad of fresh Sudanese pounds behind a counter.

“The situation in the country is uncertain, and we don't know what will happen in the future.”

Already stung by U.S. trade sanctions, the cash-strapped government has had little room to manoeuvre, forcing Bashir to announce moves to scale back fuel subsidies, raise taxes and trim the state bureaucracy last month.

Collapse

For construction engineer Ibrahim, it is a question of when, not if, the economy will face collapse.

The weakened pound and rising fuel prices have driven up the cost of materials like cement, steel and bricks, while workers are leaving building sites to pursue artisanal mining or other ventures they think will earn them cash faster, he said.

Involved in seven building projects, the engineer said he had to raise wages to keep workers from leaving, forcing him to take a loss of up to 20 percent to finish some jobs on time.

“Within three, four months... the construction sector could come to a complete standstill,” he said.

Ibrahim, who did not want his full name published, is feeling the pinch outside work too. Fuelling a vehicle costs him over £95 as opposed to £70 a few weeks ago while a kilogram of lamb rose to £40 from £34, he said.

The situation was so bad, Ibrahim said, he planned to join the anti-government protests despite the fear of a crackdown: “There is no option but fundamental change,” he said.

The Muslim holy month of Ramadan, starting in late July this year, may be another challenge, as families stock up on food for the late night feasts which follow the daytime fasting rituals.

Yassir Mirgani, general secretary of the Sudanese Consumer Protection Society, said people might start hoarding staples like sugar out of fear of shortages and price rises.

“The consumer doesn't trust the government's statements,” he said. “Whenever they say there is enough of something for Ramadan, consumers rush to buy it. They have no credibility.”

Medicine distributors, who were often paid by officialdom with post-dated cheques, are now refusing to make some shipments to pharmacies because they fear the deteriorating exchange rate will hit their profits, Mirgani said.

“People can't find medicine,” Mirgani said. “The government's policy is just one of putting out fires.

“There is no uniform policy.”

Struggle

Policymakers always knew South Sudan's secession would hit Sudan's economy, but say they did not expect it to go so badly.

The landlocked South was supposed to pay Sudan to export crude through the north, but the two failed to agree on a price. South Sudan shut down its output in January during the row, and border fighting in April hit Sudan's own remaining production.

The government has struggled to fill an estimated 6.5 billion-pound budget gap. Rebellions have sapped state finances and non-oil sectors like farming have lagged their potential.

In May, the International Monetary Fund said Sudan's economic situation had not improved since 2011, when growth slowed to 2.7 percent, barely ahead of population growth, and the fiscal deficit was about 4 percent of gross domestic product.

While Sudan's austerity measures are a “step in the right direction” toward containing the crisis, authorities were slow to react to the loss of revenues, the IMF has said.

Paul Jenkins, the IMF's resident representative in Sudan, said the main question now was whether Sudan could close the gap between revenue and spending enough to avoid “excessive” borrowing from the public or from the central bank.

“If that gap isn't closed sufficiently then there will continue to be upward pressure on inflation,” he said.

Sabir Hassan, a senior economic adviser to Sudan's ruling party, acknowledged the austerity measures, which aim to halve the deficit for the year, were only a first step. “It's not really the maximum that we wanted as economists,” he said.

Projects such as a $1-billion sugar refinery launched on Wednesday will help bolster the economy in the longer term, officials say.

One goal is to shore up the government's hard currency position, which is at the heart of the crisis. During the oil boom years, Sudan started importing more goods and employing more foreign labour, driving up demand for dollars.

With its main source of dollars now gone, the central bank's power to defend the pound is diminished. The bank's reserves are not public, but financial analysts say the pound is vulnerable.

In a drive to stabilise the exchange rate in May, the central bank licensed some exchange bureaux and banks to trade at a rate closer to the black market price, hoping to entice expatriate Sudanese to send more dollars home.

But black market rates have stayed higher than the licensed bureau prices. This week, the dollar bought about 6 pounds on the black market, while licensed bureaux traded at around 5.3.

Without an oil deal with the South, the government is running out of options to secure the amounts of foreign exchange it needs to prop up the pound, analysts say. - Reuters