05 July 2011

Economic Prospects for the Republic of South Sudan

This post co-written with Abhijeet Singh and an anonymous third contributor

This coming Saturday, 9th July, the world's newest country will officially be born. What are the economic prospects for the new state? Will the new country be “economically viable” as a Western journalist smugly put it to Pagan Amum in London a couple of years ago? Now seems like a good time to take a look. 

The Economic State of Southern Sudan: A look at the Data 

Read almost any news article or NGO report on Southern Sudan and you will be sternly informed of the terrible situation in one of the poorest countries in the world. And yes, the challenges are real. Southern Sudan does indeed have some of the worst human development indicators in the world.

Only a third of the population above the age of six has ever attended school.

One in ten children don’t make it to their first birthday.

But it’s not all bad news.

The size of the economy in Southern Sudan is actually not all that small. There are not yet any official GDP estimates for the region, but two separate independent estimates, each using slightly different assumptions, put per capita GDP at around $1,300 (One from Ben Leo at CGD, another unpublished from an economist at an international organisation based in Juba). This is only slightly less than Northern Sudan, and puts Southern Sudan firmly in the lower-middle income category of states, similar to India, and richer than most other sub-Saharan African states. The government's annual budget, at the order of $250 per head, is substantially larger than the resources available to neighbouring Uganda, at only around $100 per head.

Whilst the economy as a whole is not that small right now, there is considerable uncertainty looking into the future. GDP relies incredibly heavily upon oil (which accounts for over 95% of the government budget). Most of the oil is located in the South, but it must be exported via the pipeline running through the North. Building a new pipeline heading South through Kenya is basically unaffordable. Greg Snyders estimates that the South will need to give the North 30% of their oil revenues to avert conflict. This is still a reduction from the present 50% which goes North, significantly increasing the resources available to GOSS. In addition to this uncertainty in the future oil-sharing agreement, there is uncertainty in future production (which has been estimated by industry consultants to have peaked, and to have declined by 50% in around 6 years from now), and uncertainty in global prices, which have ranged from $50 a barrel to $150 a barrel over the last few years. There is also the uncertainty of how much of the $35 billion debt owed by Sudan as a whole will be taken on by the South, though GOSS will be loath to take on much given that most of the debt is due to unpaid arrears by Khartoum on money borrowed to pay for projects in the North.

Poverty in Southern Sudan

The other main problem with an oil-based economy is that this wealth is not automatically distributed very widely, unless the government explicitly chooses to.

In 2005 someone scratched their head and decided that poverty must be about 90% of the population, and somehow this figure stuck. Just look at how poor they all are! However the latest actual survey of poverty in Southern Sudan found a rate closer to 50%. Although based on a different poverty line, Kenya also estimates poverty to be around 50%. The situation, though bad, is clearly not quite as dire as many would like to imagine.

Challenges and the need for realistic expectations

Despite this mixed picture, there are some unrealistically optimistic expectations about the future amongst many Southerners. The Vice-President recently proclaimed to be expecting $500 billion investment over the next five years (about as much as China receives). Plans for a new capital city show soaring skyscrapers emerging from the bush. The reality is that despite reasonable national income at present, there is still a shocking lack of infrastructure and enormous demands on public resources. There is also incredibly weak capacity in the central government. Even given the most optimistic scenarios, capacity in the government and investment in public infrastructure and services is going to be a slow process taking decades.

Southern Sudan is expensive. Partly due to poor infrastructure, partly due to a very high risk premium, and partly due to geography. It is sparsely populated with a large geographical spread (Kenya, Uganda and Rwanda combined). Not only is the density low (13 persons/sq. km, approx one-fifth the density of Uganda), but also this population is very dispersed (unlike say Australia or Canada or Libya, where population density is very low but most of it is concentrated in select urban centres). It is also landlocked and far from the coast. All of which means that the cost of trade is high.

The BSF's phase two completion report gives the unit cost of constructing lots of different things - on page 20, it has boreholes: the average cost of construction of a borehole is about £10,000. To put it in context, this is about ten times as expensive as a borehole in India. Even considering that the water table may be lower and that the terrain may be harsher than India, that probably doesn't come close to explaining this gap.

The dispersion of the population, and the lack of adequate infrastructure to reach them, is also a huge barrier to expecting markets to emerge spontaneously. To put it in context, about half of the households in the country did not use cash at all in the week preceding the poverty survey (pg. 11 of the Key Indicators document).

Governance

There are also serious concerns on not only the capacity of GOSS but also the political will to prevent GOSS from becoming a kleptocracy. So far, the signs are worrying - two successive Ministers of Finance fired for having their hand in the till, disregard for budget procedures by key ministries, the collapse of Nile Commercial Bank due to political figures loaning money to themselves, and entirely infeasible infrastructure plans (animal shaped cities, new capital) taken seriously. Maybe all of this will improve after independence as the need to stay united and put on a brave face towards possible Northern aggression recedes, but in general there are reasons to be skeptical. In 2009 the Ministry of Finance (illegally) spent 13 times its annual budget.

The Good News: The best things in life are cheap

The greatest source of hope is the great dynamism that has already been seen in South Sudan since the CPA. Yes, things are still bad, but they are vastly better than they were in 2004. The 2010 Statistical Yearbook shows the number of businesses by their year of opening - over three quarters of the businesses opened in or after 2007; over half of the total businesses opened in 2009 and half of 2010.

The literacy rate for the first cohort to benefit from educational opportunities following the CPA is vastly better than any of their predecessors. Systemic issues remain, including the heavy dependence on donors and NGOs (although that is truer of health than education), but the broad message is entirely hopeful.

To borrow a phrase from Charles Kenny, the best things in life are cheap. Despite economic stagnation, conflict, and corruption, Africa as a whole has seen enormous improvements in the living standards of ordinary people over the past 50 years. Much of this has come not from increases in incomes, but the falling prices of key goods and the development and propagation of new technologies, in particular health-related technologies (the word technology used in its widest sense to include behaviours such as hand-washing). Although coming from a low base, the prospects for improvement in human development indicators is great.

Roundup

So - an economy probably larger than you expected, but still a whole host of problems, many of which have barely been touched upon here. Some really appalling human development indicators, but progress being made. Should we be optimistic about Sudan's economic future? A very qualified yes.



Sources:

Ben Leo, Sudan Debt Dynamics: Status Quo, Southern Secession, Debt Division, and Oil—A Financial Framework for the Future - CGD Working Paper 233,

BSF Report

Greg Snyders, Estimates of post-CPA oil sharing,

Uganda 2011-12 Budget Speech

Poverty Estimates from the SSCCSE

Key indicators for Southern Sudan

Statistical Yearbook for Southern Sudan (2010)

World Bank Country Economic Memorandum (2010)

2010 GOSS Budget

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