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Inform Reforms to Increase Access to Credit for Private Sector (Lead Expert)

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REQUEST FOR EXPRESSIONS OF INTEREST AFRICAN DEVELOPMENT BANK REGIONAL DEVELOPMENT AND BUSINESS DELIVERY OFFICE, EAST AFRICA (RDGE) Khushee Tower, Longonot Road, Upper Hill P. O. Box 4861 - 00200, Nairobi, Kenya.tel: (+254-20) 2998352 Fax: (+254-20) 271 2938 Website: www.afdb.org; E-mail: [email protected] and [email protected]. Brief Description of the assignment; FINANCIAL SECTOR DIAGNOSTIC STUDY TO INFORM REFORMS TO INCREASE ACCESS TO CREDIT FOR PRIVATE SECTOR (LEAD EXPERT) Place of assignment: Khartoum, Sudan and partly virtual Period of assignment: November 2020 – May 2021 Expected start date of the assignment: November 2020 Last date for expressing interest: 27th November 2020 Expression of interest to be submitted to: [email protected] and copy [email protected] Any questions/ clarifications needed to be addressed to: [email protected] and [email protected] Further details are as below. TERMS OF REFERENCE (TOR) – FINANCIAL SECTOR DIAGNOSTIC STUDY TO INFORM REFORMS TO INCREASE ACCESS TO CREDIT FOR PRIVATE SECTOR GENERAL INFORMATION Services/Work Description: Sudan – Conduct a financial Sector assessment to inform reforms necessary to expand access to credit for the private sector, notably business enterprises affected by the COVID-19 crisis. 1 Type of the Contract: Individual Consultants (one international-team leader and one national) Expected Duration: not exceeding 6 months Expected Start Date: November 2020 I. BACKGROUND Updates on recent economic developments The Sudanese macroeconomic environment is extremely challenging. Due to the secession of South Sudan in 2011, the country lost a significant part of its export’s earnings. As a result, fiscal revenues and foreign exchange earnings dwindled. The adjustment to this shock has been incomplete, and the Government has resorted to the monetization of the fiscal deficit with a negative impact on inflation. Sudan has a high level of external debt and is in arrears to international financial institutions, with a debt to GDP ratio of 213% of GDP at the end of 2019. Despite the lifting of longstanding U.S. sanctions on trade and financial flows in October 2017, Sudan remains on the U.S. list of State Sponsors of Terrorism (SSTL), blocking progress towards badly needed debt relief. Real GDP growth and growth drivers: COVID-19 is holding back Sudan’s economic recovery as containment measures reduce demand and consumer spending. GDP is estimated to contract further to 8.9% in 2020 under the worse-case scenario if COVID-19 persists until the end of 2020 compared to -2.5% in 2019. Weak economic performance in 2019 reflects declining agriculture production, amid continued droughts. Persistent sectoral constraints, particularly lack of production inputs like fuel and equipment, and low domestic demand are affecting growth. The COVID-19 containment measures like business closures, travel restrictions and a partial lockdown will affect demand whereas disruptions in global value and supply chains are expected to reduce national output on the supply side. Uncertainty related to the duration of COVID-19 will affect investor sentiments and lead to the postponement of major investment decisions, thereby affecting domestic investment and foreign direct investment (FDI) in infrastructure, mining and agriculture sectors. Monetary developments: The Central Bank of Sudan has adopted a tighter monetary policy stance through the sale of government securities to contain rising inflation. Sudan’s fiscal deficit is financed by printing money which has led to inflationary pressures. Annual inflation increased from 70.3% in June 2019 to 134% in June 2020. The reduction in domestic demand due to the COVID-19 containment measures and cautious consumer and investor sentiments will be offset by disruptions in regional and global supply chains. The effects of local currency depreciation on domestic inflation and counter-cyclical fiscal policy to respond to COVID-19 and an increase in Government wages and salaries (by 600% starting May 2020) will also increase inflation. Consequently, inflation is projected to increase from an average 50.6% in 2019 to 82.5% and 92.5% in 2020 and 2021 respectively under worse-case scenario. Sudan maintains a managed exchange rate regime and the Sudanese pound is officially pegged at 45 to one US dollar, although the parallel-market rate was142 as of August 2020. Fiscal developments: Implementation of the authorities’ fiscal consolidation strategy is expected to be suspended as the authorities scale up COVID-19 related public spending amid declining public revenues on account of depressed economic activity. Consequently, the fiscal deficit is 2 projected to increase to 17.2% and 19% of GDP in 2020 and 2021 respectively under the worse- case scenario, up from 10.6% in 2019. About SDG 70.2 billion (equivalent to USD 1.2 billion) representing 30% of Government planned revenues is expected to be lost due to the COVID-19 crisis. Grant support from Sudan’s key development partners in the Gulf region is also expected to be lower than programmed as these countries have been severally affected by COVID-19 and low oil prices. However, lower oil prices are likely to expand the fiscal space for key COVID-19 related healthcare and other expenditures considering that fuel subsides accounted for 11.75% of GDP during the period 2018-2019 due to higher international oil prices. External sector developments: Sudan’s current account deficits, which reflect structural trade imbalances will be aggravated by COVID-19. The current account deficit improved from 13.6% of GDP in 2018 to an estimated 7.8% in 2019 due to moderate growth in exports. However, exports lag imports contributing to a structural trade deficit. Gold is Sudan’s leading export, accounting for 70% of merchandize exports whereas tourism accounts for about 3% of GDP. Therefore, the country is vulnerable to fluctuations in commodity prices and travel restrictions. Sudan is expected to benefit high gold prices while depressed oil prices (oil accounts for 16% of total imports) will reduce the import bill. However, these gains will be offset by the pent-up import demand for consumer and intermediate goods, increasing the trade deficit. Reduced demand among Sudan’s major trading partners in Asia and Gulf region is expected to weaken export revenues and foreign exchange earnings. A sustained trade deficit and reduced service sector exports on account of weak tourism activity will widen the current account deficit in 2020 and 2021 to 16.3% and 17.3% respectively under the worse-case scenario. Economic outlook: Prior to the COVID-19 pandemic, Sudan’s economic outlook reflected negative but improved real GDP growth forecasts due to enhanced investor confidence in the new Government and prospects for reintegration into the global economy. However, COVID-19 will slow Sudan’s economic recovery, with real GDP growth project to further contract to -8.9% and - 4.5% in 2020 and 2021 respectively under the worse-case scenario if COVID-19 persists until the end of 2020. The COVID-19 crisis is expected to affect Sudan primarily through three channels, namely, reduced commodity prices and thus trade, lower FDI, and reduced tourism revenues due to restrained international travel. The Government’s post-COVID-19 recovery agenda is focused on addressing macroeconomic imbalances particularly high inflation, exchange rate distortions, and supporting the private sector to revive production, which is also expected to contribute to domestic revenue mobilization. The main domestic risks stem from low public revenues amid increased spending due to sharp increase in wage bill and COVID-19 related socio-economic spending. Uncertainty over oil transit fees from South Sudan is another key domestic risk. External risks include instability in the Arab region, which comprises Sudan’s key trade and development partners, and disagreements related to the construction of the Ethiopian Grand Renaissance Dam. Updates on the financial sector The Sudanese financial sector is relatively small and dominated by banks. There are 37 commercial banks, with total assets of 23.7 percent of GDP as of end 2017. Other 3 financial institutions have a marginal share in the country’s financial system. There are 39 microfinance institutions (MFIs)1,14 insurance companies, 2 leasing companies, 20 foreign exchange bureaus and 14 money transfer institutions, all with limited volume of assets with respect to the size of the economy. Financial sector challenges and risks; According to the Financial sector assessment report done by the World Bank in 2018, the banking sector risks, and vulnerabilities had increased which was consistent with a weaker economy. In particular, the devaluation of the currency had weakened banks’ capital positions and – through higher inflation and low growth – worsened borrower’s repayment capacity, leading to a likely deterioration in asset quality. This has been exacerbated by COVID lockdown. A cash flow-based analysis on banks suggest that some banks were underreporting and under provisioning nonperforming exposures, exposing themselves to losses that would impair their solvency even further. A significant shortage of banknotes during 2018 forced banks to impose limits on cash withdrawals, severely undermining public confidence in the financial sector and negatively impacting livelihoods (mainly among the poor). A run on deposits is increasingly likely, for which the authorities need to be prepared. The current crisis management framework has significant
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