South Sudan must urgently address the issue of peace and political inclusion to set the basis for growth and development, the International Monetary Fund (IMF) Executive Board has advised on conclusion of the Fund’s consultation with authorities in the country.
The Directors noted that South Sudan faces formidable near-term challenges from the ongoing civil war, volatile relations with Sudan, large swings in oil production and prices, and weak institutions and governance.
“Against this background, Directors underscored the urgent need for measures to address fiscal imbalances, including exchange rate unification, and stressed the importance of peace and political inclusion to set the basis for growth and development,” the IMF said in a statement it issued Thursday.
South Sudan is a fragile state with acute challenges since it became an independent state in 2011. While its institution building and development have been hindered by volatile relations with Sudan, its woes have increased with a 15-month shutdown of oil production, and more recently, a civil conflict.
Although rich in natural resources, the economy is centred on oil production and subsistence agriculture, with almost all consumer goods being imported.
According to the IMF, South Sudan’s economic performance has been mixed in recent years. Real Gross Domestic Product (GDP) growth has displayed high volatility as a result of changes in oil and agricultural production.
“Inflation rose in an initial period of economic instability in 2011-12 but was contained in 2013-14 thanks to fiscal and monetary restraint and lower food prices,” said the IMF statement.
“However,” the Fund pointed out, “serious challenges remain, including distortions in the foreign exchange market and in budget execution, lower international oil prices, and subdued oil production.
“As a result, financing the budget for 2014/15 is challenging and will likely require policy decisions given the otherwise potentially adverse impact on economic stability and inflation.”
The IMF staff appraisal indicated that the medium-term outlook could be promising, but there are serious risks.
“Assuming peace, regional cooperation, and economic reforms, oil production could increase in coming years and the potential for other mining and non-oil activities (especially agriculture and forestry) could be unlocked, leading to strong GDP growth and allowing for investments in social sectors and the public infrastructure,” the staff reported.
However, the report said there were several risks on the horizon, including unresolved political and security issues, continued governance problems, and insufficient progress on critical economic reforms.
Against this background, the IMF Directors agreed that reduced oil revenues and lack of room for public expenditure cuts call for policy actions on a variety of fronts to close the financing gap in the fiscal accounts and restore macroeconomic stability.
They supported the authorities’ intentions to mobilise non-oil revenue, and emphasised the importance of improving expenditure management and preventing domestic arrears, primarily through the enforcement of monthly budget allocations, a strict control of extra-budgetary expenditures, and steps to set up a single treasury account.
In addition, the Directors cautioned against increased central-bank financing of the fiscal deficit, which would fuel inflation and further weaken the local currency.
In their view, exchange rate unification would significantly reduce the fiscal imbalance, remove incentives for corruption, and improve price signals to favour private investment and non-oil economic activities.
“Directors underscored the need to unify the exchange rate and adopt a market-based system for allocating foreign exchange,” the statement said, noting that an adjustment in the exchange rate peg to a realistic level would also help stem foreign reserve losses.
While urging the authorities to remove the multiple currency practices and exchange restrictions as soon as possible, the Directors stressed the urgency of improving transparency and accountability in the management of mineral resources, government expenditures, and central bank operations.
They encouraged the authorities to enact the Petroleum Revenue Management Act, and called for the implementation of recommendations from the 2012 audit of the central bank and the wide dissemination of oil, fiscal, and financial data.
Directors emphasised that South Sudan priorities include restoring depleted reserve buffers, reorienting public spending toward social sectors and infrastructure, implementing public financial management legislation, and addressing the legacy of war.
“These tasks will require strong leadership and cooperation from the international community, including continued technical assistance,” they said..