Summary

Sudan has suffered a great deal since its independence from Britain in 1956. Oppressive dictatorships, internal wars, economic mismanagement, have all led to accelerating pauperization. In 2019 the people in collaboration with the military overthrew the Al-Bashar regime and are organizing to establish good government that will respond to the needs of the people. Once a pariah state that sponsored international terrorism, the transitional government has taken steps to normalize relations with neighboring countries and the overall international community, including the United States.

Sudan’s ability to meet the needs of the people, provide basic public services, control inflation, and rapidly declining exchange rate, and rising poverty, is severely hampered. Tax revenues are very low, much lower than any other country in the region; while government spending is poorly planned, misdirected, and only loosely controlled. Fiscal transparency is almost non-existent.

International donor assistance can help build the country’s institutions and capacities in domestic resource mobilization (DRM) and public financial management (PFM), to put the country on a path of stability and recovery.

Political economy since independence

Throughout its history as an independent nation-state, Sudan has experienced political instability. Following independence in 1956, the country was ruled by a five-member council until it was overthrown in 1958 by General Ibrahim Abboud, who subsequently handed over power to a civilian government in 1964. Ismail-al-Azahri served as President until 1969 when his government was overthrown by a military junta headed by Gaafar Nimeiry. Economic and political instability continued for the next 25 years, with several attempted and successful coups d’etat.

In 1989, a Revolutionary Command Council headed by Ali Othman Mohammed Taha overthrew Sadiq al-Mahdi’s government. Omar Hassan al-Bashir, a brigadier in the Sudanese army, served as Minister of Defense. In 1993, the Revolutionary Command Council was disbanded, and al-Bashir became President. During his twenty-six-year tenure as President, the socio-economic environment in Sudan deteriorated. The war with the Sudan People’s Liberation Army in the South continued until 2004 when both parties agreed to a permanent cease-fire. In January 2005, a comprehensive peace agreement was signed, which provided for South Sudan to vote on whether to secede or remain within the Republic of Sudan. On July 11, 2011, following a referendum in which more than 98 percent of southerners voted to secede, South Sudan became a nation-state.

Sudan’s human rights record deteriorated. Sharia laws became stricter, imprisonments were on the rise, and there were violations against women. In addition, the government attacked South Kordofan and Blue Nile, where the populations were aligned with South Sudan. This caused forced displacements, lack of access to health care, and food insecurity. Furthermore, the government entered into conflict in the Darfur area in 2003 and hundreds of thousands of people lost their lives. The Janjawid, a militia funded by the government, tortured, raped, looted, and destroyed property.

During President al-Bashir’s rule, Sudan’s relations with the West deteriorated. Primary concerns evolved around human rights abuses; initiatives to destabilize neighboring countries; and apprehensions that the government was harboring terrorists (such as Osama Bin Laden, Mujahedeen, Hezbollah, and the Palestinian Liberation Organization). In 1997, President Bill Clinton issued an executive order placing economic sanctions on Sudan. In 2006, President George W. Bush expanded these sanctions. Sanctions contributed to minimal foreign investment, limited access to equipment, hardware, and software, limited collaboration with international academic institutions, skills shortages, a scarcity of foreign currency, and hyperinflation. The USG lifted sanctions in October 2017. A survey conducted thereafter reported that Sudanese informants applauded this action. However, the majority of respondents expressed concern that: “The lack of resolution of the conflicts in Darfur, South Kordofan, and Blue Nile, together with the rapid deterioration of the economy after sanctions were lifted, has overshadowed any merits of the U.S. action.”

Sudan’s economic situation continued downward, partly due to reduced oil revenues from South Sudan, which had comprised 50 percent of government revenue and 80 percent of the country’s exports. At independence, South Sudan was producing between 350,000 and 400,000 barrels of oil per day. However, in 2012, the newly independent nation accused Sudan of “stealing $815 million worth of its oil,” and shut down hundreds of oil wells. Furthermore, a civil war erupted in South Sudan and oil production grounded to a halt, with oil rigs shut down or destroyed. Drilling only resumed in 2019, after warring factions signed a peace deal. Still, recovery remains slow due to a lack of funds for new machinery, fluctuating oil prices, and outdated infrastructure.

The economic shock contributed to a rise in inflation and decline in the growth of the economy. The distressed economy resulted in reduced incomes and increased poverty.

The Revolution of 2019

By the end of 2018, the population—especially youth and young professionals—had begun to protest. President Bashir refused to step down. Instead, he declared a state of emergency, banned public demonstrations, dissolved public institutions at a national and local government level, and replaced civil servants with military personnel. Even the military turned against him. Public protests persisted. In April 2019, the Transitional Military Council overthrew President Bashir. In December 2019, he was sentenced to a two-year jail term in a reform facility for “money-laundering and corruption after $130m was found in suitcases in his home” (The Economist, 2019). The authorities in Khartoum have indicated a willingness to extradite the former President to the Hague to face the International Criminal Court.

Sudan is currently led by an 11-member Sovereign Council comprising five military personnel and six representatives from the protest umbrella Declaration of the Forces of Freedom and Change (FFC), including two women, one of whom is a Coptic Christian. Its mandate is to address legal and economic reforms. The council will remain in power until a general election slated for 2022/3. In tandem, Dr. Abdallah Hamdok, a former economist at the UN, serves as Prime Minister. His two priority areas are securing peace and economic recovery. The media concurs with the Prime Minister’s agenda and suggests that resolving monetary issues is a priority. The situation in Sudan remains fragile. There has already been an assassination attempt against Prime Minister Hamdok in March 2020. Mistrust between various factions prevails. There are also challenges revolving around Sudan’s massive debt, weak governance, and “unresolved conflicts in marginalized areas.”

Current macroeconomic situation

Sudan’s macro-economic challenges have persisted and the government declared a state of economic emergency on September 10, 2020. The economy continues to contract—in 2020, it may have shrunk by 8 percent. The fiscal deficit (10.8 percent of GDP) has contributed to high inflation and has led to devaluations of the exchange rate. Inflation was estimated at 167 percent in August 2020. Sudan’s inflation is the third highest in the world, after Venezuela and Zimbabwe.

The country has limited foreign exchange. Reserves dwindled following the secession of South Sudan as a result of foreign exchange foregone from oil revenues. In addition, Sudan has a substantial negative trade balance; imports surpass exports by 50 percent. These two factors have contributed to currency devaluations. The real value of the currency has fallen and there is a divergence between official and unofficial exchange rates. On November 25, 2020, the rate was 260 Sudanese Pounds (SDG) to 1 USD in the parallel market, as opposed to the official rate of SDG 50 to 1 USD.

Moreover, Sudan’s external debt has soared. This is partly due to exchange rate devaluations and government defaulting on concessionary loans (from the International Monetary Fund (IMF), World Bank, African Development Bank (AfDB)) leading it to borrow funds at much-higher interest rates from other lenders. The country’s external debt, estimated at 253 percent of GDP (or US$ 57.5 billion) in 2020, is not sustainable. It is noteworthy that long-outstanding arrears make up the bulk of the debt (89.2 percent in 2020). Against this backdrop, Sudan intends to develop and implement a strategy to clear its arrears, leading the government to request a 12-month IMF staff-monitored program (SMP) as a means for eventually seeking debt relief from Paris Club creditors under the heavily indebted poor countries (HIPC) initiative. In this latter regard, the authorities have undertaken to clear “its arrears with the IMF and have a fully financed plan and a timetable to clear arrears with the World Bank and the [AfDB] to restore its eligibility to borrow from these sources.”

Fiscal imbalances are linked to several factors. First, public sector wages consume a third of the budget, which on its own is not excessive, but when matched with other extraordinary budget demands creates great budgetary rigidity. Military expenditure in the past few years constituted up to a quarter of the budget—much higher than in neighboring countries such as Chad (14 percent); Ethiopia (4 percent); and South Sudan (10 percent) (SIPRI, 2020). It is noteworthy that oil revenues enabled the government to push up the size of the army’s establishment from 65,000 to 100,000. State-owned enterprises (SOEs) in Sudan have also been a drain on the public purse, as they have been poor performers. Sudan’s transitional government has shown its willingness to divest over 650 SOEs, even those in the security sector.

Second, over the years Sudan has provided subsidies on fuel and certain foodstuffs. Fuel subsidies alone take up 36 percent of the country’s budget. The prices of petroleum products in Sudan are up to eight times cheaper than international prices. Subsidies to wheat make up another 10 percent of the budget and coupled with preferential exchange rates on imported product provided by the central bank, impose a considerable burden and market distortion. In addition, the wheat subsidy mostly benefits urban dwellers and disadvantages rural dwellers and farmers. It is noteworthy that the transitional government has indicated it will still subsidize the poor through cash transfers.

Third, a comparative analysis of tax performance suggests that Sudan’s achievement in DRM, and taxes, in particular, is at a level below the average for sub-Saharan African (SSA) countries. An IMF study set a benchmark tax revenue collection as a percentage of GDP for developing countries at 18 percent. Of course, there is no precise one-size-fits-all tax ratio, as at only 5.4 percent of GDP, Sudan’s is extremely low. Its tax effort is only 0.24, meaning it only collects about 24 percent of its tax capacity—half the average for all SSA. On USAID’s self-reliance dashboard, Sudan’s tax effectiveness indicator of 0.06 is substantially below the median value for comparator countries. A shortfall in DRM means that Sudan does not have the resources needed to finance and sustain its development efforts.

Against this backdrop, Sudan remains one of the world’s least-developed countries. Poverty rates have been on the rise for several years. Recent projections show that poverty rates will increase: from 14.2 percent and 47 percent of the population living on US$1.9 per day and US$3.2 per day in 2019 respectively; to 18.3 percent (on US$1.9 per day) and 53.5 percent (on US$3.2 per day) by 2023. Moreover, according to a recent World Bank report, “a more severe and prolonged coronavirus disease 2019 (COVID-19) outbreak than currently assumed could have further negative effects.”

Strengthening PFM and DRM

DevTech as lead on the US Agency for International Development (USAID)-funded Fiscal Accountability and Sustainable Trade (FAST) project has been studying Sudan, meeting with partners and stakeholders and international donors to develop a set of measures that can help restore fiscal balance, restore macroeconomic stability, halt inflation, and slow the rate of currency devaluations. Our recommendations are all about reforming public financial management and taxation institutions, policies, systems, processes, and building human capacity. Before making recommendations about what needs to be done, we took a careful look at what is already being done and supported by other donors.

Ten key development partners that have been or plan to support implementation of PFM reforms in Sudan. The IMF will continue to work with authorities on the medium-term fiscal framework and establishing the treasury single account (a unified cash management system). The World Bank and African Development Bank are helping with the preparation of the poverty reduction strategy paper; the European Union (EU) and the Foreign Commonwealth and Development Office are building capacity of the Ministry of Finance and Economic Planning’s newly forming analysis and monitoring unit; and the Agence Française de Développement plans to assist parastatal reforms. Some of the EU-funded support is provided by the World Bank. The EU, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), and the Government of the Netherlands are collaborating with the National Audit Commission. In addition, UNDP coordinates and harmonizes development partners through the Sudan International Partners’ Forum (SIPF). SIPF will engage with the government through a PFM Steering Committee.

Donors are engaging in Sudan, the needs for PFM reform are quite large, and much more is needed.

Priority as-yet uncovered assistance include: (1) conduct an institutional and functional review of the entire Ministry of Finance and Economic Planning; (2) strengthen the budget preparation processes; (3) raise fiscal transparency by reporting, creating a citizens budget, create a fiscal transparency portal, and other initiatives; (4) enhance public procurement transparency; (5) tighten controls on government expenditures, especially in control on the wage bill, rationalization of subsidies, impose real commitment controls, clear vendor arrears, and build internal financial controls; and (6) strengthen budgetary oversight by the National Audit Chambre (Supreme Audit Agency) and by the legislative branch of government, once it is back up and running. This would just be the starting point. Longer-term action areas include build-up multi-annual, program, and performance-based budgeting, and strengthen all legislation and regulation of the budgeting processes and systems to codify modernized methods.

In terms of DRM, donor support is quite uncertain. Up until now, there has been limited development-partner support in this area. FCDO has supported the deployment of electronic fiscal devices. The IMF will continue to provide peripatetic technical advice to strengthen tax and customs administration. The World Bank has been providing short-term technical assistance to the Sudanese Taxation Chamber in undertaking basic audits, strengthening the operations in the large taxpayer office, business intelligence, and data analytics, and enhancing revenue administration in the mining sector.

Much more needs to be done to strengthen the DRM system. In terms of supporting tax policy, donor-provided technical and capacity building assistance could help to (1) strengthen tax policymaking capacity; (2) revise current tax policies to make them broader-based, easier to comply with, and more progressive; (3) greatly reign in tax system giveaways, such as special exemptions and incentives that lose revenue and do not benefit the economy; (4) create a simplified tax policy for small business; and (5) incent public-private dialogue on tax issues to move the county forward. From the tax administration perspective, donor’s assistance is sorely needed to modernize all processes of the Sudanese Taxation Chamber, such as taxpayer registration, audit, declarations processing, anti-fraud, and appeals. This modernization assistance would include (1) tax administration reorganization to meet modern standards; (2) enhanced use of information technology and automated systems; (3) strengthened corporate services, such as strategic planning, human resource management, and management information systems. Further, donor assistance is needed to help bring about the needed modernization efforts through the development of regulations, process reengineering, change management, and implementation guidance. The Transitional Government of Sudan is contemplating the feasibility of creating a National Tax Authority, akin to semi-autonomous revenue authorities in many other countries, such as Kenya, Uganda, and Ghana. Creating this all-new tax administration could have some positive revenue implications but would be a much larger and more complex project than modernizing the current Sudanese Taxation Chamber.

Conclusion

Unless Sudan can get its public finances under control; better allocate public funds to providing basic social services and away from wasteful fuel and wheat subsidies; and generate enough domestic revenues to fund its budgetary needs, normalizing its economy and society will remain elusive. Now is the time for the international community to step up in a serious, comprehensive way to help build these foundational blocks for the transition to a new Sudan.

Dr. Mark Gallagher is a leader in Public Finance and Macroeconomics with three decades of experience working in more than two dozen countries in Asia, Latin America, Africa, the Middle East, and Central Europe and ten times as a USAID Chief of Party (COP) for economic and fiscal reform projects. Dr. Gallagher joined DevTech Systems in 2002 as a Senior Advisor and currently is the COP for USAID/FAST, and Project Director for USAID/EGSA.