Diversification: The Key to Unleashing Sudan’s Economic Potential?

Sudan holds tremendous potential, much of it unrealized due to long-running conflict and governance challenges.

Alula Berhe

Diversifying the economy, increasing agricultural productivity, and building human capital are important factors that will help ensure a promising future for Sudan’s rising generations.
Sudan’s economy lags behind many countries in attaining structural change through high productivity sectors such as manufacturing and non-traditional services sectors, according to the World Bank’s latest Country Economic Memorandum (CEM).
A retrospective review, the report entitled Realizing the Potential for Diversified Development, shows that Sudan’s economy has undergone three distinct periods of varying economic growth between 1988 and 2013.  Between 1989 and 1997, Sudan’s gross domestic product (GDP) averaged 4.9 percentage points, mainly due to growing labor and total factor productivity (TFP).  Between 1998 and 2007, GDP growth picked up the pace and economic activity increased by 6.1 percentage points due to the advent of oil revenue; in the “oil economy”, physical capital became the major driver of the country’s economy. However, the oil economy started to decline in 2008 where negative TFP growth set in. This was compounded by the secession of South Sudan in 2011, which resulted in the loss of the majority of oil reserves and related fiscal revenues and dealt a heavy blow to Sudan’s economy.
In sum, the CEM finds that there is a case for Sudan to approach growth through diversification from two angles: the production and the endowment base, both of which rely on the effective utilization of key institutions. Taken together the direct and indirect approach define a coherent way for Sudan to diversify that takes into consideration the current and future sectoral structure of the economy, existing sectoral policies of the Government, as well as the need for long-term institution building as a foundation for diversification through broadening the national endowment base.
“The loss of major oil reserves has had a significant impact on the economy,” said Michael Geiger, Senior Economist and lead author of the report. “Oil accounted for 75% of Sudan’s foreign currency earnings which at its peak in 2008 was around $8.3 billion.”
To increase growth, the report recommends economic diversification through the broadening of its endowment base, which is the country’s foundation to pursue efficient economic opportunities, and increasing productivity particularly in agriculture. Economic diversification was already important during the years of the “oil economy” between 1999 and 2011, but it is even more important now that the country is in need of alternative sources of foreign exchange earnings through exports.
“It is essential that Sudan undertakes a broad set of reforms so as to successfully diversify its economy,” said Xavier Furtado, World Bank Country Representative for Sudan. “This includes exchange rate reforms as well as ensuring a key role for the agriculture sector, which suffers from under-investment and very low yields, yet holds so much potential,” he added.
The report notes that economies with successful diversification endeavors have three things in common: the ability to manage natural resource rents, provide public services, and create a business enabling environment. Sudan has major weaknesses in all these areas, which are often complicated by conflict, fragility, and lack of clarity in the assignment of responsibilities in a decentralized public administration. The report also emphasizes the need for a sectoral focus, as agriculture is expected to pay a bigger role in the country’s economy in the foreseeable future in the absence of dominant resource-based exports.
Major findings of the report indicate that with no lasting structural change, the contribution of higher productivity economic activities will remain marginal and it will be difficult to achieve enough growth momentum in the country to reduce poverty. High, and volatile inflation, budget deficits and low savings brought on by the dramatic decline of oil revenues have also been identified as key challenges. The report argues that Sudan’s real exchange rate (RER) has been greatly overvalued for most of the past 40 years with detrimental effects on competitiveness and export sectors.
Sudan’s export markets are found to be highly concentrated as evidenced in large shares of the country’s top export items. There is hope however that the relatively low degree of concentration for non-oil products is a sign that the country already started to diversify its non-oil (export) products after the cessation of South Sudan. The report makes the following five policy recommendations for Sudan to make use of its potential for diversified growth and development:
Remove exchange restrictions to unify official and black-market rates and enhance policy consistency. Given the ever-changing black market rate and the earlier attempts in 2012 and 2013, gradual but ongoing devaluation may be the approach of choice for Sudan.
Increase agriculture productivity through a set of key (policy) changes in the areas of centralized markets, subsidies, and the promotion of fertilizer usage.
Improve the management of natural resource rents through strengthening institutions for diversification and rethinking the role of natural resource exploration in the economy.
Address broader business constraints to create space for structural transformation. There is a need to improve the regulatory framework for economic activity particularly to facilitate the development of an agro-processing and light manufacturing sector.
Build human capital to support skills-intensive modern services and reduce spatial disparities, especially by increasing education levels across the board to address the lack of an educated workforce in Sudan.
Sudan holds tremendous potential, much of it unrealized due to long-running conflict and governance challenges. Some of this potential was realized in earlier decades, (including during early industrialization) in large scale irrigation in support of food and export crop agriculture, and in investments from recent natural resources discoveries. Once the largest country in Africa, even in its diminished state Sudan holds the potential to be an economic powerhouse. It sits at the crossroads of sub-Saharan Africa and the Middle East, with fertile lands and abundant livestock, and
some remaining natural resources (oil and gold), which make it the third largest economy in North Africa (after Egypt and Morocco) and the largest economy in the greater eastern Africa region. The consolidation of peace in Sudan has the potential to positively impact peace and development in the region, especially in the Nile River Basin, South Sudan, and the Sahel.
From an economic perspective, Sudan’s ongoing debt crisis that dates back to the 1980s is truly unsustainable. Sudan’s debt crisis in the 1980s started with the Government’s inability to service its debt service obligations, which in turn led to an unprecedented increase in arrears. This is a key feature of Sudan’s striking debt burden up to the present, where 85 percent of Sudan’s debt is in arrears. Both domestic and external causes for the debt crisis are widely recognized (Rahman 1995; and Ahmed 2008), including the global recessions of the 1970s and 80s due to the oil price shocks, an overvalued exchange rate and insufficient debt management capabilities within the government.
The sectoral structure of Sudan’s economy shows the growing importance of agriculture, less importance of extractives, and relative stability of other sectors (manufacturing, services) by 2030. The simulations also show that the strongest growth rates are from sectors that are capable of producing internationally competitive tradables. Simulations suggest that in the absence of dominant resource-based exports, growth must be centered on sectors producing tradables that are exported and/ or replace imports. Therefore a sectoral focus of this CEM is to examine agriculture and trade of goods and services as a means to grow the endowments base of the country.
Looking forward, a base scenario simulation suggests that the most likely growth outcome over the next 15 years is that Sudan’s economy will grow at around 4 percent annually. GDP at factor cost growth is above the growth rates for absorption (the sum of private and government consumption and investment) and private final demands (private [or household] consumption and private investment) due to export growth in excess of import growth, driven by real exchange rate depreciation. Among macro items, only government investment grows more rapidly than GDP, a reflection of that it starts at a very low level. This structural adjustment is needed to put an end to unsustainable foreign government borrowing, particularly at the backdrop of a projected decline in gold export prices.

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