Second Review Under the 2009–10 Staff-Monitored Program —Staff Report; Staff Supplement; and Statement by the Executive Director for Sudan

Situation Report
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Political uncertainties ahead of the January 2011 South Sudan referendum on self-determination have been weighing heavily on the Sudanese economy, adding to the adverse effects of the global crisis in 2009. Economic growth in 2010 is projected to decelerate to about 5 percent. Average inflation is projected to remain at 11 percent.

Fiscal and monetary policies were noticeably tightened starting the second half of 2010. Shortfalls in both tax revenues and oil receipts were more than offset with notable underexecution in both capital and current expenditures. Monetary policy remained expansionary in the first half of 2010, but was tightened starting in July. The central bank recently undertook an exchange rate depreciation of about 19 percent.

Staff recommendations

  • Tighten the monetary stance to reduce pressures on inflation and the exchange rate.

  • Increase exchange rate flexibility in order to rebuild foreign exchange reserves.

  • Enhance non-oil revenue and streamline expenditures in order to maintain macroeconomic stability and reduce dependence on oil revenues.

  • Continue to strengthen the financial sector, including by improving banking supervision and restructuring the Omdurman National Bank.

  • Initiate a dialogue with creditors with the aim of establishing wide support for arrears clearance and debt relief.

Authorities’ views

  • The reduction of the fiscal deficit will be achieved through broadening the revenue base by reducing tax exemptions and improving administration, and reducing spending.

  • Building up foreign exchange reserves is important and a cautious monetary policy is needed to achieve this objective.

  • Progress on debt relief, under the HIPC initiative, is essential to remove the debt overhang and regain access to concessional financing for development and social projects.

  • Various policy options are being assessed to address the significant challenges posed by a possible independence of the South in 2011. While the full implications of the referendum will only be clear in the coming months, the impact on the macroeconomic framework for Sudan will be large in many dimensions. Staff is following developments in consultation with the authorities and will update the analysis and policy recommendations in light of new information.