Economic Crisis: There Are No Easy Answers

Chatham House Africa Programme
Chatham House Africa Programme

As the nation’s economic collapse gathers momentum, a UK based think tank evaluates the domestic and regional implications of the economic crisis in South Sudan.

The gathering clouds threatened a rain soaked end to what had been a pleasant day in London. Having checked the weather forecast before setting off, I brought an umbrella with me. You learn never to trust the forecast in London, but today, it seemed I’d made the right decision. Nevertheless, I was reminded of a conversation I once had with a senior economist, who’d joked that, when it came to forecasting, economists were there to make weathermen look good.

I was on my way to Chatham House, where the Africa Programme was holding an event entitled, the “Domestic and Regional Implications of the Economic Crisis in South Sudan.” Speakers included: Dr Luka Biong, Associate Professor at the University of Juba and a fellow of Peace Research Institute (Oslo) and the Rift Valley Institute; Dr Pamela Lomoro, Senior Subsea and Onshore Engineer with LP Engineering Consultancy Ltd; Dr Laura James, Affiliated Lecturer, Department of Politics and International Studies, University of Cambridge; and was chaired by the ever present Dame Rosalind Marsden, Associate Fellow of the Chatham House Africa Programme, and British Parliamentarian, who had once served as UK Ambassador to Sudan prior to South Sudan’s secession.

I hurried across St James’ Square, and chanced upon Ahmed Al-Shahi, Director of the Sudanese Programme at the University of Oxford’s St. Anthony’s College. He too had come to attend the event. As we walked together, he turned to me and asked, “Do you think they’ll talk about the people on the ground and how they are coping with the crisis?” He was keen to hear of the impact on South Sudanese households, but was worried that the speakers were too divorced from realities on the ground. “Best to manage your expectations Ahmed”, I responded. “With only 15 minutes allotted for each speaker, we are likely to only get a macro-economic view today”.

I would have to manage my own expectations also. This was unfortunate. I was full of questions, and I hoped that this panel of experts would be able to answer them for me.

A Devastating Crisis

The economic crisis in South Sudan is proving devastating to households. Even the so called elite are no longer insulated from its effect. But people in the homeland are fixated by the devaluation of the South Sudan Pound (SSP). This is understandable, given the country’s unhealthy dependence on imports. But this fixation glosses over the deep structural imbalances and profligate spending that are the underlying causes of the economic crisis. The anger, at what many believe was a political decision to devalue SSP, is misplaced.

The fixed exchange rate system had to be scrapped. It was unsustainable. No one was prepared to purchase overpriced SSP in the currency markets. The collapse we are witnessing is because the transition from a fixed to a partially managed system was poorly planned and implemented.

If I have 10 SSP secured against 2 USD in central bank, each SSP is worth 20 US cents. If I then print another 10 SSP, making 20 SSP secured against the same 2 USD, now each SSP I have is only worth 10 cents. With a fixed exchange rate, we were insisting people continue to pay 20 cents. Would you purchased anything when you know you are paying double its real value? You would likely spend your money elsewhere.

The Central Bank of South Sudan (CBOSS) is still printing money to fund government spending. And with each dollar auction, SSP loses value against the USD. It will continue to lose value because we have no assets to justify a higher exchange rate. Only last week, the deputy governor of the Central Bank of South Sudan, Dor Majok, revealed to Miraya FM that “the reserves we have may cover only imports of only 5 weeks”. Meanwhile, civil servants, health workers, educationalists and security forces have been going for months without pay. Strike action has picked up among civil servants. Criminality is on the rise amongst security forces. Recently, judges put down their gavels and joined the picket line, whilst a squad of uniformed soldiers openly robbed a trader in Juba’s bustling Konyo Konyo market. South Sudan is hurtling towards bankruptcy, with consequences for impoverished citizens struggling to pull their lives together following the civil war. And the already fragile peace deal is made more tenuous by an acute lack of funding.

Fresh in my mind were the findings of the IMF Article IV Mission to South Sudan. In their press release, it was noted that “The deficit in 2016/17 could top US$1.1 billion or 25 percent of GDP which, if again financed through borrowing from the central bank or accumulation of arrears, would continue to fuel inflation and put further downward pressure on the exchange rate.”

The IMF mission listed a catalogue of measures to restore macro-economic stability. These included, “raising non-oil revenue and cutting expenditures, particularly in the payroll, current operations, travel, and investment. Moreover, there is a need to strengthen expenditure controls, budget preparation, and to limit arrears accumulation. Meanwhile, the central bank should regain control over monetary policy by refraining from lending to the government.”

Each measure alone would be difficult to implement. Given the prevailing instability, trying to do them all at once would likely prove politically suicidal for any government. But, even if, by some miracle, the government managed to implement all these measures, the IMF economists forecast that we would only be able to “reduce the fiscal gap to about US$300 million.” The international community would still be required to provide budget support to bridge that gap.

Can anything be done to pull the country out of this mess? I was hoping the speakers could address this fundamental question at least. I settled down in a seat behind two members of the South Sudanese Embassy in the UK; Amb. Maker Ayuel Deng, the Deputy Head of Mission; and Michael Saki Longwa, the embassy’s Counsellor. It was good to see them present. Representatives of the Sudan embassy attended nearly every event, whilst those from the South Sudan embassy were usually conspicuous by their absence.

Conflict, Oil & Instability

First to speak was Dr Luka Biong. He began by referencing a report to which he had contributed. The report attempted to estimate the economic and financial cost of war in South Sudan. The key findings were that continued conflict could end up costing South Sudan a staggering US$28 billion, with the cost to the region estimated at US$53 billion. A Sudanese official had estimated that closing the border alone had cost Sudan US$7 billion to date.

The cost of conflict for South Sudan was worsened by the added economic shock of a global fall in oil prices. This negatively impacted: (a) our ability to invest in machinery, buildings and other equipment needed to produce things for export; and (b) the nation’s balance of payments – i.e. the difference between how much we earn from exports and how much we pay for imports.

Because of these two factors, South Sudan is not earning enough to provide for all its citizens. In Dr Biong’s own words, “transfers to the lowest [socio-economic groups] is at its worst.” With inflation nearing 300%, an increase in criminality is the most evident expression of this problem.

“Before it scrapped the fixed exchange rate, the government had lost the equivalent value of all foreign aid spending in South Sudan to the black market.” – Dr Luka Biong

The implications on the region was rising instability and insecurity. South Sudan is overdue on payments amounting over US$1 billion for budgetary compensation to Sudan. Bearing in mind the ongoing oil transit fee renegotiations, Dr Biong appealed to Sudan’s ruling National Congress Party to set aside historical grievances and build a new working relationship with the Sudan People’s Liberation Movement (SPLM). It was, in his opinion, the only guarantee of stability across the two Sudans.

Dr Biong re-iterated that peace was the only option. He suggested that the international community must make non- implementation of the peace agreement very expensive for the principal parties. He also advised that the internal community should promote a peace dividend to incentivise the principals towards implementing the peace agreement.

Fiscal Mismanagement

Up next was Dr Pamela Lomoro. She noted that in addition to the cost of war and falling oil prices, fiscal mismanagement by the government had also contributed significantly to the economic crisis.

Cases of fraud, such as the infamous US$4.3 billion lost to corruption are compounded by an estimated US$850 million that was spent, in the last year alone, on the war effort. Weaponry has been purchased using loans secured against future oil earnings. Due to a lack of transparency, we know nothing about the terms of these loans. Consequently, we have no idea how much of the 160,000 barrels, extracted each day, is going to pay of these debts.

“80% of instances of corruption happen during government procurement.” – Dr Luka Biong

Dr Lomoro lamented that the government is only interested in spending the wealth earned from the oil fields. It has shown no interest in investment, whether to improve infrastructure or develop the skills of South Sudanese workers. An example of this short-termism was the 2012 oil shutdown. The government had focused on the real-time loss of revenue due to the shutdown. They paid little attention to the longer term pipeline management costs of their decision. The negative effects on productivity and the cost of repair, which would inevitably be deducted from future earnings, were ignored.

She reminded the audience that oil in South Sudan was finite and was projected to run out in the near future. Production in former Unity State had already peaked, with former Upper Nile State expected to follow shortly. It was unfortunate that the government of South Sudan was competent at drafting good legislation, but was let down by a persistent failure to implement any of its legislation. This has led to a lack of human resource capacity, minimal efforts to diversify away from oil extraction, and no stable environment that might attract foreign direct investment. Particularly damning for Dr Lomoro was the neglect of tomorrow’s generation, in the rush to spend oil wealth today. The Future Generations Trust, which should have been allocated 15% of oil earnings, lies empty.

Dr Lomoro ended by voicing her lack of confidence in the transitional government of national unity. There was no evidence that it could deliver on the type of reform so desperately needed to rescue South Sudan’s failing economy. International supervision was therefore required.

The Impossible Problem

Dr Laura James was the last speaker. She admitted to being overwhelmed by the scale of the challenge that South Sudan was facing. The fiscal deficit was now three times the total of revenue. That means the government of South Sudan is spending three years’ worth of revenue in a single year. That the government is forced to print money so as to pay salaries is only making matters worth.

But in order for the state to function, the civil service must to be paid. If we are to see an end to predation by security forces on civilians, then the military must also be paid. If we are to prevent the peace process from collapsing, then the transitional government must be funded.

The only remedy is budget support from the international community. Referencing the IMF Article IV mission, Dr James noted that the necessary reforms, as a package, are over ambitious. To help South Sudan achieve them, the IMF would need to engage in “unprecedented maximalist intervention.” The scale of intervention would likely be rejected, out of hand, by the ruling SPLM, which is fiercely protective of the government’s sovereignty.

Even if accepted by the SPLM, such intervention would be unpalatable for the international community. The scale of the corruption perpetrated by the SPLM presents a reputational liability that they find difficult to overcome. Donors considering providing budget support to South Sudan would struggle to justify using their taxpayer’s money in support of an organisation heavily associated with corruption.

Should donors somehow be willing to spend political capital in justifying budget support, and should the government of South Sudan accept intervention, it would have negative long term consequences to the political development of the country. It undermines capacity building within government institutions. There is also no clear exit strategy.

The alternative to budget support and intervention is the continuation of today’s “toxic and unsustainable” political environment. The public sector will continue to crowd out the private sector. Much needed investment in infrastructure will be unavailable. Donors will eventually lose interest. The oil will eventually run out. This is a gloomy forecast for future generations of South Sudanese.

And so, we find ourselves in a quandary. Peace is the only hope for recovery. But the peace needs funding. This makes budget support critical. But budget support is currently impossible. Dr James left this difficult problem for the audience to ponder.

There Are No Easy Answers

Having engaged in some networking after the event concluded, I stepped out of Chatham House to driving rain. Did I get an answer to my question? Could anything be done to pull the country out of this mess? I opened my umbrella and forlornly made my way to Piccadilly Circus to catch the train home.

On the face of it, the solution seems obvious. There is a credible plan to pull us out of the economic crisis. For the plan to have any hope of success, we need the support of the international community. But the international community has lost confidence in the government of South Sudan. Significant change is urgently needed to rebuild confidence and secure their support.

And yet, South Sudan is not ready for that kind of change. Hilde Johnson touched upon this in her new book. Referencing Christopher Clapham’s paper on the legacies of liberation, she wrote:

“Victorious movements inherit a powerful sense of legitimacy… They find it hard to recognise others’ right to govern… With this sense of legitimacy, actual performance in government becomes less important, and might even be irrelevant.”

This crisis is not an exercise in economic forecasting. It is real and it is happening right now. The urgency is real and action is required now. There can be no ‘riding this out’ or spurious notions of a return to the liberation war economy. Klem Ryan, a member of the UN Security Council Panel of Experts for South Sudan, disclosed in a social media post that during a high-level meeting, government officials acknowledged that the economy is already in acute collapse. Difficult decisions will need to be made in the weeks and months ahead. The window of opportunity to rescue the nation from an irreversible collapse is shrinking.


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