October 26, 2011 (WASHINGTON) – The International Monetary Fund (IMF) on Wednesday sounded a warning bell to South Sudan, saying that the newly established nation will see diminishing oil production levels in less than ten years.
In its report on oil exports in Middle East, North Africa, Afghanistan and Pakistan (MENAP), the IMF noted that South Sudan relies on oil for 98% of its revenue making it almost entirely dependent on crude exports.
“[B]ut [South Sudan] faces a potentially rapid decline in production as known reserves dwindle,” the report said.
South Sudan officially became an independent state last July after its citizens voted almost unanimously in favour of secession from the north during the referendum held last January.
Prior to the country’s breakup, north and south Sudan split oil revenues by almost 50% in the 2005 peace agreement. Southerners were hoping that separating from the north will give them full control over their oil wealth particularly amid allegations that the north was underpaying the south its share.
But landlocked South Sudan cannot export its oil except through the pipelines running through the north all the way to Port Sudan on the Red Sea. The two countries are still negotiating on a fair fee for the use of the north’s infrastructure.
Khartoum said that it wants a deal reached by the end of October, warning of other options if that doesn’t happen. The north is encountering severe economic challenges with the loss of the south’s oil fields and needs a steady source of income and hard currency.
The IMF said that oil production in South Sudan ’already started falling from its 2009 peak of about 360,000 barrels per day and, barring new discoveries or improved recovery, it is likely to halve by 2020.’
To prepare for this, South Sudan must take measures that would maximise the benefits created by the oil wealth.
’Thus, there is a small window of opportunity to put the oil windfall to good use. However, given absorptive capacity constraints, investment must take place gradually while the oil wealth is saved and capacity improved. An immediate challenge is for the country to establish the credibility of its macroeconomic policy framework, including monetary operations,’ the IMF said.
South Sudan produces around 300,000 bpd and since independence has contracted oil sales worth $2.14 billion.
Despite having a per capita income of $1,000, more than twice the average of its neighbours, South Sudan is totally underdeveloped and has less than 100 km of paved roads.
’Its human and physical capital levels are extraordinarily low, and literacy and road density rates rank below those of neighboring countries despite higher income levels,’ the IMF said in its latest regional outlook released last September.
South Sudan needs to establish immediately ’the credibility of its macroeconomic policy framework, including monetary operations,’ the IMF said.