Sudanese External Debt: Sustainability Analysis and Prospects of Solutions (1)

Mohammed Gebrail Hag Mohammed Gebrail

Lecturer, University of Khartoum & Sudan International University, Khartoum, Sudan

Final Report

December 2020

(1) As the result of referendum in 2011, Sudan became two countries- Republic of Sudan with its capital in Khartoum and the Republic of South Sudan administered from Juba. Although the outstanding external debt was for united Sudan, this study is basically concentrated on the Republic of Sudan with its capital Khartoum.

Abstract

This study aims to conduct Sudan debt sustainability analysis and to suggest practical solutions to the external debt crisis. Towards this end, the study applies descriptive statistics methods on secondary data sourced from Central Bank of Sudan, World Bank and International Monetary Fund. Moreover, it reviews up-to-date related events and debates that take place between Sudan and South Sudan. Empirical results of Debt Sustainability Analysis point out that Sudan remains in debt distress since all external debt burden ratios remain well above their respective indicative thresholds and the situation becomes even worse after the secession of South Sudan in 2011. However, the study has introduced three scenarios by which the Sudanese debt crisis can be solved. The first of them is to receive full or partial debt relief through Heavily Indebted Poor Countries (HIPC) Initiative. Debt relief process is also share political reasons. Therefore, the study proposes the improvement of relations with the creditors especially with the biggest ones such as Arab countries. The second scenario is to repay all external debt through establishment of the so-called "Oil revenues fund to serve Sudanese external debt" in collaboration with South Sudan. The study also suggests debt division as a lasting solution to this issue. As such, the study proposes four different methods in which the external debt can be split between Sudan and South Sudan. Based on these methods, the study suggests that Sudan now faces an external debt burden ranging from US$ 7.96 billion (Financial capacity-weighted) to US$ 31.6 billion (Geographical method-weighted) while South Sudan's debt burden ranges from a low of US$ 8.2bn (Geographical method-weighted) to US$ 31.84bn (Financial capacity-weighted). Several policy implications have emerged from the study. For instance, the study demonstrates the infeasibility of the efforts which have been exerted by the two countries to take advantage of HIPC initiative. This might help policymakers to transfer the concern from external solutions to internal solutions through stimulating productive sectors and to try other options for addressing the issue such as debt splitting between the two countries. Besides, by highlighting the possible solutions to get out of the crisis after the secession of South Sudan and how the debt can be divided between the two states, the study would lay the foundation in designing an effective strategy to protect the economies of the two countries from a negative implication of external obligations.

1. Introduction Sudan, like other developing countries, experiences large shortage in domestic savings despite the fact that the country is considered one of the richest countries in terms of natural resources. Therefore, the country has started borrowing from international institutions. The origin of Sudan’s external debt dates back to 1958, when the World Bank provided loan assistance to the country totalling US$ 1.52 billion. Afterward, it has rapidly developed until it stood at US$ 50 billion in 2018. This increase in the stock of Sudanese external debt is mainly attributed to the accumulation of the interests, which in most cases was calculated on the basis of the compound interest method. It represents about 61% of the total debt. In 2011 Sudan has split into two countries, Republic of Sudan with its capital in Khartoum, and the Republic of South Sudan administered from Juba. Since then the problem of external debt has been aggravated due to the weakness in capacity of repayment. As a result of the decision to separate, Sudan lost 80% of the country’s proven oil reserves, 50% of government revenues, one third of its territory and 23.10% of the population. Sudan’s external debt have grown by 37.1% since 2011 from US$ 38.9 billion to US$ 50 billion in 2018. For many years, even before secession of South Sudan in 2011, Debt Sustainability for Sudan has shown that Sudanese External debt remains unsustainable, as no debt relief was granted to Sudan in the meantime. Moreover, the debt burden increases over time as the amounts needed to close projected financing gaps are added to the outstanding debt stocks. Now a protracted debate is going on about how the two countries will tackle those debts, which have become an onerous burden on the Sudan since the 1970s, and have impaired the country's process of development, as the stock of external debt reaches astronomical figure and their interests have accumulated to exceed the original debts. Oddly enough, the Sudan has not greatly benefited from those debts due to failure of numerous projects financed by the debts; some of those projects have never materialized and others have faced obstacles during the process of implementation. The main objective of the present study is to shed light on the current situation of Sudanese external debt crisis and the recent discussion made on the possible solutions of the crisis. In addition to that, the study tries to make very solid debt sustainability analysis for Sudan especially for the period after separation. Towards this end, the study reviews the existent literature and the debate made between the two countries. The importance of the study stems from the fact that solving the immense debt problems contributes to public policy by improving growth incentives, reducing fiscal pressures, and increasing the availability of external resources through improved country creditworthiness. Furthermore, the findings of the study may help the country to be involved in international economic programs offered by global institutions such as the World Bank and International Monetary Fund. The empirical investigation and suggestions to be presented by this study are considered crucial for several reasons. First, the study would contribute significantly to the existing literature and policy formulation, especially for the period after the secession of South Sudan in 2011, as there is a few researches that have been undertaken in Sudan aiming at finding solutions of Sudanese debt problem and how it can be divided between the two states. Second, conducting debt sustainability analysis for Sudan may provide policymakers in the two Sudans and key creditors with the basis to be more strategic in addressing the issue in such way which can consider the common interests. Third, the study would explore the feasibility of the efforts which have been exerted by the authorities of the two Sudans to take advantage of international debt relief initiative. This might help policy makers to transfer the concerning from external sources to the internal sources through stimulating productive sectors.

2. The major Causes of Sudanese External Debt Accumulation There are four major sources of capital available to a country: (1) capital raised through surplus budgeting; (2) the profits earned from the public enterprises (3) the government borrowing, and (4) economic assistance or loans from other countries/institutions. In most of developing countries, the first

3 three sources of raising capital are not adequate to accelerate the rate of development to the desired extent. The less developed countries, including Sudan, have to depend upon the last source which is foreign economic assistance for breaking out from the vicious circle of low purchasing power and saving capacity. Accumulation of debt and interest arrears have all led to the rapid build-up of the debt stock and the sharp decline in net resource transfers (2) to Sudan. The main cause of reverse transfers seems to have been the increase in total debt services payments. Moreover, the total debt service for the Sudan became heavier because debt obligations due to multilateral institutions are not subject to debt relief operations, and had to be met on schedule. Additionally, the terms of trade for the Sudan deteriorated further and the country continued to suffer from persistent imbalance of trade and deficit in the balance of payment resulting in widening external gaps which led to mounting internal deficits. The rising debt burden indicators reflect a combination of external and internal factors. The growing volume of debt, the rising interest rates and the accumulation of their arrears as well as the low economic performance of the economy in the 1980s and good part of the 1990s were the most important of them. The result of those factors has been widespread poverty and more serious structural weaknesses in the Sudanese economy. Moreover, according to EDU report (2014), there were a number of factors that may cause debt accumulation problem in Sudan: 1. Growing government spending compared to available resources. 2. Loan on non-concessional terms. 3. Failure of Sudan to fulfil its financial obligations. 4. Poor operational capacity of projects financed by foreign loans. 5. Weak economic ability to achieve economic surpluses to contribute to the repayment of these loans. 6. Weak economic feasibility studies and establishing funding on studies which are not sound. 7. Poor coordination between the various bodies of the State with regard to external borrowing. 8. Non-compliance with ideal principles of evaluating borrowing conditions in accordance with the offer standard criteria. 9. Poor economic management of resources. 10. Absence of a clear-cut policy for external borrowing.

3. Statement of the problem Since 1958 Sudanese external debt has grown persistently. When the two conflicting parties in Sudan signed the Comprehensive Peace Agreement (CPA) in 2005(3), the external debt reached US$ 31.5 billion. This amount included an original 14 billion and the rest was interests and punishments for delays and failure to repayments. Sudan external debt has increased rapidly till stood at US$ 50 billion in 2018, with 25.6% increasing compared to its size in 2011 when it was only US$ 39.8 billion. Throughout the successive Sudanese national governments since independence of Sudan in 1956, foreign debts constituted a dreadful obsession as the interests have increasingly accumulated year after year, obstructing the development process. The situation becomes worst after the secession of South Sudan in 2011, since Sudan has stopped servicing the debt because of the misunderstanding regarding who should bear the external debt. Therefore, now foreign debts have become one of the most outstanding issues that must be agreed between the two states. The most serious aspect of external debt is that the stock of external debt is positively associated with time due to the accumulation of the interests (delay & contractual), which was in most cases

(2) Net resource transfer is measured by adding new borrowing to scheduling minus total debt service. (3) The CPA which was signed in Naivasha – Kenya meant to end the Second Sudanese Civil War, develop democratic governance countrywide, and share oil revenues. It also set a timetable for a Southern Sudanese independence referendum.

4 calculated based on the compound interest method. As we can see from table (1) below, the average of structural and delay interests for the period 1980 -2015, represented about 57% of the total debt, whereas the average principal in the same period represented only 43% of the total debt. Sudan is a heavily indebted poor country and its total debt in 2016 was US$45.8 billion, three times the 1995 level. About 60% of the long-term debt is owed to bilateral creditors, the largest being Kuwait. Arrears of approximately US$1.4 billion are owed to the IMF. Total debt in net present value is 48% and 754% of GDP and exports respectively, over three times higher than the upper limit of HIPC thresholds. Therefore, Sudanese external debt is unsustainable, and is among the highest figures for this key indebtedness ratios in Africa. In most cases, we found that these loans were not employed in the best uses. They were used for consumption and defense purposes rather than boosting development through investment. The result is accumulation of debt and interests which slow down economic growth of Sudan economy. Hence, this study tries to formulate new policies to protect the economy of two Sudans from a negative implication of external obligations, such as poverty, marginalization and dependency on the international financial institutions. Moreover, This study aims to conduct debt sustainability for Sudan and to suggest practical solutions to the external debt crisis and how it may be allocated between the two countries and the implications of this allocation for their economic future, especially that the two countries till now have failed to take advantage of international initiative for debt relief such as HIPC. Broadly speaking, given the dearth of Sudanese studies concerning the possible solutions of Sudanese external debt crisis, this study may fill a gap in the literature and contribute to the ongoing debate on external debt crisis.

Table 1: Composition of Stock of Sudan External Indebtedness 1980 -2015 (US$ Million) Years 1980 1985 1990 1995 2000 2005 2010 2015 Debt's Comp.

Total Debt 4670 9035 15305 19355 20521 27006 37805 43884 Principal Share 46% 44% 45% 42% 39% 41% 44% 43% Principal 2148.2 3975.4 6887.25 8129.1 8003.19 11072.46 16634.2 18870.12 Contractual Interest 14% 17% 16% 18% 17% 14% 14% 11% Share Contractual interests 653.8 1535.95 2448.8 3483.9 3488.57 3780.84 5292.7 4827.24 Delay interests Share 40% 39% 39% 43% 44% 45% 42% 46% Delay interests 1868 3523.65 5968.95 8322.65 9029.24 12152.7 15878.1 20186.64 Source: External Debt Unit, Central Bank of Sudan.

3.1 Research questions: This study is trying to answer the following questions which are basically concerned with suggesting practical solution for Sudanese external debt, such as splitting the debt, beside conducting debt sustainability analysis for Sudan. • What is the current discussion on splitting of the debt and what are the options that have been proposed? • Is the debt sustainable for Sudan?

4. Research Objectives & Hypotheses: Objectives The general objective of this study is to conduct debt sustainability of Sudan and to introduce suggestions for solutions. The specific objectives of the study, therefore, are:

• To review the existing literature on the solutions of external debt crisis after the separation and how the debt can be divided between the two states. • To assess the sustainability of external debt using the framework of debt solvency methodology and to forecast the future outlook of Sudan borrowing. Hypotheses The hypotheses to be tested can be stated as follows: • Borrowing ability of Sudan is limited by growth of GDP and the present value of external debt in terms of the ratios of both debt/exports and debt/government revenues. • Debt can be divided based on Population method, Geographic area, Final beneficiary method or financial capacity method.

5. Data Sources and Methodology The information and data used in this study are collected from different official sources, namely Central Bank of Sudan, Central Bureau of Statistics, World Bank (WB) and International Monetary Fund (IMF). Moreover, the data on military expenditure has been collected from SIPIRI. However, the study does not have full access to some required data, such as data about military expenditure financed by external debt, as well as some of the development projects which have been executed in Sudan and South Sudan by using the external loans. The research follows descriptive statistical methods, as it discusses trends and patterns of Sudan external debt by types and sources (creditors) over the period 2005- 2015. Furthermore, the study tries carried out debt sustainability for Sudan by using IMF debt sustainability framework.

6. Contribution of the Research The main reason why the researcher is interested in this theme is that external debt gains a great interest in both global and regional sides on one hand, and the problem is yet without solution on the other hands. Therefore, it needs further search to make a clear vision for the external debt in Sudan and how it can be settled. After the secession of South Sudan in 2011, there is a few researches that have been undertaken in Sudan aiming at finding solutions of Sudanese debt problem and how it can be divided between the two states. Moreover, although some Sudanese studies have tried to conduct debt sustainability analysis for Sudan but these studies are no longer useful since they concentrated on the debt sustainability for united Sudan but now the country split into two states. For these reasons, this study is timely relevant to recent policy debate in Sudan. Although, Sudan and South Sudan have agreed to work together to address Sudan’s debt and reach out to donors in a bid to have written it off, after nine years of the separation they have realized that it is not possible for them to reach decision point and exempt their debts. Therefore, the study is expected to serve policy makers with a good strategy to get out of the crisis by suggesting the practical ways in which foreign debt can be divided between the two states. Further contribution of this work is by providing a focused discussion on the situation of the Sudanese’s external debt after the separation of South Sudan through reviewing an up-to-date events and debate that take place between republic of Sudan and South Sudan. As such, the visions of the creditor for solving the problem will be considered.

7. Sudanese External Debt: Historical Background and Recent Development Like other Sub-Saharan African countries, Sudan has been experiencing economic crisis since the late 1970s, represented in both internal and external imbalances. Internal imbalances became more evident after the government embarked on ambitious development programmes in the early 1970s, despite its inability to raise adequate budgetary savings which could be used for development finance. In order to bridge the gap, the government resorted to expansionary monetary policy and to massive

6 borrowing from abroad which is indicative of deteriorating balance of payments position. Since then, the Sudan economy has been suffering from weaknesses in performance and serious indebtedness. Therefore, Sudan's external debt crisis did not arise merely from a need to offset temporary external shocks such as shortfalls in exports or increases in import costs; adverse domestic policies significantly contributed to the problem. (Mutasim, 2005) Since the early 1970s onwards, the value of primary commodities in the international market declined steadily, while at the same time oil prices soared to record heights. Sudan’s foreign debt was growing, as was its repayments and servicing dues. The economic crisis came to a head in 1978 when the IMF intervened and negotiated the first of several adjustment programmes. From then until 1984, the IMF concluded five agreements with Sudan. The IMF Structural Adjustment Programmes (SAPs) were directed towards curbing the government’s budget deficit by reducing subsidies for basic needs and social services, encouraging the export sector by the expansion of mechanized farming, reducing the land available to traditional farmers and pastoralists, and stop devaluation of the Sudanese currency. Between 1978 and 1984, not only had the crisis within the subsistence economy deepened, producing growing rates of poverty, but also the economy had been redirected towards external markets, becoming increasingly vulnerable in the process. The result was the well-publicised famine of 1984-85 (Suliman 1994). In 1990, the IMF took the unusual step of declaring Sudan as non-cooperative due to its failure to meet scheduled repayments. Sudan again ranged in 1992/93 and the IMF retaliated by threatening expulsion, which was only avoided by the government’s agreeing to meet the arrears payments, to liberalize exchange rates and to reduce subsidies. The government largely complied with the terms of the agreement and was duly rewarded. The amount of total external debt was US$ 15,303 million in 1990, increasing to US$ 19,355 million in 1995 with an increase rate of 26.5%. It rose further to a record high of US$ 21,194 million in 2000 and since then went on rising to reach US$ 31.5 billion in 2005 and went up to reach US$ 39.8 billion by the end of 2011. Based on the latest available statistics from Central Bank, Sudan’s total external debt amounted to US$ 50 billion in 2018. Surprisingly, the structure of external debt had not changed since 2000. As a result of accumulated debt principal and interests, Sudan has become one of the highly indebted countries in Africa and ranks 65 in the world (4). As Elwasila (2015) argued, Lack of government revenues coupled with massive debt arrears exerted a negative influence on government finances and it became even more necessary to borrow to correct public budget deficit and balance of payments distortions as well as financing development projects, mostly agricultural projects with minor portion of financial resources allocated to industrial development. The above outlined historical narrative confirms that the bulk of Sudanese indebtedness is an old and Sudan has long history of non-payment. Figure (1) (5) below shows the stock of Sudanese external debt over the period 1980 - 2018 combined with the repayment amount for each year. It seems clear that Sudanese debt grows steadily across the years from less than US$ 4.7 billion in 1980 to more than US$ 50 billion in 2018. In contrast, repayment amount was very limited during most of this period. However, it improved significantly since 1999 when Sudan becomes Oil exporter country compiled with the slight increase in repayment which reaches its peak in 2011 when it was US$ 415.6 million. Afterword, it began to fall till reached less than US$ 126 million by 2017. This was basically due to secession of South Sudan in 2011, since Sudan has approximately stopped servicing its debt due to unclear vision towards who is going to shoulder the debt. Because South Sudan upon the separation has refused to assume part of the debt, arguing that the south received no benefits from the loans incurred by Khartoum during the war. (6)

(4) The World Factbook 2017, Central Intelligence Agency. (5) Also see the data in Appendix I. (6) Later in 2012 the two Sudans have agreed to split the external debt if they didn't get their debt off.

Figure 1: The stock of external debt and repayments 1980-2018 (US$ million)

60000 Sources: ∆ Central Bank of Sudan, ∎ World Bank 450 400 50000 350 40000 300 250 30000

200 (US$ (US$ Million) 20000 150 (US$ Million) 100 10000 50

0 0

1988 1982 1984 1986 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1980 Total Debt Repayment

Sources: ∆ Central Bank of Sudan, ■ World Bank

The current stock of Sudan’s external debt can be explained better if we consider some factors which have a significant effect not only on debt’s crisis but also on Sudan economy as a whole:

7.1 The role of American sanctions The Government of the United States imposed a set of economic constraints on Sudan at several stages which started in 1997, under Executive Order 13067 on the pretext of Sudanese government contribution in support of international terrorism, destabilizing neighbouring governments and human rights violations, the thing that may cause an extraordinary threat for national security and foreign policy of the United States. The sanctions are designed to restrict foreign investments, prevent military sales and exports and terminate the commercial activities between the two countries. The embargo was expanded on 27 April 2006 during the rule of President Bush, under Executive Order 13400 as the result of the conflict in Darfur region. On 13 October of the same year was the issuance of the Executive Order 13412 by the U.S. administration to put more economic impediments in front of Sudanese government excluding some areas, such as South Kordofan, Nuba Mountains, Blue Nile State, Abyei, Darfur and the Government of Southern Sudan since July 2008. On 7th of October 2017, The United States permanently lifted a raft of sanctions on Sudan.(7) Nevertheless, the decision leaves other sanctions in place for the time being, including those against individuals with arrest warrants related to atrocities committed during the conflict in Darfur. It does not remove Sudan from the list of states sponsor of terrorism, a removal ardently sought by its government. American sanctions have a significant negative impact on Sudan economy in general and its external debt in specific. To sum up, US economic sanctions have both direct and indirect effect on Sudanese external debt. Direct impact is represented in Preventing Sudan from any assistance through international financial institutions. As such, this negatively affected the country's relations with the international donor community, especially the IMF, the World Bank and western countries. Together

(7) “This decision comes as the result of The government of Sudan’s actions during the last nine months show that it is serious about cooperating with the United States and has taken significant steps to stop conflict and improve humanitarian access within Sudan, and to promote regional stability”, said Heather Nauert, the State Department’s spokeswoman.

8 with some other factors, the sanctions have sustained economic and political pressures and frustrated Sudanese efforts to come to agreement with the international donor community on its mounting external debt problem and thus not be admitted into the process leading to HIPC initiatives. The successful completion and signing of a Comprehensive Peace Agreement (CPA) between the Sudanese government and Sudan Liberation Movement on January 9th 2005 has not lessened international political and economic pressures on the country. In fact, enormous pressure has been brought to bear on the Sudan as a result of the Darfur problem. Due to this, the Sudan has not been given the opportunity to reach the HIPC Decision Point and its hopes to settle its debt problems have been frustrated. On the other hand, the indirect effect of US sanctions on Sudanese external debt is that, in the case of the goods and technology that are only available in the United States, these goods and technologies even if brought to Sudan through wide range circles of indirect intermediaries, but would increase the total cost and make an additional economic burden. Moreover, in the case of goods and technologies available both in U.S. and global markets, exclusion of U.S. market reduces competition options of purchasing prices and reduces the quality options. More recently, in April 2019 The National Congress's government was removed by the military after months of anti-government protests against its three-decade rule of corruption. One of the driving factors behind the protests was the rapid decline of the economic situation. Another factor is the U.S. economic sanctions imposed on Sudan since1997 which is owing mainly to that government’s links with international terrorist organizations. Therefore, with the new government, Sudan is expected to be removed from the list of a state sponsor terrorism and accordingly Sudanese external debt crisis is expected to be positively affected.

7.2 The role of internal conflicts Sudan has a very long history with wars and conflicts as the country has experienced more than three wars since its independence in 1956. The First Sudanese Civil War was a conflict from 1955 to 1972 between the central Sudanese government and the Sudan People's Liberation Army. The Second Sudanese Civil War (1983 -2005), although originated in southern Sudan but it was largely a continuation of the first civil War and spread to the Nuba Mountains and the Blue Nile later. It lasted for 22 years and is considered as one of the longest civil wars on record. Roughly, two million people died as a result of war, famine and disease caused by the conflict. The fourth Sudanese armed conflict is in Darfur which began in 2003 when the Sudan Liberation Movement (SLM) and the Justice and Equality Movement (JEM) rebel groups began fighting the government of Sudan, which they accused of oppressing Darfur's non-Arab population. This resulted in the death of hundreds of thousands of civilians. (8) Most of economists use the background of the civil war in Sudan to analyse the Sudanese economic decline in the last three decades. This clearly shows the important role of internal conflicts in explaining the deterioration in economic indicators in Sudan which are negatively affected by domestic conflicts either during or after the conflicts. As it can be seen from figure (2) below, Sudan has paid for its wars either through debt which is persistently increased since the first civil war when the stock of Sudanese external debt was only US$ 1.52 billion till it reaches US$ 50 billion in 2018. Concurrent with deterioration in most of macroeconomic indicators, for instance, the graph illustrates the upward trend of the inflation rates in Sudan during and after conflicts.

(8) Darfur’s war led to the indictment of Sudan's president, Omar al-Bashir, for genocide, war crimes, and crimes against humanity by the International Criminal Court.

Figure 2: The stock of external Debt and Inflation rates in Sudan 1980-2018 60 140%

50 120% 100% 40 80% 30 60%

20 Rates Inlation

Debt in Billion in US$ Debt 40%

10 20%

0 0%

Debt INF

Source: Central Bank of Sudan

These conflicts were both costly and destructive and leading to greatly increased defence expenditure. Moreover, the loss of productive capital, especially human and social capital, takes more time to reverse. As (Willett 1999) points out conflicts provide lucrative markets for arms dealers of both legal and illicit nature. In order to purchase arms, poor countries cut back on public expenditure in health and education and borrow foreign exchange from international creditors. The poor become poorer and conflicts become widespread. This ushers in a vicious cycle of debt, underdevelopment and conflict, which can only be broken if radical action is taken by the international community to confront the systemic nature of poverty and underdevelopment. Especially, like other war-torn developing countries, Sudan has been suffering from the above outlined problems due to the civil war in many parts of the country. Collier (1999) distinguishes among five effects of conflict. Military destruction reduces the capital stock. The government diverts its expenditure from economic services to military expenditure. Disruption raises the cost of transactions and lowers the cost of opportunistic behaviour so that social capital starts to break down. Because incomes are seen as temporarily low, economic firms will dissave. Because investment opportunities are unusually poor and risky, they will shift their portfolios abroad. These five effects have implications for both the level and the composition of economic activity. According to Elbadawi (1999), during civil wars per capita GDP is estimated to decline at annual rate of 2.2% relative to the counterfactual of no war. Moreover, civil wars in Sudan don’t only reduce the overall level of economic activity, but they are particularly damaging to the most dynamic sectors of the affected economy. Therefore, the country is keeping borrowing intensively to meet the obligations of post-war reconstruction process and this is what can explain the high stock of Sudanese external debt. One of the main sources to the outstanding stock of Sudanese external debt is the high military expenditure ratios in Sudan. For instance, during 1989/90–1993/94, military expenditures have cost Sudan a decline of 16% in investment/GDP and caused an increase of 26% in external debt during the four years. The level of debt was increased from US$ 12.9 billion in 1989 to US$ 16.3 billion in 1993. The cost due to war intensity is estimated by noting that when the war intensified from relatively low level violence (an average of 956 noncivilian casualties in 1984) to more than 4,000 in 1989, the investment ratio declined by 196% and GDP per capita growth slowed down by 6 percentage points.

Thus, the overall cost over this four-year period was such that the civil war caused the country’s external debt to be more than one-quarter of its potential level under normal conditions and reduced per capita GDP by a cumulative rate of 8 percentage points. More recently, Sudan has been classified as the second most conflicted African countries after Somalia (9) since the country has suffered from domestic conflicts in South Sudan - before separation in 2011 -, Darfur, South Kordofan and Blue Nile. Therefore, excessive military spending has replaced productive outlays in other areas such as investments in high-tech industries, education, or infrastructure. Figure (3) below (10) shows military expenditure in Sudan during the recent years 2000 to 2019. As can be seen from the figure, military expenditure in Sudan tend to grow from less than US$ 3 billion in 2000 to more than US$ 6.8 billion in 2009. Afterward, it has fallen sharply to nearly half of what it was in 2000. This is largely attributable to the consequences of the secession of South Sudan and subsequent events of December revolution, which overthrew the National Congress Regime.

Figure 3: Military Expenditure in Sudan over the period 2000 – 2019

$7,000

$6,000 MILLIONS $5,000

$4,000

$3,000

$2,000

$1,000

2006 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2000 Source: Stockholm International Peace Research Institute (SIPRI)

8. Classification of Creditors (11) The structure of external debt has not changed over the last decade. The bulk is public and publicly guaranteed (PPG) debt (US$ 49.9 billion in 2018, of which 86 percent in arrears), mainly owed to bilateral creditors and roughly equally divided between Paris Club and non-Paris Club creditors. Only a small fraction is private debt owed to suppliers (US$ 5.2 billion). According to Central Bank of Sudan annual report (2018), Sudan main creditors have been classified into five main categories as follows:

1. Multilateral Creditors. 2. Paris Club Bilateral Creditors. 3. Non-Paris Club Bilateral Creditors. 4. The Major Foreign Commercial Banks Creditors. 5. The Major Foreign Suppliers Local Commercial Banks.

(9) See Vision of Humanity Global Peace Index Ranking. (10) See also full data on appendix II (11) A complete list of the creditors is also available on appendix III.

As shown in figure (4) below, the major creditors contribution to Sudan external debt include Non Paris Club member countries 40%, Paris Club countries 32%, Foreign Commercial Banks 12%, Multilaterals 11% and Foreign Suppliers 5%.

Figure 4: Contributions to Sudan External Debt by Source in 2018 (%) ForegnForeign Suppliers Commercial Banks 5% 12% Non Pris club Multilateral Institutions 40%

11%

Pris Club 32% Non Pris club Pris Club Multilateral Institutions

Foregn Commercial Banks Foreign Suppliers

Source: External Debt Unit, Central Bank of Sudan..

8.1 Who are Sudan’s Biggest Creditors? Sudan’s two largest creditors are Kuwait and Saudi Arabia, since they hold over 29 percent of Sudan’s external debt of US$ 45.8 billion in 2016. Sudan owes Kuwaiti government roughly US$ 9.4 billion and the Saudi Government about US$ 4 billion. As shown in figure (5) below. Despite a flurry of recent loans, China is only number five on the list with US$2.2, after Austria US$ 2.9 billion, the United States of America US$ 2.7 billion and France US$ 2.1 billion. Over the years, Kuwait and Saudi Arabia provided Sudan with nearly sixty individual loans. Many of these loans financed large-scale infrastructure projects, such as roads, ports and dams. However, Kuwait and Saudi Arabia also extended well over US$ 1 billion in unrestricted cash loans. When Sudanese government fell behind on its payments, these loans exploded due to the accrual of interest and steep penalties. Between 2010 and 2014, Sudanese government was on the hook to pay Kuwaiti and Saudi governments about US$ 780 million. While large in absolute terms, this represents only about one- eighth of Sudan’s total debt service obligations. This is because most of the respective loans are old and entirely in arrears (12). Sudan has roughly US$ 2.2 billion (13) in debt payments coming due to China over the same period. In contrast to Kuwait and Saudi Arabia, all of China’s existing loans have been provided in the last fifteen years. Sudan has largely kept current on its Chinese loans as a way of ensuring that the funding spigot is kept open. As such, Kuwait and Saudi Arabia are the most important creditors in terms of overall exposure; but less so in terms of short-term liquidity constraints on Sudanese government.

(12) For instance, the scheduled debt service have already come and gone without payment. (13) Sourced from Central Bank of Sudan.

Figure 5: Top Creditors of Sudan in 2016

$10,000 $9,000

Millions $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Kuwait Saudi Arabia Austria US Chaina France

Source: External Debt Unit, Central Bank of Sudan.

9. Sudan’s New loans 2011 -2018 According to data collected from External Debt Unit at Central Bank of Sudan for the period 2011- 2018, Sudanese external debt has increased from US$ 39.8 billion in 2011 to US$ 50 billion in 2018, and this indicates that there are US$ 10.2 billion added to the stock of Sudanese external Indebtedness which correspond to the growth in Sudan's external debt by 26%. As usual, the majority of these new accumulations are interests (70%). Sudan has been largely cut off from access to external financing due to its arrears with the creditors and U.S. sanctions. It has been only able to contract new debt below one percent of GDP per year since 2012 with a limited number of multilateral and non-Paris Club bilateral creditors. As noted from Figure (6) below (14), the total new debt (principal) amounted to US$ 2.93 billion, representing only 29% of the total new external debts of US$ 10.2. The newly contracted debt has been mainly used to finance projects in the agriculture, services and energy sectors. In view of the sources of these debts, we find that they are all from Non-Paris Club countries except a limited amount of loan of US$ 5 million from Belgium in 2014. The lion's share of this new accumulation of indebtedness of Sudan comes back to the Arab Fund for Economic and Social Development, which amounted to US$ 1.321 billion during this period which constitutes 45% of the new debt, followed by the Islamic Development Bank and Kuwait Fund total loans amounted to US$ 353 million and US$ 319 million which represent 12% and 11% of the accumulation of new debt respectively. Surprisingly, and contrary to expectations, these data reveal that China did not provide a lot of loans to Sudan after the separation, as its debt did not exceed the ratio of 1% of the new debt.

(14) See also the data on appendix IV

Figure 6: Sudan’s New External Debt by Sources over the period 2011 -2018 (Share %)

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Source: External Debt Unit, Central Bank of Sudan and Author calculations

9.1 Why some Countries have continued extending loans to Sudan regardless of its long history of Non- payment? Obviously, Sudan has not obtained a lot of debt during the period 2011 - 2018, because of US sanctions imposed already on the country since 1997 on one hand and the high risk of Non- payments, especially that Sudan economy has lost more than 80% of foreign exchange reserves upon the secession of its south in 2011 on the other hand. As data in figure (6) indicates, Paris Club Countries have completely refrained from providing more loans to Sudan. It is clear that 95% of new debt came from Arab funds and other Arab countries such as Kuwait, Saudi Arabia and the UAE. Despite the long history of Sudan with non-payment, however, those countries have bolded and introduced new loans to Sudan. The following are some reasons that may explain their behaviour. • The common interests shared by Sudan and these countries and Sudan's supportive positions after the great change in Sudan's foreign relations, as Sudan has breaking up its relations with Iran which is considered as the first enemy of them. • The existence of some investments of those countries in Sudan. Therefore, they do not want to worsen the economic situation in Sudan in a manner that could lead to the collapse of those projects. It is known that Kuwait is the largest foreign investor in Sudan at present with a total capital of US$ 13 billion. • Sudan's participation in ongoing military campaign led by the Kingdom of Saudi Arabia to support the legitimacy in Yemen since April 2015 , where Sudan has the largest military force on the ground of more than 30 thousand soldiers.

10. Debt Sustainability Analysis in Sudan Debt Sustainability Framework is launched by the World Bank/IMF to become a tool on which future lending decisions can be based. It makes debt sustainability thresholds dependent on a country’s policy and institutional capacity and development, as measured by the Country Policy Indicators Assessment (CPIA) and particularly by evaluating the sensitivity of debt sustainability to a number of risks faced by low-income countries. This framework assumes that any measure used to assess a country’s ability to use additional sustainable resources effectively will improve the debt sustainability analytical framework.

Debt indicators have been developed to help countries identify their risks and thus help managing them. When these indicators are used to analyze debt sustainability, they help to assess the indebtedness of a country and its potential to become a heavily indebted country. The indicators are used dynamically to give a full image of debt trends. Moreover, they are used with other economic variables such as, expected growth, interest rates and exchange limits. Despite the usefulness of these indicators, there are conceptual problems in determining threshold levels or even acceptable and desirable areas of these indicators. Debt Sustainability Framework (DSF) thresholds vary with the Country Policy and Institutional Assessment (CPIA) score because a country with strong (weak) policies and institutions can carry more (less) debt within prudent zones. Debt Sustainability Analysis consist of ratios of external PPG debt stock or service relative to measures of repayment capacity such as GDP, exports and fiscal revenue. Sudan remains in debt distress, since all external debt burden ratios were well above the indicative thresholds. This situation resulted from further accumulation of arrears and the persistent deterioration in macroeconomic indicators. After the separation of South Sudan in 2011, the situation becomes even worse, since the country left with a sizeable external debt, which will either need to be serviced or addressed through further assistance such as Paris Club “ beyond HIPC “ bilateral debt relief and Multilateral Debt Relief Initiative MDRI. As shown in table (2) and figure (7) below, it seems clear that the present value (PV) of external debt to GDP is about 166 percent of GDP in 2017. The sharp increase in debt ratios after 2011 was basically due to separation of South Sudan, as Sudan has lost 80% of its foreign exchange resources, and partly due to high inflation and nominal GDP growth. Ratios in terms of GDP are calculated using the official exchange rate, which is overvalued in real terms. If the parallel rate was used to calculate GDP, debt to GDP ratios would be correspondingly higher than the ones reported. Similarly, the PV of debt to exports is about 1860 percent and the PV of debt to budget revenue ratio is about 1930 percent, which are all above their respective thresholds of weak economic performance of 50%, 200% and 300% respectively. (15) Sudan debt burden indictors also reveal that the debt severity and the country is in debt distress as shown below in tables (3). Furthermore, the external debt for a country becomes sustainable, if the sustainability ratios, especially the ratio of the Debt to GDP, is not growing through years. In other words, the growth rate of Debt to GDP shouldn’t be positive. For the case of Sudan, as it can be seen from figure (7), all sustainability ratios grew year by year, an evidence that Sudanese external debt is not sustainable.

Table 2: Sudan External Debt Sustainability Indicators Indicator name 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total external debt (US$ 33.5 35.7 37.8 39.8 42.7 44.4 43.7 43.9 45.4 47.1 billion)

Percent of GDP 52 57 57 55 79 77 83 81 111 166

Percent of exports 248 411 305 350 688 696 727 901 1035 1860

Percent of revenues 260 389 328 334 860 747 767 813 1282 1930

Source: Authors’ calculations based on data from CBOS, WB and IMF, 2017

(15) Indicative External Debt Burden Indicators have shown in table (4).

Table 3: Sudan’s External Debt Burden indicators Indicator Name 2008 2009 2010 2011 2012 2013 2014 2015 2016

Debt service (% of exports) 3 6 4 5 7 5 4 11 6

Debt service (% of 119 184 135 128 194 13 95 92 - revenues)

Debt Paid (% of GDP) 1.7 1.6 1 1.1 1.6 1.7 1.6 1.4 -

Source: Authors’ calculations based on data from CBOS, WB and IMF, 2016

Table 4: Indicative External Debt Burden Indicators

PV of Debt in % EXPORT GDP Revenue Strong Performer 100 30 200 Medium Performer 150 40 250 Weak Performer 200 50 300

Source: IMF Staff Guidance Note on Debt Sustainability Framework for Low-income Countries, 2013

Figure 7: Sudan External Debt Sustainability Indicators 4000% 180%

3500% 160%

3000% 140% 120% 2500% 100% 2000% 80% 1500% 60% 1000% 40% 500% 20% 0% 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Percent of exports Percent of revenues Percent of GDP

Source: Authors’ calculations based on data from CBOS, WB and IMF, 2016

10.1 Sustainability of Sudanese External Debt: Bretton Woods’ Vision In the context of the 2017 Article IV consultation with Sudan, Bretton Woods’s institutions (IMF/WB) have prepared Debt Sustainability Analysis for the country. The macroeconomic assumptions underlying this DSA have been updated based on developments in 2016 and 2017H1 (Box 1)16. The baseline scenario assumes a deteriorating fiscal deficit and monetizing of the deficit, an overvalued official exchange rate and permanent removal of sanctions. As in previous DSAs, this DSA update does not include arrears clearance, possible external debt relief, or debt apportionment between Sudan and South Sudan in its baseline or alternative scenarios. The data on macroeconomic variables in Sudan are unavailable for the period after 2017.(17) Therefore, this report confirms the above outlined results in section (9), as Sudan’s external debt remains unsustainable under the baseline scenario because all PPG external debt ratios continue to breach their indicative thresholds. The ratio of external debt to GDP is about 166 percent of GDP in 2017, five times more than threshold for weak policy performers of 30%. Also, the PV of debt to exports is about 1,860 percent and the PV of debt to revenue ratio is about 1,930 percent, more than eighteen fold and nine fold the 100 and 200 percent thresholds for weak policy performers respectively. This weakness is basically due to deterioration in the economy as a whole which resulted in keeping the debt at unsustainable levels. In addition, Sudan’s debt outlook is vulnerable to a range of shocks. For instance, the PV of debt to GDP is most vulnerable to a one-time depreciation shock, whereas the PV of debt to exports and debt service to exports ratios are most vulnerable to an export shock. The debt to revenue and debt service to revenue ratios are most vulnerable to a GDP deflator shock. A standard one-time 30 percent depreciation shock in 2018 would increase the PV-of-debt to 188 percent of GDP in that year and remain elevated over the projection horizon.

10.2 Would Sudan be classified as not in debt distress? Sudan‘s public and publicly guaranteed (PPG) external debt stood at roughly US$ 50 billion up from US$ 39.8 billion in 2011. The majority of the recent increase was due to the further accumulation of arrears to Paris Club and non-Paris Club creditors as well as sizable new loans from Arab creditors, China and India. In relative terms, Sudan‘s external debt ratios exceed those deemed sustainable for poor performing countries under the World Bank/IMF Debt Sustainability Framework (DSF) as well as the Enhanced HIPC Initiative threshold. Therefore, Sudan currently is in debt distress, as in the year 2018. However, Sudan would not be in debt distress if the country got full or partial debt relief. This choice is achievable, as Sudan is eligible for debt relief under the HIPC initiative, but has yet to meet all the qualifications. In particular, it needs to obtain assurances from bilateral official and commercial creditors that they are willing to consider providing debt relief. The other situation in which Sudan cannot be in debt distress is that, if Sudan economy is gradually recovering as a result of some major economic and governance reforms that are expected to be implemented by the transitional government that followed the era of the national Congress.

10.3 Sustainability of Sudanese External Debt: A Futuristic Perspective The external debt may be best choice to finance the deficit in domestic savings if debt cannot create any economic problems in the future. In order to keep debt sustainable, foreign loans should result in higher economic growth through promotion of the exports. The true assessment of the future trend of the external debt should consider a variety of aspects including the performance of

(16) Box 1 contains macroeconomic assumptions in 2017 in which projections have been made for “Natural resources, Real sector, Fiscal sector, External sector and External debt, for more information, see appendix V. (17) Since the country witnessed protests that led to the fall of National Congress’s Government.

17 macroeconomic variables, the management of foreign trade and debt burden indicators. Towards this end, projections have been made to explore the future position of Sudanese debt sustainability. The prospective of Sudan foreign indebtedness over the period (2024-2029) is projected and the results are shown in table (5) below which indicates that the three solvency indicators are expected to exceed the standard threshold ratios in 2024, particularly the present value of debt to GDP of 35.9%, the current value of the debt to exports is expected to reach 487% and the current value of the debt to revenues estimated at 269.4%. But five years later in 2029, these ratios are expected to improve and they are likely to be closer to the threshold ratios, as the present value of debt to GDP will decrease to be only 25%, the current value of the debt to exports is going to be 255% and the current value of the debt to revenues is projected at 202.6%.

Table 5: CBOS Forecasts for Sudan External Debt Sustainability Indicators Years ED/GDP ED/XGS ED/Revenues 2024 35.9 487 269.4 2029 25 255 202.6 LDCs Threshold 30% 100% 200% Source: CBOS, External Debt Unit.

11. Sudan and the HIPCs Initiative Sudan external debt amounted to US$ 47.1 billion in 2017, representing 24% of the total HIPCs countries total external debt. However, the ratio of Debt to GDP was 166, Debt to Exports was 1860 and Debt to Revenues was 1930 and all these ratios were well above HIPC’s thresholds of 30%, 100% and 200% respectively. In addition, Sudan has taken three important steps to meet the HIPC’s requirements: (i) it has reconciled over 90 percent of external debt stock since Dec.31.2010 in collaboration with creditors: (ii) parliament has approved an ambitious Interim Poverty Reduction Strategy Paper (IPRSP) in June 2012, and the Government has officially launched it with the IMF, WB and AfDB by November 2012. (iii) Sudan has successfully completed 13 staff-Monitored programs (SMPs) with the Fund since 1997 and has shown a good track record of macroeconomic performance. The remaining technical condition is clearing arrears to multilateral institutions. Fulfilling the last condition will set Sudan path clear to initiate negotiations with the Paris Club, Non Paris Club and International Commercial Banks. After the implementation of the Comprehensive Peace Agreement with South Sudan, Sudan placed an amicable solution to the issue of external debt, to the extent that; the two countries agreed to form a joint outreach committee to set the support of international community towards reaching the decision point and to facilitate the delivery of Sudan comprehensive debt relief. On the other hand, the main difficulty technically and economically handicapping Sudan from benefiting from HIPC is that Sudan has been accumulating substantial amounts of multilateral debts (mainly IMF and World Bank) reaching US$ 3 billion in 2019. These debts are not subject to cancellation and must be paid. Therefore, clearance of multilateral debt is a prerequisite to engagement in HIPC initiative. To sum up, Sudan has met most of the technical requirements of HPIC initiative to qualify for the exemption of external debt. Nevertheless, it is still a long way for the country to benefit from the initiative, because debt relief process is also share political reasons. Therefore, the crucial factors beside meeting the technical conditions is to reach agreement with Non-Paris club countries, especially Arab countries and funds. Moreover, Sudan should normalize its relations with International Monetary Fund and World Bank, pay their arrears of US$ 3 billion and make regular payments as committed. Sudan also is requested to accelerate the process of removal its name from the list of State Sponsors of

Terrorism, because this step may provide opportunities for the influx of investments and foreign funds to Sudan.

11.1 The possibility of the coordination among Sudan’s Non-Paris Creditors According to Central Bank of Sudan, Debt obligations to the Non-Paris Club (18) totaled US$ 19.8 billion in 2018, representing 39.7 % of Sudan’s external debt, of which, US$ 12.9 billion were in arrears. Non-Paris Club creditors have played an increasingly important role over the last two decades, especially after separation of South Sudan in 2011, since almost all Sudan’s new loans have been received from them. Of these creditors, Arab countries have a lion share of Non Paris debts. Kuwait and Saudi Arabia are considered as Sudan’s two largest creditors, since they hold over 29 percent of Sudan’s external debt. Moreover, China is among the largest creditors of Sudan owning nearly more than US$ 2 billion. In the way to get 100% forgiveness to its external debt, Sudan has to ensure that the coordination among Non-Paris Club Creditors is achievable. HIPC’s Initiative is designed to address the debt owed to Paris Club. Therefore, the coordination of Non Paris Creditors to write off Sudan’s debt depends on a number of factors; the common interests ranks among the top of these factors. For instance, China has written-off all government loans to Sudan from before 2016 and it further signed with Sudan several cooperation agreements in the fields of agriculture, industry and customs management. Secondly, any positive action towards Sudanese external debt crisis basically relays on foreign policy of Sudan, since normalizing the relations with the international community and the multilateral creditors is considered as the key to overcome any difficulties in the way to cancel Sudan’s external debt, because both Paris and Non-Paris creditors are directly or indirectly affected by the position of the international society regarding Sudanese external debt. In the case that new development in Sudanese political scene led to normalize the relations with international community, Non-Paris Club debts of Sudan can be addressed through “beyond HIPC “bilateral debt relief and Multilateral Debt Relief Initiative MDRI.

11.2 Efforts to address Non Paris club debt Non Paris Club Countries are considered as the major creditors of Sudan, with a contribution rate of 39.7% of Sudan's total debt in 2018. The lion’s share of this amount is to Arab countries and funds. It is known that Kuwait and Saudi Arabia are biggest creditors of Sudan, where they account for more than 30% of Sudan's foreign debt. At first glance it may seem that Sudan's task will be easy to persuade those countries to exempt their debts on Sudan. But, in reality, these countries are not islands isolated from the rest of the world; because these countries are subject to the standards of the global financial system in lending and borrowing. Since the first and second oil crises, huge monetary reserves have been accumulated for the Gulf oil states, and they have invested that money in countries that have financial difficulties such as Sudan. Since then the Arab countries, particular Kuwait and Saudi Arabia, have become more integrated in the global economic system and have become major factors in the formation of the global economy, and up until the present there are many aspects of homogeneity between the Arab Gulf states and the western world. Rather, it has become more like a strategic alliance. According to an official source, the Sudanese government has previously come to understandings with Kuwait about addressing the problem of its debts on Sudan, as it is one of the major creditors with total debts exceeding US$ 9 billion. After the negotiations have made great progress, Kuwaiti stance changed greatly as a result of foreign pressure not to do so. In addition, the issue of foreign debts due to Arab countries, even though they are linked with the Sudan by the bonds of religion and ethnicity,

(18) The major Non- Paris creditors for Sudan include: Kuwait, Saudi Arabia, China, India, United Arab Emirates and Turkey. For the detailed information on the creditors of Sudan, see appendix III.

19 foreign debt is one of the sovereign issues of both the creditor and debtor countries. Therefore, any exemption (partial or complete) must go through sovereign measures that include approval by the parliaments of those countries and other measures that require a long time to be completed and perhaps all of these procedures end up in rejection. Although the systems of governance in some of the major creditors of Sudan (Kuwait and Saudi Arabia) do not pay attention to the approval of the representatives, but the issue of exempting Sudan's debt may have led to people's revolution against these rulers. Therefore, they would not take a risk by involving themselves in such things. In addition, Sudan, in the eyes of the creditor nations, is not poor, as it is always seen as a country rich in precious resources and therefore it is considered a distinctive destination for investment in the future. For example, Kuwait is the major investor in Sudan as well as being the biggest creditor. So those countries, even though the fact that Sudan does not repay its debts, but it does not mind granting it more loans. The reason is that these countries, especially the Gulf states (Kuwait and Saudi Arabia) are betting a lot on Sudan's natural resources and that they consider them as guaranteed reserves for their future generations, especially since most of the Gulf economies depend on oil which it is one of the exhaustible (non-renewabl) resources. Another thing that impedes addressing Sudanese external debts owed to Non Paris Club countries, especially the Arab ones, is that since the secession of the South in 2011 all international development supports to Sudan were stopped, and also the majority of the countries of the world have refused to provide any form of support. Thus, Sudan had no access to foreign support except through the Arab countries. Therefore, Instead of discussing how to address its debts with its major creditors, Sudan has become dependent persistently on the assistance and loans from Arab countries to correct public budget deficit and balance of payments distortions as well as financing its basic needs such as “food, fuel and medicine”. To some up, all efforts which have been exerted by Sudan. To address its external debt of the Arab countries has not exceeded the limits of rescheduling debt and then requesting more debt. In return, Sudan has always granted these countries investment privileges from time to time, as well as ensuring Sudan's diplomatic stance in facing the security threats to these countries, especially from Iran. when the December revolution broke out, which toppled the thirty-year rule of Inghaz, there were expectations that the transitional government would bring about a radical change in state policy by relying on the domestic resources instead of foreign loans as well as increasing production and productivity. To make these objectives achievable, Sudan should lift subsidies from basic commodities (fuel, medicine, and bread). Statistics show that the daily cost of subsidizing these commodities exceeds US$ 8 million. However, this policy was not accepted by the Sudanese people, and therefore the government changed its opinion and decided to continue the subsidy until the Economic Conference which will be held in April 2020. Thus, the new government followed the same track as the government of the National Conference, which sought to get more loans regardless of their terms and the country's ability to repay them.

12. Current discussion on Sudanese External Debt The international community highlighted that conclusion of a lasting peace agreement between the warring parties should open the door for the required support of the donor community for the reconstruction and development of Sudan; to promote growth, alleviate poverty and restore debt sustainability. In this context, the creditors were encouraged by renewed indications of interest in the establishment of a support group of creditors and donors to prepare to mobilize in the financing for Sudan, to clear its arrears and reduce its heavy debt burden following a peace agreement. Later the two Sudans have realized that nothing happened regarding their external debt and they should look for other alternatives. Below is a brief summary to the discussion which has been made on the external debt after the separation of South Sudan in 2011.

12.1 Technical Working Group on Debt In the context of the roundtable on Sudan the IMF and WB staffs (at the request of some donors/creditors) agreed to co-lead a technical working group, including Sudan’s major official creditors, on Sudan’s external debt. The objective of the group is to provide factual information on Sudan debt structure, classifications and reconciliation position to the international community and international financial institutions to initiate the debt relief process. In collaboration with the IMF, The External Debt Unit at Central Bank of Sudan (EDU) has started a debt reconciliation exercise with the creditors and accordingly received creditors’ statements from multilaterals, Paris Club and Non Paris bilateral creditors. In line with these technical efforts, Sudanese government issued a decree in March 2011 constituting a high level Debt Committee to handle the external debt burden issue and its prospective solution pre-requisite. It is worthy to mention that Sudan in collaboration with the Government of South Sudan has formulated Sudan External Debt Relief and Arrears Clearance Strategy (SEDRACS) to serve as the framework document that will guide the outreach to the international community on external debt relief issues. It is intended to suggest the processes for re-engagement with international creditors and other relevant parties. Unfortunately, until now, those efforts have not borne fruit.

12.2 The Zero option Pre-secession negotiations between Sudan and South Sudan, have led to an agreement on the principle of the “Zero option” as part of the Agreement on Certain Economic Matters (ACEM), which was signed in 27 September 2012, Addis Ababa, and became effective in 17 October 2012. The table below is Article 3 of the (ACEM) that dealt explicitly with the Treatment of External Assets and Liabilities. Article (3) Treatment of External Assets and Liabilities 3.1 Agreed Zero-option Approach: 3.1.1 The two states hereby agree that the Republic of Sudan (RoS), as the continuing

state, shall retain all external debt liabilities and external assets of the RoS. 3.1.2 The two states shall take all necessary steps, including through a joint creditor outreach strategy, to secure from international creditors a firm commitment to provide comprehensive relief of the external debt of the RoS. 3.2 Trigger for potential Apportionment of External Debt and Assets: 3.2.1 If the firm commitment from international creditors regarding the relief for the external debt of the RoS is not secured, the Agreed Zero Option shall cease to apply. 3.2.2 Upon the agreed Zero Option ceasing to apply, the two states shall enter into good faith negotiations to conclude apportionment of the external debt of the RoS and its external assets.

At the conclusion of this Agreement, a committee was established and is composed of representatives of the two governments and the African Union High Level Implementation Panel (AUHIP) on Sudan and South Sudan. The Joint Approach includes requests for assistance from the international community in four areas; namely: transitional financial assistance for Sudan, development assistance for South Sudan, comprehensive debt relief and the lifting of economic sanctions imposed on Sudan. The Committee held one meeting during 2013 and agreed on a joint plan of action and developed outlines for a number of working documents. As it has been outlined in the agreement, Sudan will retains all the external liabilities after the secession of South Sudan, provided that the international community gives firm commitments of delivery of debt relief within two years. Absent such commitment, Sudan’s external debt would be apportioned with South Sudan based on a formula to be determined. This deadline has been extended

21 many times in 2014, 2016 and 2018. Till present nothing new regarding the debt relief. Therefore, the time is absolutely suitable to speak about splitting the debt between the two countries given the continuous failure to take advantage of international debt relief initiatives.

13. Suggested scenarios for solution Sudan has been given numerous promises to have its foreign debts written off if the government has achieved peace in the country and the government has eventually signed the peace deal in 2005, but its debts have not been forgiven and they have remained a source of obsession and an obstacle to the development process; especially as the major part of those debts are interests which grow each year, since the original debts did not exceed US$ 16 billion in 2011. Three scenarios for addressing Sudanese external debt are sketched out, improve of the relations, Establishing Oil Revenues Fund to Serve Sudanese external debt, and splitting the debt between the two states. Below are the details to each of them.

First Scenario: Improvement of relations It is still a long way for Sudan to benefit from HIPC’s initiative, despite its fulfilment of most of the technical requirements to qualify for the exemption of external debt, as the refusal to write off Sudan debts shares political reasons. Therefore, the two Sudans should unify their efforts in demanding the international community to write off all the debts which are unbearable to the economy of either party. In the light of the fact that the majority of Sudanese external debt (39.7%) is owed to Non-Paris club, the two countries have to reach an agreement with Non-Paris club countries, especially Arab countries and funds. Moreover, Sudan and South Sudan should improve their relations with the big powers, topped by the United States. This include improving the relations with the creditors and speed up reaching agreement with the IMF, the World Bank, the Paris Club member states and other states which fall under the IMF influence. This may at least help address the debts, if not written off. The main obstacle to forgiving the debts is that Sudan is not capable of repaying US$ 3 billion of the IMF and World Bank debts, because debt obligations due to multilateral institutions are not subject to debt relief operations, and had to be met on schedule.

Second Scenario: Establishing Oil Revenues Fund to Serve Sudanese External Debt During the period before the secession of South Sudan in 2011, oil and the oil revenues have been pivotal in the last decade, amounting to over half of government revenues and 95% of exports. Soon after the secession the oil has become at the heart of the struggle between Sudan and South Sudan, beside the issue of external debt, because South Sudan is the most oil dependent country in the world, with oil exports accounting directly or indirectly for almost the totality of exports, and for around 80% of GDP. After the secession of South Sudan, Sudan is confronted with large macroeconomic and fiscal challenges. (19) Although both countries are now independent, they have remained interdependent in terms of the oil industry. Being a landlocked country, South Sudan so far has the only chance of exporting all of its crude oil via a pipeline through Sudan to Port Sudan on the Red Sea. The CPA had called for the establishment of a National Petroleum Commission (NPC) to formulate public policies, approve new oil contracts and monitor the implementation of existing ones. However, the CPA did not solve the interdependence issue after secession and failed to provide provisions on a post-independence oil-sharing mechanism or transit fees. In turn, following the secession, Sudan‘s government in Khartoum asked for transit fees of US$ 32-36/barrel (bbl), while South Sudan countered with less than US$ 1/bbl. On January 20, 2012, South Sudan announced that it

(19) Almost 75 percent of the total oil production originates from areas in South Sudan.

22 would shut its production until a fair deal was reached on transit fees, or an alternative pipeline was built. The Agreement on Oil and Related Economic Matters signed in Addis Ababa in September 2012 stipulates the formula of US$ 1/bbl as transit fees and US$ 1.60/bbl for processing fees and between US$ 6.50/bbl and US$ 8.40/bbl for transportation fees. Since the secession of southern Sudan in 2011, Sudan's relations with the south have been very tense and difficult. Sometimes both governments are called for cooperation to settle the suspending issues such as (external debt, Oil and demarcation dispute). However, relations between the two countries soon returned back to square one where each regime starts accusing the other of supporting the opposition. This unsettled situation between the two countries, has negatively affected their economies. South Sudan was raging bloody battles between the government and its opponents, where over 50,000 people have been killed and more than 1.6 million have been displaced since civil war broke out in South Sudan in December 2013. This has made the international community threaten to impose harsh sanctions on the nascent state if there is no solution to the ongoing human rights violations. The insecurity in the south has disrupted the oil industry. A lot of wells are no longer productive and a complete collapse of the economy has occurred in southern Sudan to such an extent that, in March 2018, President Silva Kiir had publicly declared the bankruptcy of the southern Sudanese state and admitted that there was insufficient cash to pay state employees. However, the most important manifestation of the economic collapse in southern Sudan is the scarcity of food, where famine has hit large parts of the nascent state, led to the migration of large numbers of southerners to Sudan. According to the United Nations, the number of southern IDPs (International Displaced People) in the north is 771 thousand people, while government estimated the IDPs of one million and 300,000 people. On the other hand, Sudan's economy has not been safe of the serious effects caused by the wars in the south and the complete stop of oil production in some fields and partial in others. Thus, Sudanese economy has witnessed a dramatic deterioration since 2012, as the inflation rate rapidly increased to more than 60% in June 2018, let alone the continuous collapse of the value of Sudanese pound against foreign currencies, where the value of the dollar against Sudanese pound reached more than 40 pounds in July 2018. This explains the sharp scarcity of hard currencies since the Separation in 2011, as Sudan has lost 80% of its foreign exchange resources due to the separation of South Sudan. All this has coincided with the tight oil crisis since March 2018 and the alignment of vehicles in all cities of Sudan in search of fuel. Under the threat of international sanctions and following several rounds of negotiations supported by the Intergovernmental Authority on Development (IGAD), President Salva Kiir signed a peace agreement with rebel leader and former Vice President Riek Machar on June 17, 2018 in Khartoum. This agreement has brought many heralds for the economy of both countries. The most important of these is that; the two countries have agreed to entrust Sudan with securing and re-operating oil fields that stopped production in the previous period. Perhaps this friendly atmosphere between Sudan and South Sudan is appropriate to discuss how to deal with the external debt problem of the two countries. Since, South Sudan produces approximately 320,000 barrels per day, ranking the new state as the third largest producer in sub-Saharan Africa after Nigeria and Angola. This study proposes to create so called “oil revenues fund to service external debts” and it will be financed by cutting off from oil revenues, e.g 10% of the monthly oil revenues to serve external debt. What reinforces this suggestion is that: a large part of the external debt was actually caused by oil prospecting in the South. In addition, the oil production process requires the cooperation of the two countries, as the fields locate in the south, but the export and processing as well as securing the fields will be the responsibility of Sudan. This suggestion to get out of Sudan external debt crisis, if taken into account, should coincide with a request to creditors for special treatment of Sudan debts appreciating its circumstances as creditors have to submit a debt repayment proposal that includes scheduling and stopping increases in

23 the volume of interests. The creditors' proposal should also include the determination of the total size of the external debt in coordination with the government of the two countries as well as the determination of the time limit at which Sudan and its south will become debt free.

Third Scenario: Splitting the Debt between the two states If the second Scenario is not supported by the two countries, the door should be opened for the discussion on how the external debt can be split in the light of the fact that neither the north nor the south is in a position to repay the debts, because the north cannot meet its own development demands (20) if let alone to repay the foreign debts while the south is too concerned with building its new state and meeting the living demands of its people than to be worried about those debts. For these reasons, the foreign debt should be divided between the two Sudans.(21) The external debts issue needs amicable negotiations between Sudan and South Sudan urgently, because external debt grow rapidly as the result of non-repayment since the separation in 2011. It is clear that, time is due for the two states to discuss the splitting of the debt in the light of potential failure of the endeavours which are now held by the two states seeking the sympathy of the international community to have Sudanese external debt written off. There are four international theories for dividing the foreign debts, population size in the two states, the theory of the geographic areas, the projects which have been financed by the debts (Final Beneficiary method), and financial capacity theory. Consequently, debt splitting is not a trouble issue as it can be dealt with in light of the above outlined international theories which have previously been used in similar cases of secession. The external debt is considered as a matter of sovereignty. Therefore, in many countries which have separated from each other, a settlement to their foreign debts were made urgently. There are some precedents of countries which have experienced separation, such as Yugoslavia and Czechoslovakia where each new state shouldered the foreign debts in accordance with its capabilities. Moreover, in the case of Pakistan and Bangladesh, Pakistan has borne the debts by itself and so has Russia after the Soviet split, though Ukraine later on demanded that it bears its own foreign debts all by itself.

14. Suggested methods for Debt splitting between Sudan and South Sudan Sudan’s total external debt was estimated at US$ 39.8 billion upon the separation of South Sudan in 2011(22), of which US$ 33.9 billion was arrears. As a result of the decision to separate, Sudan lost 23.1% of its population, 20.5% of its territory and 80% of its foreign exchange resources, out of many post-referendum issues that need to be resolved between the north and the South, allocating the debt is key among them. Four scenarios for allocation between the two countries are summarised in the following table:

(20) Sudan has faced financial difficulties after oil gone. (21) Sudan would not bear the debt alone and the south Sudan would be exempted as the creditors (US) suggested. (22) It is well known internationally that the division of external debt should be based on the size of the debt in the year in which the secession occurred.

Table 6: External Debt Allocation between the two Sudans 1.Population size method Allocation North South Size 34.2 million 10.3 million Percentage 76.90% 23.10% Debt Share US$ 30.6 billion US$ 9.2 billion 2.Geographical areas method Allocation North South Area 2,506,000 sq KM 644,399 sq KM Percentage 79.50% 20.50% Debt Share US$ 31.6 billion US$ 8.2 billion 3.Final beneficiary method Allocation North South Financed projects - - Percentage - - Debt Share - - 4.Financial capacity method Allocation North South Percentage 20% 80% Debt Share US$ 7.96 billion US$ 31.84 billion Source: Author’s calculations based on data from CBOS, WB and IMF, 2011

As it can be seen from the table, Sudan now faces an external debt burden ranging from US$ 7.96 billion (Financial capacity-weighted) to US$ 31.6 billion (Geographical area -weighted) while South Sudan’s debt burden ranges from a low of US$ 8.2bn (Geographical area-weighted) to US$ 31.84bn (Financial capacity-weighted). However, due to the lack of data on some projects financed by foreign loans such as loans for military expenditures (23), the study is silent on how to divide debt on the basis of the theory of Final Beneficiary method. The study points out that Sudan’s external debt is unsustainable under all of these debt attribution options except financial capacity method, because it will assume the majority of the debt. Furthermore, it has lost a significant portion of its export base (oil) to South Sudan. And for reasons that are mirror opposites of these, South Sudan ends up with a sustainable debt burden except financial capacity method. It further highlights that Sudan cannot take it for granted that debt relief will be forthcoming and if it does, it could take at least five years to accomplish. South Sudan’s ‘better’ debt sustainability ratios may also mean that it is too ‘healthy’ to qualify for HIPC debt relief.

14.1 Bretton Woods’ Vision As aforementioned, there are a number of potential debt division approaches, such as population-weighted; final beneficiary principle and Financial capacity-weighted. Historically, creditors largely have utilized the final beneficiary principle. However, the dissolution of the Socialist

(23) we have tried to access these data from Stockholm International Peace Research Institute (SIPRI) which is an international institute based in Sweden, dedicated to research into conflict, armaments, arms control and disarmament. But even in this website we did not find the required details, since SIPRI introduced only annual data about military expenditure as percentage of Government expenditure and as percentage of GDP. 25

Federal Republic of Yugoslavia (SFRY) provides an illustrative case study. The majority of SFRY debt was already allocated to specific states prior to the dissolution while the rest of the debt was treated as unallocated debt. The World Bank and IMF were given the principal role in determining the distribution of unallocated assets and liabilities among the successor states. They devised a formula by which to divide the unallocated debts. This breakdown (known as the IMF Key‘) used a number of criteria, such as republics ‘contributions to the federal budget, export earnings, and percentage of total SFRY population and territory. For the case of Sudan, using Final Beneficiary approach would require an exhaustive loan-by- loan analysis – including program expenditures by geographic region. Currently, detailed information is unavailable for nearly all creditors. However, the World Bank Group provides loan-specific documentation, based upon available documentation, a rough loan-by-loan division could suggest the following: (1) Sudan (66 percent); (2) Southern Sudan (2 percent); and (3) unallocated (32 percent). For the unallocated loans, publicly available information was inadequate to either identify the ultimate geographic beneficiary or the relative share of each. According to a simplified IMF Key’formula, Khartoum would assume approximately 63.7 percent of unallocated debt obligations and Southern Sudan roughly 36.3 percent.

14.2 Challenges facing the division of external Debt between the two Sudans and the potential way forward The problem of foreign debts in developing countries is considered as one of the main sources of poverty. Whatever the type of debts granted (concessional or non-concessional), the debtors are required to repay their financial obligations. In order to do so, the country's trade balance should be of sufficient surplus which means an existence of enough reserve of hard currency. This can be achieved by motivating the increase of exports and reduction of imports, especially the consumer ones. Otherwise, this country will face great difficulties in its balance of payments. This is exactly what is happened in Sudan, where the trade balances instead of recording a surplus that enables the state to meet its debts, they have recorded a continuous deficit, except for some years of minor surpluses. Consequently, the debts of the Sudan have fabulously accumulated to reach US$ 50 billion in 2018, which led to the deterioration of its foreign relations and even led to its political isolation. This study attempts to provide practical solutions to Sudanese external debt and one of the possible options is to divide the debts between the two countries. However, the likely methods for debt splitting are discussed and we have even determine the amount of debt assumed by each country, but there are some challenges facing the division of Sudan's external debts. In general, we can divide these challenges into two parts: Political Challenges: The two countries are not fully convinced of resorting to this option and betting on debt cancelling. Sudan believes that it has made much sacrifices to reach the decision point for the HIPC’s initiative. It has been the biggest incentive for Sudan to sign peace agreement with southern Sudan, which led to the secession of the south in 2011 and resulted in the collapse of the Sudanese economy. This agreement was a friendship token for the consent of the international community and the forgiveness of Sudan's external debts and lifting its international isolation. For south Sudan, its desire to divide the debts is even weaker. It has even insinuated on more than one occasion that it is not responsible for these debts and that the South Sudan did not benefit from any of these debts, despite the agreements which have already been made between the two parties in this regard. Technical Challenges: As noted before in this paper, there are four possible ways to divide Sudan's external debts. South Sudan may agree to divide the debts on the basis of population size or geographical area methods, because these methods would let South Sudan shoulder a fewer debts. However, according to Sudanese official source, that would be unfair to Sudan, because these loans had come to the whole unified Sudan where southerners were spread throughout the states of Sudan (north, center

26 and south) and they enjoyed projects financed by foreign loans, whether in the field of health, education or infrastructure in a fair manner with their northern and without any discrimination against them. Thus, these debts should be divided between the two countries by equal shares which is 50% each. From the above illustration, it is clear that the method of dividing foreign debts on the basis of the final beneficiary is widely accepted even by creditors, but the problem is the lack of detailed data for some of the projects financed by loans. Additionally, there is a considerable amount of foreign loans appropriated unlawfully by corruptors, instead of being used in the national projects. (24) With regard to the way in which the two states can overcome these challenges, this study proposes that both Sudans should enter into good faith negotiations, bearing in mind that they are originally members of one nation and they have a common destiny. The agreement of Sudan and the South Sudan on particular division of their foreign debts even if it seems theoretically in the interest of a certain party, but in fact there is no loser. However, both Sudans will be winners and the agreement on the division of debts between the two countries should be the beginning of a full economic integration between Sudan and South Sudan.

15. Conclusion The study introduces many scenarios within which Sudanese external debt can be tackled. This includes highlighting the ways of debt splitting between the two countries and the debt burden faced by each Sudan. Moreover, the study conducts debt sustainability analysis of Sudan, with a special focus on the period after the secession of South Sudan. With these concerns in mind, the study has carried out analysis and the following results were found: • Based on the latest available statistics in 2017, the present value (PV) of external debt is about 166 percent of GDP, three times more than the 50 percent threshold for weak policy performers. Similarly, the PV of debt to exports is 1860 percent and the PV of debt to budget revenue ratio is about 1930 percent. However, the average external debt to GDP ratio, external debt to exports ratio and external debt to revenues ratio for the period after separation of South Sudan are 81, 733 and 801 percent respectively. This indicates that by all indicators, Sudan's external debt burden ratios are large and unsustainable since they were well above the indicative thresholds carried out by HIPC's Initiative. Therefore, Sudan continues to be in debt distress. • Throughout the period since the secession of South Sudan in 2011 till 2018, the new (principal) accumulation of Sudanese indebtedness amount to US$ 2.93 billion. The bulk of them (95%) is owning to Non-Paris Creditors, especially Arab countries such as Kuwait and Saudi Arabia. In contrast, US economic sanctions imposed on Sudan since 1997, beside internal conflicts have a significant negative affect not only debt's crisis but also Sudan economy as a whole, as they deprive the State of any assistance through international financial institutions and have frustrated Sudanese efforts to be admitted into the process led to HIPC initiative. • The study uses four methods for debt splitting between Sudan and South Sudan including: Population size - weighted, Geographical area - weighted, Final beneficiary method and financial capacity method. Based on these methods, the study finds that Sudan now faces an external debt burden ranging from US$ 7.96 billion (Financial capacity-weighted) to US$ 31.6 billion (Geographical area-weighted) while South Sudan's debt burden ranges from a low of US$ 8.2 billion (Geographical area-weighted) to US$ 31.84 billion (Financial capacity- method).

(24) Even though, a considerable number of the projects which have been financed by external debt were listed on appendix VI.

In light of the above findings, the study recommends the following: • As shown in the debt sustainability analysis, Sudan is potentially eligible for HIPC Initiative assistance. When Sudan signed the Comprehensive Peace Agreement with South Sudan in 2005, the country has received numerous promises to have its foreign debts written off. Nevertheless, it was a long way for Sudan to reach the decision point given political instability and the conflicts in Darfur, Southern Kordofan, and Blue Nile. As the result of a popular revolution in December 2018, the corrupted National Congress's government which was accused by the US's government as responsible for support of international terrorism removed. Therefore, new government should urge US government to remove Sudan from the list of a state sponsor terrorism because this step can positively affect addressing Sudanese external debt crisis. • Non Paris Club countries are considered as the major creditors of Sudan, with a share of 39.7% of Sudan's total debt in 2018, the lion’s share of this amount is to Arab countries and funds. Therefore, the study recommends to speed up reaching an agreement with them. This can help at least to lessen the Sudanese external debt crisis. • Since South Sudan produces approximately 320,000 barrels per day, ranking the new state as the third largest producer in sub-Saharan Africa after Nigeria and Angola, this study propose to create so called “oil revenues fund to service external debts” and it will be financed by cutting off from oil revenues, e.g 10% of the monthly oil revenues to serve external debt. What reinforces this suggestion is that: a large part of the external debt was caused by oil prospecting in the South. In addition, the oil production process requires the cooperation of the two countries, as the fields locate in the south, but the export and processing as well as securing the fields will be the responsibility of Sudan. • In case that all of these options had reached a deadlock, the two countries should enter into good faith negotiations to conclude apportionment of the external debt of Sudan as has been shown above (section 14). The agreement of Sudan and the South Sudan on particular division of their foreign debt, even if it seems theoretically in the interest of a certain party, but in fact there is no loser. However, both Sudans will be winners and the agreement on the division of debts between the two countries should be the beginning of a full economic integration between Sudan and South Sudan.

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Appendices

Appendix I Total Debt* and Repayment** in Sudan 1980 -2011 (US$ Million) Years Total Repayment Years Total Repayment Years To. Dt Repayment Debt Debt 2005 27006 291.063 1980 4670 53.445 1992 16085 14.085 2006 28457 209.213 1981 5763 51.374 1993 16321 9.335 2007 31873 216.259 1982 6272 98.864 1994 18002 2.619 2008 33542 218.85 1983 7454 40.009 1995 19355 14.541 2009 35687 362.366 1984 8594 40.502 1996 19451 0 2010 37805 397.453 1985 9034 16.086 1997 19357 0.158 2011 39800 415.626 1986 9834 151.236 1998 20483 1.262 2012 42470 273.639 1987 11636 41.609 1999 20546 5.705 2013 44379 211.275 1988 12136 58.037 2000 20521 143.005 2014 43660 178.578 1989 12855 45.395 2001 20798 138.131 2015 43884 411.86 1990 15305 14.638 2002 23608 80.056 2016 45800 54.5 1991 15834 12.159 2003 25710 188.308 2017 47100 126.3 2004 26784 204.373 2018 50000

Sources: * Central Bank of Sudan, ** World Bank

Appendix II Military Expenditure in Sudan over the period 1988 – 2019 YEARS Mili. EXP. YEARS Mili. EXP. YEARS Mili. EXP. YEARS Mili. EXP. 1988 1604 1996 564 2004 4749 2012* 3199 1989 ------1997 445 2005 3881 2013* 3309 1990 1858 1998 1288 2006 4565 2014* 3418 1991 1490 1999 2308 2007 5782 2015 3222 1992 1290 2000 2973 2008 6974 2016 3376 1993 1471 2001 1885 2009 6801 2017 4383 1994 1088 2002 2211 2010* 2979 2018 2254 1995 759 2003 1672 2011* 3089 2019 1048

Source: Stockholm International Peace Research Institute (SIPRI), “*”=Researcher estimates based on data from SIPRI

Appendix III Creditors of Sudan

1. Multilateral Creditors include the following creditors: African Development Bank African Development Fund Arab Fund for Economic and Social Development Arab Monetary Fund European Investment Bank International Development Association International Fund for Agricultural Development International Monetary Fund

Islamic Development Bank OPEC Fund for International Development

2. Paris Club Bilateral Creditors include the following creditors: Austria - Oesterreichische Kontrollbank AG - Bank of Austria Belgium - Office Nationale Du Ducroire Canada - Export Development Corporation Denmark - Danish Export Credit Council France - Banque de France - COFACE - Natixis Germany - EULER HERMES Italy - Sace - artigiancassa Ireland - Department of Industry Japan - Ministry of Finance, Export - Insurance Division Overseas Economic Cooperation Fund – Japan International Cooperation Agency(JICA) Netherlands - Nederlandsche Kredietverzekerings Maatschappij Norway - Norwegian Guarantee Institute for Export Credits Russia - Bank of International Foreign Affairs - Moscow Spain - Instituto de Credito Oficial Switzerland - Federal Office of Foreign Economic Affairs United Kingdom - Export Credits Guarantee Department United States - Agency for International Development - Department of Agriculture Department of Defense - Exim-bank

3. Non-Paris Club Bilateral Creditors include the following creditors: Abu Dhabi Fund for Arab Economic Egypt - Central Bank of Egypt Development. Algeria - Ministry of Finance. Iran - Ministry of Finance- EXIM Bank China - Bank of China – Exim Bank, Beijing Qatar - Ministry of Finance Czech - Ceskoslovesnka Obchodni Banka-Praha India - Ministry of Finance – EXIM Bank Croatia - Geotehnika LTD – ZAGREB Egypt - Central Bank of Egypt Abu Dhabi Fund for Arab Economic Hungary – Hungarian State Treasury Development Kuwait Fund for Arab Economic Development Serbia – Jubmes Bankaa .d. Beograd Libya - Ministry of Finance Kuwait Fund for Arab Economic Development Pakistan - State Bank of Pakistan, Karachi Kuwait - Ministry of Finance Turkey – The Central bank of the Republic of Romania – Electroexportimport - Turkey – Exim Bank Masinenexport - Rompetrol Iraq - Ministry of Finance Poland - Bank Handlowy w Warszawa Saudi Fund for Development Saudi Arabian Monetary Agency

4. The Major Foreign Commercial Banks Creditors include the following:

Arab African International Bank, Cairo B NAT Paris London The Argo Fund limited - London Lazard & Co. limited, London

Standard Bank - London Arab International Bank, Cairo

Citibank NA, Bahrain National Bank of Kuwait, Kuwait

UBAF, Paris Bank of Nova Scotia

UBS Warburg, Stamford (formerly SBC) Societe Generale, Paris (inc.Bahrain bch.) Citibank NA, Nassau Swiss Bank Corp

Abu Dhabi Investment Company, Abu Dhabi ING Bank (Luxembourg) SA Alahli Bank of Kuwait Ing Bank NV, London

Bank Melli Iran, London MGTC New York Bank of New York, New York Natexis Banque Paris (formerly BFCE) Chase Manhattan Bank, London National Bank of Kuwait, Paris

Credit Agricole (Banque) Indosuez, Paris Union Arab American Bank, New York

Appendix IV Sudan’s New loans by Sources for the period 2011 – 2018 (US$ Million) Creditors 2011 2012 2013 2014 2015 2016 2017 2018 Total Share % Islamic Development 235 19 99 0 0 0 0 353 12% Bank Arab Fund for Eco.& 468 248 236 0 0 199 170 1321 45% Soc. Dev. Arab Monetary Fund 0 45 0 133 0 0 75 253 9% Abudhabi Fund 0 0 0 0 90 0 0 0 90 3% Saudi Fund for 0 0 0 0 170 0 0 0 170 6% Development Saudi Fund 130 0 0 0 0 120 0 0 250 9% Belgium Govt 0 0 0 5 0 0 0 0 5 0% China 24 0 16 0 0 0 0 0 40 1% India 0 0 125 0 0 0 0 0 125 4% Kuwait Fund 0 89 177 47 6 0 0 0 319 11% Source: External Debt Unit, Central Bank of Sudan and Author calculations

Appendix V Box 1. Macroeconomic Assumptions 2017–37

Natural resources. Oil production is projected at 90 thousand barrels/day in 2017, slightly lower than the 2016 production level. Ageing oil fields and a low international oil price outlook along with moderate expansion of further exploration keep oil production flat at 90 thousand barrels/day over the medium term. Meanwhile, non-oil GDP is projected to grow by about 3.4 percent, on average, by 2022 and remain stable afterwards. Price projections are guided by the IMF’s latest World Economic Outlook (WEO). The price of Sudan’s crude oil is projected to average USD$47/barrel in the medium term.

Real sector. Real GDP growth rate is expected to slightly decline to 3.2 percent in 2017 driven by weaker domestic demand. Real growth is expected to increase to 4 and 3.7 percent in 2018 and 2019, respectively, boosted by the impact of sanctions removal, and then gradually decline to 3 percent by 2022, and remain unchanged on average over 2022–37. Medium-term real GDP growth mainly reflects our baseline scenario assumptions: sanctions have been revoked, but there

is no further progress toward debt relief, nor do the authorities undertake far-reaching economic reforms. With a still overvalued exchange rate, weak business environment, and loose fiscal policies financed by money creation, macro imbalances are likely to intensify, compromising growth prospects. Inflation, as measured by the GDP deflator, is projected to slightly increase from about 25.7 percent in 2017 to about 26 percent in 2022. Inflation is expected to increase in the medium to long term averaging 31.2 percent in 2023–37.

Fiscal sector. The fiscal deficit is projected to deteriorate over the medium term to 3.7 percent by 2022, reflecting a combination of revenue losses arising from the substantial use of the overvalued official exchange rate for government transactions and dwindling oil revenues, and unchanged pattern in current spending. Over the long run post-2022, the fiscal deficit is expected to stabilize at 3.5 percent through 2032 and thereafter improve slightly to 3.4 percent by 2037. Under those assumptions, the domestic debt-to-GDP ratio is projected to rise over the long run.

External sector. The current account deficit is expected to worsen over the medium term, to a high of about 8.5 percent of GDP by end-2022, reflecting the deteriorating effect of fiscal deficit as well as stable growth in real GDP. In the long run, it is projected to remain elevated at 6.3 percent of GDP, on average. The deficit will be financed by foreign direct investment and continued accumulation of external debt. Sizable financing gap are assumed to be covered by external debt throughout the projection period.

External debt. Reflecting continued limited access to international finance and a deteriorating debt service capacity, disbursements of new loans are expected to be limited, at about 0.6 percent of GDP during 2017–37. In line with the recent portfolio of new contracted debt, the share of new concessional loans is assumed at around one-third. It is assumed that Sudan will continue not to service obligations arising from the stock of arrears. In addition, the projected financing gaps are added to the external debt stock.

Appendix VI The projects Financed by External Debt About 70% of the developmental projects which have been implemented since the independence of Sudan in 1956 and to present were financed by external loans, the discussion of these projects and how external loans were distributed among them is not an easy task, since there is a very large database. We are now display some of them. It is worth mentioning that it was not possible for the researcher to know the size of the loans that were directed to the defense and the military equipment. Because of the confidentiality of these data, also we were unable to obtain loans for petroleum exploration and its extraction as well as the development projects implemented in the south Sudan. Below are examples of the projects which have been financed by external debt. • The United States provided a loan of US$ 1066 million, of which about 83% was used for commodity and food imports, while only 17% was used for developmental projects in the roads and agricultural research sectors. The following is the details of using this amount of money. • Development projects: "Khartoum-Madani Road, Khartoum-Al-Jaili Road" Al-Mona Street, "Kosti-Al-Obyaed Road, subsidizing the Industrial Bank and the resolution of funding the agricultural research projects in West Sudan." • Food aid: includes the supply of wheat and wheat flour.

• Commodity aid: includes capital equipment "equipment, machinery, spare parts" and inputs of agricultural production "fertilizers and pesticides". • Projects financed with secured loans from the British government include: financing the construction of the Sennar Dam, the establishment of the Jazira Scheme, loans for purchasing “De Hevilliand Comit” aircraft for Sudan Airways, railway loans, loans for electricity equipment for Sennar Dam, equipment and spare parts for various sectors. The establishment of Khartoum North (Bahri) thermal power station "60 MW, also the construction of Madani - Sennar-Kosti Road, and in the field of agriculture, the funding of the project for the reconstruction of irrigation projects in the Nile" Kali, Sial, Kabushia and Zaidab. • The Rusiris Dam Project was implemented in 1961 by Germany in cooperation with the World Bank, a loan to finance “Khashm Al-Qirba Sugar Factory” 1962 in cooperation with the Kuwait Fund for Economic. One of Projects accomplished by German loans is Nyala-Kass-Zalingei Road, jointly financed by the Islamic Bank for Development and the Saudi Fund for Development, Jabal Awlia-Rabek Road, financed jointly with the World Bank, imported equipment and spare parts for the sugar factories of Al-Junaid and Khashm Al-Qurba and for the railways. Digging water wells in rural areas, installing health care centers for the displaced in Khartoum, Jabal Awlia, Dar es Salaam, providing equipment for 12 rural hospitals, installation of acoustic equipment for the Omdurman National Theater, sewage network in Wadi Halfa, the small reservoirs in Darfur and the allocation of DM 60 million For the city water project of Port Sudan City. • Total Dutch economic aid in the period 1962-1990 is estimated at US$ 480 million. Among the most important projects financed by Dutch aid are the Al-Obied-Kadugli Road, Nyala-El Fasher Road, the expansion and rehabilitation of the Khartoum Central Foundry, the construction of the Central Medical Supplies stores. Power suply of Kassala, Al-Obeid and Khashm Al-Qurba, Nyala and Al-Geneina water projects, providing medicines, oils and lubrications for cars, fertilizers, potatoe seeds and livestock input production. • Italian loans have been used to fund the drilling of underground wells in Kordofan, the Gado textile factory, project, the Kana Abu Naama sisal factory and the sisal factory of al-Tunj, purchase of 40 trucks for relief transport, and a US$ 20 million commodity loan for the purchase of industrial equipment and inputs. • Some of the loans taken from France have been allocated for the purchase of agricultural inputs and "Peugeot cars" used in government offices. France also provided a grant of US$ 5 million after the flood disaster. This amount was used to buy spare parts for the former mechanical transport Service, fire engines and equipment for the Corn Hospital in Khartoum. France also provided loans in the field of gold prospecting in partnership with the Government of Sudan and a French company that succeeded in this field. • The funding of the sesame planting project in Qadarif, as well as the implementation of the timber production project in the Blue Nile and Bahr el Ghazal region, was undertaken by a Canadian loan. In the field of food aid, Canadian assistance included large quantities of Canadian wheat. In the field of technical assistance, the Canadian International Development Research Center (IDRC) provided funding for many researches in the field of medical services and economics. • Norway provided a loan to the Government of Sudan in 1975 in the amount of NOK 234 million to finance the purchase of river vessels for the River Transport Corporation in Sudan. Finland provided loans in 1978 to finance forest development projects in Khartoum and the former Eastern and Central Regions, and also financed the power transmission line between Kassala

and Khashm al-Qirba, and the mechanized farming project in Al-Showak. As for the Denmark, it has funded Shendi -Atbara power supply and Atbara Cement Factory project. • The economic cooperation with the Soviet Union was limited. The loans obtained from there were used to construct the National Council Hall building and the Khartoum. Khartoum North spinning factory was financed by Romania. Yugoslavia purchased four ships for the Sudanese sea lines, Obeid City water project, Rabak cement factory project and the carton factory in Aroma. Hungary financed the purchase of passenger vehicles for the Railway Corporation for US$ 15 million in 1960. Poland provided funding for electricity transmission lines and transformers for the National Electric Corporation for US$ 24 million. • The Kuwait Fund for Development, which was established in 1961 has a very large contribution to the development projects in Sudan, estimated up to 2006 about US$ 400 million, one of the most important of these projects is Halfa al-Jadida sugar factory, Kenana sugar factory, Asalaya sugar factory, Sindar sugar factory, Sindar-Sangeh-Damazin Road, Al-Rahad Agricultural Project, Support and Development of the Railways Corporation, Financing for the former Industrial Bank, Contribution to Financing the Hilton Hotel, Implementation the first pipeline for transporting petroleum materials from Port Sudan to Khartoum, US$ 347 million, African Islamic Centre(currently: International University of Africa), "the Merowe dam project, in addition to many investments in telecommunications, transport and the financial sector. • Whereas the Saudi Development Fund (SDF), which was established in 1974 provided several soft loans to the Sudan, estimated at SR 1.4 billion (US$ 365 million) from the inception of the Fund until 2006. One of the most important projects funded is Al-Rahad Agricultural Project, the rehabilitation of the Al-Jazeera Scheme, project of development of the West Savannah, Nyala-Kas-Zalingei Road, project 14 satellite communications station, the financing of the Merowe dam, rehabilitating the health centers and rural hospitals and the projects of rehabilitating the schools and digging wells and construction of wells, dams and water reservoirs for 100 million Saudi riyals. The Government of Saudi Arabia also provided financial assistance to Sudan during the period 1976-1984, estimated at US$ 1 billion. In addition, loans and cash grants were provided in 1998 and 2000 amounting SR 200 million in 2006. • There is also a good proportion of loans provided by the Government of the UAE through the Abu Dhabi Fund for Development (ADFD) - two loans in 1976 to finance the Haj Abdullah spinning factory and the developing the railway. The Fund stopped assistance until 2002 when it made a contribution to finance the Merowe Dam project for US$ 150 million. There is also a loan provided by Sheikh Zayed for the construction of Khartoum International Airport, Jordan Airport and another in Morocco and after the completion of the project it turns into a grant. And other loans to finance the new project of Khartoum airport, which was transferred from the area of Haj Youssef to the area of Omdurman. • At the end of 2006, China ranked first in the list of donor countries to finance the development of Sudan. The economic cooperation between the two countries started in 1970. The total loans and grants until the end of 2006 amounted to about US$ 2.7 billion. The ratio of commercial loans is estimated at 93.7%, interest-free loans is 4.3%, preferential loans of 1.2% and grants 0.8%. After the appearance of the Chinese Petroleum Company Sudan in 1997, Sudan received several commercial loans to finance important projects in the fields of oil, electricity, water and irrigation. Economic cooperation between China and Sudan has been characterized by low cost of projects, with average cost estimated at only 25% compared to the cost of projects implemented by European and Western companies due to the low cost of Chinese labore.

• There are other group of projects which have been financed by external debts, as shown in the table below:

Arab Fund for Economic and Social Development Project Name Loan Amount Date Roussir Reservoir Project Phase II 205,878.18 06/01/2008

An additional loan for Merowe Dam project 205,878.18 05/03/2008

Additional loan for White Nile Sugar Project 106,488.71 05/04/2010

Project Sadi Upper Atbara and Stett 177,481.19 28/03/2011

New Khartoum International Airport Project 177,481.19 28/03/2011

Eastern Sudan Roads 191,679.68 17/03/2012

Water harvesting project in the border states 53,244.36 17/04/2012

Loan for Industrial Development Project 35,496.24 04/01/2013

Project Sde Upper Atbara and Satit additional 106,488.71 18/03/2013 works

Transformational electricity 202,328.55 11/07/2013

Electricity Sadi Upper Atbara and Stett 106,488.71

Total 1,568,933.70

Arab Monetary Fund Project Name Loan Amount Date second reform facility 45,197.74 09/01/2013 Extended Loan V 132,697.82 22/12/2015

Total 177,895.56

Abu Dhabi Fund for Development Project Name Loan Amount Date Raising the Reservoir 25,003.95 20/05/2008

An additional loan is the second dam project 50,007.90 20/05/2008 Merwe

White Nile Sugar Project 50,007.90 03/11/2008

Project Sadi Upper Atbara and Stett 90,016.42 10/05/2010

Rescheduling the balance of payments 49,608.92 16/06/2011

Rescheduling Khartoum International Airport 5,677.52 12/06/2011 Project

Total 270,322.61

Republic of Algeria Project Name Loan Amount Date Project Sadi Upper Atbara and Stett 38,000.00 10/05/2010

Total 38,000.00

Bank of China Project Name Loan Amount Date Cotton Processing Machinery 6,092.28 03/04/2006

The Road of Rabak Al - Obeid Road 73,680.00 01/05/2006

The equipment and the equipment (5) 81,855.00 30/06/2006

The equipment and the equipment (6) 45,750.80 30/06/2006

The grain warehouse in your Lord 24,200.19 30/06/2006

Electricity National Capital 26,184.95 12/10/2006

Loan 11,455.92 10/06/2008

Equipment for water supply (3) 21,287.84 09/07/2008

Equipment for water supply (4) 7,240.35 09/07/2008

The equipment for water t ... (5) 11,313.04 09/07/2008

Al-Jaili Road Shandi Atbara 116,711.41 20/07/2008

Al Foolah Electricity Project 612,305.40 24/12/2008

Al-Nahoud or Kadada Road Project 109,800.00 23/12/2008

Zalingei El Geneina Road Project 108,131.63 23/12/2008

Dongola Road Project - Wadi Halfa 108,000.00 24/12/2008

Al - Dubaybat Road Abu Zubd Al - Foula 90,000.00 24/12/2008

Sennar Bridge 59,400.00 24/12/2008

Omdurman Para Road Project 199,395.00 09/01/2009

Road of Umm Rawaba Abu Jubaiha 56,880.00 01/03/2009

The road of Umm Kadada El Fasher 86,400.00 01/03/2009

Integrated Information Phase I 37,640.87 29/12/2009

Water Projects 21,600.00 07/01/2010

Blue Nile Agricultural Project 26,972.31 26/02/2010

South Kordofan power station 232,900.00 04/04/2010

Integrated Information System 11,292.26 11/10/2010

Total 2,186,489.25

Islamic Development Bank Project Name Loan Amount Date Development of basic education in Darfur 10,761.38 30/05/2006

Development of basic education in Darfur 1,906.30 30/05/2006

Al - Khawi Al - Nuhud Road Project 6,149.36 30/05/2006

White Nile Sugar Project 56,448.17 30/05/2007

Project of three regional hospitals 14,120.47 30/05/2007

Loan to Omdurman Islamic University 10,761.38 11/06/2007

Loan to Omdurman Islamic University 4,166.19 11/06/2007

Support for the Central Malaria Center 7,256.25 29/10/2007

Urgent relief for Darfur 10,300.18 08/11/2007

Raising the Reservoir 91,195.00 02/04/2008

Modernization and development of the island 10,761.38 30/08/2008

Extension of White Nile Sugar Project 11,865.13 27/06/2009

Cotton wipes 19,500.00 04/07/2009

Water harvesting project 8,500.00 08/07/2009

Faculty of Engineering, University of Khartoum 5,869.57 06/10/2009

Faculty of Engineering, University of Khartoum 10,289.00 06/10/2009

Support for the first phase microfinance project 11,268.71 28/07/2010

Support for the second phase microfinance 5,200.00 28/07/2010 project

Biological control of malaria project 5,088.60 11/01/2011

Gedaref water supply project 80,000.00 06/02/2011

Atbara High-rise Complex Project 150,000.00 07/09/2011

Sustainable villages in West Darfur 14,650.00 25/01/2012

Halfa Agricultural New Project Phase I 34,630.00 04/04/2012

Halfa Agricultural New Project Phase II 14,470.00 04/04/2012

Rainwater harvesting project in South Kordofan 19,677.96 13/03/2013

East Darfur Electricity Line Project 50,200.00 06/04/2014

Irrigation Development in the Tokar Delta 9,850.00 06/04/2014 Project

Irrigation Development in the Tokar Delta 39,420.00 06/04/2014 Project

Total 714,305.03

IFAD

Project Name Loan Amount Date

Integrated Rural Development Project in Batna 25,827.32 16/02/2007

Total 25,827.32

Republic of India

Project Name Loan Amount Date

Kosty steam turbines 350,000.00 23/01/2006

Sengah El Gedaref Road 41,900.00 23/01/2006

Credit Loan 48,000.00 02/02/2007

Exim Bank Rescheduling 14,300.00 30/03/2007

Credit Loan 52,000.00 23/07/2007

Sugar project 25,000.00 26/01/2009

Loan 47,302.12 24/07/2013

A second loan project 125,000.00 24/07/2013

Total 703,502.12

Kuwait Fund for Development

Project Name Loan Amount Date

Raising the Reservoir 53,244.36 02/05/2009

Project Sadi Upper Atbara and Stett 88,704.59 22/12/2010

Eastern Power Project 88,740.59 02/01/2013

Dandar and Al Rahad Project 88,740.59 30/06/2013

Establish an integrated laboratory for the mining 47,301.98 17/02/2014 sector

Water Harvesting Project in Pastoral Areas 6,043.01 29/11/2015

Total 372,775.11

OPEC Project Name Loan Amount Date White Nile Sugar Project 25,000.00 31/01/2007

Al Rahad Project 20,600.00 06/09/2007

Raising the Reservoir 30,000.00 28/07/2008

Resource Management Program in Western 8,600.00 03/02/2009 Sudan

Atbara High-rise Complex Project 30,000.00 24/02/2012

Total 114,200.00

Saudi Fund for Development Project Name Loan Amount Date Merowe Dam Project 59,999.04 03/06/2008

Raising the Reservoir 39,999.36 12/10/2009

White Nile Sugar Project 53,332.48 21/10/2009

Project Sadi Upper Atbara and Stett 99,998.40 02/10/2012

Project Sadi Upper Atbara and Stett 79,998.72 24/09/2012

Importing products from Saudi Arabia 70,400.88 29/09/2015 (fertilizers)

Importing products from Saudi Arabia 100,000.00 29/09/2016 (Gasoline)

Total 503,728.88

Republic of Turkey Project Name Loan Amount Date The bridge project of the tiger 13,830.95 02/05/2006

Water supply system for local marine 11,643.65 21/01/2008

Al Halfaya Bridge Project 20,384.90 26/12/2008

The project of sanitation of local marine 29,074.24 28/05/2010

Total 74,933.74

Kingdom of Belgium Project Name Loan Amount Date Drinking water project 5,157.75 01/04/2014

Total 5,157.75

Source: External Debt Unit, Central Bank of Sudan.