Conflict, corruption and too many failed businesses left it with a sclerotic banking sector with little appetite for risk, but South Sudan hopes its status as a newly created nation state will encourage investors to rethink their approach to an economy that hopes to underpin its regeneration with its rich reserves of oil.

The referendum on the secession of the south of Sudan earlier this year resulted in an overwhelming vote in favour of separation. More than 99% of registered voters cast their ballot between January 9 and January 15, and just under 99% of those voted in favour of the creation of a new state.

Secession will formally take place on July 9 and plans are now being developed to create a central bank and launch a new currency in South Sudan. Initially, however, the priority will be to address the more fundamental economic challenge.

The world’s youngest nation will immediately become one of its poorest. According to a World Bank report in September 2010, 85% of the population of South Sudan lives below the poverty line. Infrastructure is severely lacking: only a tiny fraction of the country’s roads are paved; electricity, where it is available at all, is produced from small-scale generators; the provision of drinking water is left largely to the labour of women, children and donkeys; sanitation facilities are scarce and waste disposal almost non-existent.

Banking deficiencies

It is no surprise, then, that South Sudan lacks a banking system worthy of the name. The majority of people do not have bank accounts, there are only a handful of ATMs in the whole country – none of which take international cards – and credit cards cannot be used. Foreign visitors to the country have to ensure they bring enough US dollars for the duration of their stay, and most change them on the black market.

Coming up with a plan to ensure the stability and economic development of the new country is a pressing priority. The Government of South Sudan (GoSS), created as a semi-autonomous body under the Comprehensive Peace Agreement that brought a formal end to the civil war with the north in 2005, has just five months to create an institutional, legal and policy framework on which South Sudan’s future will depend.

At the same time, it must reach an agreement with Khartoum on the sharing of Sudan’s oil resources and its international debt. An estimated 75% of the country’s oil production – and known reserves – lie in the south, but all the export and refining infrastructure is in the north. A number of oil fields are in territory whose ownership is disputed by north and south; others straddle the border.

The Juba-based GoSS claims that it has a right to ownership of the country’s oil and gas infrastructure, because it was built with revenues from oil extracted largely from territory in the south. However, it is prepared to compromise, says David Deng Athorbei, South Sudan's minister of finance and economic planning: “We have to give the north something from the oil, because we don’t want it to collapse: instability in the north is not in our interests.”

Sovereign debt worries  

The debt issue is potentially more problematic. Sudan’s total external debt amounted to $35.7bn at the end of 2009, including more than $30bn in arrears, according to the World Bank and International Monetary Fund; it is now estimated to be in the region of $38bn. According to Elijah Malok Aleng, the head of the Bank of South Sudan, the Juba arm of Sudan’s Khartoum-based central bank, the debt should be written off: “As we are parting ways without violence, we hope that most of it will be waived. Let it be a gift for the sake of the people of the two Sudans.”

If the debt is not waived, South Sudan’s share of the burden will become a question not only of its negotiations with the north, but also of its eligibility for debt relief. One Juba-based economist says: “The question is: If a part of a country that is eligible for debt relief secedes, is it automatically eligible? There is no precedent. If it is eligible, is it sufficiently indebted to qualify? If [South Sudan has] to pay off its debts, it would absorb a fair amount of its oil windfall.”

In the meantime, the new government is pressing ahead with plans for the development of a financial sector. Preparations for the introduction of a new currency are well advanced, says Mr Athorbei: “It has already been designed. It will be called the South Sudanese pound. It will be ready for printing soon, and will be ready for issue after independence.”

The de-linking of the south’s currency from the current national currency of Sudan, the Sudanese pound, is likely to be a gradual one. “It will be introduced according to a timetable that will be agreed with Khartoum – there will need to be a transition period,” says Mr Athorbei. “It will take some time,” adds Mr Aleng. “How long depends on political considerations, and how immediately we separate from the north in terms of economic links, which will be a long process.”

The new currency will need to be carefully managed. “The south will have very volatile terms of trade,” says Mr Aleng. “A big chunk of its imports will be food, the price of which is at an all-time high, while almost all exports will be of oil, which is also volatile.” The country’s dependence on its neighbours is also a source of currency risk. “We are at our weakest point at the moment, because we buy most of our goods from east Africa, so volatility in the region will also affect us,” says Mr Aleng.

Options to peg the new currency to the Sudanese pound during the transitional period are being considered, as is the introduction of a peg to the US dollar, say sources close to the government. This is a decision that will not be taken in haste. “The value of the currency will be tied to the level of reserves, so there’s no point talking about a peg yet,” says Mr Aleng.

He is confident that the currency can be managed through the judicious use of monetary policy. “The currency per se is not an issue. It is what support it has in the treasury that is important,” he says. “There are a host of ways in which you can influence the value of the currency, including monetary tools, such as interest rates.”

Weak banking sector

However, the poorly developed state of the banking sector will mean that monetary tools have limited effect, at least in the early years. Several banks are present in the market, but their performance has been mixed and their appetite to lend is weak. The local Nile Commercial Bank, created in 2003 through the sale of shares to the general public, has fallen foul of bad debts, many of them to civil servants and government officials who saw the bank as an easy source of cash, according to economic sources in Juba. Periodic injections of capital from the government have failed to keep the bank afloat. Other local banks have also struggled. Ivory Bank shifted its headquarters from Khartoum to Juba in 2009, but the move was accompanied by a warning from Mr Aleng that the bank must deal with unpaid debts on its balance sheet before any further deals can be made.

Three overseas banks have fared better. Kenya Commercial Bank (KCB) was established in South Sudan in 2005 and now has 15 branches across the country. It plans to expand its network to 19 by June 2011, and to have a total of 30 branches by 2015, along with increasing its customer base from 10,000 to 100,000. Equity Bank, also from Kenya, entered the South Sudanese market in 2008 and now has two branches in Juba and another in Yei. Further branches are planned in Wau, Kaya, Nimule and Malakal. Commercial Bank of Ethiopia, the latest entrant, began operations in 2009.

Even these banks, though, provide only a limited range of services, and lending is negligible. “Banking in South Sudan is difficult for reasons that have nothing to do with normal business practice,” says one Juba-based businessman. “Banks do not give loans easily because they consider South Sudan a high-risk area, which makes me wonder why they ever operate here. .”

Fresh regulations 

Plans for the establishment of the Central Bank of South Sudan, which will regulate the sector, are progressing. “The Bank of South Sudan will become the central bank,” says Mr Athorbei. “Regulations are being prepared to establish the new institution. It will have a role in the provision of debt, but it will be limited.”

The central bank will hold at least 20% of total deposits from the country’s banks, says Mr Aleng, and will have a degree of independence from the government. “It will be an independent bank, with control over monetary policy. Of course, we will co-operate with the ministry of finance, because fiscal policy will be determined by the government.”

The hope is that following the creation of the new South Sudanese state, companies will have more appetite to do business with the country, and banks will have more appetite to lend. From such a low base, it will be a long process. Mr Aleng, though, is realistic. “You have to start somewhere,” he says. “You can’t go to university without first going to primary school.”


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