Home | Comment & Analysis    Thursday 7 January 2016

Flour Power: Bread crisis, a cash crunch, and Sudan’s shrinking private sector

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By Omer Ismail

As economists and analysts keep their eyes on Sudan’s growing hard currency shortage and the falling value of the Sudanese pound against the U.S. dollar, many Sudanese consumers have been watching the price and availability of bread in local bakeries and the outcome of a dispute between a major flour supplier and the Sudanese government. The state of Sudan’s currency, its bread, and private sector enterprise has a direct impact on the daily lives of many Sudanese people and provides signals about the tactics and stability of the regime itself. There are signs that the hard currency shortage is driving elites to take over private enterprise and gain control of even the less lucrative markets, including agriculture, in their bid for more cash.

The dollar, the pound, and the wheat

Globally, the value of the U.S. dollar has been rising, putting currencies that are exchanged for dollars and used to purchase products sold in dollars at a disadvantage. Meanwhile, the prices of agricultural products, including wheat (of which the U.S. is a top global producer), have fallen.

This trend and a combination of other factors has had mixed consequences for Sudan. Despite having arable farmland, including areas suitable for cultivating wheat, Sudan is a heavy wheat importer on the global market (bringing in an average of 2.7 million tons annually in the last three years). Sudan benefits from the lower global wheat price. But it can afford to buy less of the lower-cost wheat at the same time because Sudan’s currency is losing value and the country faces a hard currency shortage, particularly with U.S. dollars, given years of U.S. sanctions. The higher value of the dollar and lower value of the Sudanese pound (SDG) hurts Sudan’s ability to pay for the imports it needs, including wheat.

The Central Bank of Sudan currently lists the official exchange rate of Sudanese pounds (SDG) to U.S. dollars at approximately 6 to 1. Black market exchange rates are reportedly higher than 10 to 1 currently, and economist Hamid Eltigani, of American University in Cairo, Egypt, has warned that the rate could increase further and reach 20 to 1.

The current currency pressures are symptoms of broader and more pervasive economic problems in Sudan that have endured for years and grown worse with time. These problems are the result of detrimental fiscal and monetary policies as well as irregular fiscal and monetary practices by government leaders and their supporters. These individuals have hijacked the country’s natural resource endowments and economic factors of production (land, labor, and capital) and used them against the Sudanese people for private enrichment. Sudanese consumers—anyone who buys bread—have paid the highest price.

Fiscal policies and practices: revenue and spending

Sudan’s land, livestock, and manufacturing sectors could be fully developed to generate national revenue and funds for reinvestment across all regions. However, many parts of the land, livestock, and manufacturing sectors have been destroyed, neglected, mismanaged, or sold off to foreign investors. Instead, it was the oil sector that generated most of the national revenue and growth from 1999 until 2011. Most of the oil money went to military spending for wars Khartoum waged with southern Sudan, Darfur, South Kurdofan and Blue Nile. Oil revenues were not spent on development, and with South Sudan’s independence, Sudan lost an estimated 75 percent of the oil.

Oil revenue losses coincided with the discovery of another significant natural resource that could provide revenue and foreign currency: gold. A 2014 IMF report, based on Sudanese government data that cannot be independently verified, estimates that gold exports provided 13 percent of total exports from Sudan in 2011, 42 percent of exports in 2012, and 36 percent of exports in 2013.

The national fiscal policies of decentralization that govern revenues at the national and regional levels exacerbated problems with the federal government’s management of the country’s available resources. Fiscal decentralization encouraged unprecedented corruption and diversion of public funds by the government and party cronies—who enjoy total impunity.

Beginning in the late 1990s, the Sudanese government instituted a practice called tajneeb, translated as “keeping funds aside.” Because the ministers are political appointees—appointed on the basis of loyalty and not necessarily technical competence—the inherent loopholes of tajneeb allowed ministers at the federal level to divert ministry funds without reporting the amounts to the Ministry of Finance.

Tajneeb gave rise to a range of various ungoverned ways to raise revenues through taxes at the federal level. States and local governments followed suit and developed their own tax collection methods and bodies independently of the central tax authorities and without their knowledge. Officials were also allowed to own businesses that benefitted directly from their positions in public office—a practice that was unheard of before the Omar al-Bashir government and that further institutionalized systemic corruption. The combination of unregulated and unsystematic taxation with convergence of the public and private sector—private businesses profiting from public positions of privilege—emboldened, rewarded, and legitimized officials who were extracting revenues from the public in order to benefit their private interests.

Over time, since 1989, this diversion of funds from the public by a public office-holder toward private entities that did not benefit the public has led to decreased revenue generation by the national Ministry of Finance. The problem became especially acute in 2005 and 2006 as the prospect of lost oil revenues with southern Sudan’s secession became more likely. It was also becoming apparent that the government would not quickly and decisively win the war in Darfur. With more than 60 percent of the country’s revenue going to the military, the government of a land of plenty was running on empty with higher costs and little cash coming in.

Monetary policies and practices: money supply and currency rates

The Sudanese government’s longtime inability to raise and retain revenues at the national level and to balance revenues with spending contributed to extreme inconsistency in the policies on money supply. The rapid infusion of large oil revenues also contributed to the volatility. The resulting policies have been marked by desperation and parasitic greed as well as inconsistency.

Since 1989 the Sudanese government has tried to control the exchange rate through contradictory policies: curbing the use and trade of foreign currency at one point, and promoting it at another. The competing pressures and self-contradictory policies have driven down the value of the Sudanese pound over time. The national currency is now worth a fraction of what it once was when al-Bashir took power in 1989. At the time the government official in charge of the economic policies said that one of the justifications for taking the government by force was to stop the Sudanese currency from reaching the level of 20 pounds to the dollar—the very rate economists now fear could become a reality, and with a Sudanese currency that is now worth a thousandth of the value it had in 1989, after years of successive currency devaluations.

The discovery and production of gold has helped shore up the national treasury’s stock of foreign currency. The production and exports of 71 tons of gold in 2014 brought in $1 billion in 2014, with higher gold production rates anticipated by the Sudanese government for 2015 and 2016.

The foreign exchange infusions from gold or Gulf allies have helped Sudan’s foreign reserves levels, but for some, no amount of additional cash is enough—particularly if national coffers are tapped for private use. And as the range of sources and more lucrative sources of national revenue that make up the economic pie grow smaller, the fight over those streams has intensified and government actors have extended and tightened control over private commercial enterprises.

New fights with old friends

In its search for money the ruling Sudanese National Congress Party (NCP) is turning against even its own longtime friends, allies, and business partners, like Osama Daoud Abdellatif.

Daoud and his family have led big businesses in Sudan since the 1960s. Today Daoud runs DAL Group, which calls itself Sudan’s largest and most diversified business group with activities in the food, agriculture, engineering, real estate, medical services and education sectors. DAL Group holds several exclusive high-value contracts, like with Mitsubishi automobiles, among other automobile manufacturers.

One of DAL Group’s businesses is Sayga (also spelled Saiga), which is one of three companies that has had a major stake in the Sudanese flour market. Sayga halted production at its flour mills in July 2015 because of a dispute with the Sudanese government involving the currency exchange rate for wheat imports.

This resulted in Sudanese consumers facing immediate bread shortages and price increases.

There are several theories why DAL fell out of favor with the Sudanese regime. There are rumors of competing “power circles” within the al-Bashir regime that are each trying to capture and draw the most successful and lucrative economic enterprises into their orbit. Others see it as a result of the diminishing influence of key members of the Sudanese power structure who have backed Daoud, including General Abdelrahim Hussein, who has been a longtime ally of al-Bashir and was recently demoted from his role as the long-serving Minister of Defense to become the governor of Khartoum state.

Analysts say the halted Sayga production is ultimately a symptom of something bigger: the degree to which Sudan’s cash crunch has driven desperate and powerful elites from the regime and military to extract money from the lower-value markets, including agriculture, that affect all Sudanese people, not just the elites. The government of a country that was once touted as the continent’s breadbasket, has now sold out a longtime business partner, sought to capture the rents of private enterprise, and pocket these rents for private use to supply, pay, and feed the militias that are attacking civilians in the periphery.

The crises affecting Sudan’s currency, its private enterprise, and its bread market are self-inflicted by those in positions of power. The vast corruption and mismanagement of the country has created a parasitic parallel economy that has captured the formal economy and healthy private enterprises and destroyed both the public and private sectors while pulling the country into a perpetual loop of hyperinflation.

The author is a Senior Advisor at the Enough Project

Sources cited in this article:

1. "Sudan’s growing hard currency shortage": http://www.sudantribune.com/spip.php?article56611
2. "falling value of the Sudanese pound against the U.S. dollar": https://www.dabangasudan.org/en/all-news/article/conflict-sanctions-press-sudanese-currency-rates-economist
3. "dispute between a major flour supplier and the Sudanese government": https://www.dabangasudan.org/en/all-news/article/major-sudanese-miller-halts-production
4. "prices of agricultural products, including wheat (of which the U.S. is a top global producer), have fallen": http://www.ft.com/intl/cms/s/0/ce5ce816-5c5b-11e5-9846-de406ccb37f2.html#axzz3oZ9IumMW
5. "Sudan is a heavy wheat importer on the global market": http://www.indexmundi.com/agriculture/?commodity=wheat&graph=imports
6. "bringing in an average of 2.7 million tons annually in the last three years": http://wheatatlas.org/country/exports/SDN/0
7. "given years of U.S. sanctions": http://www.treasury.gov/resource-center/sanctions/Programs/pages/sudan.aspx
8. "official exchange rate of Sudanese pounds": http://www.cbos.gov.sd/en/currency_archive
9. "Black market exchange rates are reportedly higher than 10 to 1 currently": https://www.dabangasudan.org/en/all-news/article/conflict-sanctions-press-sudanese-currency-rates-economist
10. "broader and more pervasive economic problems in Sudan": http://www.enoughproject.org/reports/enough-forum-watching-bubble-burst
11. " irregular fiscal and monetary practices by government leaders and their supporters"
12. "sectors have been destroyed": https://thesentry.org/country-briefs/sudan/
13. "neglected,": http://www.reuters.com/article/2013/02/20/us-sudan-railway-idUSBRE91J0QO20130220
14. "mismanaged,": http://www.sudantribune.com/spip.php?article45813
15. "sold off to foreign investors": http://www.landmatrix.org/en/get-the-detail/by-target-country/sudan/
16. "another significant natural resource that could provide revenue and foreign currency: gold": http://www.enoughproject.org/files/Darfur_Gold_Rush.pdf
17. "A 2014 IMF report,": https://www.imf.org/external/pubs/ft/scr/2014/cr14364.pdf
18. "more than 60 percent of the country’s revenue going to the military,": http://www.democracyfirstgroup.org/News/Economic%20Policies%20ENGLISH%20FINAL.pdf
19. "the very rate economists now fear": https://www.dabangasudan.org/en/all-news/article/conflict-sanctions-press-sudanese-currency-rates-economist
20. "The production and exports of 71 tons of gold in 2014 brought in $1 billion in 2014,": http://www.sudantribune.com/spip.php?article55639
21. "Osama Daoud Abdellatif": http://www.ft.com/intl/cms/s/0/94a54080-9274-11e3-8018-00144feab7de.html%22%20%5Cl%20%22axzz3khsMxlJb
22. "Daoud runs DAL Group": http://www.dalgroup.com/about-us/dal-group
23. "exclusive high-value contracts, like with Mitsubishi automobiles,": http://www.dal-motors.com/
24. "One of DAL Group’s businesses is Sayga": http://www.dal-motors.com/

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