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IMF says Sudanese economy could face fiscal gap on oil price fallout

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June 30, 2015 (WASHINGTON) – The International Monetary Fund (IMF) warned that the Sudanese economy could be adversely impacted by the drop in worldwide oil prices and that inflation rate could surge upwards because of excess liquidity.

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International Monetary Fund headquarters in Washington D.C. (AFP Photo/Brendan Smialowski)

“Remarkable progress has been made toward restoring macroeconomic stability and strengthening economic growth following the shock of South Sudan’s secession. In particular, fiscal consolidation and tight monetary policy helped reduce inflation below 20 percent in May 2015, narrow the external deficit, and support growth at about 3.7 percent in 2014,” a visiting IMF delegation said in a statement released on Monday.

“The outlook remains challenging, however, as lower international oil prices and the conflict in South Sudan are adversely affecting oil-related revenues, which could possibly lead to fiscal and external financing gaps.

Sudan has been reclassified by the IMF in 2012 from a net exporter to a net importer after the oil-rich south became an independent state, taking with it 75% of the petroleum reserves that existed in the united Sudan.

However, landlocked South Sudan is paying its northern neighbor a cut of the oil it exports through pipelines that run through Sudanese territories to the coastal city of Port Sudan.

Earlier this year, it was announced that the two countries have started renegotiating the oil transit fee agreement signed in 2012 to account for falling crude prices.

Juba pays Khartoum approximately $25 per barrel for oil transported through the latter’s territory. The former’s oil production have also diminished owing to armed conflict in oil-rich states thus complicating its economic situation.

The IMF also noted that restrictions on international financial transactions “continue to weigh on growth”.

Dozens of financial institutions worldwide including those in Arab Gulf states and China have suspended any dealings with Sudan for fear of potential hefty US fines which has imposed economic sanctions on the East African nation since 1997.

Furthermore, the IMF said that expansionary fiscal policies of Khartoum in support of agriculture “injected considerable liquidity in the economy”.

“These developments could put upward pressure on inflation and the exchange rate,” the IMF warned.

Sudan has been struggling with double-digit inflation since secession of the oil-rich south in 2011 but it has succeeded in bringing it down from a high of 46.8% in July 2014 to 19.8% in May 2015.

The 2015 budget has a target inflation rate of 25% which is close to the IMF projections of 19%.

The IMF team also said it is discussing the initiation of a new Staff-Monitored Program (SMP) for Sudan which has expired in December and has yet to be renewed.

“The IMF staff team had productive discussions with the Sudanese authorities on economic and policy developments. These discussions, including on a new Staff-Monitored Program for 2015-16 to support the authorities’ economic reform efforts, will continue in the coming weeks.

The SMP is an informal agreement between country authorities and IMF to monitor the implementation of the authorities’ economic program. SMPs do not entail financial assistance or endorsement by the IMF executive board.

In 2009, Sudan agreed to SMP to help it achieve a set of economic and financial policies and objectives which include sustaining economic growth, controlling inflation, reforming the banking sector and reducing budget deficit among others.

(ST)

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