Sizzling South Sudan
Why Oil Is Not the Whole Story
<
http://www.foreignaffairs.com/author/alex-de-waal> Alex de Waal
February 8, 2013
<
http://www.foreignaffairs.com/articles/138836/alex-de-waal/sizzling-south-s
udan?page=show> Article Summary and Author Biography
The newly independent Republic of South Sudan may top the list of the
world's fastest-growing economies in 2013. The main reason for this is that
last year South Sudan experienced one of the most spectacular economic
contractions of any state in modern times -- a situation that is expected to
reverse in the year ahead.
The South Sudanese economy crashed 12 months ago when, during a dispute with
northern Sudan, the South Sudanese government shut down the nation's entire
oil production. Until then, oil revenues, totaling about $400 million per
month, had represented 82 percent of South Sudan's gross domestic product
and 98 percent of government revenues. The oil companies were stunned by the
shutdown; their revenues fell to zero. A World Bank director commented that
the bank had never seen such a dramatic collapse. The IMF, meanwhile,
estimates that South Sudan's GDP contracted by 55 percent in 2012.
South Sudan is scheduled to resume oil production soon, but it will take
four to six months to reach pre-shutdown levels. Assuming no further delays,
South Sudan's economic growth during 2013 could reach an astonishing 70
percent.
OIL'S NOT WELL
South Sudan seceded from Sudan in July 2011, taking with it 75 percent of
Sudan's oil production. However, the export infrastructure -- pipelines and
ports -- is in the north. The two countries failed to settle a number of
border issues and did not agree on tariffs or fees for use of the north's
pipelines. In December 2011, northern Sudan began unilaterally diverting
South Sudanese oil to its own refineries for illegal sale on international
markets. South Sudan responded by shutting down its wells.
In Juba, South Sudan's capital, the government was immediately in trouble.
Its non-oil revenue was miniscule, mostly gained through business licenses
and import taxes. The minister of finance's 2012 budget projected the
government's monthly expenditure to be $250 million and its income to be $25
million. By September 2012, government revenue had reached only $12.6
million monthly. Juba appealed for international assistance, but donors
could not fully fill the gap. Officials instead proposed austerity measures,
including across-the-board cuts of 26 percent, but exempted the military,
which had constituted 55 percent of the pre-shutdown spending. For the past
year, the government has gotten by thanks to a few loans and some discreet
foreign handouts. It has also saved money by neglecting to pay out salaries
and service debts.
As Sudan and South Sudan teetered on the brink of all-out war in April 2012,
the African Union and the United Nations developed a plan to ease the
tension, resolve outstanding disputes, and restart oil production and
export. At a summit meeting in Addis Ababa in late September 2012, Salva
Kiir Mayardit, the South Sudanese president, signed several agreements with
Omar al-Bashir, his Sudanese counterpart. As part of the deal, Mayardit
agreed to pay a commercial tariff to pump southern oil through the north. He
also agreed to make several payments to the North -- amounting to just over
$3 billion -- in recognition of the north's own fiscal crisis brought on by
the loss of petroleum revenues following the secession.
The deal immediately increased confidence in the South Sudanese economy, but
its prospects in the coming year depend on whether the September agreements
are implemented. At the moment, the prospects look grim: Khartoum has dug in
its heels. Two major issues were left unresolved. One is an ongoing conflict
in two Sudanese states near the border with the south, where rebels are
fighting Khartoum, demanding a secular and democratic state. As long as such
conflicts persist, the prospect of the south being dragged back into the
fighting remains a possibility. A second issue is the status of the disputed
area of Abyei, which both the north and the south claim. The African Union
proposed holding a referendum at the end of this year to let the residents
of Abyei decide. All evidence suggests that they would vote to go south. No
surprise, then, that Khartoum's generals are blocking the implementation of
the agreements.
Festering grievances have reinforced South Sudan's unwillingness to deal
with its northern neighbor. Juba is developing plans to build a new oil
pipeline that would go eastward toward the Kenyan coast. Preliminary
estimates put a $3 billion price tag on the pipeline, and South Sudan has
entered negotiations with potential contractors. But sinking funds into that
pipeline would be a major gamble.
For one, pessimists fear that South Sudan's oil production may have already
passed its peak. According to industry estimates, the country's known
reserves will last only another decade or so. And some of the wells that
were closed in January 2012 will never reopen because they were already
almost dried up. The pipeline to Kenya, meanwhile, faces its own obstacles.
China, on which South Sudan had pinned hopes for funding, has showed little
interest. Beijing was dismayed by Juba's decision to shut down oil
production. In turn, it has politely rebuffed requests for financing,
observing that China had already built one serviceable pipeline (the one
that heads north) and that South Sudan would be advised to use it.
Meanwhile, other potential investors have expressed wariness of a South
Sudanese government that has proved ready to take enormous commercial and
political risks against the advice of international partners.
BEYOND BLACK GOLD
In the long term, given the problems with South Sudan's oil sector, the
country's most valuable resources will be agricultural land and water. The
country has already attracted large-scale agricultural investors, notably
from the U.S. and Egypt. A company from the Emirates is promoting
ecotourism. Since 2010, meanwhile, South Sudan has made long-term leases of
more than five million hectares. Yet relatively little of that has yet been
converted into productive enterprises for farming and biofuels.
The question now is how to attract international investment in key sectors
other than oil production. In December 2011, Washington hosted an investment
conference for South Sudan. Due in part to strong connections between South
Sudan and influential U.S. constituencies, including churches, celebrity
advocates, and Israel, the United States is an active proponent of aid and
investment in South Sudan. Businessmen attending the conference, however,
were disappointed that the enthusiasm had yet to yield feasible commercial
projects or even proposals for them. In practice, most of the investment in
South Sudan is still from neighboring countries, especially Kenya (for
banking and transport), Uganda (for retail and telecoms), Ethiopia (for
hotels), and Eritrea (for retail and hotels).
Somewhat surprisingly, there are potential investments coming from northern
Sudanese, too. Much of the population of South Sudan lives near the border
with the north. South Sudanese obtain most of their consumer goods and food
from the north, and many families rely on northern migrant labor. This
population was hard-hit by the closing of the border in early 2012 and by
the exodus of northerners. Agreements made last September, to reopen border
trade and to provide the "four freedoms" (the right of all South and
northern Sudanese to live, work, move, and own property in either country),
will bolster the border region's economy -- when they are implemented. And a
provision of the September agreements to create a standing conference of the
11 governors of border states, both north and south, to focus on
cross-border cooperation and infrastructure, should further assist
development of these areas.
Over the last few years, the people of South Sudan have displayed remarkable
tenacity. Last March, the World Bank made dire predictions about an economic
crisis that would result from the oil shutdown, which would include rampant
inflation, the collapse of essential services, and increasing food
insecurity. Although inflation did surge to more than 60 percent, massive
fuel shortages ground the country to a halt, and hundreds of thousands of
people were left dependent on food aid, there was no total state collapse.
One reason was aid from international donors, notably the United States,
which went toward paying for essential government functions. Another was
that the majority of the South's oil income had never previously reached the
people but had been siphoned off and ferreted abroad by members of the
ruling elite, including the army's 600 generals. For the average citizen,
conditions were much the same.
South Sudan has approximately a decade to enjoy substantial oil revenues,
with oil production potentially returning to 300,000 barrels per day during
2013. During this period, it must establish sound internal governance and
the basis for a productive economy in the long term. The U.S., determined
not to see South Sudan become a failed state, is assisting. The country has
the advantages of some of the world's best agricultural land, a globalized
population, and a tremendous reservoir of goodwill. It also has the
opportunity to bank the peace and cooperation agreements with its northern
neighbor. It is remarkable that both countries' strategy of putting military
and financial pressure on the other, hoping that their neighbor will bend,
has not led to battle. Even if no shots are exchanged, though, that strategy
will eventually break both. More than any other single factor, South Sudan's
prospects depend on its ability to build a mutually beneficial relationship
with its difficult northern neighbor.
This article is the third installment of a
<
https://www.foreignaffairs.com/features/collections/the-next-economic-giant
s> five-part series examining the world's fastest-growing economies,
according to the IMF
<
http://www.businessinsider.com/worlds-fastest-economies-2012-10?op=1>
World Economic Outlook.
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Received on Sat Feb 09 2013 - 07:55:04 EST
