Sudan Economic Report AFRICANDEVELOPMENTBANKGROUP About this series This new Country Economic Report series seeks to bring the best possible knowledge to bear on policy and institutional reforms in Africa. It also seeks to develop and help implement the African Development Bank’s High Five strategies, while guiding the design of individual country assistance strategies. And it seeks to enhance the quality and impact of the Bank’s analytical and advisory activities and development policy operations — and to foster a community of economists (across sectors) on the continent. The series is produced by the Country Economics Department, in close collaboration with teams in other departments of the Bank’s Vice-Presidency for Economic Gov- ernance and Knowledge Management and Office of the Chief Economist. Copyright © 2018 African Development Bank Group ISBN: 978-9938-882-84-1 The opinions expressed and arguments employed herein do not necessarily reflect the official views of the African Development Bank, its Boards of Directors, or the countries they represent. This document, as well as any data and maps included, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries, and to the name of any territory, city, or area. Foreword t took a long time for economic historians deepen policy reforms. That would strengthen and development theorists to explain the the case for heavily indebted poor countries Imystery of modern economic growth. Some (HIPC) debt relief, which might enlarge the fiscal researchers suggested that a combination of space, attract more concessional financing, and cheap energy costs and high wages encouraged help reintegrate Sudan into the global econo- business people in the western world to devote my. Removal of sanctions also bodes well for more resources to technological innovation. the fairly resilient private sector, which is now Others focused on the benefits of colonial re- looking for opportunities to borrow from the source extraction, or on the social and political African Development Bank and others. Both institutions that encouraged entrepreneurship. traditional and nontraditional creditors are These traditional arguments sounded con- stepping up technical assistance work that vincing for a long while. Today, they are insuf- would position them to take such investment ficient at best. Material and political conditions opportunities. Removal of sanctions will also alone could not have done it. The Industrial improve the operational environment, ending Revolution was primarily the result of ideas. long delays in transferring funds for such devel- People and business leaders found innova- opment partners, including the Bank. tive ways of adopting technology and making Policy makers may want to prioritize policies it commercially viable so that it could boost for grasping low hanging fruit to achieve quick productivity. Some great inventions had been wins that could boost investor confidence and sitting on the shelves for many decades. It enhance the momentum for development. For took some wise and very practical people to Sudan, it is critical to apply the rent generated design the institutions that would create the from natural resources to facilitating diversifi- appropriate incentives and conditions for their cation to other non-resource-based industries. broader use by firms and households, bring It has abundant land and natural resources, benefits and rewards to all stakeholders — and so it is a primary- product exporter in the first stimulate economic growth. stage of development. To upgrade its industri- In a world where labor and capital are quite al structure, it must first close its endowment mobile, the main explanation for the economic gaps with advanced industrial countries by in- differences between rich and poor countries is vesting in human and institutional capital and not just money: It is also and increasingly the in physical infrastructure. difference in their ability to generate, or bor- row and use, the best ideas out there. Ferdinand Bakoup This Sudan Country Economic Report, the Acting Director, Country Economics first in a new series, confirms that it is time for Department After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | the country to generate, borrow, and use the Vice-Presidency, Economic Governance and best ideas out there. It shows that the per- Knowledge Management/Office of the manent removal of U.S. economic sanctions Chief Economist Foreword creates an incentive for the government to African Development Bank Group iii Preface he Bank has responded positively to African Development Bank Group assistance a government request to finance the to Sudan will be undertaken in the context of T preparation of an economic recovery the extended Sudan Country Brief 2020–21. master plan through its efforts to intensify This extended brief, as the development coop- its assistance to Sudan in the post-sanctions eration framework between the Bank and the era. The plan will facilitate Sudan’s access to government of Sudan, has two pillars: capacity debt relief and its reintegration into the glob- building for improving service delivery, and ag- al economy. That will, in turn, unlock conces- riculture for job creation and livelihoods. The sional financing, create more fiscal space, -at complementary and mutually reinforcing pillars tract both foreign and domestic investment, address the country’s fragility and are geared and end the country’s international economic toward attaining the Bank’s High 5 development isolation. goals—light up and power Africa, feed Africa, Preparing the plan will proceed in tandem industrialize Africa, integrate Africa, and improve with updating the arrears clearance and debt the quality of life for the people of Africa. The relief strategy financed by the Bank in 2013 assistance will unlock about $277 million for and resuming technical assistance to the Afri- 2020–21, bringing the Bank’s Sudan portfolio to can Union High-level Implementation Panel, about $431 million. The Bank will leverage addi- chaired by the former president of South Af- tional resources from bilateral Trust Funds, Afri- rica, Thabo Mbeki. The strategy will be used ca50, the Global Environment Fund, the Climate by the Tripartite Committee on Debt—com- Investment Fund, and the Green Climate Fund prising the governments of Sudan and South and explore co-financing with other partners. Sudan and the Panel—to seek debt relief. This economic report analyzes the impact Since 2010, the Bank has complemented its of sanctions and suggests a pragmatic poli- technical and advisory services to the Panel, cy framework and set of targeted policies to the lead mediator in Sudan’s initiative to secure achieve quick economic wins. a bailout package to address its debt burden. The Bank will resume technical and advisory Gabriel Negatu services to enable Sudan to build momentum Director General, East Africa Development and seeking debt relief, especially in searching for a Business Delivery Office debt relief champion. African Development Bank Group After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Preface iv Contents Foreword iii Preface iv Acknowledgements x Abbreviations xi Overview 1 Part1 Sudan’seconomy 7 Chapter1 Sudanintheglobaleconomy 9 Issues of regional integration 10 Sudan’s assets 11 Sectoral structure and unemployment 11 Chapter2 Avolatileandchallengingenvironment 17 Political background to macroeconomic imbalances 17 The macroeconomic effects of Sudan’s two decades of ‘solitude’ 18 Missed economic opportunities but still resilient 19 Chapter3 Growingmacroeconomicimbalances 23 Fiscal imbalance and inflation 24 Dynamics of public debt and debt sustainability 24 Official external flows, foreign direct investment, and remittances 26 Macroeconomic effects of sanctions 29 Evidence of the price effect of sanctions 31 Chapter4 Chartinganewpath 33 Poverty and inequality 34 Opportunities for reengaging with the international community 36 A macroeconomic strategy for the post-sanctions era 41 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | A new path 45 Contents v Part1Notesandreferences Notes 47 References 47 Part2 Targetedstrategiesforquickeconomicwins 51 Chapter5 Sudan’smedium-termoptions 53 The Growth Identification and Facilitation Framework 54 Chapter6 Identifyingsectorswithlatentcomparativeadvantage 59 Sudan’s existing comparative advantage 59 Which sectors could Sudan potentially enter competitively? 62 How does comparative advantage change over time? 62 Identifying sectors for quick wins in the short to medium term 64 Chapter7 Assessingdomesticcapacityandproductioncosts 69 Sudan’s manufacturing sector 69 Estimating direct production costs 71 Easing institutional constraints to reduce costs 71 Chapter8 Attractingfinancingforeconomicdevelopment 75 Sudan’s advantages as a member of international organizations 75 New forms of development financing 75 Patient capital 76 Chapter9 Scalingupself-discoverybyprivatefirms 81 Examples of successful self-discovery by private firms in other countries 81 Support by the government of Sudan 82 Chapter10 Recognizingthepowerofindustrialparksandprovidinglimitedincentives 85 Recognizing the power of industrial parks and export processing zones 85 Providing limited incentives to industries having a latent comparative advantage 87 Part2Notesandreferences After Decades Two of “Solitude”: Targeted Strategies