The economy had recorded a strong growth pickup before the COVID-19 pandemic, with real GDP growth estimated at 9.3% in FY2019/20 but a contraction of -3.4% is projected in FY2020/21. Oil production was estimated at 62.1 million barrels in FY2019/20, representing a 26.5% increase from 49.1 million barrels realized in FY2018/19. However, oil production is expected to decline to 58.4 million barrels in FY20/21, as COVID-19 restrictions impacted movement of machinery and OPEC+ production cuts affected production. With COVID-19 restrictions delaying new investment, activity in the oil sector is not expected to improve until FY2022/23 when oil production is projected to rise to 60.2 million barrels. At the same time, the country has experienced concurrent shocks with floods, locust infestation, and higher subnational conflict intensity contributing to a dire economic outlook. Consequently, the economy is projected to contract by -3.4% in FY2020/21, driven by subdued economic activity in both oil and non-oil sectors. Beyond FY2020/21, recovery is predicated on the assumption of a rebound in the global economy (that will support higher oil prices, investment, and remittances), commitment to a credible reform process, sustainability of peace, and resilience to climatic shocks.
The oil sector continues to dominate, but recent price drops and delayed investment highlight the need to diversify sources of growth and revenue. South Sudan has the third largest proven crude oil reserves in Sub Saharan Africa with a reported 3.5 billion barrels. While current oil production is still about half of what it used to be before the conflict, the sector is estimated to account for more than one-third of GDP, 90% of central government revenue, and more than 95% of the country’s exports. For sustained and inclusive growth over the medium term, South Sudan should follow a diversification strategy meant to wean the country off the oil sector and build the resilience of the economy to future shocks. Investments in the agricultural sector provide low hanging fruits for such a diversification path.
Monetization of the fiscal deficit has led to a significant increase in inflation and exchange rate depreciation. Significant expansion of net claims on Government-led monetary expansion in the first half of 2020, with the monetary base expanding at a faster rate in the first half of 2020, more than at any time during 2019. This growth was led by large increases in net claims on government which nearly doubled to SSP 77 billion in June from SSP 35 billion in January 2020, and to SSP 141 billion in July 2020. This sustained expansion of Central Bank overdrafts to Government and associated monetary base expansion could partly explain rising inflation and developments in the foreign exchange rate markets with the SSP depreciating rapidly starting in the second half of 2020. At the same time, border restrictions instituted to control the spread of COVID-19 slowed the movement of trade goods into South Sudan with a resulting impact on prices across the country. With these developments, the cost of the national median Multi-Sectoral Minimum Expenditure Basket (MSSMEB) increased by about 18% between July and August, and 86% year-on-year.
The FY2019/20 budget deficit widened with large shortfalls in oil revenue. The FY2020 budget envisaged the government share from oil exports to increase to SSP 235.5 billion (32.5% of GDP) from SSP 198.2 billion (25.5% of GDP) realized in FY2019. However, with a plunge in oil prices, gross oil revenues are estimated to have turned out at SSP 201.1 billion (24.4% of GDP), representing a shortfall of about SSP 34.4 billion. Non-oil tax revenues were more resilient and are estimated at SSP 31.8 billion (3.8% of GDP) compared to SSP 29.9 billion (3.6% of GDP) that was budgeted. At the same time, expenditures turned out at an estimated SSP 289.4 billion (35% of GDP), lower than the budgeted SSP 311.5 billion (39.4% of GDP). This was due to under execution of the capital budget: it was expected to contribute a sizeable proportion of expenditure (14.8% of GDP) but only 3.0% was realized. Despite improvements in revenue and capital budget under execution, the overall cash balance is estimated to have widened to SSP 56.4 billion (6.8% of GDP) from the SSP 26.7 billion (3.2% of GDP) that was budgeted.
Budget planning and execution challenges have led to persistence of expenditure arrears. Poor budget execution has been exacerbated by lower revenue going into the budget with FY20 government spending on infrastructure and service delivery estimated to be lower than budget. Expenditure arrears continue to be a persistent and chronic problem in South Sudan and are a symptom of underlying weaknesses in the country’s public financial management. The authorities estimate cumulative outstanding obligations at the end of FY 2019/20 amounting to SSP 896 billion (108% of GDP) excluding salaries. In addition, total salary arrears were estimated at SSP 18.45 billion (2.2% of GDP) and outstanding obligations to foreign missions amounting to USD 1.63 billion (32% of GDP). Without an approved arrears management strategy, budget execution will continue to be a challenge in the medium term.
The FY21 budget seeks to stabilize the economy, provide basic services, consolidate peace, and address COVID-19 effects. The FY21 budget envisages a more balanced allocation of resources, with a significant reduction on anticipated security sector spending. Across sectors, the budget envisions a large allocation to infrastructure (23%), which is expected to absorb 85% of capital spending. The security sector is expected to absorb 8.4% of the budget while education has been allocated 10.3%; natural resources (including agriculture) 2.8%; and health 1.9%. The budget includes an allocation for the clearance of arrears both for central government and states, which is expected to absorb 10% of the budget. However, the budget is massively underfunded and the deficit in the FY21 is expected to rise to more than SSP 123 billion (13% of GDP) as both oil and non-oil revenues are expected to underperform.
South Sudan has suffered multiple shocks in 2020, potentially derailing an economic recovery and peace building process. The signing of the latest truce in September 2018 and subsequent formation of the Revitalized Transitional Government of National Unity (RTGoNU) in February 2020 had provided hope for recovery and peace building. However, the RTGoNU has had to deal with concurrent shocks with the COVID-19 pandemic, low oil prices, floods, and locust infestation drastically changing the economic outlook. At the same time, subnational conflict has intensified in parts of the country as the number of violent events and associated fatalities in the first half of the year surpassed 2019 levels. An escalation of intercommunal violence has left hundreds of people dead and many more displaced with humanitarian agencies forced to scale down operations.
IMF executive board approved USD 52.3 Million RCF disbursement to South Sudan. The IMF’s Executive Board approved a disbursement of USD 52.3 million to South Sudan under the Rapid Credit Facility on November 11, 2020. The disbursement is expected to help finance South Sudan contain the fiscal impact of the shock and will provide critical fiscal space to maintain poverty-reducing and growth-enhancing spending. The authorities indicated that the disbursement would be used to settle two months’ civil service salary arrears. This is the first IMF-supported financial assistance to South Sudan and is expected to play a catalytic role that will enable South Sudan to access a large pool of concessional financing. It is expected that the facility will be followed by a Staff Monitored Program.
Increased incidents of insecurity combined with COVID-19 related containment measures weighed heavily on already weak healthcare systems in the country. Severe underfunding and recurring cycles of conflict have resulted in a gap in healthcare infrastructure, inadequate healthcare provider motivation and effort, and significant shortages of qualified health care workers. At the same time, a resurgence of conflict and waterborne diseases left many people in need of healthcare assistance. However, the situation is dire with only 22% of health facilities fully functional and nearly 3.6 million people lacking access to health assistance. In the context of COVID-19 restrictions, healthcare delivery was constrained by access restrictions and capacity constraints. At the same time, delivering much needed lifesaving services is constrained by budget execution challenges. With these challenges South Sudan struggled to mount a credible health response at a scale that would be sufficient to save lives and protect livelihoods.
Jobs have been lost due to COVID-19, especially in non-farm self-employed activities, but the scale is limited. One in eight households (13%) report having lost all income from their main job activity at some point since the onset of the pandemic in early April. Losses have been largest among the roughly one in four households (23%) that depend primarily on non-farm self-employed business activities. Among these households, one in five have lost all income from their primary activity (20%). Household businesses mostly attributed their losses to a lack of demand (52%) and to usual places of business being closed (49%). Among market traders, one in seven (15%) report having lost their business, due to travel restrictions due to COVID-19 (33%), but also a broad range of other issues both related and unrelated to the pandemic. Hardly any businesses reported having closed permanently (0.3%), and very few remained temporarily closed as of end-June (5%). However, measuring permanent business closure is difficult, and businesses do report that they know a direct competitor who has gone out of business (47%), and that they considered closing at some point (35%). Activities in Juba seem to have been particularly affected, with higher loss of activity among market traders (31%), and more businesses considering closing (52%) and having competitors who closed (58%).
With widespread poverty and a history of shocks, households are looking to replace lost income opportunities. The real but limited extent to which activities have been lost may be expected, given that households and businesses have lived through many shocks, and that generating income is an immediate question of survival for many households. It is worth recalling that, since 2013, conflict led to the loss of primary activities for 47% of households, that 50% of businesses lost assets and 43% had to temporarily close. While the disruption due to COVID-19 is harmful, it is thus not unheard of. Respondents also reflect some early signs of recovery: while some traders had stopped their activities, respondents were about twice as likely to say that on balance, the number of traders in the market had increased since April than to say that it had decreased. Similarly, about one in five households that lost their main activity (22%) reported that they had started a new activity. Both market traders and businesses also report a modest increase in the number of workers they employ since April, although the rate of hiring has slowed substantially among businesses. Whether households and businesses will succeed in their efforts to replace lost activities will depend in significant part on whether prices stabilize and consumer demand recovers.
Market activity has reduced, and loss of revenue and income is pervasive. While few job activities have stopped outright, many respondents report losing income from their main activities. This is true of every other main household activity (52%), and of three in five market traders (59%). Traders who offer consumer commodities reported larger declines in revenue (a 35% drop at the median) than food traders (a 25% drop), consistent with temporary closures of non-food markets and a loss of consumer disposable income. Among businesses, four in five (81%) report a decrease, including 59% who say income has declined by half or more.
The main obstacles to business today are the same as what respondents expressed when surveyed in 2019, but they have tightened. When surveyed in mid-2019, households, market traders, and businesses consistently identified insecurity, bad roads, access to funding, and low demand as their main obstacles. They flagged the same constraints when re-surveyed now, but were likely to say that the constraints had become more difficult to navigate, perhaps with the exception of insecurity, where businesses were more likely to report an improvement (44%) than a deterioration (28%). Surveys in 2019 did not directly ask about inflation as an obstacle, while in 2020, inflation has become a very prominent concern – the third-most frequently cited obstacle among market traders, and the second-most frequently cited among businesses.
Sourcing goods has become more difficult but is rarely considered a key business obstacle. Border closures and movement restrictions have raised transport cost and slowed down sourcing. Among market traders who source agricultural products from Juba or abroad, 85% say buying supplies has become more difficult since the onset of the pandemic. At the same time, while traders mention poor availability of inputs (8%) and transport cost (13%) as obstacles, they give less prominence to them than to other constraints. Similarly, nearly four in five businesses (79%) say that since April, it has become more difficult to buy goods to re-sell or use as inputs. Yet, transport cost is mentioned frequently as an obstacle (12%), but less often than a lack of funds, high inflation, and low demand (only 2% mention poor availability of inputs).
Low market demand already posed an important obstacle before the pandemic, and it has further declined due to the crisis. Even before the pandemic, businesses of all sizes viewed constrained demand for goods and services as a key obstacle. Respondents across all three surveys agree that demand has further tightened. Among the households who were unable at some point during the pandemic to buy staple cereals (46% of all households), most say that this was due to a lack of funds (44%), rather than to traders being out of stock (7%) or price changes (11%).
Majorities of market traders explain that they have fewer customers on a typical market day (63%), and that customers buy less (60%). Businesses agree: most (73%) say that demand for their products has declined, and half (52%) say that it has dropped by half or more.
With the damage COVID-19 has wrought, effective support to job activities is more urgent than ever. Progress toward peace in 2019 went hand in hand with more optimism among businesses, greater activity in the markets, and opportunities for farmers to re-connect to markets. Sustainable growth requires deep reforms, but even in the short term, there are actions the Government and development partners can take that would yield real results for South Sudanese. Businesses at all levels – from small household activities to larger businesses – stress that efforts to limit inflation are decisive for them. Lower fees in markets and check points can also help lift a burden on business activities. Further, with low consumer demand, development partners can look to ramp up humanitarian purchases to create opportunities for farmers, and Government efforts to regularly pay public servants can do much to restore a customer base for market traders. Finally, direct support to cash-strapped households can help workers do better in self-employment and household business, first of all, in processing and trading food products.
The current crisis highlights urgent need for reform and it is critical that the nascent public financial management reforms succeed. While South Sudan is currently faced with an economic crisis, this crisis has also provided an opportunity to reflect on how the country can bounce back better, building on key milestones already achieved as part of the peace process. The authorities have accelerated dialogue on key reforms intended to cushion the economy amidst a double health and economic crisis. The current reform dialogue has centered on Public Financial Management Reforms. These include the formation of an oversight committee for Public Financial Management Reform Strategy (PFMRS) and its governance structures, as well as a technical committee on the economy whose role is to advise on ways to diversify both sources of growth and revenue. Given the necessity of these reforms, it is critical that they are supported to succeed and may have to be accompanied by wider economic management reforms in the medium term.