Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AfricaOctober 1 2012

South Sudan held hostage to oil fortune

The government of South Sudan has finally approved a budget for the 2012/13 fiscal year, which began in July, but of greater significance is the newly formed country's negotiations with Sudan over how to transport its vast oil reserves.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
South Sudan held hostage to oil fortune

The early years of the world’s 193rd country were always going to be tough. The southern part of Sudan was almost entirely neglected by Khartoum, Sudan's capital, after independence from the UK in 1956. A year earlier, a civil war began between the north and south that raged for 18 years, paused for eight, and resumed in 1982, ceasing only in 2005 with the signing of the Comprehensive Peace Agreement (CPA). By then, an estimated 2 million people had lost their lives in the conflict.

When South Sudan became a country on July 9, 2011, after an almost unanimous vote in favour of independence in a referendum in January 2011, it immediately became one of the most impoverished in the world. A country of a size comparable to that of France, it has almost no tarmac roads, and only a tiny proportion of the population is connected to a power or water network.

The agriculture sector is by far the largest employer, but the country still imports vast quantities of food. Local manufacturing and industry is almost non-existent. The government is the only significant provider of service sector jobs, but in doing so has created a bureaucracy that is bloated and inefficient. Illiteracy is estimated at 85%, and the majority of the population lives on less than $1 a day.

Crude consequences

But South Sudan does have one thing in its favour: oil. Prior to the south’s secession, the Khartoum government accrued most of the benefits of oil production, investing little in the south. During the CPA, a revenue-sharing arrangement was put in place, but there were still suspicions that it was not being adhered to by the north.

The potential economic benefits of South Sudan’s oil resources are great. The two Sudans have estimated proven oil reserves of 6.7 billion barrels, according to BP’s Statistical Review of World Energy, and about 75% of these reserves lie in the south of the country. Production from Sudan in the four years prior to independence fluctuated between 450,000 and 500,000 barrels a day. Between South Sudan’s independence and January 2012, the new country sold 33.6 million barrels of oil for a total of $3.3bn, according to government figures published in July.

But these benefits were short-lived. By the end of 2011, Sudan had begun confiscating oil coming from the south, claiming it as compensation for the use of its pipeline and refining infrastructure – the only way that South Sudan can get its oil to market. Powerless to ensure the safe transit of its oil through its neighbour, in January 2012 South Sudan took the ultimate sanction. It stopped pumping oil altogether.

It is hard to overestimate the consequences of the loss of oil revenues for South Sudan. While the oil was flowing, it accounted for 98% of government revenue and more than 70% of GDP. “From August, average income from oil sold at $80 a barrel, which produced about $600m a month if everything went well,” says the minister of finance, Kosti Manibe Ngai. “We’re probably losing roughly $500m a month from the shutdown.”

Currency pressure

In a leaked memo made public by the Sudan Tribune in March 2012, Marcelo Giugale, director of economic policy and poverty reduction programmes for Africa at the World Bank, said that his organisation had “never seen a situation as dramatic as that faced by South Sudan”.

Mr Giugale said the oil shutdown would put “catastrophic pressure” on the South Sudanese pound, the currency would “almost certainly collapse” and there would be an “exponential” rise in inflation. Once the government runs out of money “state collapse becomes a real possibility”, he said – an eventuality that he foresaw would transpire in July, or at best October.

In South Sudan's capital, Juba, Mr Giugale’s report was viewed with scepticism. The memo, which prior to being leaked was presented to South Sudan’s president, Salva Kiir, and to the country’s key bilateral donors, was probably designed to warn off Juba from expecting a bail-out from the international community. “He was overdramatic,” says one senior international banker in Juba. “The good news is that there’s no economy to fall apart.” 

But many of the ill effects of which Mr Giugale warned are already in evidence. In the first five months of the year, the value of the local currency on the parallel market fell from SS£3.3 to the dollar to SS£5.5. In May, year-on-year inflation reached 80%, before easing to 61% in July. The Bank of South Sudan has cut the supply of US dollars to the market from $200m a month to $100m a month. 

“The Bank of South Sudan is not using its foreign reserves to manage the exchange rate, but to ensure that certain strategic commodities, such as fuel and medicine, will continue to be available,” says Mr Manibe. 

South Sudan’s dependence on foreign imports means that the shortage of dollars has an impact throughout the economy. “The private sector is operating at 30% to 40% capacity at the moment because of the shortage in hard currency,” says Paul Gitahi, executive director of the South Sudan arm of Kenya’s Equity Bank. 

South Sudan held hostage to oil fortune Table

Budget boundaries

The favourite topic of conversation in Juba is when the government is going to run out of money. The current street wisdom is that it will be October, but analysts believe the government can hobble on for several months. The 2012/13 budget includes SS£1.2bn in government reserves – all of which will be exhausted during the coming financial year, according to finance ministry officials. In fact, such a sum would barely cover a month’s expenditure. “It needs about $300m a month just to tick over,” says the senior banker.

It is widely assumed that the government has additional reserves of funding – perhaps held personally by government officials, perhaps held in other government accounts – but their true extent is unclear. “The level of foreign exchange reserves is a state secret,” says the senior banker. 

The government is cutting spending wherever it can. With the exception of certain key projects, all civil works and construction not funded by grants or loans is to be halted, along with all rehabilitation work. Government salaries have been ring-fenced, but overtime and additional incentives have been removed, and housing benefits halved.

The budget also envisages a dramatic increase in non-oil revenues, which the government aims to almost triple, from SS£300m in 2011/12 to SS£867m in 2012/13. The bulk of the increase is to come from customs and excise receipts, which it plans to increase to SS£300m in 2012/13, from about SS£67m in 2011/12, and VAT receipts, which it hopes will reach SS£220m, from SS£40m last year.

The government has already had some success in raising tax and customs income. Monthly non-oil revenue increased from less than SS£20m in July 2011 to almost SS£55m in April 2012. But cuts to government spending will ultimately result in a reduction in private consumption and corporate investment, which will in turn hit VAT and corporate tax receipts.

Loans drive

The government also plans to raise SS£4.7bn from domestic and foreign loans and oil and gas concessions. Borrowing from local private banks is a “good initiative”, says Mr Gitahi, as it will mobilise money in the banking system that is “currently lying dormant at the central bank”.

But raising debt funding will not be easy. “It is extremely difficult to find external finance because they have no credit rating,” says the senior banker. “It can’t sell oil upfront, and it can’t use it as collateral because it doesn’t exist yet in banking terms.” The licensing of new oil and gas acreage is also unlikely to happen quickly.

Donor finance will be crucial. In early September, Garang Diing Akuong, the commerce minister, announced that Qatar National Bank had agreed to provide $100m in hard currency to fund imports, prompting a strengthening of the local currency to SS£4.3 to the dollar. “It can get loans from friendly countries, such as Qatar, Angola and – potentially – China, which will allow it to tick over for the rest of the year, and it has foreign reserves that might last another four to five months,” says the banker.

Oil deal sealed

Analysts in Juba are hopeful that the government can string out its finances until a deal is reached with Khartoum on the resumption of oil supplies. But time is running out if the revenues from such a deal are to reach the treasury before it runs out of money. The energy ministry has indicated that it will take up to six months for production to resume on its oilfields in Upper Nile state, and up to a year to start production in Unity state.

In early August, the governments of the two Sudans reached a provisional deal on pipeline transit prices. The agreement envisages South Sudan paying between $7 and $10 a barrel to use the two export pipelines, in addition to a payment of $3.2bn to Khartoum over a three-year period as compensation for the oil resources and infrastructure it lost as a result of separation.

But the deal is contingent on the successful conclusion of a separate agreement on border security. Negotiations are under way in the Ethiopian capital, Addis Ababa, to reach a deal on the delineation of a demilitarised zone. South Sudan says it accepts the borders of the proposed zone “unconditionally”, but Khartoum has so far refused to do the same. “We have not given up on discussions with Khartoum, and if they succeed we can resume oil production in a matter of months,” says Mr Manibe.

In the meantime, South Sudan is doing its best to prepare for a future where it no longer has to depend on exporting its oil via the north. The government has drawn up plans for three possible oil export routes. Those favoured by the government are from Upper Nile state via Ethiopia to Djibouti and from Unity state to Lamu in Kenya, says Mr Manibe, and construction will take “three to four years”.

Japan’s Toyota Tsusho, a trading company part-owned by the carmaker, has completed technical feasibility studies of the Lamu route, and a similar study is planned for the Djibouti option. But local industry sources are sceptical that the government is capable of raising the $3bn in funding that would be required to bring either project to fruition.

Mr Manibe insists that revenues from the resumption of oil exports “do not factor” in South Sudan’s budget calculations. But the assumption among independent observers is that exports will resume eventually, simply because they have to. “It is no longer in the interests of either country to continue the standoff,” says the banker. “More importantly, South Sudan has achieved what it wanted politically.”

Was this article helpful?

Thank you for your feedback!

Read more about:  Reports , Africa , Sudan