Saturday, August 10, 2019

Incoming Sudan govt will inherit $8.7-9.2bn trade deficit & business environment beset by corruption

NOTE from Sudan Watch Editor: Here is an interesting thread of tweets by Sudanese economist Yousif Elmahdi posted on his Twitter page 02 August 2019 @Usiful_ME

Note, in the final tweet Yousif reveals the source of his data is as follows: Macro data is from IMF;  agriculture productivity estimates come from a private sector study commissioned by government;  export data is from a mix of sources. 

Yellow highlighting is mine for future reference. I have used green to highlight Yousif's sense of humour.

The incoming #Sudan government will be inheriting an economy highlighted (as of 2018) by:
— $8.7-9.2bn trade deficit 
— Fuel subsidy of 8% GDP (over $3bn)
— Wheat subsidy of around $500m, on top of $800m import bill 
— 60% power coverage deficit (4,000 megawatts)
  • Yousif Elmahdi
    Alongside this:
  • — International reserves were as low as $1bn gross by end-2018. 
  • — In reality, there are no reserves because the budget deficit meant Central Bank was financing a parallel budget. On-budget expenditure was covering roughly:
  • Yousif Elmahdi
    - All of Chapter 1 (wages and salaries), of which 20-25% security sector wages.
  • - 30% of Chapter 2 (capital expenditure)
  • Yousif Elmahdi
    — Tax to GDP ratio was 6%. For reference, sub-Saharan Africa average is around 18%.
  • Yousif Elmahdi
    — Oil production declined from 160,000 to 70,000 barrels, all of it consumed locally (w/ deficit imported) covering around: 
  • - 30-40% diesel needs. For reference, total diesel consumption composition is est: 50% transport sector; 10% industry; 10% agriculture; 5% general)
  • Yousif Elmahdi
    - 40-50% gasoline needs. For reference some of locally produced gasoline is exported to Ethiopia in exchange for 100-200 megawatts power. 
  • - 70-80% LPG needs.
  • Yousif Elmahdi
    — Gold production estimated at 100 tonnes ($4bn), but only 20/30 tonnes ($1.5bn) accounted. 80% artisan produced.
  • Yousif Elmahdi
    — Agriculture sector v. low productivity and high cost of 45 million cultivated acres: 44m rain-fed; 1m irrigated (against 5m capacity). 
  • Some examples: 
  • - 8 million acres sesame: 100kg/acre ($300m exports). For comparison, Turkey produces around 1,700kg/acre.
  • Yousif Elmahdi
    Another example:
  • - 2 million acres sorghum: 3 sacks/acre ($20-60m exports).
  • Yousif Elmahdi
    — Business environment beset by corruption, especially around natural resources.
  • - State-owned enterprises completely off-budget, no forensic audit etc.
  • Yousif Elmahdi
    To fill gap: 
  • — Govt. monetized (printed money), especially as couldn’t sell debt due to lack of credit worthiness of Govt. bonds. 
  • -> Inflation 73% by end-2018.
  • — KSA and UAE also provide $100m monthly in fuel, wheat, medicine, fertilizer etc.
  • Yousif Elmahdi
    In the backdrop you have:
  • — Real exchange rate that’s hugely overvalued. This of course:
  • - renders the whole economy uncompetitive
  • - while different exchange rates create distortions (80% transactions in parallel market).
  • Yousif Elmahdi
    Given this context, the new government’s priorities must necessarily include:
  • 1. Competitive exchange rate 
  • 2. Tax reform 
  • 3. Business climate reform (including banking sector) 
  • 4. Infrastructure (especially energy sector)
  • 5. Agriculture 
  • 6. Health and Education
  • Yousif Elmahdi
    The key priority, however, for new #Sudan Govt. will be to find the resources to finance all of this; to fill the budget deficit; and to cushion the poorest.
  • Yousif Elmahdi
    On the latter, previous government social safety net program reached 500-600,000 families against 800,000 target. 
  • With poverty rate currently estimated around 36%, about 3 million families (today) need same level of support. 
  • Gap is around 1% GDP (based on $5/month support).
  • Yousif Elmahdi
    Above all, any reform measures need to be grounded in citizen engagement, trust and awareness building, and transparency.
  • Yousif Elmahdi
    A few additional points to this thread:  
  • — Any serious & sustainable reform package would have to include (as priority) removal of fuel & wheat subsidies, esp. fuel. 
  • - #Sudan fuel prices are amongst lowest in the world and the country simply can’t afford to maintain these
  • Yousif Elmahdi
    Difficulty with fuel is that once the subsidy is removed, even if gradually or partially, prices will sky rocket across the entire economy. 
  • We would be dealing with the sorts of numbers (in the 000s) you hear in some other countries across the continent.
  • Yousif Elmahdi
    Exchange rate competitiveness would also entail initial inflationary pressures, but ultimately helps private sector development by improving competitiveness.
  • Yousif Elmahdi
    Ramifications in the short to medium term would be severest on those whose incomes are not inflation adjusted (public sector especially), and on the poorest. 
  • In theory, some of the savings could be directed towards expanding social safety nets and adjusting public sector wages
  • Yousif Elmahdi
    Ultimately the public sector is severely bloated due largely to excessive administrative structure. 
  • This would need to be reformed at some point but I won’t get into this rabbit hole right now.
  • Yousif Elmahdi
    Basically, the medicine will be very bitter, for very long before it’s positive effects can start to be felt. 
  • Postponing it only exacerbates magnitude of problems to be addressed. This is what previous regime did, ironically because of regime sustainability considerations.
  • Yousif Elmahdi
    Previous regime structured economy in this way also for regime sustainability considerations (and perverse incentives) and could afford it while it had substantial oil revenues.
  • Yousif Elmahdi
    What works in incoming transitional government’s favor is that it won’t be encumbered by election mandate or future election campaign. 
  • In terms of resourcing it would potentially have many friends.
  • Yousif Elmahdi
    So in theory provides an ideal platform to initiate difficult and politically divisive reforms. 
  • However, this assumes the coalition remains stable, Cabinet is well constituted, and public trust can be quickly gained and sustained.
  • Yousif Elmahdi
    On wheat imports (approx. $800m), I’ve heard that the major mills believe actual import needs are around $500m i.e. substantial amount of smuggling when you add on the subsidy (approx. $500m).
  • It’s believed Khartoum consumes 65% of actual wheat needs.
  • Yousif Elmahdi
    Staying on agriculture, livestock is a significant export source, generating around $800m from 5 million heads. 
  • But when you consider total livestock population, this is paltry, and largely due to lack of transport infrastructure.
  • Yousif Elmahdi
    Value could also be significantly increased by exporting as meat (instead of live) but at present the infrastructure and value chains don’t exist.
  • Yousif Elmahdi
    I sincerely hope those that assume power will recognize this and will be bold, empowered and supported to initiate reversal. We will need a significant leap in transparency and citizen engagement.
  • Yousif Elmahdi
      @Omer58606983  Macro data is from IMF. Agriculture productivity estimates come from a private sector study commissioned by government. Export data is from a mix of sources.

  • To visit and view the above series of tweets at Yousif's Twitter page click here:

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