To save its economy, Sudan needs civilian rule
Loss of foreign funding and economic mismanagement have pushed the Sudanese economy to the brink since the coup.
On October 25, 2021, the Sudanese army carried out a coup against the civilian leadership of the country. Under the pretext of protecting the stability of the country, the military arrested Prime Minister Abdalla Hamdok and a number of officials from his cabinet.
The coup was widely condemned, with foreign donors and international financial institutions terminating cooperation with Khartoum. There have been attempts to bring back civilian rule through various diplomatic initiatives, but there still is no clear roadmap.
The coup came just two and a half years after longtime President Omar al-Bashir was removed from office following a popular revolution, which paved the way for a political transition and the stabilisation of the Sudanese economy. Just as the country was getting back on the right track and making good economic progress, the removal of the civilian-led government derailed these efforts. In the past year, mismanagement by the army has reversed the progress made between 2019 and 2021 and exacerbated the cost-of-living crisis, price hikes, and business sector recession.
It is not only worsening the economic situation in the country and depriving it of much-needed international funding and support, but it is also disproportionately affecting vulnerable groups in Sudanese society. If the economy is not stabilised quickly, the consequences can be catastrophic for the country. That is why it is crucial that the military hand over power to a civilian government and that the political transition is restarted.
Economic recovery post-2019
The revolution, which ended al-Bashir’s 30-year military rule, brought hope that a stable civilian government would emerge in Sudan. The regime change carried out in April 2019 created a window of opportunity for fundamental reforms and for re-starting a stagnating economy, burdened by large internal and external imbalances and unsustainable external debt, deprived of foreign funding and starved of foreign investment.
After the formation of a civilian-led government, Sudan embarked on a journey of re-opening itself to the world and restoring normal diplomatic and economic relations with international financial institutions and donors.
In December 2020, the efforts of Sudanese diplomacy culminated in Sudan’s removal from the US State Sponsors of Terrorism List (SSTL), which allowed the Sudanese government to receive US financial aid and further normalise engagement with international financial institutions.
The country began a process of economic reforms with the support of the International Monetary Fund’s Staff-Monitored Program (SMP) to address structural distortions in its economy. The government introduced tight fiscal and monetary policies, fuel subsidy reform, tax reform, and social protection programmes to mitigate the negative impact of policy adjustment.
The Ministry of Finance and the Central Bank of Sudan also embarked on tackling major problems state-owned enterprises have faced, including opaque ownership and lack of government oversight. It also set out to restrict access to finance for these enterprises, which have dominated the Sudanese economy, in order to promote private sector growth and job creation.
Meanwhile, the transitional government took initial steps to address the illicit gold trade in the country. It tried to curb black-market exports and revised the mineral wealth and mining law to improve transparency and governance.
Some of these reforms were hard to push through and resulted in fuel and bread prices rising which triggered social unrest. But by the summer of 2021, they were starting to pay off.
Sudan reached a landmark achievement on June 29, 2021, when the World Bank and the IMF determined that the country was eligible to benefit from the Heavily Indebted Poor Countries (HIPC) debt relief initiative. The HIPC could see some $56bn in debt forgiven, when Sudan reaches the completion point in June 2024.
To help Sudan achieve this, the IMF also approved a $2.5bn extended credit facility for a 39-month programme to continue economic and institutional reform, enhance economic governance and provide a safety net for its population. The debt relief process renewed international funding and ambitious economic reforms produced the first signs of stability.
In August 2021, inflation declined by 35 points for the first time in more than a year. Sudan’s chronic trade deficit also decreased by 25 percent to $1.6bn in the first half of 2021, driven by an increase in exports on an annual basis. Remittances increased from $136m in the first half of 2020 to $717m in the first half of 2021.
According to the 2022 state budget report, the current account deficit decreased from $5.8bn in 2020 to $990m in 2021, mainly due to the tightening of the trade deficit after the introduction of the exchange rate reform and the improvement of external transfers
The catastrophic impact of the coup
However, all these positive developments are now at risk of being reversed. The October 25 coup interrupted the path of democratisation and brought Sudan back into a state of isolation similar to the one under al-Bashir’s autocratic rule. Over the last 12 months, the coup has had a catastrophic impact on economic institutions and the domestic market.
Many donors immediately stopped funding and disbursement of already allocated funds. As a result, Sudan lost some $4.6bn in foreign aid. This includes nearly $2.6bn from the World Bank meant for projects in agriculture, irrigation, energy and health as well as about $580m allocated by foreign donors for the Sudanese Family Support Programme.
The US also suspended $700m in aid, approved after Sudan was removed from the SSTL, as well as the delivery of 350,000 metric tonnes of wheat worth $125m to support subsidised bread in the country.
In June, the Paris Club of major creditor countries also announced that it was suspending debt relief to the country because of the coup.
These financial losses have affected the performance of the 2022 budget and the country faces a macroeconomic crisis. The budget deficit is expected to be mainly financed by domestic borrowing from the Central Bank, in temporary advances, if the military continues to retain power.
After the coup, the Sudanese pound lost about 30 percent of its value to the dollar but the downward trend stopped mainly due to weak demand for foreign currency amid business activity decline and reduced household purchasing power.
To compensate for the loss of revenues, the coup government has raised the prices of many goods and services and pushed up charges on anything from corporate business tax to customs duties and healthcare fees.
Since the coup, the price of bread has increased more than tenfold, while other staples have seen a 200 to 300-percent price hike.
The prices of gasoline and diesel have jumped by more than 135 percent. Given that fuel in Sudan seems to be much more expensive than in neighbouring countries, there is clearly a problem in how the import of oil is managed by the government. Higher prices at the pump have resulted in increased transportation costs with pervasive implications on production and household purchasing power.
Thus, the cost of attaining a basic living standard has skyrocketed and exposed vulnerable Sudanese families to food insecurity. Currently, some 30 percent of the Sudanese population faces hunger.
The efforts to promote the private sector in Sudan have also been rolled back. The ceiling for borrowing by state-owned enterprises has been lifted after the coup, maintaining their dominance of the economy.
Furthermore, the coup has allowed the mismanagement of the country’s natural resources to continue, especially in the gold mining and trade sector. Smuggling has flourished and that deprives the state of large funds from taxes and royalties, diminishing its ability to finance socioeconomic priorities.
It is going to be a tough end of 2022 and possibly an even tougher 2023 in Sudan, as it faces an increased risk of recession. The business sector downturn and reduced household purchasing power will likely drive real economic growth into negative territory.
A way out of the crisis
It is clear that for the Sudanese economy to be saved from disaster, the coup needs to be reversed as soon as possible. The country needs to go back to its democratic transition led by a civilian government. Trust between the civilian and military forces needs to be rebuilt.
The army has to accept that its role is only to provide security for the state and should agree not to intervene in government affairs. It should also agree to reforms of the security sector and state-owned enterprises, the integration of the Rapid Support Forces (RSF) into the regular ranks of the army and the revision of agreements with armed groups to stop fighting. These changes are needed to ensure the army stays out of politics.
Once the civilian government is in full control of policy-making and state institutions are able to function independently again, Sudan can pursue a wide-range economic recovery plan.
Within its framework, it should resume the economic reform programmes it embarked on prior to the coup and restore full engagement with the IMF, the World Bank, development partners and donors. It should seek to restore the provision of financing assurances for HIPC debt relief as soon as possible.
In parallel, the civilian government should pursue a strong social protection programme to help address pressing socioeconomic ills and help vulnerable communities weather the economic crisis. It should focus on tackling the cost-of-living crisis, creating jobs for the youth and increasing women’s participation in the labour force.
It should also seek to clamp down on illicit economic activity, especially illegal gold mining and trade, and promote a transparent and safe business environment for private enterprises to thrive in. It also needs to continue anti-corruption measures as well as the recovery of assets stolen by the previous regime.
The international community would also have an important role to play, especially in stabilising the Sudanese economy. It needs to help the country resume the debt relief process and ease access to concessional loans for infrastructure and basic services such as health care, education, and food security. It needs to support Sudan through its transformation from a “fragile state” to a developing state.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.