Sudan’s Unceasing Secession Tendencies

Months after reaching agreement with Khartoum on detailed implementation of its 2-year old independence, oil producing South Sudan, which provided two-thirds of hard currency earnings and half of budget revenue, splintered again into tribal and leadership conflict between loyalists to the president and vice president as neighbors tried to mediate and the UN mission added thousands of troops. China, the biggest petroleum importer, pledged to work with Europe, the US and Gulf states toward a solution as the al-Bashir regime still under international indictment for war crimes marked 25 years in power with the economy in tatters and relief elusive on the $45 billon external debt mostly in arrears. It aims to restart a staff-monitored program with the IMF, which estimates 2 percent GDP growth in 2013 on 30 percent inflation and a chronic fiscal gap reflecting staple subsidies and meager tax collection. Its latest Article IV consultation criticized a 20 percent public salary hike and fuel transfers “disproportionately benefiting the rich” as the flagship state telephone company banned the internet and went bust. The security apparatus already takes around 70 percent of the budget to fight dissidents and rebel groups, and military elements in the government advocate greater spending. Arab Spring-like street unrest against higher living costs met with harsh response and peaceful opposition interests have been quashed. External credit lines to import food are scarce and domestic Islamic bond issuance to banks to cover borrowing has experienced repayment delays and defaults. The multi-tier exchange rate arrangement is in temporary violation of Fund provisions with the South’s breakaway, with only a fraction of remittances routed through formal channels. The currency is overvalued and foreign reserves are inadequate, as it recommends immediate flexibility and unification which authorities challenge. Islamic banks represent over 95 percent of the financial sector, with the rest insurance and micro-lending. Capital adequacy is under the 12 percent standard, with private credit just 12 percent of GDP. The Khartoum Stock Exchange operates under old legal and regulatory structures and equity trading is scant. High-yield government musharaka certificates tend to displace alternatives, and 15 micro-finance units must rely on wholesale funding.

Secondary debt prices have corrected after a post-independence rally posing the chance for sanctions removal and arrears clearance. An initial deadline for reaching the HIPC decision point was set for later this year which could trigger official forgiveness but will likely be extended. Non-concessional borrowing from Chinese and other providers has typically been project-tied and came to almost $300 million in the first half of 2013. Beijing’s infrastructure footprint on the continent was recently supplemented by a Japanese aid thrust during a swing to selected capitals by Prime Minister Abe. Amid the fallout in Juba, Kenyan officials plan to go ahead with a maiden sovereign bond at the same time they host negotiations between the battling parties and deal with Horn of Africa security blows.