IMF Staff Completes Visit to South Sudan

South Sudan is facing a deep economic crisis following several years of conflict.

The September 2018 peace agreement has increased the prospects for lasting peace and reestablishing macroeconomic stability and credibility.

Full dedication to peace, economic stabilization and robust oil management will be key in rebuilding policy credibility and regaining access to external financial support.

A staff team from the International Monetary Fund (IMF), led by Jan Mikkelsen, visited South Sudan during March 5-15 to conduct discussions of the 2019 Article IV Consultation. At the conclusion of the mission, Mr. Mikkelsen made the following statement:

The resumption of hostilities in July 2016 severely impaired the South Sudanese economy, which led to a substantial loss of income, high inflation, foreign exchange shortages, and acute deterioration in humanitarian conditions. About half of the country’s population is estimated to face food insecurity and more than 4 million people are displaced. Moreover, the conflict has led to the loss of fiscal discipline and weakening of public institutions. The country is in a deep economic crisis and policy adjustments are urgently needed to reestablish economic stability and credibility.

The peace agreement signed in September 2018 has significantly increased the prospects for lasting peace, restoring macroeconomic stability, and returning to positive economic growth. The implementation of the peace agreement, including the cessation of hostilities in large parts of the country, have contributed to a peace dividend in the form of increased daily oil production of about 20 percent. Another positive development is the decline in inflation to about 40 percent by end-2018 from triple digits previously.

The mission stressed that restoring macroeconomic stability would require collaborative efforts by South Sudan and its development partners. While development partners continue to support South Sudan through humanitarian assistance amounting to about US$1.5 billion annually, external support is needed to be directed towards implementation of the peace agreement. However, the government must also do its part by restoring budgetary discipline, strengthening oil management and transparency, and applying rigorous priorities on spending with due consideration to peace-related spending. On the management of oil revenues, the mission urges the authorities to immediately stop contracting oil advances that are expensive and nontransparent. This measure will also help to ensure that oil revenues will be fully available for financing budgetary spending. Meanwhile, the central bank should continue tight monetary policies and refrain from lending to the government, to keep inflation on a decelerating path and gradually replenish foreign exchange reserves.

Fiscal conditions for the remainder of 2018/19 will be constrained by large repayments of oil advances. With a tight resource envelope, the authorities should strictly prioritize core peace-related spending and payment of civil servant salaries. With the clearance of oil advances in the current fiscal year, the 2019/20 budget can be based on a predictable revenue stream. With a projected rise in oil revenue and improvement in the collection of non-oil revenue by the newly-formed National Revenue Authority, the authorities are advised to formulate a balanced budget with appropriately prioritized allocations for the peace process, the costs related to the formation of the enlarged Revitalized Transitional Government of National Unity and paying salary arrears to civil servants.

The current dual foreign exchange rate system with a large spread between the official rate and the parallel market rate is unwarranted, as it gives rise to rent seeking and reduces inflows of foreign exchange into the country. There is an urgent need to normalize the foreign exchange market by discontinuing the so-called special accounts (whereby numerous foreign account holders are forced to sell foreign exchange at the official rate), and letting banks freely determine their buying and selling rates.

Demonstrating dedication to peace, economic stabilization, and robust management of oil revenue and public finances will be key in rebuilding policy credibility and regaining access to external financial support.

The mission met with First Vice President Deng Gai, Minister of Finance Mabiordit, Central Bank Governor Ngor, other high-level government officials, and representatives of the diplomatic community, private sector and civil society. The team wishes to express its gratitude to the South Sudanese authorities for the constructive discussions and their hospitality.

The IMF Executive Board is expected to complete the 2019 Article IV consultation in May 2019.

Source: International Monetary Fund

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