A man holds South Sudanese flags as he prepares to dance at the country's anniversary celebrations, at the John Garang mausoleum in Juba, South Sudan.

Juba - South Sudan will push ahead with a $10 billion plan to build a new capital despite losing nearly all its revenue when it shut oil production this year, a official said, a move that will dismay donors who see other priorities in the poor nation.

Western diplomats had in the past said they hoped to persuade the war-ravaged country to drop the project and focus its limited resources on pulling its population out of poverty.

South Sudan seceded from Sudan last year under a 2005 peace deal that ended decades of civil war. It is seen as one of the world's least developed countries.

The African nation's cabinet decided last year to relocate the seat of government from the scruffy boomtown Juba on the banks of the White Nile further north to Ramciel, in a swampy region in the central Lakes state.

The new government said it needed more space and wanted to build a modern city from scratch.

The project would continue and be paid for in phases, Minister for Housing and Physical Infrastructure Jema Nunu Kumba told Reuters in an interview.

The government was open to a public-private partnership for a project estimated to cost $10 billion over 20 years, she added. “We will work together with the private sector ... All the infrastructure like the roads, the sewage, water - this is government.”

One Juba-based diplomat, who asked not to be named, criticised the announcement. “Such a decision at this time of austerity will raise lots of concern ... Resources are scarce,” he said.

No one was immediately available for comment from international donors and aid agencies based in Juba who have already poured millions of dollars into development projects in South Sudan.

Kumba said the government had paid $2.5 million to a South Korean company to carry out a six-month feasibility study on the new capital.

The study started in April but results were delayed because of the rainy season, she said.

The war with Sudan devastated South Sudan, leaving it with almost no industry or infrastructure outside the oil sector. Many South Sudanese hoped independence would usher in a new era of prosperity.

Instead, the landlocked country remained stuck in a dispute with Khartoum over how much it should pay to export crude through the north, pushing it to shut down its oil output in January - the source of 98 percent of its state revenues.

The two sides reached an interim deal this month that would restore exports but have not signed a final agreement.

While some in South Sudan laud the idea of the new capital, others complain it is a misplaced priority in a country struggling to provide basic services and which faces rampant corruption, high youth unemployment and multiple armed rebellions.

Kumba said the government was determined to carry on with the proposal despite the obstacles.

“For us to function, to meet the demands of the services that are needed, we need to expand offices. We need to expand infrastructure and so on,” she said.

“We're not saying, if it's costing $10 billion, it will be implemented all at a go. It will be done in phases. We will only start with what we need at the moment.”

The national government has also indicated it wants to avoid administrative confrontations with a state government that shares the current capital.

Kumba said a request for new land was turned down by the state government and that replanning Juba for expansion would involve relocating people from slum areas.

“The only option was to go to a complete new place where the government can be able to design the city as it wants, and also to avoid confrontation with local people and the stakeholders.” - Reuters