Country Report

Sudan

Sudan at a glance: 2007-08

OVERVIEW Strong concerns remain over the implementation of the 2005 north-south peace deal, particularly over the sharing of oil revenue and boundary delineations. Nevertheless, on balance the Economist Intelligence Unit still expects the Government of National Unity to survive over the outlook period. Ongoing inter-factional fighting in Darfur and the government!s launch of a new offensive against those rebels who reject the May 2006 peace agreement have drawn increasing international attention. However, despite the extension of the mandate of the existing African Union peacekeeping force in Darfur to mid- 2007, there is little prospect that it will be provided with sufficient support from the UN and elsewhere to make a major difference to the situation on the ground. Despite the signing of a peace agreement with eastern rebels in October 2006, there is also a danger of ongoing unrest in other outlying areas. Real GDP growth will remain robust, driven by rising domestic demand and oil production increases. The current account will record large deficits over the outlook period, however, as import growth outstrips increases in oil earnings.

Key changes from last month Political outlook • Fighting between northern and southern government troops in the southern town of Malakal, as well as an ongoing escalation of the violence in Darfur, has placed existing peace agreements under additional strain. Economic policy outlook • Based on new data from the Ministry of Finance and National Economy, we now expect the fiscal deficit to fall from an estimated 3.7% of GDP in 2006 to around 1.7% in 2007 and just 0.9% in 2008. Economic forecast • Based on a downward revision to our oil production forecast, combined with new information on local oil prices, we now expect the current-account deficit to average around 12% of GDP in 2007-08.

December 2006

The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom

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Sudan 1

Contents

Sudan

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2007-08 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

19 Economic policy

23 The domestic economy 23 Economic trends 24 Oil and gas 28 Infrastructure 30 Agriculture

31 Foreign trade and payments

List of tables 9 International assumptions summary 11 Forecast summary 20 Fiscal performance 31 Export earnings 32 Import spending 32 Trade account 33 Current account 33 International reserves

List of figures 12 Gross domestic product 12 Consumer price inflation

Country Report December 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006

Sudan 3

Sudan December 2006 Summary

Outlook for 2007-08 Although concerns persist over the implementation of the 2005 north-south peace deal, on balance the Economist Intelligence Unit expects the Government of National Unity to survive over the outlook period. Ongoing fighting in Darfur and the government!s launch of a new offensive against the rebels have drawn increasing international attention. Despite the extension of the mandate of the existing African Union peacekeeping force in Darfur to mid-2007, there is little prospect that it will be provided with sufficient support to make a major difference to the situation on the ground. Although a peace agreement was signed with eastern rebels in October 2006, there also remains a danger of ongoing unrest in other outlying areas. Real GDP growth will remain robust, driven by rising domestic demand and oil production increases. The current account will record large deficits over the outlook period.

The political scene There has been fighting between northern and southern government forces in the town of Malakal. The Government of Southern Sudan has revealed its 200- day action plan. Laws have been drafted in preparation for the 2009 elections. Violence has increased in Darfur and is spilling over into neighbouring countries, despite the extension of the mandate of the African Union force to mid-2007. A peace agreement has been signed with the rebel Eastern Front.

Economic policy The fiscal deficit widened in the first nine months of 2006. The US has tightened economic sanctions. Sudan was ranked 154th out of 175 states for ease of doing business by the World Bank. The launch of the new currency has been delayed to early 2007. The dinar has continued to appreciate against the US dollar.

The domestic economy Sudan!s GDP growth has remained strong. Inflation rose sharply in the second half of 2006. Oil has begun to be exported from Blocks 3 and 7, but a dedicated export terminal has not yet been completed, and it is fetching prices of only around US$18/b. The concession has been awarded for Block 12A in Northern Darfur. USAID has awarded a five-year contract for infrastructural development in Southern Sudan to Louis Berger Group, a US firm.

Foreign trade and payments Export proceeds rose by 10.5% in the first half of 2006, and import spending increased by 42%. The current-account deficit more than doubled year on year to reach almost 10% of GDP on an annualised basis. FDI flows have risen strongly. Foreign-exchange reserves have been shown to be lower than previously believed, standing at around 2.6 months of import cover. Editors: Laura James (editor); Robert Powell (consulting editor) Editorial closing date: December 10th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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Political structure

Official name Republic of Sudan

Legal system Sharia (Islamic law) is applicable in the north of the country in both civil and criminal cases. However, under the new constitution (inaugurated in mid-2005), Southern Sudan is exempt and will have its own, separate judiciary. A constitutional court has been created to monitor and protect the implementation of the constitution

National legislature Bicameral parliament, to be made up of a wholly-elected 450-member National Assembly and a Council of States, composed of two representatives from each state. The current National Assembly is wholly appointed, however, according to the power-sharing quotas agreed under the Comprehensive Peace Agreement

National elections December 2000 (presidential and parliamentary); next elections due by 2009

Head of state Lieutenant-General Omar Hassan Ahmed al-Beshir, who took office following a 1989 coup and was sworn in as president in October 1993; elected in March 1996 for a five-year term; re-elected in December 2000

National government The Council of Ministers, appointed by the president in consultation with the first vice- president and the second vice-president

Main political parties National unity government consisting primarily of the National Congress (NC; up until 1998 the National Islamic Front) and the Sudan People!s Liberation Movement (SPLM), with some representation from the National Democratic Alliance (NDA)"an umbrella group consisting of 13 parties. The Democratic Unionist Party (DUP) and the Umma Party are leading northern opposition groups. The Beja Congress is an opposition movement in the east of the country, and the Sudan Liberation Movement (SLM) and the Justice and Equality Movement (JEM) have been fighting a guerrilla war in Darfur, to the west

The cabinet President Omar Hassan Ahmed al-Beshir (NC) First vice-president Salva Kiir (SPLM) Second vice-president Ali Uthman Mohammed Taha (NC) Senior assistant to the president Minni Minnawi (SLM)

Key ministers Agriculture & forestry Mohammed al-Amin Issa Kabashi (NC) Animal resources Galwak Deng (NC) Cabinet affairs Deng Alor Kol (SPLM) Culture, youth & sport Mohammed Youssef Abdullah (NC) Defence Abdel-Rahim Hussein (NC) Education Hamid Mohamed Ibrahim (NDA) Energy & mining Awad Ahmed al-Jaz (NC) External trade George Boreng Niyami (SPLM) Federal relations Abdel-Basit Saleh Sabdarat (NC) Finance & national economy Zubeir Mohammed Hassan (NC) Foreign affairs Lam Akol (SPLM) Health Ta b i ta Sokaya (S PLM ) Industry Jalal al-Dugair (dissident DUP) Interior Zubair Beshir Taha (NC) Justice Mohammed Ali al-Mardi (NC) Labour Alison Manani Magaya (NC) Science & technology Abdelrahman Saeed (NDA) Transport Kol Manyak Gok (SPLM)

Central bank governor Sabir Mohammed al-Hassan

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Economic structure

Annual indicators 2002a 2003a 2004 a 2005 b 2006b GDP at market prices (SD bn) 4,320.4b 4,972.2b 5,936.0 b 7,204.9 8,609.1 GDP (US$ bn) 16.4b 19.1b 23.0 b 29.6 39.7 Real GDP growth (%) 6.1 5.1 5.2 7.9 9.6 Consumer price inflation (av; %) 6.9 7.7 8.4 8.5 7.5 Population (m) 34.2b 34.9b 35.5 b 36.2 37.0 Exports of goods fob (US$ m) 1,949.1 2,542.2 3,777.8 4,824.3 a 5,969.1 Imports of goods fob (US$ m) 2,293.8 2,536.1 3,586.2 5,946.0 a 8,693.2 Current-account balance (US$ m) -1,008.1 -955.3 -870.9 -3,013.1 a -5,468.1 Foreign-exchange reserves excl gold (US$ m) 248.8 529.1 1,338.0 1,868.5 a 2,784.1 Total external debt (US$ bn) 23.6 24.2 26.3 27.7 29.2 Debt-service ratio, paid (%) 3.0b 5.3b 4.4 b 3.4 4.4 Exchange rate (av) SD:US$ 263.3 261.0 257.9 243.6 a 217.1 a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2005a % of total Components of gross domestic product 2000b % of total Agriculture 38.6 Private consumption 73.9 Industry 27.8 Government consumption 6.0 Mining 15.6 Gross fixed capital formation 12.6 Construction 4.1 Change in stocks 5.2 Services 33.6 Exports of goods & services 16.1 Imports of goods & services 13. 9

Principal exports 2005 US$ m Principal imports cif 2005 US$ m Crude oil 4,187.0 Machinery & equipment 1,971.9 Sesame 119.0 Manufactured goods 1,627.9 Livestock 115.0 Transport equipment 1,149.7 Gum arabic 108.0 Chemicals 493.8 Cotton 107.0 Wheat & wheat flour 383.6

Main destinations of exports 2005 % of total Main origins of imports 2005 % of total China 46.7 China 20.6 Japan 32.7 Saudi Arabia 8.6 Saudi Arabia 3.9 Germany 4.4 Egypt 2.5 UAE 4.4 a Central Bank of Sudan; b World Bank series.

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Quarterly indicators 2004 2005 2006 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Prices Cotton Liverpool index (US cents/lb) 55.72 50.12 53.22 55.59 54.66 57.20 59.46 56.34 Financial indicators Exchange rate SD:US$ (av) 258.9 253.6 250.2 248.5 242.8 232.9 229.1 221.8 Exchange rate SD:US$ (end-period) 257.5 250.6 249.3 247.0 238.1 230.5 225.8 217.6 M1 (end-period; SD bn) 530.3 604.4 653.5 672.9 700.7 813.0 889.7 n/a M1 (% change, year on year) 31.9 31.8 31.9 31.5 32.1 34.5 36.1 n/a M2 (end-period; SD bn) 880.7 960.5 1,105.5 1,179.0 1,234.5 1,378.2 1,605.3 n/a M2 (% change, year on year) 32.0 30.8 37.1 40.5 40.2 43.5 45.2 n/a Balance of payments (US$ m) Goods: exports fob 1,046.5 1,058.6 1,037.8 1,270.0 1,321.9 1,194.6 n/a n/a Goods: imports fob -943.7 -1,032.7 -1,111.7 -1,338.8 -1,578.0 -1,917.5 n/a n/a Merchandise trade balance fob-fob 102.9 25.9 -73.9 -68.7 -256.2 -722.9 n/a n/a Services balance -272.8 -297.4 -344.8 -405.8 -452.0 -528.0 n/a n/a Income balance -337.3 -306.8 -294.9 -330.0 -358.6 -378.2 n/a n/a Net transfer payments 276.9 292.1 277.2 280.2 283.3 360.2 n/a n/a Current-account balance -230.3 -286.2 -436.5 -524.3 -783.4 -1,268.9 n/a n/a Reserves excl gold (end-period) 1,050.3 1,338.0 1,447.1 1,623.1 1,864.0 1,868.6 2,213.8 2,603.5

Source: IMF; International Financial Statistics.

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Outlook for 2007-08

Political outlook

Domestic politics Relations between the ruling National Congress (NC) party, which dominates the Government of National Unity (GNU), and the Sudan People!s Liberation Movement (SPLM), which leads the autonomous Government of Southern Sudan (GOSS), will remain tense over the outlook period. Although gradual progress is likely to be made in implementing the country!s interim constitution, and the 2005 Comprehensive Peace Agreement (CPA) should remain in place, there are significant downside risks. Important differences over the equitable division of oil revenue, the exact delineation of the north-south boundary and each party!s relations with dissident factions within the other!s territory are likely to become increasingly sensitive if left unresolved. Tensions will rise towards the end of the outlook period, as parties prepare for the elections that are due to be held before mid-2009, as well as looking further ahead to the referendum on southern independence due in 2011. There is no prospect of an imminent end to the ongoing violence in the western region of Darfur, despite the signature of the Darfur Peace Agreement (DPA) in May 2006. A major government offensive began at the end of August, while attacks on rebel-held villages by pro-government janjaweed militias were on the rise. These have been countered by increased activity on the part of the National Redemption Front, a coalition of insurgents who reject the DPA, which includes a number of field commanders from the Sudan Liberation Movement (SLM) and members of the Islamist Justice and Equality Movement. Former rebels from the SLM faction that accepted the peace deal, led by Minni Minnawi (now, under the terms of the agreement, a senior adviser to the president, Lieutenant-General Omar Hassan Ahmed al-Beshir, and head of the newly formed Darfur Transitional Authority) have been complaining of the slow pace of implementation and continued attacks. The African Union peacekeeping mission in Darfur (AMIS) has neither the strength nor the mandate to impose security and safeguard the access of humanitarian agencies to Darfur. The force!s presence in the area will now be extended until at least mid-2007, and all sides have agreed that the UN will provide it with some additional technical support and specialist personnel. However, it remains unlikely that the Sudanese government will be persuaded to consent to any substantial role for UN personnel in its command structure or any major increase in troop numbers. In the absence of a new, broader agreement with the various Darfur rebel factions, AMIS will therefore remain unable to impose security effectively and safeguard the access of humanitarian agencies to Darfur. As a result, intercommunal violence and population displacement are expected to continue. The prospects are better for the Eastern Sudan Peace Agreement (ESPA), signed in mid-October following a series of talks mediated by Eritrea"largely because the former insurgents from the Beja-dominated Eastern Front lack the domestic and international support to continue fighting. However, the ESPA allows the

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rebels relatively little representation within the national government, and its wealth-sharing commitments are weak. Some of these defects may be offset by a national conference, planned for 2007, which is intended to produce a broader consensus on the administrative balance of power between the national government, the regions and the states. Nevertheless, this is likely to be difficult to achieve, given the long-standing competition between different regional interests in Sudan over high-level bureaucratic positions and the allocation of scarce resources. Although the government has budgeted sharp increases in allocations to the states, it is reluctant to pass further wealth and administrative power, which has historically been centralised in the capital, Khartoum, to outlying regions. It may also fear that, should decentralisation be taken too far, this would strengthen opposition groups in the NC!s northern heartlands.

International relations The Darfur conflict, which has long drawn strong negative international attention, will continue to damage Sudan!s relations with the US and the EU, especially if the government fails to reach an agreement with the UN over detailed plans for a joint UN-African Union peacekeeping force. Nevertheless, international disapproval is unlikely to jeopardise Sudan!s economic development, with partners such as China, Malaysia and India unwilling to risk the enormous sums they have invested in the country!s energy sector.

Economic policy outlook

Policy trends Under the terms of its IMF reform programme, the Sudanese government is committed to pursuing economic stability, including a strong external position and low inflation. However, the pressing need to ensure that the country experiences a "peace dividend" in the wake of the three recent peace agreements has led the GNU to revise its economic priorities. The government!s focus on the daunting task of countrywide reintegration, regeneration and reconstruction following decades of conflict has combined with lower than expected oil revenue to push the fiscal and current-account deficits beyond IMF-agreed targets. Over the outlook period, the government is likely to continue to take on extra non-concessional debt to fund major infrastructure projects, despite substantial existing arrears and IMF disapproval.

Fiscal policy The Economist Intelligence Unit estimates that total government revenue will have reached SD1.6trn (US$7.4bn) in 2006. It is projected to rise by around 29% to SD2.1trn in 2007, on the back of a substantial increase in average oil output, together with ongoing high oil prices and strengthening tax receipts. However, revenue growth in 2008 will be limited to around 17%, as a decline in production from some of the more mature oilfields will partially offset future output growth in the new oil blocks (which in any case produce a lower-quality crude than existing blocks). The oil sector remains the major source of revenue for both the GNU and the GOSS"which, under the CPA, is apportioned half of net oil earnings from southern wells, after 2% is allocated to the oil-producing areas themselves. Total government expenditure is estimated to have increased to SD1.9trn in 2006. It is expected to grow over the outlook period, as new infrastructure projects, particularly in Khartoum and the southern capital, Juba,

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reach implementation stage. However, its rate of increase is projected to be less than that of government revenue, falling from 16% in 2007 to 13% in 2008. The overall result is that, having reached an estimated SD321bn (3.7% of GDP) in 2006, the fiscal deficit will narrow to a forecast SD171bn (1.7% of GDP) in 2007 and further in 2008 to about SD106bn (0.9% of GDP).

Monetary policy Sudan!s banking system currently operates effectively only in the north of the country, where all financial institutions are governed by sharia (Islamic) law. The Bank of Southern Sudan, set up in July 2006, aims to manage a parallel banking system, based on international rather than Islamic norms. However, the operation of such a dual system could result in some policy incoherence over issues such as interest rates, banking sector regulation and data collection. In the short term, the problems may be aggravated by the introduction, in early 2007, of a new national currency, the Sudanese pound"although in the longer term this should assist economic integration. The existing national currency, the Sudanese dinar, is principally used in the north, whereas foreign currencies tend to be used in the south. The Bank of Sudan (the central bank) has, on average, lowered murabaha and musharaka rates (sharia-compliant rates of return) over the past few years. Partly as a result, Sudan has seen extremely high rates of credit growth to the private sector. However, rates of return have stabilised since mid-2005, and are now expected to rise slowly over the outlook period, helping to constrain inflationary pressures in a context of rapid economic growth.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2005 2006 2007 2008 Real GDP growth World 5.0 5.4 4.7 4.9 OECD 2.6 3.1 2.2 2.5 EU25 1.8 3.0 2.3 2.3 Exchange rates ¥:US$ 110.1 116.2 105.0 97.5 US$:€ 1.245 1.253 1.358 1.338 SDR:US$ 0.677 0.680 0.646 0.644 Financial indicators ¥ 2-month private bill rate 0.00 0.23 1.13 2.00 US$ 3-month commercial paper rate 3.38 5.05 4.92 5.04 Commodity prices Oil (Brent; US$/b) 54.7 65.8 65.0 63.3 Cotton (US cents/lb) 55.2 59.2 65.8 71.5 Food, feedstuffs & beverages (% change in US$ terms) -0.5 13.3 -0.2 1.5 Industrial raw materials (% change in US$ terms) 10.2 51.1 1.5 -14.7 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

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We estimate that in 2006 the global economy will have registered healthy overall growth of around 5.4% at purchasing power parity rates. However, slower US and EU expansion in 2007-08 is forecast to cause an easing of global growth to an average of 4.8%. Crude oil prices have been pushed up to record highs in recent years by strong demand, especially in Asia. Although prices have fallen back somewhat of late, political uncertainties in several large oil producers (particularly in the Middle East) will continue to weigh heavily on the oil markets, with OPEC countries also committing themselves to keeping prices relatively high. We therefore expect the price of the benchmark dated Brent Blend to average around US$65/barrel in 2006-07, before easing to about US$63/b in 2008, on the back of additional projected supply growth.

Economic growth In line with its commitments to promote regional economic development under the CPA and other agreements, the Sudanese government will take advantage of rising oil earnings and high levels of foreign direct investment to boost investment expenditure on infrastructure over the outlook period. This, in turn, will benefit private consumption, which could also be supported by growing confidence in the south, provided that the internal political situation there remains stable. The growth in export volumes caused by the coming on stream of new oil capacity will be partly offset by surging import demand. These imports will largely go into development projects, ultimately benefiting the economy, but their effect over the outlook period will be to constrain growth. As a result, we estimate that real GDP growth will have accelerated to 9.6% in 2006, and project a further rise in 2007, to about 11.8%. The slower rate of increase in Sudan!s oil output in 2008, however, will bring real GDP growth back down to around 5.5%.

Inflation Inflation fell sharply in the first half of 2006, averaging around 4% year on year. This probably reflected measures taken by the Bank of Sudan to tighten domestic liquidity and the authorities! easing of supply bottlenecks at the country!s ports, as well as the role that the rapid strengthening of the dinar played in containing the cost of imports. However, consumer prices were boosted in the later part of the year by the cuts in subsidies on fuel and sugar imposed in August, with year-on-year inflation exceeding 15% in September. As a result, we estimate that inflation will have reached the IMF-agreed target of 7.5% in 2006. Over the outlook period, robust domestic demand is expected to keep price pressures strong, causing inflation to average just over 8% in 2007-08.

Exchange rates A managed float of the dinar against the US dollar is operated by the central bank through foreign-currency purchases and daily limits on the trading band. Some liberalisation of the exchange-rate regime has allowed the currency to appreciate rapidly since 2005, owing to the large sums of foreign currency entering Sudan in the form of oil earnings, rising foreign direct investment and worker!s remittances. By early December 2006 the dinar had strengthened to below SD203:US$1"a year-on-year rise of around 12%. We expect the central bank to begin to restrain the rate of dinar appreciation from around SD200:US$1, currently seen as the level at which the competitiveness of the country!s non-oil exports could begin to suffer. With the dollar expected to

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weaken further in 2007, the currency is projected to appreciate by just 5% on average in 2007-08 (compared with an estimated strengthening of 13% in 2006).

External sector We estimate that total export revenue will have risen to around US$6bn in 2006, largely owing to record international oil prices. The effect of continued high oil prices will be compounded in 2007 by a strong production increase, boosting export revenue to around US$8.6bn, which will be followed by a smaller rise in 2008, to around US$9.7bn. These projections have been revised downwards on the grounds that the new oil coming on stream will be of poorer quality than previously expected, and will therefore fetch a lower price. At the same time, import spending (particularly on capital inputs) will rise sharply, from an estimated US$8.7bn in 2006 to around US$10.9bn in 2007 and US$12.5bn in 2008. We therefore forecast that the trade deficit (which is estimated to have widened sharply to US$2.7bn in 2006, owing to a sharp increase in imports and further delays to anticipated oil production increases), will narrow only marginally in 2007, to around US$2.4bn, and will widen again to US$2.7bn in 2008. The large trade deficit expected over the outlook period will be compounded by a widening non-merchandise deficit. As new oil capacity comes on stream, greater income repatriation by foreign firms will result in a substantial increase in income debits, and services payments will rise roughly in line with imports and the needs of the oil sector. These negative flows will be only slightly offset by increased current transfers credits, as workers! remittances rise. Overall, we estimate that the current-account deficit will have widened to around US$5.5bn (13.8% of GDP) in 2006. It is projected to widen to US$6.7bn in 2007 and to US$7.1bn in 2008"although ongoing strong economic growth will cause it to narrow somewhat as a proportion of GDP, to 12.7% and 11.4%, respectively.

Forecast summary (% unless otherwise indicated) 2005 a 2006 b 2007c 2008c Real GDP growth 7.9 b 9.6 11.8 5.5 Oil production ('000 b/d) 282.1 b 309.3 509.6 550.0 Crude oil exports (US$ m) 4,187.0 5,301.1 7,822.4 8,943.5 Consumer price inflation (av) 8.5 b 7.5 8.5 8.0 Government balance (% of GDP) -1.7 b -3.7 -1.7 -0.9 Exports of goods fob (US$ bn) 4.8 6.0 8.6 9.7 Imports of goods fob (US$ bn) 5.9 8.7 10.9 12.5 Current-account balance (US$ bn) -3.0 -5.5 -6.7 -7.1 Current-account balance (% of GDP) -10.2 b -13.8 -12.7 -11.4 External debt (year-end; US$ bn) 27.7 b 29.2 30.8 32.4 Exchange rate SD:US$ (av) 243.6 217.1 195.0 185.0 Exchange rate SD:¥100 (av) 221.3 186.9 185.7 189.7 Exchange rate SD:€ (av) 303.2 272.0 264.7 247.4 Exchange rate SD:SDR (av) 360.0 319.2 301.7 287.4 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

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Gross domestic product Consumer price inflation (% change, year on year) (av; %)

Sudan Sudan Middle East and North Africa Middle East and North Africa 12.0 9.0 8.5 10.0 8.0 8.0 7.5 6.0 7.0 6.5 4.0 6.0 2.0 5.5 0.0 5.0 08 03 04 05 06 07 03 04 05 06 07 08 2002 2002

The political scene

Military clashes endanger the Fighting broke out in late November between the national Sudanese Armed

north-south peace Forces (SAF) and the southern Sudan People!s Liberation Army (SPLA) in Malakal, the capital of Upper Nile state near the north-south border. The fighting arose from a series of clashes between the SPLA and fighters from the Southern Sudanese Defence Forces (SSDF), a rival militia dominated by the Nuer ethnic group, some of whom took refuge in a garrison held by the SAF" formerly allied to the SSDF during the lengthy civil war. The resultant fighting between the SPLA and the SAF"which are supposed to act in co-operation and eventually even merge, according to the terms of the 2005 Comprehensive Peace Agreement (CPA)"left around 150 dead and over 400 injured, according to UN estimates. It also raised fears that further such clashes might ultimately endanger the CPA itself. The secretary-general of the Sudan People!s Liberation Movement (SPLM), Pagan Amum, issued a statement blaming the incident on the northern ruling National Congress (NC) party!s desire to acquire southern resources and "unrealisable costly dream" of re-occupying Southern Sudan. The fighting in Malakal highlights several potential flashpoints in the implementation of the north-south peace deal, including the sensitivity of the oil-rich border areas and the slow pace of implementation of the security arrangements associated with the CPA (especially the formation of joint bodies to manage disagreements), which has delayed the redeployment and disarmament of forces on both sides. SPLA troops arrested 15 soldiers from the SAF on suspicion of involvement in a string of attacks that led to the killing of 38 civilians in the vicinity of the southern capital, Juba, in October. The continued presence of tribal militias with historic links to the SAF in parts of the south and the relatively weak state security forces have resulted in persistent low-level insecurity and banditry. Nevertheless, the promptitude with which the Malakal incident was managed demonstrated that the commitment of both sides to sustaining the peace deal remains strong. UN peacekeeping forces stationed in the south (UNMIS) moved swiftly to separate the combatants, and a series of confidence-building measures, including joint patrols by SAF and SPLA forces, were implemented. High-level officials in both

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the Government of National Unity (GNU) and the Government of Southern Sudan (GOSS) called for calm and ongoing implementation of the provisions of the CPA

The SPLM remains focused Opening the second session of Southern Sudan!s legislative assembly on

on the south September 6th, Salva Kiir, the president of the SPLM-led GOSS and the first vice-president in the GNU, outlined a "200-day action plan" for the GOSS. During August and September, in what was widely perceived as an anti- corruption reshuffle, Mr Kiir made a number of new appointments and replaced some officials, including four state governors. Luka Biong Deng"a skilled and well-respected SPLM figure who used to head the southern Sudan statistics agency"was appointed to the new post of minister in the Office of the President, bringing the number of cabinet ministers to 24. Mr Kiir also named Barnaba Marial Benjamin as minister of regional co-operation, replacing Nhial Deng Nhial, a senior SPLM figure who resigned in May. The 200-day action plan reflects the pressure on the GOSS to deliver tangible results in Southern Sudan. After more than a year in office, and nearly two years since the CPA was signed, the SPLM!s leaders"and international aid agencies and donors"are aware that there is considerable disappointment among southern Sudanese that the peace has not brought more concrete benefits in terms of new services and infrastructure. Tribal rivalries and sensitivities about representation in government are also a persistent concern (influencing many decisions about appointments), and there is an awareness that perceived imbalances in the distribution of resources and aid may stoke local conflict. As a result, many senior members of the SPLM are focusing their attention and efforts more closely on the south, although this carries the risk of further undermining the SPLM!s position at a national level. Opening the legislative session, Mr Kiir also highlighted four key outstanding issues on CPA implementation"the dispute over the Abyei Boundary Commission, the demarcation of the north-south border, control of the National Petroleum Commission (NPC) and the establishment of the National Civil Service Commission.

The National Congress Although implementation of the CPA is making some progress, it remains a

controls CPA implementation slow and laboured process. In September the National Constitutional Review Commission (NCRC) created various committees to assist the belated establishment of CPA-mandated commissions. In early November the cabinet approved a new civil service law, which should lead to the establishment of the National Civil Service Commission. Under the CPA, this body is charged with ensuring that 20% of middle- and senior-level civil service positions are filled by southerners by 2008"although given the slow progress to date, and the south!s shortage of trained personnel to fill government posts, it seems unlikely that the target will be achieved. In mid-November Mr Kiir announced that agreement had also been reached on the chairing of the NPC"a key outstanding issue, as one of its functions is to oversee the equitable division of oil revenue between north and south. Despite this measure of progress, resolution is as far away as ever on other highly controversial questions, including the delineation of the north-south

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boundary and the dispute over the state of Abyei. Resolution of the dispute is being held up by the NC!s refusal to accept the verdict of the independent Abyei Boundary Commission, which should be binding under the terms of the CPA. In early November the NC!s deputy leader in the National Assembly (parliament), Al Dirdiri Mohammed Ahmed, warned the SPLM that the NC would use its majority to block any attempt to force the president to answer questions on Abyei. The ongoing delays and obstructions demonstrate the extent to which the NC remains able to dictate how and when many of the components of the CPA are implemented. The SPLM is well aware of the problem, and its political bureau in September issued a press release calling for full CPA implementation and committing the SPLM to repealing any laws that were contrary to the CPA and the Interim National Constitution. However, the fact remains that the SPLM can do little about the NC!s dominance, particularly as other leading opposition parties still play a relatively limited role in the GNU.

Legal preparation for the 2009 The NCRC has also been working on drafts of two new laws in preparation for

election has begun the general election due in 2009. The draft political parties law, which was under discussion in the National Assembly in early December, would bar senior members of the civil service and armed forces from political activity. It would also create a process allowing the constitutional court to dissolve any political party rejecting the CPA"a provision that has caused some concern among northern opposition parties. However, the heads of all the main parliamentary blocs have insisted on the need for unanimous ratification of the draft law. Plans for a new general elections law are at a less advanced stage, partly because the National Election Commission has not yet been appointed, but the NC appears to be pushing for a measure of proportional representation, allowing the use of party lists. If adopted, this provision would tend to enhance the cohesion of existing parties and blocs, reinforcing central control.

The government is wary Relations between the government and sections of the local media are strained

of the media following anti-government demonstrations in the capital, Khartoum, in late August and early September, after which security staff forced several newspapers to withdraw articles and twice prevented one newspaper, Al Sudani, from being printed. The National Security Service also banned the press from reporting the murder of Mohammed Taha Mohammed Ahmed, a newspaper editor who was kidnapped from his home in Khartoum and beheaded in early September. The topic of Mr Taha!s murder is a sensitive one, as it demonstrates the tensions between extremist elements in Sudan!s political circles and the violence these sometimes produce. As the editor of Al Wifaq, an Islamist-oriented newspaper in Khartoum that has often been critical of the government, Mr Taha had many enemies, and had recently even been tried for blasphemy. These and other prohibitions on newspaper reporting attracted strong criticism, with some journalists arguing that they contravened the constitution and the spirit of the CPA, and that the government was using the restrictions to prevent support being voiced for the proposed deployment of a UN peacekeeping mission to Darfur. Yasser Armane, the deputy secretary-general of the SPLM, denounced the censorship and threatened to quit his role as chairman of the

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parliamentary information committee in Khartoum. In November the govern- ment held discussions on the subject of media liberalisation and freedoms. However, the talks produced only vague assurances about the government!s "policy to give more freedom to the media" and ominous statements regarding the need "for freedom and responsibility" in the media to go together. The censorship is symptomatic of the government!s habitual wariness of the local press, and is therefore unlikely to change soon. The government also imposes restrictions on foreign journalists and media: a recent example was the refusal to allow a UN-backed radio station promoting the CPA to broadcast in northern Sudan.

The Darfur Peace Agreement More than half a year after it was signed, the Darfur Peace Agreement (DPA),

comes under strain which was meant to end the ongoing conflict in Darfur, is failing. All efforts to persuade the major Darfur rebel groups opposing the agreement to sign up have been unsuccessful, in part because public support for the agreement among the more than 2m Darfuris displaced by the conflict remains low. As a result, the DPA has made minimal progress on the key issues of ending the fighting and beginning disarmament. There has been a certain amount of movement in implementing the formal terms of the agreement. For example, three members of the Sudan Liberation Movement (SLM) faction led by Minni Minnawi (the main DPA signatory on the rebel side) were appointed to government positions in November. Nevertheless, even those rebels who signed up to the deal clearly have their doubts. In early December Mr Minnawi"who has lost substantial influence on the ground in Darfur since the peace deal"complained to journalists that the janjaweed militia, who had launched an attack on the market in Al Fasher, the capital of Northern Darfur, had recently been rearmed by the government. He hinted that he might be forced to withdraw from the DPA, as "only 3%" had been implemented and there had been repeated violations of its terms.

The rebels continue fighting The lack of an effective peace agreement has meant that fighting and displacement have continued in Darfur, as government forces, the janjaweed militia and the various rebel groups launch periodic attacks, usually on civilians, before falling back on their core territories. Following a spate of attacks on villages in the rebel-held Jebel Moon area in North Darfur that killed 60 people in late October, the report of the UN Office of the High Commissioner for Human Rights concluded: "At the very least, the attacks demonstrated the government of Sudan!s continued failure to disarm militia in Darfur, and at worst its continued use of militia forces that target civilian populations." The various Darfur rebel groups"which remain as divided as ever"have also largely continued their military activities on the ground. The most active coalition of dissident rebels, the National Redemption Front (NRF), which is made up of a group of field commanders, including members of the Islamist-leaning Justice and Equality Movement (JEM) and representatives of other SLM factions, has extended its campaign. In late November, in a move that brought them much closer to the economic centre of the country, NRF forces attacked and damaged the 10,000-barrels/day Abu Jabra oilfield in Southern Kordofan. In early December, NRF forces were reported to have

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surrounded the town of Al Fasher in response to the janjaweed attacks on the market, triggering a UN evacuation of all non-essential personnel. Nevertheless, most Darfur rebel groups continue to make frequent declarations of support for the political process. In October the SLM faction led by Ahmed Abdel Shafi Baasi stated that it was still committed to the ceasefire agreements signed before the DPA, but in early December Mr Baasi also emphasised that unity among the various factions must precede any talks with the government in Khartoum. In November a "peace faction" of the JEM announced that it was forming a new political party and was trying to persuade other JEM members to lay down their arms. At the same time, the government declared that several SLM and JEM commanders had agreed to support the DPA, and Mr Minnawi stated that "dialogue" with other factions was continuing. The factionalism of the Darfur rebels tends to encourage the government to try to split its opponents and buy off opposition, resulting in the offer of fewer concessions to hold-out groups and the pursuit of military solutions. However, faction-ridden though the rebels are, there is no sign that the government is any nearer being able to defeat them militarily than when the conflict first escalated in 2003.

The prospects for further Awareness has slowly grown, both inside Sudan and abroad, that if the DPA is

peace talks are mixed to become an effective agreement capable of ending the conflict in Darfur, further talks must be held between the Sudanese government and the various rebel factions. In early November an independent local newspaper, Al Ayam, announced that the Darfur negotiations portfolio had been transferred to Mustafa Othman Ismail, a former foreign minister and now an adviser to the president, replacing Majzoub al-Khalifah, another of the president!s advisers, whom the rebel groups often criticised for his rigidity. Mr Ismail, who led the government!s successful negotiations with rebels in the east of the country, was expected to adopt a more flexible attitude, negotiating with the hold-out Darfur rebels as a bloc and potentially establishing a greater degree of trust. However, a final decision over Mr Ismail!s role in the Darfur negotiations has not yet been agreed, implying that there may be ongoing divisions within the GNU over the merits of a more conciliatory and unified approach to the Darfur rebels. Meanwhile, the international backers of the DPA, in particular the African Union (AU), the US and the EU, have largely avoided committing themselves to any major new Darfur peace talks. In early November the AU commissioner for peace and security, Said Djinnit, held a number of meetings in Khartoum that were meant to prepare the way for a "Darfur-Darfur Dialogue Conference", as mandated in the DPA. However, after their experience of participating in the talks in the Nigerian capital, Abuja, in April"where their insistence on imposing a deadline for the talks produced a premature and incomplete peace agreement"the US and the EU have avoided any direct involvement. Although it remains possible that talks with AU or other regional assistance, or even unmediated negotiations, may now gather momentum, a sudden resolution to the Darfur fighting is highly unlikely, given the scale of the conflict, the unpopularity of the DPA and the determination shown by the various rebel groups.

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A new peacekeeping formula The Sudanese government has continued to reject UN Security Council

proves elusive Resolution 1706, which proposed a UN peacekeeping mission of up to 20,800- personnel in Darfur to take over from the existing 7,700-strong AU mission (AMIS). In early October the government provoked an angry response from the Security Council after it sent a letter to potential troop-contributing countries warning that participation in such a UN force in Darfur would be considered a "hostile act". Soon afterwards the government announced that it had decided to expel the UN envoy to Sudan, Jan Pronk, after Mr Pronk claimed in his weblog that the Sudanese army had recently suffered several heavy defeats in Darfur. The expulsion was widely denounced, with the UN secretary-general, Kofi Annan, supporting Mr Pronk!s position. However, with Mr Annan due to end his tenure at the end of the year, the Sudanese government appears to have felt no need to retract its decision. Instead, it indicated that it was ready to work with the next UN envoy to Sudan and that it had no objection to AMIS being given a stronger mandate and additional support, provided that there was no transition to a UN force in Darfur. The Sudanese government!s steadfast refusal to accept a UN peacekeeping mission in Darfur has slowly pushed the US and the EU to accept that the only available option for now is some formula for a "hybrid" force, whereby AMIS is reinforced by UN assistance. Although Resolution 1706 only "invites" the consent of the Sudanese government to the deployment of a UN mission in Darfur, neither the UN nor any major troop-contributing countries would deploy to Darfur without the government!s approval. Such a deployment would pose major logistical difficulties, and might also risk jeopardising the UN-monitored north-south peace deal. Following a meeting in the Ethiopian capital, Addis Ababa, in mid-November, Mr Annan announced plans to increase UN support in three phases, culminating in a hybrid UN/AU force. However, although the Sudanese government originally appeared ready to consider such a force, it has raised queries over its appropriate size and remains unwilling to allow the UN control over its command structure. In a press conference in late November, the president, Lieutenant-General Omar Hassan Ahmed al-Beshir, denied that Sudan had accepted a hybrid force. He also accused aid agencies of exaggerating the scale of the crisis to protect their jobs, claiming that not even 9,000 had died in Darfur"in contrast to the UN estimate of at least 200,000 killed by war or famine since the situation deteriorated in early 2003.

The mandate of the AU Meanwhile, both the Sudanese government and the international community

mission is extended have welcomed the decision taken by the AU Peace and Security Council at Abuja in late November to extend the mandate of AMIS for six additional months, until the end of June 2007. In accordance with the first phase of the plans for enhanced UN support formulated at Addis Ababa, AMIS has already begun to receive some modest technical and logistical assistance from the existing UN peacekeeping mission in Sudan, UNMIS, which polices the CPA. The likelihood is that such assistance will continue to be increased, and that AMIS will be expanded"although the head of UN peacekeeping, Jean-Marie Guehenno, emphasised in early December that the international community must be assured of the effectiveness of the force (which would depend on a

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ceasefire and political talks) before providing further funding. Nevertheless, unless AMIS receives a major boost in personnel and assistance from the UN or elsewhere, it will remain unable to offer more than the very limited degree of security it currently provides in Darfur. A further possibility is that AMIS may yet be complemented by the deployment of UN forces in the areas of Chad and the Central African Republic (CAR) bordering Darfur, where many Darfuri refugee camps are located. In November, UN officials visited Chad and the CAR to investigate this option.

Cross-border destabilisation Despite efforts to patch up relations between Sudan and Chad and an

continues agreement by each government to stop supporting rebel groups in the other country (September 2006, The political scene), the well-established pattern of cross-border destabilisation between the two countries continues and has extended to the CAR. From late October, Chadian rebels identifying themselves as the Union of Forces for Democracy and Development (UFDD) began a series of attacks on government targets in eastern Chad, capturing and briefly holding several towns. The Chadian foreign minister, Ahmar Allami, claimed that the rebels had entered Chad from Sudan and could only have procured their arms "within the sight of and with the knowledge of the Sudanese authorities". Also in October, in the CAR, a coalition of rebels captured the town of Birao in the far north-east of the country, close to the border with Southern Darfur. The CAR government also immediately charged Sudan with backing the insurgents"an accusation rejected by the Sudanese government. Although such bouts of cross- border rebel activity are not new, they remain a cause for concern, as they add a further element of instability to both the situation in Darfur and Sudan!s political relations with its neighbours.

The eastern peace agreement The Sudanese government and the rebel Eastern Front (EF)"an alliance of two

strengthens the government insurgent groups, the Rashaida Free Lions and the Beja Congress"signed a peace agreement on October 14th in the Eritrean capital, Asmara, ending some ten years of low-level conflict in eastern Sudan. The Eastern Sudan Peace Agreement (ESPA) was mediated almost exclusively by Eritrea, without the involvement of the AU, the UN or the Horn of Africa Inter-Governmental Authority for Development, which led the negotiations for the CPA. Although the ESPA was concluded after a relatively brief round of negotiations, talks with the EF have been held intermittently over the past six years, during which time the rebels have been weakened both politically and militarily, culminating in the withdrawal of the SPLM (a former ally) from the east earlier this year in accordance with the CPA and the rapprochement between the Sudanese and Eritrean governments. Although, as with other Sudanese rebel groups, the grievances of the EF concerned economic and political marginalisation, the eastern conflict had never escalated and polarised the civilian population to the same extent as in Darfur and the south. From the government!s point of view, the fact that eastern Sudan is the gateway for most of Sudan!s imports and exports (including oil) has always been a vital incentive to settle the conflict peacefully rather than militarily. The ESPA"which does not involve any AU or UN monitoring or peacekeeping" is a useful boost for the government, particularly as it has come at a time of

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considerable international pressure over Darfur. The agreement marks a substantial improvement in Sudan!s relations with neighbouring Eritrea, and resulted in the reopening of the border. It reinforces the country!s economic security by removing the (admittedly small) risk of rebel attacks disrupting oil exports through the pipeline that runs through eastern Sudan or the flow of container traffic on the paved road between Port Sudan and Khartoum. An end to the eastern conflict provides better conditions for foreign investment in the area in gold mining and the oil and gas sector. Like the CPA, and to some extent the DPA, the agreement also strengthens the ruling NC in political terms, by reinforcing its position as a key party to peace in the country. It could also allow the government to redeploy troops from the east to Darfur.

The ESPA is likely to hold The prospects for the eastern agreement are better than for the DPA. In general, expectations among the EF and the eastern public revolve around the desire to see economic improvements in the area and better representation for peoples such as the Beja and Rashaida. Reflecting these concerns, the key elements of the ESPA focus on governance, security and the economy. The agreement provides for the appointment from the EF of one assistant and one adviser to Mr Beshir, and one state minister. Two posts of cabinet minister and one of state minister in the national government will continue to be held by eastern Sudanese, as currently. The agreement also allocates eight seats in the National Assembly to the EF and provides for the establishment of an Eastern Sudan States Co-ordinating Council. On security, a comprehensive ceasefire that took effect on October 16th will be monitored by a joint government-EF committee chaired by Eritrea. Although the agreement does not set out detailed arrangements for wealth-sharing, it does provide for the government!s Fiscal and Financial Allocation and Monitoring Commission to ensure "appropriate and fair" distribution of funds to the eastern states (Gedaref, Kassala and Red Sea). It also establishes an Eastern Sudan Reconstruction and Development Fund, into which the government is to put US$100m in 2007 and US$125m annually in 2008-11. Although implementation of some of these provisions may well be incomplete, the agreement is likely to hold. The government lifted the state of emergency in Kassala and Red Sea states in October. In November the EF held a congress to ratify the agreement and decide its nominations for appointments in government.

Economic policy

The fiscal deficit widened in Figures obtained from the Ministry of Finance and National Economy for the January-September 2006 first three quarters of 2006 show a rapid widening in Sudan!s budget deficit, which reached almost SD194bn (US$894m). Total revenue including grants reached more than SD1trn (US$4.6bn) over the nine-month period, of which around 40% was tax revenue (more than half stemming from customs and excise duties). Of the SD651bn of non-tax revenue, nearly 80% came from oil production"an item that is expected to rise strongly in the fourth quarter. On the expenditure side, total government spending stood at some SD1.3trn. Of this, 16% was transferred to the Government of Southern Sudan (GOSS) and to southern states as their share of oil revenue under the Comprehensive Peace

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Agreement (CPA), and 18% was transferred to northern states under a variety of headings, including SD48bn for local and foreign development projects. Within the category of national government spending, SD273bn went on wages and salaries; SD227bn was used for national development purposes (of which 65% was spent on locally initiated development projects); just under SD100bn was transferred to the General Reserve; and around SD48bn was spent on servicing foreign and domestic debt.

Fiscal performance, Jan-Sept 2006 (SD bn unless otherwise indicated) Tax revenue 430 Non-tax revenue 651 Oil revenue 518 Total revenue (incl others) 1,081 Wages and salaries 273 Debt servicing 48 General Reserve 100 National development 227 Transfers to the GOSS & southern states 206 Transfers to northern states 234 Total expenditure (incl others) 1,275 Balance -194

Source: Ministry of Finance.

If annualised, this budget deficit would be around SD257bn"the equivalent of around 3% of estimated GDP. However, the Ministry of Finance expects expenditure to continue to grow strongly in the fourth quarter, despite reductions that were made in August in some subsidies (September 2006, Economic policy), offsetting a healthy revenue rise based largely on recent oil production increases. As a result, it estimates that the full-year fiscal deficit will stand at around SD266bn. Based on the same data from the first nine months of the year, the IMF has projected a slightly higher budget deficit of SD294bn (3.7% of GDP, according to IMF estimates). This is much lower than the expected 2006 budget deficit of around SD543bn (equivalent to around 5.8% of GDP) forecast by the Ministry of Finance in August. However, it remains well above historical levels"Sudan showed a small fiscal surplus in 2003 and 2004, and the deficit in 2005 of just 1.7% of GDP was the widest since the late 1990s, relative to the size of the economy. Moreover, as in 2005, the deficit will significantly exceed the IMF-agreed target of a maximum of 1% of GDP. Only about 17% of the deficit will be financed by foreign loans"most of the remainder will be financed from domestic borrowing, together with around SD10bn of privatisation revenue.

Longer-term management of In itself, this size of deficit is manageable. However, the extent to which it

fiscal pressures is a concern exceeds earlier targets does give further reason to question how the government will manage fiscal pressures over the coming years. The 2007 budget was due to be discussed by the National Assembly (parliament) in December, and it was reported that, in early drafts, the fiscal deficit was projected to reach as much as SD300bn (in contrast to an IMF projection of just SD210bn), although this was expected to fall as various departments! expenditure plans were bargained down. Nevertheless, the finance and national economy minister, Zubeir

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Mohammed Hassan, in his report to the cabinet in October, announced several large planned investments which may draw significantly on the public purse, if they go ahead: these include the planned purchase of 1,100 new wagons and 120 locomotives and other rolling stock to upgrade Sudan!s railways, a tender to buy 22 barges and tugs for the National River Transport Corporation, and the investment of SD4.8bn to develop agricultural projects at Er Rahad and Halfa. In addition to these plans, under the terms of the Darfur Peace Agreement signed in May and the Eastern Sudan Peace Agreement signed in October (see The political scene), over the next five years, the government has pledged to contribute substantial sums of money annually to dedicated development funds for Darfur and eastern Sudan"in theory a combined total of around US$300m per year over the first three years of the peace agreements. Historically, Sudan!s government has not followed through on all of its major spending plans. Many projects, especially for road construction and agriculture, have stalled, with less money spent on them than initially pledged. However, under current circumstances, with the need to demonstrate a nationwide peace dividend and a high degree of earmarking of funds for transfer to the various regions, it seems likely that the recent trend of strong annual expenditure rises (averaging almost 50% over the three years to 2005) will continue to be sustained. At the same time, there have been ongoing problems with tax revenue collection (especially the collection of customs revenue on the southern border of Sudan). Oil revenue has also been disappointing, with planned production increases delayed by repeated technical problems and poor-quality crude being sold for low prices (see The domestic economy: Oil and gas). In principle, a new unit in the government, the Fiscal and Financial Allocation and Monitoring Commission, which was established in 2005 but has only recently become operational with World Bank assistance, should lead to improvements in fiscal management. However, the Commission is tasked primarily with overseeing the implementation of wealth-sharing arrangements under the various peace deals. It may thus bring only modest improvements to the government!s management of broader fiscal pressures.

Western economic sanctions The US president, George W Bush, signed a decree in October tightening US

pose few difficulties economic sanctions on Sudan. On November 1st, he also renewed the declaration of an emergency in relation to Sudan, under which the sanctions are maintained. The decree prohibits US companies from involvement in the energy or petrochemicals sectors in Sudan, and renews the sanctions on US trade with Sudan that were imposed in 1997. Southern Sudan, Darfur and the "transitional areas" between the south and the north"Abyei, Blue Nile and Southern Kordofan (the Nuba Mountains)"were exempted from the decree. There are also EU sanctions in place against Sudan, but these are limited to restrictions on European firms and governments involved in the defence sector. Nevertheless, partly as a result of US divestment campaigns, major European oil and gas companies are also wary of being seen to do business with the Sudanese government. The response to the renewal of US sanctions was muted, reflecting the fact that they are likely to have a relatively limited effect on the government!s economic plans. Similarly, additional sanctions currently being advocated by some

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international campaigners and governments either have little chance of being imposed or would have little effect. Calls for a naval blockade on oil exports from Port Sudan have no chance of being taken up, not least because much of Sudan!s oil is exported to China (which would veto any UN Security Council resolution), but also because the GOSS partly depends on oil revenue. A Brussels-based non-governmental organisation (NGO), the International Crisis Group, has called for international sanctions to be imposed on Sudanese companies and charities linked to members of the government and the security apparatus. However, it is doubtful whether such sanctions would have much effect, given the opaque nature of the networks that could be targeted and the difficulty of identifying their (relatively few) international linkages. The Sudanese government has therefore made little effort to counter the threat of new sanctions, and is instead concentrating on attracting foreign investment from Asia and the Middle East, where interest is strong. A trade and investment conference for Gulf investors was held in the capital, Khartoum, in November. In the same month, during the China-Africa summit in Beijing, Sudan!s energy and mining minister, Awad Ahmed al-Jaz, announced that agreements had been signed with Chinese companies wanting to invest in gold and iron ore extraction in central and western Sudan. Mr Jaz gave no details about the agreements, but said that some companies were also interested in copper mining opportunities and that new areas for iron ore exploration would be opened up shortly.

Red tape and corruption Of more immediate concern for Sudan!s investment prospects is the perceived

are problems level of red tape and corruption, and the negative effect on the country!s business environment. In a report published by the World Bank and the International Finance Corporation, Doing Business 2007: How to Reform, Sudan is ranked 154th out of 175 countries for ease of doing business. The rankings are based on indicators of the time and cost of meeting government requirements for running a business, from start-up and operation, through trade, taxation and closure. Sudan comes out similarly poorly in assessments of corruption. In November, Transparency International, an NGO headquartered in Germany, published its annual "corruption perceptions index", which this year ranked Sudan 159th out of the 163 countries included. The index, which is based on surveys of perceptions of public-sector corruption, scores countries on a scale of zero to ten, zero indicating high levels of perceived corruption, ten indicating low levels. On this scale, Sudan emerged with a score of 2.0. Sudan!s ranking in Transparency International!s corruption index has worsened over the past four years"from 106th in 2003, to 122nd in 2004 and 144th in 2005. The deterioration almost certainly reflects the perception in Sudan that the country!s growing oil sector and surging oil revenue have fostered new corruption. To some extent, this assessment has arisen because most Sudanese feel that oil revenue has not brought any tangible improvements in their lives, and suspect that the income has instead gone into private bank accounts and property investment. In the absence of greater transparency about oil earnings and government spending, and with the evidence of a marked boom in luxury property development in Khartoum, such perceptions of growing corruption are likely to continue to be reinforced.

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Launch of the new currency is In late September the governor of the Bank of Sudan (the central bank), Sabir

behind schedule Mohammed al-Hassan, confirmed that the launch of the new currency (the Sudanese pound, which will equal SD100"September 2006, Economic policy), was behind schedule, saying that the delay was a result of a shortage of funds. As plans stand, the new currency will be launched first in the south, beginning on January 9th 2007, where it will gradually replace the foreign currencies that are customarily used there. By April, sources within the central bank suggest that the currency will be made available to the public in the north as well. Reportedly, two denominations of the new currency have already been printed and are ready for distribution. However, delays in tendering and financing have meant that other denominations will not be available until later in 2007. Further delays or complications in the launch of the new currency are likely, not least because of the logistical challenges of managing its distribution in the south, where the banking network is rudimentary and communications and transport are difficult. Indeed, more than a third of the estimated US$150m total cost of introducing the pound is expected to be consumed by logistics, covering the recall of existing currency and the delivery, storage and distribution of the pound. However, the introduction of a new currency was called for by the CPA and is particularly needed in Southern Sudan, where multiple currencies circulate and the existing Sudanese dinar is often not used.

The dinar strengthens further The dinar has continued to appreciate against the US dollar, strengthening from around SD211:US$1 at the start of September to under SD203:US$1 in early December. This compares with an average value of SD244:US$1 in 2005 and almost SD258:US$1 in 2004. The appreciation is overwhelmingly the result of the large increase in oil exports over this period. So far, the appreciation appears to have had little negative impact on non-oil exports, and for this reason the central bank has been content not to intervene to try to weaken the dinar. This policy may be set to change as the exchange rate approaches the psychologically significant SD200:US$1 barrier, which some banking sector sources have identified as the point at which competitiveness might be endangered. Still, any action to slow the appreciation is likely to be gradual rather than abrupt, not least owing to the recent weakening of the dollar.

The domestic economy

Economic trends

Five-year growth targets In September the finance and national economy minister, Zubeir Mohammed

are optimistic Hassan, presented a report to the cabinet on the performance of the economy in the first half of the year, stating that foreign direct investment had risen by 69% year on year from US$1,064m to US$1,799m. Mr Hassan also announced that the government would pursue a five-year economic plan for 2007 to 2012, which will aim to achieve an annual real GDP growth rate of 8-10%; to increase productivity in the agricultural and industrial sectors; and to provide new investment in infrastructure and technology.

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The annual GDP growth target over the next five years, although high, is not entirely unrealistic, thanks to growth in oil output and revenue, as well as ongoing strong foreign investment inflows. Even in the period 2003-05, when Sudan!s oil output was relatively constant, real annual GDP growth averaged over 6%. As a result, the Economist Intelligence Unit estimates that Sudan!s real GDP will have grown by 9.6% in 2006, and forecasts that this growth rate will increase to some 12% in 2007. However, growth rates are likely to ease at this point, as oil production increases slow. We therefore forecast GDP growth of around 6% in 2008.

Inflation spikes sharply Figures recently released by the Bank of Sudan (the central bank) show that

in the second half inflation remained well within the IMF-agreed target of a maximum of 7.5% during the first six months of the year, averaging just 4% on a year-on-year basis. By the end of July, the rate of inflation had dipped to 1.7%, before rising to 5.2% the following month. In September, however, average consumer price growth surged to 15.7%, as a result of the reduction in sugar and petrol subsidies in August (September 2006: Economic policy). This reflected a large leap in transport costs, which not only almost doubled the prices of some forms of personal transport, but also had a knock-on effect on the prices of many staple food items, some of which have to be transported long distances by road to markets in Sudan!s major towns. Since September the rate of inflation has begun to return to more normal levels, standing at around 9% in late November. As a result, we estimate that average inflation in 2006 will have reached approximately 7.5%"only just within the IMF target.

Oil and gas

Oil prices ease despite After peaking at US$79/barrel in August, average crude oil prices have eased

OPEC action markedly over the past three months. The fall in prices was the result of a number of factors"in particular, the end of the Israel-Hizbullah conflict, a partial resumption in production from fields operated in Alaska by a British oil major, BP, and the end of the summer "driving season" in the US. A milder than expected hurricane season in the US and high OECD stock levels have helped to bring down prices further, as has the slight easing in geo-political tensions over Iran!s uranium enrichment programme. As a result, by late November, prices for the benchmark dated Brent Blend were averaging below US$60/barrel"although they began to rise again in early December, climbing back above US$64/b. The overall fall in prices came despite OPEC member states! agreement in October to cut output by 1m barrels/day (b/d), the impact of which was diluted by uncertainty over the cut!s implementation. Sudan is not currently an OPEC member, although in early December the country (together with Angola and Ecuador) announced that it was considering joining the cartel. However, such a move remains unlikely, largely because of the major limitations it would impose on Sudan!s efforts to raise its"currently relatively low"levels of oil production.

Petrodar raises production, In September the energy and mining minister, Awad Ahmed al-Jaz, and Youssif

but problems continue Mohammed, the general manager of Sudapet, the state-owned oil company,

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announced that Sudan!s crude oil production had reached around 500,000 b/d. Ministry of Finance oil production data for the month of October confirmed that total output stood at an average of just over 458,000 b/d. This figure included long-standing production from the Greater Nile Petroleum Operating Company (GNPOC) fields in Blocks 1, 2 and 4, which had been averaging just above 250,000 b/d in the January-October period"although the volume produced in the first half of 2006 fell by 14% year on year. It also included new production from Block 5A, managed by the White Nile Petroleum Operating Company, averaging just under 24,000 b/d, as well as the long-awaited output from Blocks 3 and 7 (the Petrodar concession), which reached 178,000 b/d. Initial production from Blocks 3 and 7 started in April, after a series of delays to the completion of a new pipeline to Port Sudan, and the first shipment was exported in September (September 2006, The domestic economy: Oil and gas). However, as of December, construction of the new Bashayer 2 export terminal at Port Sudan, which was intended to be used for the oil from the Petrodar concession, was not yet complete, and the existing GNPOC export terminal was also being used for exports from Blocks 3 and 7. Some difficulties are attached to this temporary solution, as the terminal is currently operating at about 70-80% of capacity, rather than the more usual 40%"slowing the export of GNPOC!s more valuable Nile Blend oil, reducing the opportunity to perform routine maintenance and raising the risks of a blockage that could potentially halt all of Sudan!s oil exports. Moreover, there have been severe problems with the quality of the oil produced in the two blocks. It was originally stated that the oil would be Dar Blend, a viscous crude that trades at a substantial discount to Nile Blend"of up to US$15/barrel, according to some estimates. In fact, however, the oil currently being produced is not Dar Blend, but an even more acidic crude that does not meet the specifications of any existing refineries. Efforts are currently being made to improve the quality of the oil with chemical treatments, but meanwhile the output that is currently being exported from Blocks 3 and 7 is fetching just US$17-18/b.

Oil output growth is now In early December Mr Jaz announced that Sudan was targeting oil production

expected to slow of around 1m b/d by 2008. Based on assumptions about Petrodar and other new ventures, Sudanese officials have previously said that they hoped to raise output to 650,000 b/d by the end of 2006 and to 1m b/d by 2010 (June 2006, The domestic economy: Oil and gas). The first target now seems certain to be missed, and the longer-term goal is highly speculative at this stage, as the new concessions have not yet been explored. In their earlier announcement in September, Mr Jaz and Mr Mohammed said that they expected natural declines in some of Sudan!s more mature fields to hinder any major increases in total output over the coming few years. According to Mr Mohammed, output has begun to fall marginally in Blocks 1, 2 and 4 in the Heglig Basin, three mature production areas in which Sudapet is a minority partner to the China National Petroleum Corporation (CNPC) and Petronas of Malaysia. Most of these fields are unsuitable for the use of enhanced oil recovery technologies to boost production, although there is some scope for further exploration, particularly within Block 4.

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Of the other currently producing blocks, 5A should in theory have the capacity for production to be increased substantially over the next few years. In fact, however, output must remain capped at around 30,000 b/d (10% of the total combined production of Blocks 1, 2, 4 and 5A), for fear of altering the composition of the crude in the GNPOC pipeline beyond the specifications for Nile Blend. Block 6, most of which is refined domestically, has the potential for production to be raised from around 30,000 b/d to as much as 80,000 b/d in the medium term. There is in theory room for further growth in output from the Petrodar concession: figures cited by Sudanese officials range up to an additional 150,000 b/d. However, until a solution is found to the current problems with the specification of the crude, there will be very little incentive to raise production"indeed, output is likely to be kept to the minimum necessary to maintain the viability of the pipeline. Until new discoveries are made, therefore, Sudan!s oil output growth is expected to be much slower than in 2006-07.

The concession is awarded for In its ongoing efforts to raise future production by granting concessions to Block 12A in Northern Darfur consortia of foreign oil companies, the Sudanese government has awarded one further oil exploration and production licence, leaving just three more blocks available for bid. In mid-November, Block 12A was awarded to a consortium of six companies from Arab countries, led by Jordan-based Dindir Petroleum International (DPI), which holds a 15% stake. Although the granting of the concession heralds the first major involvement by Arab countries in Sudan!s oil exploration sector, it is in line with the increasing interest in investment prospects in Sudan shown by Gulf states in particular. For example, in September it was reported that the Aref Investment Company of Kuwait had bought a 51% share of Heglig Petroleum Services and Investment, a privately- owned Sudanese firm, for US$60m. Apart from DPI, the other partners in the 12A consortium include the Abdel Hadi Abdullah al-Qahtani & Sons Company of Saudi Arabia, with 33%; Ansan Wikfs of Yemen and the Sudanese state-owned oil company, Sudapet, each with 20%; Hi-Tech Petroleum Group (a Sudanese company set up by a former energy and mining minister, Abdel Aziz Osman, in which a brother of the president, Lieutenant-General Omar Hassan Ahmed al-Beshir, holds a senior position) with 7%; and Libya!s All-Africa Investment Corporation with 5%. The consortium partners have pledged to invest US$43m over six years in exploring the area. Block 12A covers a large area in the northern part of Northern Darfur, stretching up to the Libyan border. Although little information is publicly available about the potential of this block, new exploration in some adjacent areas has been yielding positive results. In August, for example, Mr Jaz announced that oil had been discovered in Block 14 (for which the exploration concession is held by PetroSA of South Africa, with Sudapet owning a 20% stake), in the neighbouring area of Wadi Halfa in the far north of Sudan.

The three remaining blocks In early December Mr Jaz also stated that the three remaining exploration

look less promising blocks that have not yet been allocated would be awarded in 2007. In fact, however, it is unclear whether there is likely to be sufficient interest from foreign operators. Ongoing violence and political sensitivities are likely to

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continue to deter potential investors in Block 12B, which is located just to the south of 12A (covering the rest of Northern Darfur, most of Western Darfur and parts of Southern Darfur, Northern Kordofan and Western Kordofan). As long as the Darfur conflict continues, any exploration work in this region would be extremely controversial and would carry significant political and security risks for the companies involved. Following the signing of the Eastern Peace Agreement, a second unallocated concession, Block 10, which covers an area around the town of Gedaref and along part of the Ethiopian and Eritrean border up to Kassala, has become less politically difficult to award. However, there remains a lack of enthusiasm among potential bidders, possibly owing to the unpromising nature of local rock formations. Hopes are higher for the final concession under consideration, Block 13, a partly on-shore and partly off-shore area between Port Sudan and the Egyptian border, in which Reliance Industries of India is believed to have expressed an interest.

The lawsuit against Talisman In September a US New York district court judge dismissed a lawsuit against a

Energy is dismissed Canadian oil company, Talisman Energy, which had alleged that Talisman had aided the Sudanese government in war crimes including ethnic cleansing, killings and confiscation of property. The lawsuit was brought by the Presbyterian Church of Sudan and a number of Sudanese individuals under the US Alien Tort Claims Act, and related to the activities of Talisman in western Upper Nile in the late 1990s and up to Talisman!s withdrawal from Sudan in 2003. In dismissing the case, the judge said that the plaintiffs had failed to provide "admissible evidence" showing that Talisman had violated international law. The dismissal of the lawsuit is a meagre consolation for Talisman after its controversial venture in Sudan. As was documented at the time by the UN and various non-governmental organisations (NGOs), Ta lisma n !s activities became inextricably connected to the intensified killing and forced displacement of civilians during the civil war between the govern- ment and the Sudan People!s Liberation Movement (SPLM). Although Talisman is highly unlikely to try to return to Sudan, given its past experience, the troubles within which it became enmeshed will continue to serve as a warning to foreign oil companies (particularly those based in the US and the EU) about the perils of doing business in Sudan. The warning has been reinforced by the recent divestment campaigns in the US, which have targeted CNPC and several other companies doing business in Sudan. Although US oil companies are prevented from doing business in Sudan!s oil sector by US sanctions, European companies suffer no such direct prohibition. So far, though, only Total of France and the UK-listed White Nile are attempting to pursue business in the country, and both"given their ongoing dispute over the rights to a southern oil concession (September 2006: The domestic economy: Oil and gas)"have already discovered that success is likely to depend on careful navigation of Sudan!s complex internal politics. In the meantime, most major Western oil companies remain justifiably wary.

A new licence dispute arises While the dispute between Total and White Nile over the rights to explore in the south Block 5 in Southern Sudan remains unresolved, a further dispute is potentially looming between White Nile and a British Virgin Islands-based company, the

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Jarch Management Group (JMG). JMG claims that the leaders of the South Sudan Defence Force, a Nuer-dominated and government-backed militia that fought the SPLM during the war in the south (see The political scene), awarded it an oil exploration licence for Block Ba, the same area claimed by White Nile within Block 5. Although White Nile!s dispute with JMG is much less significant than that with Total, it provides another example of the extent to which rivalries between militias and tribes can impact on the oil sector. As a result, it is possible that more such disputes may arise in the future.

Oil revenue sharing The Ministry of Finance and National Economy has begun publishing a

transparency is incomplete monthly report on the share of oil revenue of the Government of Southern Sudan (GOSS). According to the latest report, in September the GOSS received US$86.5m in oil revenue, bringing the total for the first nine months of 2006 to US$739m. During these nine months the GOSS!s monthly share has fluctuated from as low as US$61m in February to a peak of US$95m in June. According to the report, the GOSS!s earnings for September did not include a share of earnings from exports from Blocks 3 and 7, as the proceeds of these exports would only be recorded in October. As these two blocks lie almost entirely in Southern Sudan, the GOSS!s oil earnings should increase in the last quarter of 2006"although not by as much as originally expected, owing to the low price fetched by the viscous and acidic crude extracted from the Melut Basin. As a result, the GOSS is probably on course to receive total oil earnings of around US$1bn for 2006, comfortably above the US$750m that had been budgeted. The oil revenue sharing report is an important step in increasing transparency on this issue between the central government and the GOSS. However, given the prevalent belief in the south that the full share of oil revenue due is not yet being transferred, there remains scope for further improvements and clarifications. For instance, at present the report gives no data on the average monthly output from the various operating blocks, providing only an aggregate total. It should be possible to give a breakdown of output, however, as even in its current form the report gives a detailed month-by-month percentage split (accurate to two decimal places), showing what share of the monthly output was produced in the south. In addition, the report would be much more persuasive if it were endorsed by representatives of the GOSS who had been permitted to access the original data, ideally within the framework of the newly established National Petroleum Commission between the ruling National Congress and the SPLM. Nevertheless, the transfers that have already been made are substantial, and for the moment higher than budgeted levels of oil revenue and other priorities will tend to distract the GOSS from challenging the finance and national economy ministry on all the details of oil revenue allocations.

Infrastructure

Basic infrastructure The US Agency for International Development (USAID) announced in October

development is picking up that it had awarded a five-year contract for infrastructure and basic services development in Southern Sudan and the three "transitional areas" (Abyei, Blue Nile and Southern Kordofan) to the Louis Berger Group, a US firm. The contract is worth up to US$700m and reportedly covers transportation, urban

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development, water, sanitation, public buildings, energy and natural resources. It constitutes the largest single contract yet awarded for basic infrastructure development in the south and the transitional areas. In August USAID awarded a similar but smaller contract to the UN Office for Project Services for "accelerated" infrastructure development. Earlier this year the World Bank- administered Multi-Donor Trust Fund (MDTF) agreed a US$44m grant to support the rehabilitation of roads and railways in South Kordofan, Blue Nile and Kassala states. Many other infrastructure-related projects are also being carried out by UN relief and development agencies and NGOs, and the GOSS has contributed to some of these. Nonetheless, infrastructure development in the south and the transitional areas continues to be constrained by a number of factors. Chief among these is the limited capacity of contractors, implementing agencies and Sudanese counter- parts (such as in the state administrations) to deliver in environments where existing infrastructure is sometimes minimal, and communications and trans- port are difficult and costly. In addition, the activities of the MDTF have been subject to substantial delays, owing to a combination of factors, including the slow pace of the World Bank!s disbursement procedures and a lack of comple- mentary government structures on the ground. As a result, aid expenditure on infrastructure continues to be overshadowed by spending on humanitarian assistance. In 2005, for example, USAID!s total budget for Sudan was US$855m, with much of this going on relief in Darfur. By contrast, in 2004-06, USAID spent a total of only around US$84m on infrastructure in Southern Sudan.

Ethiopia-Sudan power grid Ethiopia and Sudan agreed in October on financing arrangements to build a

connection moves forward 320-km 230-kilovolt power grid connection between Gondar in Ethiopia and Gedaref in eastern Sudan. Sudan will contribute US$27m to the project, and Ethiopia will contribute US$38m (of which all but US$3.5m will provisionally come from a World Bank loan, due to be considered by the Bank!s board in January). The connection between the two countries! power grids will enable Ethiopia to sell surplus power generated from a number of new hydroelectric projects. Rapid economic growth in Sudan, combined with widespread expectations of infrastructure improvements in outlying areas now that peace has been established in the south and east (which is likely to benefit in particular from the new power grid connection to its neighbour), means that demand for electricity is set to grow strongly over the coming years. As a result, the Sudanese government has continued to seek new sources of power, despite the existence of a number of major ongoing power generation projects"most notably, the 1,250-mw Merowe Dam, which is expected to be completed by 2009 (September 2006, The domestic economy: Infrastructure).

Arab investors are looking In October it was announced that Dubai-based Amlak Finance had bought a

for opportunities 60% stake in the Sudanese El Nilein Industrial Development Bank. The acquisition has been made jointly with the local Al Salam Bank (in which Amlak is a shareholder) and Dubai-based Emaar Properties, which is the main shareholder in Amlak. As part of the investment"which has been reported to be worth between US$40m and US$80m"Amlak and Al Salam will take on the debts of El Nilein Industrial Development Bank. The Sudanese government

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holds the remaining 40% of the bank, which was formed from a merger in 1993 of two Sudanese banks, the Industrial Development Bank and El Nilein Bank. Amlak!s investment is typical of the linkages that have often been made between banks and investors in Sudan, Saudi Arabia and the Gulf. Moreover, with the region currently benefiting from booming oil revenue, such linkages and investments are likely to accelerate, with much Arab money also going into other sectors, especially property development. To some degree, the current situation echoes the period following the 1972 peace agreement that ended an earlier north-south civil war, when Arab investors and governments poured petrodollars into new banks and ambitious agricultural investment schemes in Sudan. Many of those schemes subsequently failed, and large sums of money were lost. Although some investors are aware of the precedent, and are attempting to select projects more carefully, their ultimate success will depend on continued high economic growth and a stable political environment.

Agriculture

Harvest levels in Darfur The World Food Programme (WFP) reported in October, following a UN-led

are yet to be seen assessment mission, that overall malnutrition levels in the three Darfur states had broadly stabilised in 2006. It also found that food security had slightly improved, thanks to a stronger international response to relief agencies! appeals. In addition, the WFP reported that the crude mortality rate had fallen for the third year running. Nonetheless, malnutrition rates in Darfur are still high, and the food security outlook remains a cause for concern. In September the WFP reported that insecurity had again cut off around 355,000 people in North Darfur from food aid the previous month. Since then, violence across Darfur has continued to prevent access to malnourished populations. The food security outlook for the coming months now largely depends on harvest levels at the start of 2007. Fighting and population displacements during the second half of 2006 are likely to mean that harvests from some of Darfur!s more fertile areas will be poor. Even so, in early December the International Committee of the Red Cross, which currently feeds around 300,000 people in remote communities, announced that it was cutting its 2007 budget for Sudan next year by 43% to US$61.2m and halting food distribution in Darfur, as its assessment showed that people had been able to harvest much more than previously, despite the fighting, attaining a certain level of self-sufficiency. Elsewhere in Sudan, a good rainy season has meant that harvest levels are generally expected to be adequate or good, although in some areas (such as the Sobat Corridor in Upper Nile state) local authorities have indicated that large areas of crops may have been destroyed by flooding.

Foreign trade and payments

The value of exports rises by According to data from the Bank of Sudan (the central bank), the value of

10.5% in the first half of 2006 exports rose by over 10% year on year in the first half of 2006. Crude oil continued to make up the vast bulk of the value of Sudan!s exports, at around 80%. Oil export proceeds rose by 6.5%, to above US$2bn. However, this figure

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conceals a 23% drop in the volume of crude sold, owing to the maturing of fields in Blocks 1, 2 and 4, as well as the delayed onset of production in Blocks 3 and 7, which was only offset by the steep rise in international oil prices in the first six months of the year. By contrast, the value of petroleum products exported (around 8% of the total) almost doubled, as a result of both higher prices and a 43% increase in the quantity exported of benzene, Sudan!s principal petroleum product export. The performance of non-oil exports, which make up just 12.5% of total exports by value, was more mixed. Proceeds from the export of sesame more than doubled, in line with a substantial production increase, to make it the country!s most significant non-oil export. The next most important category, livestock, brought in 20% more export revenue than in the same period of 2005. However, the value of exports of gum arabic halved, and proceeds from gold and cotton exports also fell sharply.

Export earnings, Jan-Jun (US$ m unless otherwise indicated) 2005 2006 % changea % total Crude oil 1,897.9 2,021.7 6.5 79.3 Petroleum products 105.5 210.8 99.8 8.3 Total non-oil 304.4 317.9 4.4 12.5 Cotton 42.0 36.0 -14.2 1.4 Gum arabic 48.5 24.4 -49.6 1.0 Sesame 49.9 103.5 107.4 4.1 Livestock 56.5 68.0 20.4 2.7 Gold 31.4 27.6 -12.1 1.1 Total incl others 2,307.8 2,550.4 10.5 100.0 a Year on year. Source: Bank of Sudan.

Most of Sudan!s exports in the first six months of 2006 went to Asian countries, particularly China, which received 71% of Sudan!s exports by value. The next most important export markets were Japan, with 10%, and the UAE"a key re-export market, which took just over 4%. In each case, by far the largest proportion of the export revenue came from petroleum and petroleum products. About one-third of the proceeds of sesame exports came from China, with about the same proportion coming from Egypt. All of the country!s gold went to Canada, and 85% of the livestock exported by value was received by Saudi Arabia, with Egypt taking 12%.

The value of imports The value of Sudan!s imports rose much more sharply than exports in the first

climbs strongly six months of 2006, climbing by just under 42% on a year-on-year basis. The most important import category was machinery and equipment, which rose by 73% in value to reach US$1.4bn, or 35% of the total. Of the next most significant items, spending on manufactured goods rose by 18%, transport equipment climbed by 39%, and the value of raw materials imported rose by a massive 153%"largely owing to a strong rise in the quantity (and an even stronger rise in the value) of imported petroleum products. These figures reflect the high growth in imports needed for the new industrial and infrastructural developments across the country"and especially around the capital, Khartoum. The only significant category in which the value of imports fell was foodstuffs,

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where spending decreased by almost 7% year on year. The reduced requirement for food imports probably reflects a better harvest and a lower level of conflict- driven food insecurity, especially in the south.

Import spending, Jan-June (cif; US$ m unless otherwise indicated) 2005 2006 % changea Foodstuffs 371.3 346.0 -6.8 Beverages & tobacco 19.6 24.7 25.9 Raw materials 132.4 334.6 152.7 Chemicals 194.8 250.2 28.4 Manufactured goods 693.5 819.4 18.2 Machinery & equipment 787.8 1,367.0 73.5 Transport equipment 491.2 683.4 39.1 Textiles 94.2 122.8 30.4 Total 2,784.7 3,948.1 41.8 a Year on year. Source: Bank of Sudan.

China was Sudan!s most important source of imports in the first half of 2006, providing 20% of total imports by value (including 32% of Sudan!s imports of manufactured goods and 22% of machinery imports). Next were Saudi Arabia, with 8%; India and Japan, each with 7%; Egypt, with 6%; and the UAE, with 5%. Although Sudan!s Arab neighbours provided a range of goods, India was the country!s largest single source of petroleum products (providing 45% of the total), and Sudan spent US$199m on transportation equipment from Japan" more than from any other country.

The current-account deficit As a result of sluggish export growth set against strongly rising imports, Sudan!s widens sharply trade deficit, which had widened in the first quarter of the year (September 2006, Foreign trade and payments) deteriorated further over the April-June period. The trade deficit more than trebled on a year-on-year basis, to reach US$858m"or 67% of the value of exports over the same period.

Trade account (US$ m unless otherwise indicated) 2005 2006 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr % changea Exports (fob) 1,269.6 1,321.8 1,194.6 1,267.5 1,282.9 1.0 Oil 1,115.1 1,165.2 1,018.4 1,083.6 1,148.8 3.0 Imports (cif) 1,521.3 1,793.2 2,179.0 1,806.9 2,141.2 40.7 Trade balance -251.7 -471.4 -984.4 -539.4 -858.3 241.0 Overall value of trade 2,790.9 3,115.0 3,373.6 3,074.4 3,424.1 22.7 a Year on year. Sources: IMF, International Financial Statistics; Bank of Sudan.

As a result, the country!s overall trade deficit grew extremely strongly in the first six months of 2006, increasing by a factor of 6.5. Sudan also showed habitually large deficits on the income and services accounts in the first half of the year. The services deficit widened by 37% compared with the same period of 2005, in line with import spending, and the income deficit widened by nearly 20%, as

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foreign oil companies increased their profit repatriation. The slight widening of the surplus on the current transfers balance, largely owing to rising worker remittances from abroad, was insufficient to offset these shortfalls. The country!s overall current-account deficit therefore more than doubled in size in the first six months of 2006 to reach US$1.9bn"or, on an annualised basis, almost 10% of estimated GDP.

Current account, Jan-Jun (US$ m unless otherwise indicated) 2005 2006 % changea Trade balance -143 -924 547.6 Services credits 46 93 104.0 Services debits -796 -1,125 41.2 Services balance -751 -1,031 37.4 Income credits 21 38 78.5 Income debits -646 -785 21.4 Income balance -625 -747 19.5 Current transfers balance 654 758 15.9 Non-merchandise balance -722 -1,020 41.3 Current-account balance -865 -1,944 124.8 a Year on year. Sources: Bank of Sudan; Economist Intelligence Unit.

This current-account deficit is being funded principally by strong growth in foreign direct investment (FDI) in Sudan, which reached US$1.6bn in the first quarter of 2006 alone (showing year#on-year growth of over 280%) before falling to a still-substantial US$688m in the April-June period. The current- account deficit thus remains sustainable under current circumstances"although risks may arise in the longer term owing to the unpredictable nature of FDI flows, particularly if the trade balance continues to deteriorate.

Foreign reserves are lower In November the IMF!s International Financial Statistics revised downwards than previously believed historical data on the levels of Sudan!s foreign-exchange reserves minus gold going back to 2001. As a result, import cover over the past few years was shown to have been noticeably lower than was formerly thought, at 3.5 rather than 4.2 months at the end of 2004, and at 2.9 rather than 3.4 months at the end of 2005. The latest data show that foreign-currency reserves fell slightly in the third quarter compared with the second quarter, to US$2.4bn, although they were still up by around 30% on a year-on-year basis. Given simultaneous strong growth in imports, however, this was equivalent to just 2.6 months of import cover, compared with 2.9 months at the end of September 2005"a substantially lower cushion than those of most other regional oil exporters.

International reserves (US m unless otherwise indicated; end-period) 2005 2006 2002 2003 2004 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Foreign-currency reserves 248.9 529.4 1,338.0 1,447.1 1,623.1 1,864.0 1,868.6 2,213.8 2,603.5 2,407.3 Months' import cover 1.0 1.9 3.5 2.2 2.5 2.9 2.9 2.4 2.8 2.6

Source: IMF, International Financial Statistics.

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