Fiscal Austerity and #SudanRevolts

Compiled By:  @al_loya

In the below article, I’ve tried to compile a number of tweets by Yousif ElMahdi on Sudan’s Economy ,why ‘Fiscal Austerity’ is a sham and how this relates to #SudanRevolts.

Oil Revenue Plundered

The Government of Sudan’s share of oil revenue from 1999-2011 brought in a total of around $60bn-$80bn, that’s $5bn-$7bn a year from oil alone.

Oil represented around 65% of Sudan’s total revenue (the majority of the other 35% was taxes) and represented around 90-95% of its exports.

Agriculture, which receives just 3% of total expenditure, accounted for less than 5% of total exports. This in a country where 80% of rural populations are engaged in agriculture as their primary source of income, and in a country which pre-oil, was fully agriculture dependent. For example, in 1988 Sudan’s total revenue was only around $700m, mostly from agriculture; yet it had a social welfare system.

The NCP removed social welfare in spite of $5bn/year accrued from oil, plus other income sources that brought total revenue close to $10bn/year. It spends just 2.4% and 2.3% of total expenditure on health and education respectively. This is justified by the NCP’s transfer of responsibility for social service provision to States. Yet these States have minimal, if any, income and receive federal transfers based on patronage.

The result is that Sudan’s Human Development Index is lowest of all MENA and Arab League countries and a reprehensible 169 of 187 overall. It is therefore not surprising that poverty is widespread and grows more acute. Estimates based on the 2009 household baseline survey put 46.5% of Sudan’s population and 57.6% in rural areas below the poverty line. In my opinion this figure is distorted. The poverty survey set a poverty line of 3.8 SDG a day for minimum consumption of food and non-food items. That means the 46.5% earn less than 3.8 SDG/day but in reality that amount won’t even purchase one meal. The threshold should have been much higher and hence the numbers are underestimated.

The NCP shows off the dams, bridges and other infrastructure its constructed over the years as major achievements but these were built on loans from Arab Funds and China, not from oil. The Sudanese people will have to pay off these loans.

The point is, NCP didn’t spend on infrastructure, social services or agriculture. They plundered $60bn-$80bn in oil revenues. Now that these revenues have stopped, they need us to subsidize them so they can sustain their wars, corruption and lavish and unproductive expenses. Sudan had an Oil Stabilization Account (OSA) designed to save oil earnings above annual projections (as a result of unanticipated increases in world oil prices) for a rainy day such as this. True to form the OSA was completely depleted without recourse to its rules of inception and outside of the budget (unrecorded).

‘Fiscal Austerity’

This is what fiscal austerity is all about. The NCP can’t and won’t cut unsustainable expenditure; spending that doesn’t trickle down to the people anyway, so they tax us. The cuts they’ve announced are cosmetic. Wages and salaries accounted for 49% of their total spending in the now defaulted 2012 budget, of that 88% was for security and political sector staff alone. Those two sectors alone account for 82% of total national spending. Cutting a few advisors does not reduce that figure, it is cosmetic and for the sake of propaganda. To get rid of that level of spending you would need deep-seated restructuring. To do that you need two things:

  1. Downsize the entire security sector by canceling the Popular Defense Forces (Jihadists) and all other illegal militias while limiting NISS to fulfilling the intelligence role stipulated in the constitution. They won’t do that because rather than remain in power through prudent spending and emphasis on development, they choose to remain through force.
  2. Reconfigure the monstrous federal, state and locality organizational hierarchy. The myriad of states and localities in Sudan receive very little funding anyway and whatever they do receive goes to Wages and Salaries with little left to actually do any work. However they won’t do that, because this patronage based and wasteful divide and rule administrative configuration keeps them in power.

As I was saying, there has not been any sufficient contraction in expenditure (cosmetic) that would be required for fiscal austerity to work. Instead they are attempting to focus on the revenue-side. But without economic diversification, subsidization by the public (taxes) remains their preferred option, an option that has been exhausted to its limit.

These measures are regressive, burdening the poor through removal of subsidies on essential commodities and increasing value added on food and basic items. The tax base could have been widened while protecting the poor, for example through increases in business profit tax increases.

In addition to taxing the public, they continue to borrow heavily; from the banking sector, the public sector and central bank. This is mainly through bonds that they cannot afford. This type of borrowing erodes the share of the private sector in financing because banks prefer the lucrative government bonds (high interest). To finance these costly loans, the government prints money.

The devaluation of the currency also results in more money being printed. The Balance of Payments took pummeling by secession and Higlig. You really would have expected a devaluation to come sooner. While they still had significant oil revenues devaluation would have promoted productive sector exports if supported by oil-financed investment in agriculture and agro-industry. They didn’t and they insisted on the over-valued exchange rate which following the loss of oil exports caused loss of foreign reserves (less than a month of imports, if that), a premium in parallel market and foreign exchange rations.

Devaluation now without a continuous “drip” of foreign exchange means they will continue to print money to generate liquidity, so hyperinflation will kick in while the parallel market devalues further.

Inflation

Inflation is the game-changer for #Sudanrevolts. In May official annual inflation was 30.4%. This is underreported. Annual inflation isn’t monthly; it compares prices in the month with prices of commensurate items during the same month of the previous year. Do we really think prices were only 30.4% higher in May 2012 than a year ago? My own prediction is that inflation is closer to 100% – think about how much you paid for your food and essentials last year and compare that to what you pay for them now (if you can still afford them).

The underreporting of inflation is for political purposes, it’s done to avoid the kind of reaction that has manifested with #Sudanrevolts. This discounts the fact that people don’t need figures to realize their cost of living is spiraling out of control. And by the way, 30.4% is in itself very high, inflation ranged between 11.3% – 18.1% between 2008 and 2011.

In addition to the printing of money, inflation is driven by increased food prices. Lack of investment in agriculture means Sudan does not produce enough to feed itself, let alone export. 24% of total imports are of food, the cost of which is inevitably affected by the exchange rate pass-through from the devaluation. Even a protective exchange rate for food items is insufficient given the lack of availability and restricted access to official foreign exchange – importers are reliant on the parallel market.

Inflation is worst in the states. For example in North Darfur it’s 46% and so inflation is disproportionately felt by the poor. Most (not just the poor) have reached breaking point when you consider 30.4% inflation in May (albeit underreported) is to be compounded by even more expensive food imports (devaluation), and the removal of subsidies and increased costs of production from fuel increases associated with the fiscal austerity measures.

Fuel Subsidy Removal or Fuel Price Increase?

Notice I said fuel increase not subsidy removal. Sudan is an oil producer. Even after the split we still have enough oil to satisfy our consumption. Oil produced in Baleela, Fula, etc. is used for local consumption due to its reduced quality/low export price. Production in these oilfields makes up around 70% of domestic needs. Before the fiscal austerity fuel increases, this oil was sold to local refineries at $49/barrel. That’s a $49/barrel profit for the Government of Sudan.

There is no loss involved in this transaction. It is correct that world prices are currently around $85/barrel but definitely not for Baleela/Fula quality oil, yet there would still be an opportunity cost. This is called an ‘implicit’ subsidy, no money is paid out to cover the cost (no cost involved) but some profit is foregone. Fiscal austerity is designed to make that extra profit, even though new local fuel price is likely higher than the international price for such limited quality blends.

Where there is an “explicit” subsidy is in filling the 30% consumption gap. This is by choice. Higlig (Nile Blend) is top quality ($85/barrel) and exclusively exported to maximize profits. GoS could use some of the Higlig produce to plug the gap, instead they choose to import a lower quality blend (lower price) to plug the consumption gap and reserve Higlig produce for export. The imported 30% is what is subsidized to match the $49/barrel local price – they used to cover difference – by choice.

So they basically removed a 30% subsidy and conned us on the rest. They make more profit now through local consumption of Baleela/Fula produce then they would exporting it; hence it should be called a fuel increase (not subsidy removal). The premise they’ve used means they should be reducing the price of fuel when the world price goes down but we all know how likely that is.

Solutions and Current Outlook

In summary fiscal austerity is the result of economic mismanagement, it’s not being done correctly and could have been avoided altogether. The solution to the economic crisis is solving the political crisis. From the revenue side: (i) oil deal with South Sudan; (ii) diversification of economy; (iii) return of embezzled and off budget funds/assets; and (iv) HIPC for cancellation of Sudan’s $40 billion external debt (‘zero-option’ was agreed with Sudan taking on debt and South Sudan helping to lobby for its clearance, but significant progress has been stalled by reemergence of conflict in Three Areas) and to provide access to IFI concessional lending (Chinese loans are non-concessional and toxic). On the expenditure side: (i) end unwanted costly wars ($4m/day); (ii) security and administrative restructuring.

The issue with all these reforms is that they require political will that the NCP lacks. These measures are all interrelated and achievable so long as you have a politically willing regime in place. The NCP is not that regime since Sudan’s crises are of their own making, designed to sustain power. Given this reality regime change is inevitable with Sudan heading down an unsustainable path both politically and economically. The current outlook is dire.

The IMF projects 7.2% contraction in 2012 and 13% decrease in GDP over this 3 year cycle (2011-13). It predicts that surplus GDP of 2.1% in 2011 will turn into deficits of 4.6% in 2012 and 4.2% in 2013 (approximately 7% negative GDP swing). These projections from the IMF assume modest policy response moving forward. That means that if projections were based on the current ‘status quo’ situation they would be even worse. For the record, fiscal austerity is considered by the IMF to be a positive policy response measure but one that can be counterproductive in the absence of a broader package of reform.

This post was originally published in Rhapsodic Stanza, read it here.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s