Country Report

Sudan

Sudan at a glance: 2007-08

OVERVIEW Although the Economist Intelligence Unit expects the 2005 north-south Comprehensive Peace Agreement to survive over the outlook period, serious concerns persist over questions of implementation. Arguments over issues such as the sharing of oil revenue, boundary delineations and the role of militias will result in rising tension. Both northern and southern leaders will be increasingly preoccupied with securing their core bases of support in preparation for national elections, due in 2009. In Darfur we expect ongoing inter-factional fighting, insecurity and population displacement, as pro- government forces confront those rebels who reject the May 2006 Darfur Peace Agreement. There is little prospect that the planned "hybrid" UN-African Union (AU) peacekeeping force, which the UN hopes will take over from the existing undermanned and under-funded AU mission in Darfur, will be allowed sufficient troops and operational independence to make a difference to the situation on the ground. Further oil output rises, combined with growing domestic demand, will keep real GDP growth strong over the outlook period. However, the current account will record large deficits, as increasing oil earnings are more than offset by growth in import spending.

Key changes from last month Political outlook • Our political outlook is unchanged. Increasing international pressure is unlikely to result in a lasting solution to the humanitarian crisis in Darfur. Economic policy outlook • Our economic policy outlook is unchanged. Economic forecast • Following the publication of new trade figures by the Bank of Sudan (the central bank), we have made a small downward revision to our projections for Sudan!s current-account deficit, which we expect to average around 12% of GDP over the outlook period.

March 2007

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Sudan 1

Contents

Sudan

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

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

12 The political scene

19 Economic policy

24 The domestic economy 24 Economic trends 25 Oil and gas 28 Infrastructure 29 Agriculture 31 Financial and other services

32 Foreign trade and payments

List of tables 9 International assumptions summary 11 Forecast summary 20 State budget 32 Trade account 33 Current account, Jan-Sep 33 Official reserves

List of figures 12 Gross domestic product 12 Consumer price inflation

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Sudan 3

Sudan March 2007 Summary

Outlook for 2007-08 Although the 2005 north-south Comprehensive Peace Agreement (CPA) should survive over the outlook period, arguments over the sharing of oil revenue, boundary delineations and the role of militias will result in rising tension. Both northern and southern leaders will be increasingly concerned with securing their core bases of support in preparation for national elections, due in 2009. In Darfur there will be ongoing violence, as pro-government forces confront the rebels. There is little prospect that the planned "hybrid" UN-African Union (AU) peacekeeping force will be allowed sufficient troops and operational independence to improve the situation on the ground. Further oil output rises, together with growing domestic demand, will keep real GDP growth strong in 2007-08, although the current account will record widening deficits.

The political scene The Sudanese government has retreated from its apparent agreement to allow a three-phase transition to a AU-UN mission in Darfur, although some progress has been made on the first two phases. Prosecutors at the International Criminal Court have named two suspects blamed for human rights abuses in Darfur. Opposition parties have protested against the passing of a new political parties law. The president and first vice-president have traded accusations over the responsibility for slow implementation of the CPA.

Economic policy The 2007 state budget, forecasting a widening fiscal deficit, has been approved by the National Assembly. The 2007 budget of the Government of Southern Sudan (GOSS) has allocated 36% of funds to the Sudan People!s Liberation Army. The Sudanese pound has been launched as the new national currency.

The domestic economy The dinar has slowed its rate of appreciation against the US dollar. Inflation averaged around 7% in 2006. The GOSS has continued to assert its right to award oil exploration concessions in the south. Sudan has applied to join OPEC. Sudan and China have signed a US$1.2bn contract for the upgrading of the railway between Khartoum and Port Sudan. International agencies have forecast a good harvest in 2007. The government has moved forward with its plan to restructure and develop the banking sector.

Foreign trade and payments The Bank of Sudan (the central bank) has reported that the trade account recorded a small surplus in the third quarter of 2006. The current-account deficit widened strongly in the first nine months of 2006, to almost US$2bn. Foreign-currency reserves declined sharply in 2006, by 11% year on year.

Editors: Laura James (editor); Robert Powell (consulting editor) Editorial closing date: March 6th 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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Political structure

Official name Republic of Sudan

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

National legislature Bicameral parliament, which after 2009 will be made up of a wholly-elected 450-member National Assembly and a Council of States, composed of two representatives from each state. The current National Assembly is wholly appointed, however, according to the power-sharing quotas agreed under the 2005 Comprehensive Peace Agreement

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

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

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

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

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

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

Central bank governor Sabir Mohammed al-Hassan

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Economic structure

Annual indicators 2002a 2003a 2004 a 2005 b 2006b GDP at market prices (SD bn) 4,320.4b 4,972.2b 5,936.0 b 7,225.7 8,628.9 GDP (US$ bn) 16.4b 19.1b 23.0 b 29.7 39.7 Real GDP growth (%) 6.1 5.1 5.2 8.3 9.6 Consumer price inflation (av; %) 6.9 7.7 8.4 8.5 7.0 Population (m) 34.2b 34.9b 35.5 b 36.2 37.0 Exports of goods fob (US$ m) 1,949.1 2,542.2 3,777.8 4,824.3 a 6,190.3 Imports of goods fob (US$ m) 2,293.8 2,536.1 3,586.2 5,946.0 a 8,047.5 Current-account balance (US$ m) -1,008.1 -955.3 -870.9 -3,013.1 a -4,764.5 Foreign-exchange reserves excl gold (US$ m) 248.8 529.1 1,338.0 1,868.5 a 1,659.9a Total external debt (US$ bn) 23.6 24.2 26.3 27.0 a 28.3 Debt-service ratio, paid (%) 2.8 4.9 4.2 b 3.3 4.0 Exchange rate (av) SD:US$ 263.3 261.0 257.9 243.6 a 217.2 a Actual. b Economist Intelligence Unit estimates.

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

Principal exports 2005 US$ m Principal imports cif 2005 US$ m Crude oil 4,187.0 Machinery & equipment 1971.9 Sesame 119.0 Manufactured goods 1627.9 Livestock 115.0 Transport equipment 1149.7 Gum arabic 108.0 Chemicals 493.8 Cotton 107.0 Wheat & wheat flour 383.6

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

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Quarterly indicators 2005 2006 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Prices Cotton Liverpool index (US cents/lb) 53.22 55.59 54.66 57.20 59.46 56.34 58.47 57.95 Financial indicators Exchange rate SD:US$ (av) 250.2 248.5 242.8 232.9 229.1 221.8 212.9 204.9 Exchange rate SD:US$ (end-period) 249.3 247.0 238.1 230.5 225.8 217.6 208.9 201.3 M1 (end-period; SD bn) 653.5 672.9 700.7 813.0 889.7 953.0 957.3 n/a M1 (% change, year on year) 31.9 31.5 32.1 34.5 36.1 41.6 36.6 n/a M2 (end-period; SD bn) 1,105.5 1,179.0 1,234.5 1,378.2 1,605.3 1,721.6 1,752.4 n/a M2 (% change, year on year) 37.1 40.5 40.2 43.5 45.2 46.0 42.0 n/a Sectoral trends Crude petroleum production ('000 barrels/day)a 293 289 275 271 254 248 259 449 Balance of payments (US$ m) Goods: exports fob 1,037.8 1,270.0 1,321.9 1,194.6 n/a n/a n/a n/a Goods: imports fob -1,111.7 -1,338.8 -1,578.0 -1,917.5 n/a n/a n/a n/a Merchandise trade balance fob-fob -73.9 -68.7 -256.2 -722.9 n/a n/a n/a n/a Services balance -344.8 -405.8 -452.0 -528.0 n/a n/a n/a n/a Income balance -294.9 -330.0 -358.6 -378.2 n/a n/a n/a n/a Net transfer payments 277.2 280.2 283.3 360.2 n/a n/a n/a n/a Current-account balance -436.5 -524.3 -783.4 -1,268.9 n/a n/a n/a n/a Reserves excl gold (end-period) 1,447.1 1,623.1 1,864.0 1,868.6 2,213.8 2,603.5 2,408.2 1,659.9 a Excluding Block 6 output. Sources: IMF; International Financial Statistics; Ministry of Finance; Government of Southern Sudan Oil Revenue Share report.

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Outlook for 2007-08

Political outlook

Domestic politics The Economist Intelligence Unit expects the 2005 Comprehensive Peace Agreement (CPA) between the ruling National Congress (NC), which dominates the Government of National Unity (GNU), and the Sudan People!s Liberation Movement (SPLM), which leads the autonomous Government of Southern Sudan (GOSS), to hold over the outlook period. However, important differences between northern and southern leaders over key issues"including the equitable division of oil revenue, the exact delineation of the north-south boundary (especially the status of the disputed Abyei territory) and the actions of rival militias"are likely to become increasingly divisive if left unresolved. Tensions will rise further towards the end of 2008, as parties prepare for the elections that are due to be held in 2009. Potentially more seriously, the approach of the referendum on southern independence, scheduled for 2011, could provoke a crisis if southern secession begins to seem likely. Both main parties will therefore lay a growing emphasis on cementing the support of their core constituencies. In the south of the country, the SPLM will attempt to promote more rapid development and fight corruption allegations while continuing to spend much of its revenue on salaries and benefits for its armed wing. In the north, although the NC will remain largely in control of political outcomes, it will have to contend with rising social pressures, as oil revenue climbs less rapidly than is popularly expected in the country. Although the government has budgeted sharp increases in allocations to the state govern- ments, it is reluctant to transfer further wealth and administrative power, which has historically been centralised in the capital, Khartoum, to outlying regions. It may also fear that decentralisation, should it be taken too far, would strengthen opposition groups in the NC!s northern heartlands. The president, Lieutenant-General Ahmed Hassan al-Beshir, will therefore continue to seek to secure his power base by balancing the allocation of financial resources and high-level bureaucratic positions among key interests in the NC leadership, business and the army and security services. The government will also continue to seek to delay any significant deployment of UN peacekeeping troops in the western region of Darfur, to reinforce the existing African Union Mission in Sudan (AMIS), which has neither the strength nor the mandate to impose security and safeguard the access of humanitarian agencies to the area. In late 2006 Mr Beshir apparently consented in principle to the conversion of AMIS into a "hybrid" UN-African Union peacekeeping force, and, as part of the first phase, AMIS has already begun to be reinforced by some UN technical support and specialist personnel. However, the government is still unlikely to allow the full implementation of the planned final phase of the conversion, which would involve a substantive role for UN personnel in the command structure of the hybrid force and a major increase in troop numbers. The prospects for a new, more widely accepted peace accord to replace the failed Darfur Peace Agreement (DPA), signed in May 2006, remain poor. Even

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former rebels from the Sudan Liberation Movement (SLM) faction that accepted the peace deal, led by Minni Minnawi (now, under the terms of the agreement, a senior presidential adviser and head of the newly formed Darfur Transitional Authority), have been complaining of the slow pace of implementation. Recent months have seen increased activity on the part of the National Redemption Front"a coalition of insurgents who reject the DPA, including a number of field commanders from the SLM and members of the Islamist Justice and Equality Movement. At the same time, there have been more attacks on rebel-held villages by pro-government janjaweed militias and by the Sudanese air force. As a result, although there may be further negotiations with rebel groups, Darfur is likely to see ongoing fighting between the various rebel factions and forces supporting the government, with all sides increasingly targeting international peacekeepers and the staff of non-governmental organisations.

International relations The humanitarian crisis in Darfur will continue to complicate Sudan!s international relations, placing a particular strain on the country!s links with the US and European countries and raising the prospect of further bilateral or multilateral sanctions. However, with Asian partners such as China, Malaysia and India unwilling to risk the huge sums they have invested in the energy sector, as well as a burgeoning economic partnership with Arab Gulf countries, these are unlikely to jeopardise Sudan!s economic development.

Economic policy outlook

Policy trends The Sudanese government has for some years been pursuing an IMF reform programme, which commits it to seeking economic stability, including a strong external position and low inflation. However, the government!s focus on the daunting task of countrywide reintegration, regeneration and reconstruction following decades of conflict has combined with lower than expected oil revenue to push the fiscal and current-account deficits beyond historical norms. This trend is likely to continue, as the need to ensure that the country experiences a "peace dividend" following the three recent peace agreements (in the south, west and east of the country) remains pressing. Partly as a result of this, Sudan is likely to continue to take on extra non-concessional debt (largely from China) to fund major infrastructure projects, despite substantial existing arrears and IMF disapproval.

Fiscal policy The bulk of national government revenue (around 50%) continues to come from the oil sector. Oil earnings are expected to rise by 15% in 2007, owing to a substantial increase in average oil output, the effect of which will be only partially offset by the impact of falling international prices and the poorer quality of some of the oil produced. Combined with strengthening tax receipts, this is projected to raise total government revenue by 19%, from an estimated SD1.6trn (US$7.5bn) in 2006 to nearly SD2trn in 2007. Revenue growth in 2008 will remain strong at around 16%, as a decline in production from some of the more mature oilfields will partly offset output growth in the new oil blocks. Government expenditure is also expected to expand over the outlook period, with the implementation of new infrastructure projects, mostly in Khartoum.

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Transfers to the state governments, especially in the north, and to the GOSS, which, under the CPA, is apportioned half of net oil earnings from southern wells, will rise strongly. Nevertheless, spending growth is projected to be slower than revenue growth, rising by an average of 14% in 2007-08. As a result, the fiscal deficit is forecast to narrow slightly over the outlook period, from an estimated SD285bn (3.3% of GDP) in 2006 to SD276bn (2.7% of GDP) in 2007, and further to around SD241bn (2.1% of GDP) in 2008.

Monetary policy Sudan!s banking system currently operates effectively only in the north, where all financial institutions are governed by sharia (Islamic) law. The Bank of Sudan (the central bank) manages monetary policy through the issuance of Islamic financial certificates rather than government bonds or Treasury bills. The key financial indicator is the average murabaha profit margin (a sharia- compliant rate of return), which stood at an estimated 11.4% in 2006 and is expected to remain relatively constant over the outlook period. The Bank of Southern Sudan, set up in July 2006, aims to manage a parallel banking system, based on international rather than Islamic norms. However, the operation of a dual system could result in some policy incoherence over issues such as data collection, banking sector regulation and interest rates. A new national currency, the Sudanese pound, is being gradually introduced, replacing the existing Sudanese dinar at a fixed rate of S£1:SD100. In the south of the country, the dinar is currently largely unused, and foreign currencies have long been preferred. Although there may be some short-term adjustment problems and delays to the ambitious timetable set forth by the Bank of Sudan, in the longer term a common currency should assist economic integration between the north and the south.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2005 2006 2007 2008 Real GDP growth World 4.7 5.2 4.7 4.6 OECD 2.6 3.2 2.6 2.7 EU27 1.7 2.9 2.4 2.2 Exchange rates ¥:US$ 110.1 116.2 117.0 103.5 US$:€ 1.246 1.256 1.329 1.353 SDR:US$ 0.677 0.680 0.659 0.646 Financial indicators ¥ 2-month private bill rate 0.00 0.28 0.90 1.84 US$ 3-month commercial paper rate 3.38 5.04 5.15 5.00 Commodity prices Oil (Brent; US$/b) 54.7 65.3 58.8 57.4 Cotton (US cents/lb) 55.2 58.3 64.1 68.8 Food, feedstuffs & beverages (% change in US$ terms) -0.5 16.1 5.3 -2.0 Industrial raw materials (% change in US$ terms) 10.2 50.1 0.8 -14.3 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

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Real world GDP growth is expected to slow over the outlook period, as a result of easing US and EU expansion. We forecast that the global economy will register average growth of around 4.7% at purchasing power parity rates in 2007-08"substantially down from the estimated 5.2% seen in 2006. Crude oil prices were pushed up to record highs in 2006 by strong demand, especially in Asia, with the average price of the benchmark dated Brent Blend exceeding US$65/barrel. Over the outlook period, demand is projected to remain steady, supported by strong consumption. Political uncertainties in several large oil producers (particularly in the Middle East) will also continue to weigh heavily on the oil markets, with OPEC countries also committing themselves to keeping prices relatively high through output constraints. Nevertheless, as spare capacity increases modestly and output continues to rise, the average price of Brent is forecast to fall slightly to around US$58/b in 2007-08.

Economic growth The Sudanese government will continue to take advantage of rising oil earnings to boost investment expenditure on infrastructure, in line with its commitments to promote regional economic development under the CPA and other agree- ments. Growth in private consumption will also remain strong, as a result of growing confidence (particularly in Khartoum, but also in the south of the country) and rising foreign direct investment (FDI). The main driver of economic growth in 2007, however, will be rising export volumes caused by the coming on stream of new oil capacity (largely from the Petrodar concession in blocks 3 and 7). These are expected to boost real GDP growth from an estimated 9.6% in 2006 to around 12.8% in 2007. In 2008 the slower rate of increase in Sudan!s oil output will combine with ongoing strong demand for imports to bring real GDP growth down to a projected 5.8%.

Inflation Despite a sharp fall in inflation in the first half of 2006, cuts in subsidies on fuel and sugar imposed in August caused consumer prices to climb in the later part of the year, resulting in average inflation of around 7%"just within the IMF- agreed target. Robust domestic demand"together with possible, smaller subsidy cuts in 2007-08 and a lessening of the downward pressure on import costs as the central bank acts to constrain the rapid appreciation of the dinar"is expected to keep price pressures strong throughout the outlook period, resulting in average inflation of around 8%.

Exchange rates The value of the Sudanese dinar has been pushed upward in recent years by the large sums of foreign currency entering Sudan in the form of oil earnings, FDI and workers! remittances. The central bank, which operates a managed float of the dinar against the US dollar through foreign-currency purchases and daily limits on the trading band, allowed the currency to appreciate rapidly, and in 2006 it strengthened by almost 13% year on year, averaging SD217.2:US$1 over the year as a whole. However, by early March 2007 the dinar had appreciated to only SD200.6:US$1"a quarter-on-quarter increase of just 1%. The authorities, which see a rate of around SD200:US$1 as the level at which the competitiveness of the country!s non-oil exports could begin to suffer, will continue to act to restrain the strengthening of the dinar. Even though the US dollar is projected to weaken further in 2007, the Sudanese currency is

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therefore expected to appreciate by an annual average of just 4% over the outlook period.

External sector In 2007 a strong rise in average oil output will offset the effect of a fall in international oil prices (and a decline in the quality of the new oil, which will therefore sell at a substantial discount), resulting in a considerable rise in oil export revenue. As almost 90% of Sudan!s export revenue comes from the oil sector, total export proceeds will climb sharply, by around 25%, to US$7.8bn" compared with an estimated US$6.2bn in 2006. At the same time, import spending (particularly on capital inputs) will increase sharply, from an estimated US$8bn in 2006 to US$10.1bn in 2007. We therefore project that the trade deficit will widen from an estimated US$1.9bn in 2006 to around US$2.4bn this year. In 2008 slower oil output growth will result in a more modest 10% increase in the value of exports, and import spending will strengthen further to around US$11.4bn, resulting in a further widening of the trade deficit to about US$2.8bn. The non-merchandise deficit is also expected to widen over the outlook period. Higher income repatriation by foreign firms (as new oil capacity comes on stream) will result in a substantial increase in income debits, and services payments will also rise roughly in line with imports and the needs of the oil sector. These negative flows will be only partially offset by increased current transfers credits, as workers! remittances continue to rise. The overall result will be a further expansion of the current-account deficit, from an estimated US$4.8bn in 2006 to around US$6.6bn (12.9% of GDP) in 2007. Next year, we project that the deficit will widen further, to about US$7.2bn, although it will narrow as a proportion of GDP, owing to Sudan!s strong economic growth.

Forecast summary (% unless otherwise indicated) 2005 a 2006 b 2007c 2008c Real GDP growth 8.3 b 9.6 12.8 5.8 Oil production ('000 b/d) 282.1 b 324.5 510.6 552.5 Crude oil exports (US$ m) 4,187.0 5,522.3 7,029.7 7,779.9 Consumer price inflation (av) 8.5 b 7.0 8.0 8.0 Government balance (% of GDP) -1.7 b -3.3 -2.7 -2.1 Exports of goods fob (US$ bn) 4.8 6.2 7.8 8.5 Imports of goods fob (US$ bn) 5.9 8.0 10.1 11.4 Current-account balance (US$ bn) -3.0 -4.8 -6.6 -7.2 Current-account balance (% of GDP) -10.2 b -12.0 -12.9 -11.9 External debt (year-end; US$ bn) 27.0 28.3 29.8 31.4 Exchange rate SD:US$ (av) 243.6 217.2 196.9 189.5 Exchange rate SD:¥100 (av) 221.3 186.9 168.3 183.1 Exchange rate SD:€ (av) 303.5 272.7 261.8 256.3 Exchange rate SD:SDR (av) 360.0 319.6 299.1 293.4 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

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

Sudan Middle East and North Africa Sudan Middle East and North Africa 14.0 9.0

12.0 8.5 8.0 10.0 7.5 8.0 7.0 6.0 6.5 4.0 6.0 2.0 5.5 0.0 5.0 03 04 05 06 07 08 03 04 05 06 07 08 2002 2002

The political scene

Sudan prevaricates over a The Sudanese government has retreated from its apparent agreement, in

hybrid AU-UN mission November 2006, to allow a hybrid UN-African Union (AU) mission in Darfur, where fighting is continuing between rebels and pro-government militias. The UN!s three-phase plan for supporting the AU envisaged that the UN would supply a "light" support package followed by a "heavy" one, which would then lead into a fully-fledged joint mission (December 2006, The political scene). However, problems in agreeing the third phase have put the whole plan into doubt. In February the new UN secretary-general, Ban Ki-moon, stated that he was still waiting for a "positive and clear agreement" from the Sudanese government to the proposed third phase of the UN support package for the AU Mission in Sudan (AMIS), which would involve the deployment of large numbers of UN personnel. Although Mr Ban!s special envoy for Darfur, Jan Eliasson, and the AU!s special envoy for Darfur, Salim Ahmed Salim, subsequently went to meet senior Sudanese government officials in Khartoum and Libya in a renewed attempt to reach agreement over such a deployment, they made little progress. Efforts have continued to be obstructed by a lack of consensus over the timeframe for implementing the plan, the extent of UN support, and the identity and command of the envisaged joint mission. Hopes for a compromise were further undermined by comments made by the Sudanese president, Lieutenant-General Omar Hassan Ahmed al-Beshir, who emphasised in early February that the country could "solve its own problems without foreign intervention". In late February he stated at a press conference in Addis Ababa that the plan to transform the AU force into a UN force had a "hidden agenda" aimed at placing the whole country under UN trusteeship. The Sudanese foreign affairs minister, Lam Akol, has followed a broadly similar line in justifying the government!s opposition to the deployment of UN troops in Darfur, even though he is a representative of the southern Sudan People!s Liberation Movement (SPLM), the former southern rebel group that leads the autonomous Government of Southern Sudan (GOSS) and that officially favours such a deployment. In February Mr Akol claimed that Sudan was co-operating fully with the international community over Darfur. Similarly, Ali Sadiq, a

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spokesman for the Ministry of Foreign Affairs, stated that there was full agreement over the first two phases of the plan for the AU-UN mission, on which Sudan!s position was "clear", with "only minor details" needing to be finalised. In fact, however, these details include important negotiating points, including the number, mandate and national origin of UN personnel to be deployed in Darfur.

Some progress is made on the Despite the many difficulties, a small amount of progress has been made in

first two phases implementing the support plan for AMIS. By mid-February around half of the roughly 100 UN civilian and military personnel due to be deployed in the first phase had arrived in Darfur. At the end of the month, Mr Sadiq announced that work on the first support package was on the verge of completion, with the minor difficulties affecting it having been largely overcome. He added that the members of the tripartite mechanism overseeing the plan, which includes representatives of the UN Mission in Sudan (UNMIS), AMIS and the Sudanese government, were in the process of approving the implementation of the second phase. Mr Sadiq said that the UN had pledged to provide US$45m to fund the second support package, in which some 400-500 experts and technicians would be deployed over two to three months. This is in contrast to Mr Ban!s announcement in late February that the second phase would involve the deployment of more than 3,000 UN troops, at a cost of US$287.9m, over a six-month period. These personnel would prepare for the arrival in the third phase of the full complement of 22,000 UN/AU troops"including the 7,000 currently in AMIS. Further progress should continue to be made over the coming months, but it is likely to remain slow. Although Mr Beshir pledged in January to improve access to Darfur, as of February the Sudanese authorities were continuing to hold up the clearance of supplies being imported by UNMIS and the issuance of visas to UN staff. Besides the difficulties caused by the Sudanese government!s attitude, the transition to a joint AU-UN mission has also been hampered by other practical considerations. The absence of any precedent of a similar joint mission has hindered preparation, as has lack of funding. UN member states have also been reluctant to offer personnel for the proposed joint peacekeeping mission. By the end of June, therefore, when AMIS!s current mandate expires, it is likely that only modest progress will have been made in implementing the first phase and possibly the start of the second phase of the transition to a AU-UN joint force. Another last-minute appeal for funding and an extension to AMIS!s mandate are consequently likely to be necessary.

China maintains a policy of Faced with the Sudanese government!s intractability over Darfur, the US and

non-interference the EU have recently looked to China, which has substantial investment in Sudan!s oil industry and is the country!s principal trade partner, to press the government in Khartoum to accept the deployment of UN forces in Darfur. However, so far they have been largely disappointed. In January the Chinese president, Hu Jintao, visited Khartoum, and Chinese and Sudanese officials afterwards suggested that Mr Hu had given serious attention to Darfur in his discussions with Mr Beshir. According to one anonymous Sudanese official quoted in a Reuters report, Mr Hu told Mr Beshir that he must "resolve this

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problem", and that the Sudanese government must do more to persuade the active Darfuri rebel groups to sign up to the Darfur Peace Agreement (DPA)" June 2006, The political scene. In fact, China still appears unwilling to apply political pressure to Sudan over the Darfur issue. China!s avoidance of a more active role over Darfur is no surprise. The principal purpose of Mr Hu!s visit to Khartoum was to consolidate China!s economic relationship with Sudan"for example, he reportedly agreed that China would cancel US$104m of Sudanese debt owed to it, lay a new railway line and provide US$17m to build a new presidential palace. Although China remains highly unlikely to take the lead in Darfur-related negotiations, in case of a broader agreement, the country might be prepared to contribute troops to a UN force in Darfur, just as it has contributed over 400 personnel to the UN peacekeeping mission in Southern Sudan (UNMIS).

The threat of sanctions The US has been threatening to pursue a "Plan B", under which it would

remains weak impose a range of new sanctions on Sudan. These would be in addition to its existing sanctions, which prohibit US companies from doing business in Sudan except in approved areas, such as in Southern Sudan (December 2006, Economic policy). The threatened sanctions would aim to discourage foreign governments and companies from business involvement in Sudan, partly by targeting US dollar-based international transactions. Under the sanctions plan, the US Treasury would block US commercial bank transactions with Sudan. In theory, the plan would also put pressure on Darfuri rebel leaders to participate in peace talks with the government, by targeting individuals or entities identified as obstructing the peace process in Darfur. Publicly, Sudanese officials reacted to the US sanctions threat with indignation" Mr Sadiq, for example, in early February described the plan as "unjustifiable" and evidence that the US was pursuing "a policy of confrontation" with Sudan. However, the threat of increased sanctions"imposed either unilaterally by the US or by the UN Security Council"is not new and has failed to intimidate the Sudanese government. At present the country is protected from the possibility of harsh UN economic sanctions by China!s desire to protect its economic interests in Sudan!s oil sector, as well as by the fact that the US and Europe remain keen to support the implementation of the 2005 north-south Comprehensive Peace Agreement (CPA) and will avoid any sanctions that might harm the nascent GOSS. As the GOSS receives more than half of its annual budget from Sudan!s oil export revenue, this rules out sanctions directly affecting the oil sector"which generates almost 90% of the country!s export proceeds. Indirect US sanctions targeting foreign companies doing business in Sudan would be an inconvenience, and the prospect has already deterred some European firms, but ultimately they would do little to prevent other foreign countries from doing business in Sudan. Similarly, UN sanctions that imposed travel or banking restrictions on senior Sudanese officials would have a minimal impact.

Sudan prepares to fend off ICC At the end of February prosecutors at the International Criminal Court (ICC)

prosecutions investigating war crimes and human rights abuses in Darfur named their first two Sudanese suspects: Ahmed Haroun (now Sudan!s minister of state for

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humanitarian affairs, who in 2003-04 was a junior interior minister with responsibility for the Darfur region) and Ali Mohammed Ali Abdel-Rahman, also known as Ali Kushayb, who is accused of being a leader of the pro- government janjaweed Arab militias. In principle, this should be the start of a number of prosecutions, as the ICC has had many suspects to investigate, starting with a confidential list of 51 people drawn up by a UN commission of enquiry in 2005. Reflecting this, since the start of the ICC!s investigations in June 2005, staff from the ICC prosecutor!s office have made more than 70 visits to some 17 countries, gathering depositions from potential witnesses and other documentation. However, progress with prosecutions is far from assured. The Sudanese authorities have shown some willingness to co-operate with the ICC, at least to the extent of allowing some ICC investigations inside Sudan. However, their co- operation will certainly not extend to facilitating the investigation of any senior figures in the government or armed forces. Instead, the Sudanese government, which is not a signatory to the ICC convention, insists that it can and will take responsibility for prosecuting any crimes committed in Darfur, and that the ICC has no jurisdiction. Responding to the naming of the two suspects, the Sudanese justice minister, Mohammed Ali al-Mardi, stated that the government did not accept the indictments, which he said were based on "lies" told to the prosecutor by Darfuri rebels. He claimed that Mr Kushayb (who was arrested by Sudanese investigators in November 2006 over killings in Darfur and brought before a special criminal court in March 2007) was a member of Sudan!s regular police forces rather than the janjaweed. Mr Haroun declared his own innocence, arguing that the accusations against him were politically motivated. The Sudanese government is likely to continue to resist pressure to hand over any individuals for prosecution, by mounting its own prosecutions and by other delaying tactics.

Darfur peace talks remain in With international efforts focused on bringing about a transition to a joint

disarray AU-UN force in Darfur, efforts to organise peace talks for Darfur and maintain a semblance of a peace process have largely been overwhelmed by events. Symptomatic of this has been the ongoing failure to convene a Darfur peace conference, which has long been mooted by the Sudanese government and which the AU had talked of convening in February. Plans for peace talks in Libya in mid-February between the Sudanese government and the National Redemption Front (NRF"an alliance between Darfuri rebels from the Sudan Liberation Army (SLA) and the moderate Islamist Justice and Equality Movement) appear to have come to nothing. Although progress was made in talks between Sudan and Chad at the Libyan summit, with the two countries once more announcing their intention to end the violence on their common border, there was no word on any meeting with the rebels. For their part, the various Darfuri rebel groups remain as divided as ever, and continued fighting on the ground has undermined what little momentum there had been behind moves towards a peace process. Events in Darfur have a very limited impact on the national government!s political and economic control of Sudan as a whole. As a result, the govern- ment sees little to be gained from negotiations that might require it to revise the

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existing DPA and cede any more power than it has already. It also views the persistent divisions among the rebels as an opportunity to defeat them militarily or bribe them into submission. In January, for example, a planned meeting of factions of the SLA in Northern Darfur was disrupted by a government bombing raid, despite the government having previously given its consent for the meeting to go ahead. In late February a group of SLA field commanders met at an unspecified location in Northern Darfur in yet another attempt to form a united front, but there has been no word on the group!s progress. The SPLM and NRF have announced that they will meet in Yei, in Southern Sudan. However, the lack of SPLM influence over Darfur means that the meeting (if it is held) is very unlikely to produce results. Instead, as with all conflicts in Sudan, it appears that until there is a concerted domestic and international effort to organise talks with the necessary level of inclusiveness to be effective, a definitive political settlement to the conflict will not be realised.

Fighting continues on the On the ground in Darfur the security and humanitarian situation has changed ground in Darfur little. During a visit to Sudan in January the governor of the US state of New Mexico, Bill Richardson, appeared to have persuaded the Sudanese government and three Darfuri rebel groups to agree to a 30-day ceasefire. However, one of the groups reneged on the agreement within a day, and the government was soon found to have carried out new aerial bombing raids in Northern Darfur. Violence between the rebel NRF, made up largely of fighters from the sedentary Fur, Zaghawa and Masalit peoples, and the janjaweed (recruited principally from Darfur!s nomadic Arab tribes) has also continued in Western Darfur and across sections of the border with Chad. In addition, in mid-February there was an outbreak of heavy fighting in Southern Darfur between the nomadic Rizeigat tribe and farmers from the Targem people. The incident reflects the extent to which competition for pasture and water resources fuels ongoing conflict in Darfur, even in the relatively peaceful southern areas. Attacks on AU forces and aid workers in Darfur have also continued, with frequent car hijackings and a number of killings, including of AU troops. Many non-governmental organisations (NGOs) have consequently pulled out of the region, or confined their activity to the major towns. As usual, however, the fighting has continued to affect civilians the most acutely. According to UN estimates, attacks by the janjaweed in the eastern Jebel Marra area caused the displacement of 30,000-35,000 people between December and early February. In one attack in December in Western Darfur, 31 civilians were killed when horsemen shot at and fired a rocket-propelled grenade at a truck. The persistence of such a high level of violence in Darfur after four years of conflict reflects both the lack of an effective ceasefire and the weakness of AMIS.

Opposition parties are At a meeting of the opposition Popular Congress in Khartoum in February, the

increasingly restless party!s secretary-general, Hassan al-Turabi, called for a popular uprising against the ruling National Congress (NC). The call was noteworthy, not only because Sudan has in the past seen two such uprisings, which overthrew the incumbent governments in 1964 and 1985, but also because of Mr Turabi!s own history. As the spiritual founder of the National Islamic Front, the precursor of the NC, Mr Turabi was the guiding political force behind Mr Beshir!s regime for ten

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years. However, since splitting from Mr Beshir in 1999, he has gradually presented himself as a reformed democrat, saying that he has learnt a lesson that political parties must not resort to military coups"as he himself did in backing the coup that brought Mr Beshir to power in 1989. Since 1999 Mr Turabi has intermittently inveighed against the regime, and has repeatedly landed himself under house arrest. However, his political influence within the country has been much reduced in recent years. The other leading northern opposition parties have also been scaling up their rhetorical attacks on the NC in recent months. Strong criticism has come from the Umma Party, led by Sadeq al-Mahdi, from the Democratic Unionist Party and, less influentially, from the National Democratic Alliance (NDA"a loose umbrella group of 13 parties). At the moment none of the northern opposition parties has the wherewithal to organise a popular uprising by itself, but it is not impossible that they could do so by acting together. Because of this, the government tightly controls the opportunity for public protests and is careful to continue to hold out the prospect of national elections.

The path to national elections At present, national elections are scheduled for 2009, but it is far from certain

is uncertain that they will go ahead. Legislative preparations are continuing, and the new political parties law, which was approved by the National Assembly in January, gives all political parties three months to conform with regulations and register at the "party affairs council". Controversially, the law includes a clause (supported by both the SPLM and the NC) that allows for the dissolution or suspension of the activities of a party, or for it to be prevented from participating in elections, if it is deemed to have breached the terms of the CPA (December 2006, The political scene). In protest at this, the NDA announced that it was withdrawing its MPs from the assembly, and in February a number of opposition parties signed a manifesto calling for the abolition of the law, which they see as favouring parties participating in the incumbent Government of National Unity (GNU). The political parties law is only one of a series of issues that could complicate the holding of national elections in 2009. At the moment, larger doubts surround the tasks of carrying out a national census (which is due to be held in November), preparing an electoral roll and determining electoral boundaries. Although these tasks are essential for full elections to be held, work on them appears to be behind schedule. The National Constitutional Review Commission has not yet completed its consultations prior to drafting a new election law. Furthermore, the North-South Boundary Committee"set up under the CPA to delineate the north-south border"remains deadlocked by the NC!s refusal to accept the verdict of the Abyei Boundary Commission on the disputed oil-rich area of Abyei (September 2006, The political scene). With two years to go before elections are due, it remains possible that further reasons for delay will also emerge.

Concerns grow about CPA At a ceremony to mark the second anniversary of the CPA on January 9th,

implementation Mr Beshir traded accusations with Salva Kiir, the first vice-president and leader of the SPLM, over the question of responsibility for the slow implementation of the CPA. Mr Kiir accused the government of destabilising the south by

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continuing to sponsor militias and by refusing to resolve the Abyei border dispute, thereby depriving the GOSS of part of its rightful share of oil revenue. For his part, Mr Beshir accused the SPLM of inefficiency and of squandering the US$60m that the government had given it to use in the six months following the signing of the CPA in January 2005 in order to help it prepare to join the government. The SPLM and the GOSS promptly rejected the claim, and the GOSS has tasked its Anti-Corruption Commission with investigating how the US$60m was spent. Despite this exchange of accusations, Mr Beshir and Mr Kiir have nevertheless emphasised that they remain committed to the continued implementation of the CPA in 2007. Additional progress has been made with the technical aspects of implementation. In January the National Assembly passed legislation to establish the National Civil Service Commission, and a decree was issued authorising the establishment of the Commission for the Protection of Rights of non-Muslims in the National Capital, which is intended to safeguard the interests of the many thousands of southern Sudanese refugees living in Khartoum. Legislation is also being drafted for the establishment of three further commissions provided for by the CPA, covering elections, human rights and land. However, the functioning of a number of other key commissions established under the CPA has begun to reveal major shortcomings. In particular, the Assessment and Evaluation Commission (AEC), the Ceasefire Political Commission, the North-South Boundary Committee and the National Petroleum Commission are all either under-resourced or partly deadlocked, for example over the issue of Abyei. Moreover, the AEC"which is supposed to act as the overall monitor of the CPA"has no power to deal with shortcomings or violations in CPA implementation.

Distrust of the NC increases in As a result, doubts over the prospects of the CPA remain strong, particularly in

the south the south of the country. At a US congressional hearing on Sudan in January, two GOSS ministers warned that the NC was pursuing a "deliberate strategy of derailing the implementation of the CPA". Similarly, Roger Winter, a former US special envoy for Sudan with many years of experience in the country, expressed his belief that the CPA was unravelling and that the NC was planning to use militias to destabilise the south and ultimately justify postponing the national elections scheduled for 2009. Indeed, recent opinion polls conducted in Southern Sudan by the National Democratic Institute, a US NGO, suggest that a growing number of people expect an eventual return to civil war. Tensions were further heightened in February when one student was killed and another six injured during violent clashes at El Nilein University in Khartoum between student groups aligned with the NC and those supporting the SPLM. Limited though the clashes were, like other incidents they are an indicator of the animosity that persists between the northern and southern populations"reflecting higher-level divisions. Many SPLM officials blame the ongoing problems with the implementation of the CPA on undefined elements within the NC that are opposed to sharing power under the north-south peace agreement.

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Implementation of the eastern Progress has continued to be made with the implementation of the Eastern peace agreement moves ahead Sudan Peace Agreement (ESPA), signed in October 2006 by the government and the rebel Eastern Front (EF). In February the deputy leader of the EF, Amna Dirar, announced that the rebel group had registered as a political party in Khartoum and that the demobilisation of its soldiers would begin within a few days. According to Ms Dirar, five camps were being prepared in the Sudanese states of Kassala and the Red Sea and in western Eritrea to receive an estimated 1,800 EF troops, and former rebel forces had already begun to gather at two of these, one inside Sudan and the other in Eritrea. Responding to scepticism within Northern Sudan about the political coherence of the EF, Ms Dirar acknowledged that the EF was "not yet very well organised as a political party", but she claimed that it had been holding internal meetings aimed at making the group more united in its decisions and policies. Under the ESPA, the EF will nominate an assistant to the president and a junior minister, and will be allocated eight seats in parliament. The national govern- ment is also required to set up a US$600m five-year development fund for Eastern Sudan. These power- and wealth-sharing commitments are much lighter than those agreed under the CPA and the DPA. Consequently, although some slippage is likely on disbursing funds and meeting deadlines, implementation of the agreement should continue. The government will be keen to avoid a return to conflict in the east, both because of the ongoing difficulties in Darfur and because of the strategic importance of Port Sudan, which remains the country!s sole outlet for oil exports.

Economic policy

The 2007 budget reflects a Sudan!s state budget for 2007, which was presented to the National Assembly broader economic programme in December 2006 and subsequently approved, has now been published on the Ministry of Finance website"in contrast to previous years, when the government!s fiscal projections were not widely distributed. The budget is framed as being part of a medium-term five-year plan covering the period 2007-11. It is explicitly intended to support not only the 2005 Comprehensive Peace Agreement (CPA) between the ruling National Congress (NC) party and the former southern rebel group, the Sudan People!s Liberation Movement (SPLM), but also the recent peace agreements covering Darfur and the east of the country (see The political scene). The budget therefore focuses on ensuring an equitable distribution of resources and balanced growth across the country" lack of which in the past has been a major cause of Sudan!s armed conflicts. Similarly, it prioritises areas such as food security, health, poverty reduction, primary education, water and the reintegration of internally displaced persons for increased spending. The economic programme!s policy objectives also include goals that have long been promoted by the government, such as developing non-oil natural resources, attracting local and foreign investment, increasing technology transfer from foreign oil companies, developing Sudan!s financial markets and using privatisations to restructure the economy and stimulate private-sector growth.

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In order to measure progress towards these broader objectives, the budget also lays out a number of general economic targets and benchmarks for 2007, including a GDP growth rate of 10%, an inflation rate of 8% and an average exchange rate of SD200:US$1. These targets seem broadly realistic, although the real growth rate is relatively conservative (see The domestic economy: Economic trends). The budget also envisages that the value of exports will increase by 10% year on year in 2007, whereas import spending will rise by only 8%, resulting in a reduced trade deficit of around US$1.9bn"substantially narrower than Economist Intelligence Unit forecasts. In addition, the document lays out a number of more specific targets for 2007, including increasing the number of students in higher education to 100,000, compared with 84,000 in 2006. It is intended that 42,000 students should receive targeted financial assistance in 2007, up from 36,000 the previous year. The budget also provides for an increase in health insurance, so that it will in theory cover all state employees and poor students. Finally, the finance ministry states in the budget report that it is in the process of trying to adopt the standard international financial statistics system in order to allow it to present a single, transparent budget.

State budget (SD bn unless otherwise indicated) 2006 2007 % change Total revenue 1,709.4 1,824.6 6.7 Tax 676.0 739.5 9.4 Direct tax 105.0 119.5 13.8 Customs & excise 334.5 380.0 13.6 VAT 236.5 240.0 1.5 Non-tax 1,033.4 1,085.1 5.0 Oil 908.4 929.1 2.3 Crude exports 743.4 663.1 -10.8 Domestic refineries 165.0 266.0 61.2 Non-oil 125.0 156.0 24.8 Total expenditure (incl others) 2,085.2 2,358.9 13.1 Wages & salaries 378.5 481.5 27.2 Pensions & social insurance 39.9 39.3 -1.5 Other current expenditure 486.2 522.1 7.4 National development expenditure 365.2 394.1 7.9 Local projects 145.4 207.0 42.4 Foreign projects 118.3 133.8 13.1 Government capital contribution 77.5 31.3 -59.6 Strengthening development financing institutions 7.0 5.0 -28.6 Agricultural season support 17.0 17.0 0.0 Transfers to the GOSS 306.9 283.8 -7.5 Transfers to southern states 12.5 12.4 -0.8 Transfers to northern states 477.8 602.4 26.1 Current spending 336.2 363.7 8.2 Development spending 141.6 169.7 19.8 Reconstruction funds 0.0 69.0 - Balance -375.8 -534.3 42.2

Source: Ministry of Finance.

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The budget forecasts a strong The 2007 budget projects a 6.7% increase in total revenue compared with the rise in revenue previous year!s budget, from SD1,709bn (US$7.9bn) in 2006 to SD1,825bn in 2007. (Full-year outturn data for 2006 are not yet available, but the government!s own projections based on figures for the first nine months suggest that actual revenue last year reached around SD1,600bn"December 2006, Economic policy.) The overall rise is forecast in spite of the fact that oil revenue, which accounts for more than half of total government revenue, is expected to increase by only 2.3%, from SD908bn in the 2006 budget to SD929bn in 2007. This total includes crude oil export revenue of SD663bn (down by 11% on the previous year!s projections) as well as proceeds from domestic refineries of SD226bn (up by 61% compared with the 2006 budget). This forecast decline partially reflects the fact that oil output in 2006 fell substantially short of budget projections, as a result of the ongoing delays to the coming on stream of the Petrodar concession (September 2006, The domestic economy: Oil and gas). However, it also reflects the low oil export price assumption used in the budget"US$55/barrel for the older oilfields (compared with our forecast of US$59/b) and a more realistic US$30/b for the poor-quality oil from the Petrodar concession. The government projection for other non-tax, non-oil revenue (including profits from state-owned enterprises and investments) also shows a strong 25% rise. In addition, the budget forecasts an increase in tax revenue, which is expected to climb by over 9% compared with the 2006 budget (and by 26% compared with the government!s projection based on nine months! outturn data), reaching SD740bn, or around 40% of total revenue. Both customs duties and direct tax proceeds are expected to increase by about 14% compared with the previous year!s budget, although value-added tax (VAT) revenue projections will remain relatively constant, at around SD240bn. Overall, the budget!s non-oil revenue projections seem reasonably realistic, given the expectations of high economic growth.

Government expenditure will Total government spending is budgeted to increase more strongly than revenue,

focus on bases of support climbing by just over 13% in 2007, to SD2,359bn, compared with the 2006 budget (and by around 27% compared with the government!s estimated 2006 outturn, which is based on three quarters of data). The two areas that account for the bulk of the spending increase are transfers to the state governments in Northern Sudan, and wages and salaries. The total wages and salaries bill is budgeted to increase by 27%, from SD379bn in the 2006 budget to SD482bn in 2007. This reflects the government!s increased focus on placating its core constituencies in advance of preparations for the national elections in 2007. Other current expenditure is expected to rise by a more modest 7% compared with the projections for 2006, reaching SD522bn. Planned spending on national development will also grow by around 8% to SD394bn. The remaining government expenditure will be made up of transfers to the Government of Southern Sudan (GOSS) and to state governments. The amount received by the GOSS and by the southern states, which is determined by the level of revenue from oil produced in the south, according to the CPA, is projected to decline by around 7% compared with the 2006 budget, reaching

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SD296bn in total, as production continues to fall short of earlier expectations (see The domestic economy, Oil and gas). Conversely, transfers to the governments of northern states, which constitute the principal support base of the ruling National Congress (NC) and which have been complaining of unfair treatment in recent months, are budgeted to increase by 26%, from SD478bn in the 2006 budget to SD602bn in 2007"more than double the amount received by the south.

The fiscal deficit is projected to The finance ministry data suggest that the budget deficit will stand at around

widen again in 2007 SD534bn in 2007"the equivalent of just over 5% of GDP. This is substantially higher than the 2006 deficit, which we estimate was around SD285bn. The projected shortfall in 2007 also comes despite the subsidy cuts for sugar and petroleum products implemented by the finance ministry in August 2006, which were undertaken partly in order to reduce the fiscal deficit (September 2006, Economic policy). The government plans to finance this deficit principally through sources of domestic financing (largely government certificates and bonds), which it hopes will account for around SD311bn. This may place some strain on the budget target of limiting planned government borrowing from banks to 0.38% of GDP. The remainder of the deficit will be financed through foreign grants and loans, which are projected to reach SD224bn"well above the estimated SD124bn received in 2006, according to the finance ministry!s nine- month figures. On its own, a projected fiscal deficit of 5% of GDP in 2007 should not necessarily be a cause for concern. Coming directly after another relatively large deficit in 2006, however, it would raise questions about the government!s new approach to fiscal management. Sudan kept its fiscal deficit at just 1.7% of GDP in 2005, following small surpluses in 2004 and 2003, and deficits above 4% of GDP have not been recorded since the 1990s. Moreover, the government!s revenue target remains vulnerable on several fronts. For example, it would be severely affected by a sharp or sustained downturn in oil production and prices. In such a scenario, the country!s fiscal deficit could widen extremely rapidly. Nevertheless, we expect slightly higher oil revenue and slightly lower disbursement of funds in 2007 than does the finance ministry. As a result, we project a smaller fiscal deficit of around SD276bn (or an estimated 3% of GDP).

The GOSS budget is also The Southern Sudan Legislative Assembly (the southern parliament) in January

approved approved the 2007 budget for Southern Sudan. Total spending by the GOSS is set to reach US$1.53bn--around 18% above the US$1.3bn budgeted for 2006. As in 2006, by far the largest part of the budget--US$550m, or nearly 36% of the total--has been allocated to the Sudan People!s Liberation Army (SPLA"the military arm of the SPLM) and will be handled by the Ministry of SPLA Affairs. The next-largest allocations are US$140m each for the Ministry of Housing, Lands and Public Utilities and the Ministry of Roads and Transport, followed by US$112m for the Ministry of Education, Science and Technology. Nonetheless, the allocation of more than one-third of GOSS spending to the SPLA appears to have caused little controversy so far, despite the massive need for development in the south to improve basic infrastructure and public services. Barry Wanji, the head of the GOSS Development, Economy and Finance Committee (which

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prepared the budget), stated in late January that there had been fewer disputes over the SPLA allocation in discussions over the 2007 budget than in the previous year. Mr Wanji justified the size of the allocation by citing a list of security incidents in the south, arguing that the SPLA was "the only guarantor of the CPA". Mr Wanji also said that the SPLA needed still more money and that it should therefore look for assistance from friendly countries. A report on the final outturns of the 2006 budget is not yet available, but on the basis of national data, it appears that the fiscal position of the GOSS is fairly balanced. According to figures from the finance ministry, in 2006 the GOSS received revenue of SD240bn from the national government"leaving aside tax and other revenue collected within the south by the GOSS itself and budgetary contributions from international donors. As government spending in the 2006 budget was intended to reach US$1.3bn, the GOSS would therefore have shown a budget deficit if all funds had been disbursed. In fact, however, the GOSS struggled to spend its budget in 2006, not because of a lack of need for spending but because of a lack of absorptive capacity in the still very under- developed southern economy and the absence of a trained bureaucracy. According to a report published with the 2007 budget, the Ministry of Health spent only 45% of its budget and the roads and transport ministry disbursed only one-quarter of allocated funds. Similarly, the GOSS Commission on Demilitarisation, Demobilisation and Reintegration managed to spend just 11% of its allocated expenditure, and according to the southern education minister, Michael Milli Hussein, his ministry spent only 36% of its target. As a result, assuming there has been no major mismanagement of funds, the GOSS is unlikely to have to find a way of financing a budget deficit.

Questions remain over the The GOSS!s 2007 budget report raised the question of why the value of GOSS's share of oil revenue Southern Sudan!s share of oil revenue had not increased between 2005 and 2006, if oil prices and Sudan!s oil output had both risen. It is probable, therefore, that the SD296bn of oil revenue allocated to Southern Sudan in the 2007 national budget (constituting 31% of projected national oil revenue, compared with the 34% budgeted in 2006) may yet prove controversial in the south. The CPA-mandated share of revenue from oil produced in the south that is projected to go to the GOSS and the southern oil-producing states in 2007 allocates them just 16% of total national revenue. Meanwhile, 33% of total revenue is to go to the northern state governments and the remainder is to be disbursed by the national government. Nevertheless, for now the GOSS is unlikely to make much effort to dispute the fairness of its share of national revenue. Until a census is carried out, the GOSS does not have a reliable estimate of how many people it is meant to be serving in Southern Sudan, with most estimates ranging from 6m to 12m"at most, one- third of the national population. Added to this, large numbers of southerners (between 2m and 4m) live in the north. The GOSS may therefore still have substantially more revenue per capita to spend in the south, compared with some of the state governments in Northern Sudan, such as in Darfur. This aside, even though GOSS officials may question the fairness of the share of oil revenue allocated to the south, in the short term the GOSS is likely to be too

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preoccupied with managing the disbursement of the funds it does receive to mount an effective challenge to the national government!s figures.

The new national currency is On January 9th, the second anniversary of the signing of the CPA, the Bank of

launched Sudan (the central bank) launched the new national currency, the Sudanese pound. As expected, the pound is being launched with a value of one pound to 100 dinars (S£1:SD100); one pound comprises 100 piasters. Contrary to earlier reports that the pound would initially be launched only in the south, it has been launched simultaneously in the north and the south"although only after a series of delays (December 2006, Economic policy). The new pound comes in five banknote denominations, but only the S£1, S£10 and S£50 notes have begun to be circulated, due to funding shortfalls. The designs of the notes and coins have been chosen to avoid potentially divisive subjects such as human portraits, ethnic and religious symbols, or references to wars or conflicts, instead reflecting themes such as peace, "unity in diversity", Sudan!s civilisational history, its natural resources and its industrial progress. According to the schedule published by the central bank, the aim is to complete the introduction of the Sudanese pound by the end of June 2007, whereupon the dinar will cease to circulate as legal tender. Currently, the Bank of Sudan and the Bank of Southern Sudan (the southern central bank) are automatically exchanging pounds for dinars in all transactions with the country!s commercial banks, which are expected to pass on the new currency--when available"to citizens making cash withdrawals, and to change the official denomination of all holdings. In the south, where banking coverage is poorer and many foreign currencies circulate, substitution centres have already been set up to allow citizens to exchange these currencies and the old Sudanese pound (the precursor to the dinar, which came into being in 1992) for the new Sudanese pound. During June the central bank plans to set up substitution centres across the country where citizens will be able to exchange pounds for dinars. In July only banks will be able to exchange dinars for pounds, and in August the currency exchange will only be possible in the central bank and its branches. If all runs to schedule, from the beginning of September the dinar will no longer be considered legal tender. Given the various delays to date, however, as well as the size and uneven development of the country, some slippage is expected in this ambitious timetable.

The domestic economy

Economic trends

Real GDP growth remains All signs are that Sudan!s economy continues to grow very strongly. The 2007

strong but uneven budget report, published by the Ministry of Finance, estimated that real GDP grew by 9% in 2006 (compared with 8% in 2005) and is projected to expand by 10% in 2007. However, GDP growth in 2007 may well exceed even this projection: the IMF has forecast growth of 13%, and in January the governor of the Bank of Sudan (the central bank), Sabir Mohammed al-Hassan, said that he too believed that 13% growth was realistic. Despite the fall in average oil prices

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in early 2007, the Economist Intelligence Unit also forecasts growth of around 13% this year, as a result of the expected massive increase in Sudan!s oil export volumes. The overall structure of Sudan!s economy remains broadly consistent with previous years. According to the estimates in the 2007 budget report, agriculture accounted for 38.8% of real GDP in 2006, services for 32.7% and industry for 28.5%. As a comparison, according to figures from the central bank, in 2005 agriculture accounted for 38.6% of GDP, services for 33.6% and industry for 27.8%. Growth in 2006 was strongest in the services sector, at 10.8% (which the report attributed to increased government spending), whereas expansion in industry was 9% and growth in agriculture was 6.4%. These overall figures do of course conceal significant variation across the country. Sudan!s economy and most of the growth are concentrated in the north, in particular in the capital, Khartoum, and the surrounding states. Although no data are yet available for the south, anecdotal evidence of trade and construction suggests that its economy is also beginning to expand, albeit from a low base. By contrast, the ongoing conflict in Darfur is constraining economic growth.

The dinar strengthens slightly The dinar has continued to strengthen against the US dollar, but less rapidly than during the past two years. At the beginning of March 2007, the exchange rate stood at around SD201:US$1, compared with SD203:US$1 three months previously, and SD227:US$1 in March 2006. According to the 2007 budget report, the government is targeting an average exchange rate of SD200:US$1 (or S£2:US$1) in 2007. However, this target is likely to come under ongoing pressure from the combination of strong economic growth and high imports that is driving up the value of the dinar. The authorities, which operate a managed float of the currency, are likely to attempt to intervene to prevent the dinar from strengthening too far beyond the SD200:US$1 mark, to avoid damaging non-oil exports. Nevertheless, it remains highly improbable that the government would move to adopt either a "fixed peg" or a "crawling peg" to the dollar for either the dinar or its successor currency, the Sudanese pound.

Inflation is under control According to the 2007 budget report, consumer price inflation averaged around 7% in 2006, marginally lower than the 8% originally expected by the govern- ment. Although inflation averaged just 4% in the first half of 2006, it increased substantially in the second half of the year, as a result of price increases for some goods and basic services following the partial lifting of subsidies on fuel and sugar and a fall in prices for most crops in the final quarter of the year (December 2006, The domestic economy: Economic trends). According to data from the central bank, year-on-year inflation leapt from 5.2% in August 2006 to 15.7% in September following the subsidy adjustments, although the effect appears to have been relatively short term.

Oil and gas

Oil quality problems are In December 2006 the energy and mining minister, Awad Ahmed al-Jaz, stated

proving costly that Sudan!s oil output currently stood at 500,000 barrels/day (b/d) and that the government was targeting output of 1m b/d by around 2008. The following

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month, Angelina Teny, a member of the former southern rebel group, the Sudan People!s Liberation Movement (SPLM), who is the minister of state in the Ministry of Energy and Mining, agreed that output was 500,000 b/d. She added that it was likely to change little in 2007, although she expected production to rise to 1m b/d by 2009 or 2010. The vagueness of these projections is partly a result of ongoing problems with output from blocks 3 and 7, the concession operated by Petrodar, a joint venture between the China National Petroleum Corporation (CNPC), Petronas (Malaysia), Sudapet (a local state-owned company), Sinopec (China) and Al Thani (UAE). Blocks 3 and 7 are currently producing around 165,000 b/d, but the oil has proved to be of very poor quality, reportedly more acidic than the Dar Blend oil that the concession was supposed to produce (December 2006, The domestic economy: Oil and gas). The market expected Dar Blend to trade at a discount of around US$15/barrel to the benchmark dated Brent Blend, the price of which averaged US$57.4/b in February 2007. In fact, however, reports suggest that the oil currently being produced by the Petrodar concession has been fetching only US$17-18/b. Until the quality of output is brought up to at least Dar Blend standard, Petrodar remains unlikely to bring on stream the extra 150,000 b/d that blocks 3 and 7 are reportedly capable of producing. The quality problem with Petrodar!s output has been at least partly factored into the government budget for 2007 (see Economic policy). In its calculations of the national government!s oil revenue, the budget assumes that the average sale price for output from blocks 3 and 7 will be US$30/b in 2007. It also assumes a price of only US$35/b for output from the CNPC-operated Fula field in Block 6, which is estimated to be producing around 30,000 b/d, largely for use in domestic refineries. In comparison, the budget is based on an average price of US$55/b for the higher-quality Nile Blend oil produced from blocks 1, 2 and 4 (the GNPOC concession), and for oil from Block 5A. However, the 2007 budget report also confirms that during 2006 output from blocks 1, 2 and 4, where the fields are maturing, fell from a target of 285,000 b/d to around 254,000 b/d, entailing a loss in potential revenue of around SD48.7bn (US$220m). These figures confirm that there is little prospect of substantial output growth coming from existing fields.

Total maintains its claim on The dispute between White Nile, a British firm, and Total, the French energy

the disputed Block Ba group, over the rights to Block Ba in Southern Sudan"or Block 5, under the block numbering scheme used by the national government"remains unresolved (September 2006, The domestic economy: Oil and gas). In December Mr Jaz reiterated the national government!s view that White Nile!s licence was "illegal", adding that the company would have to leave Sudan. In early February the Court of Appeal in London ordered White Nile to hand over to Total information relating to its licence claim, in a pre-action disclosure pending a potential legal suit by Total against White Nile. White Nile was refused permission for any further appeals and ordered to contribute to Total!s legal costs. Nevertheless, White Nile is standing by its claim"which is based on a 2005 agreement with the Government of Southern Sudan (GOSS), in contrast to To tal !s 27-year-old licence, which was granted and renewed by the national

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government"and is pressing on with exploratory operations on the ground. In December White Nile!s chairman, Phil Edmonds, described early results from Block Ba as "very exciting" and said that with further development he believed White Nile could "significantly de-risk the project". In December the company restated its intention to drill two exploratory wells in Block Ba in the first quarter of 2007, and it recently raised £12m (US$23m) from a mix of existing and new investors to finance appraisal drilling. The relatively low levels of financing it has raised are an indication of White Nile!s limitations, and it seems likely that the firm will need some larger partners if the export of oil from Block Ba is to become economically viable. Moreover, White Nile!s positive early results may encourage Total to persevere with its claim. In February the public relations director for Total!s exploration and production unit, Jean-Francois Lassalle (who used to head Total!s operations in Sudan before it withdrew in 1985), said that the French energy giant was willing to consider ways of getting the GOSS "financially interested" in the prospect of Total operating the disputed block.

The GOSS issues licences to According to a report in January in the France-based Indian Ocean Newsletter,

less established companies Nilepet"the GOSS!s oil company"has signed a Memorandum of Understanding (MoU) concerning Block Ea, an exploration block covering around 48,000 sq km in Western Equatoria and Northern Bahr al-Ghazal. Nilepet signed the MoU with representatives of a joint venture between H Oil, an oil-trading company based in Spain, which owns 65%, and the Supiri Resource Corporation, a firm set up by several Southern Sudanese living in Canada, which holds the remaining 35%. The joint venture was formed in November 2005 for the purpose of working in Southern Sudan. Although the GOSS has approved the MoU, the national government is likely to continue to assert its ultimate right to maintain the primacy of existing contracts, as set out in the Comprehensive Peace Agreement (CPA). However, the MoU with Supiri and H Oil is another example of the GOSS!s approach to licensing, which seems to entail entering into agreements with relatively unknown oil exploration companies, rather than with more established operators such as those that have been awarded licences by the national government. There is a resultant danger of slow progress, as in the case of Ascom, a Moldavian company, which was awarded a licence in Block 5A by the GOSS in May 2005, but appears to have made few moves towards exploration (The licence is being disputed by Petronas, on the grounds that it already holds the concession.) In 2006 Ascom installed a team in a base camp that had originally been set up by Total in the 1980s, but now the firm is reportedly seeking confirmation of the validity of its licence from the Government of National Unity in Khartoum.

Concerns are raised about In January the CNPC, a Chinese state-owned oil company, which is extensively corporate social responsibility involved in the Sudanese oil sector, announced that it was making a US$1m donation to the Ministry of Welfare and Social Development, to finance on unspecified social support activities. The CNPC claims to have spent more than US$30m on charitable or "corporate social responsibility" (CSR) activities in Sudan since 1995, when it started to work in the country. It has also agreed to

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fund a US$900,000 training package for Sudanese professionals in the oil sector. This announcement followed the claim made in December by Tom Vraalsen, the head of the Assessment and Evaluation Commission (AEC"a joint government, SPLM and donor body that monitors the implementation of the CPA), that oil companies operating in Sudan were seriously violating the CPA. According to Mr Vraalsen, violations include environmental degradation, disregard for the interests of local populations and failure to pay compensation for damage caused by oil-related operations. Mr Vraalsen!s case is in line with the record of past allegations against oil companies operating in Sudan. When Western firms first explored for and discovered oil in the south in the 1970s and 1980s, their activities provoked accusations of misconduct. At the moment, however, there is little sign that the national government or any other body will take strong action on CSR issues. The AEC lacks the power to move against oil companies it judges to be violating the CPA. Meanwhile, the National Petroleum Commission (NPC"the governmental body that has overall authority over the oil sector) is preoccupied with licensing matters and otherwise deadlocked by tensions between the ruling National Congress (NC) and the SPLM.

Sudan applies to join OPEC In December Sudan formally applied to join OPEC. Sudan!s application received support from Nigeria, at the time the only OPEC member from Sub- Saharan Africa. Given Sudan!s close links with the Arab world and the Middle East, its application is also likely to receive wider backing. Joining OPEC would have a number of advantages for Sudan, not least the status and credibility that membership would bestow, consolidating Sudan!s international position as a significant oil producer. One benefit that might particularly attract the Sudanese authorities is the political support that OPEC could potentially offer Sudan if it were ever confronted with sanctions or the threat of sanctions against its oil industry, as has been mooted over the situation in Darfur. However, one concern for the Sudanese government would be the level at which its production quota might be set by OPEC. Sudan!s oil output has roughly doubled since 2003 and Mr Jaz has stated that it will double again by 2008. Even though this expectation appears to be much exaggerated, the Sudanese authorities may prefer not to hurry their application for membership, but to wait until they have a better idea of Sudan!s likely output ceiling.

Infrastructure

China increases investment in On February 28th Sudan and China signed a US$1.2bn contract for the Sudan's rail network upgrading of the railway between Khartoum and Port Sudan, the country!s main export port, converting the existing 762-km line to a double track. The construction contract has been won by a consortium comprising two Chinese contractors, the China Railway Engineering Group and Transtech Engineering Corporation (a unit of the China Railway Erju Company, which is indirectly controlled by the China Railway Engineering Group). A German firm, Dornier Consulting, has also been awarded a contract to provide consulting and technical services for the project. This is in line with a number of other projects planned by the state-owned rail operator, the Sudan Railways Corporation

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(SRC), to upgrade the country!s ailing 4,600-km railway network, which constitutes a vital part of the country!s limited transport infrastructure, but has long been starved of investment. According to information from the Khartoum Economic Forum"a state body established in 2006 to promote foreign investment in Sudan"the SRC is planning 15 additional rail improvement projects. These include a US$125m project to improve 830 km of the northern sector of the rail network (from Atbara to Karima and Wadi Halfa) and US$160m improvements on the 802-km Haiya-Kassala-Sennar line in the east of the country. The latter project, together with the strengthening of a 55-km section of track from Sallom to Suakin and a US$35m project for other line repairs and new shunting locomotives, was supposed to have begun in 2006, and the remaining 12 initiatives are due to start this year. Current plans call for all 15 projects to be completed within three years at a cost of US$909m. However, this target seems unlikely to be hit, given the delays to the projects that were due to begin in 2006. The lack of a realistic timeframe for implementation of the proposed projects, together with the unavailability of detailed information, suggests that the much-needed improvements to Sudan!s rail infrastructure may be slow in coming.

Bids are opened for the new In January bids for the main contract for building Khartoum New International

airport in Khartoum Airport were opened. The Saudi Binladin Group was the lowest bidder, followed by a Turkish firm, TAV, and then by an unidentified Chinese company. The contract is expected to be worth around US$530m and is to cover all core engineering, construction and procurement for the airport, which is to be built on a greenfield site 40 km south-west of Khartoum, on the Omdurman side of the White Nile (September 2006, The domestic economy: Infrastructure). A German firm, Dorsch Consult, is overseeing the project.

Agriculture

Harvests are forecast to be The outlook for cereal production and basic food supply this year is extremely

good in 2007 good. Based on assessments in Northern and Southern Sudan between October and December last year, two UN agencies, the Food and Agriculture Organisation (FAO) and the World Food Programme (WFP), forecast a record cereal harvest of 6.64m tonnes for the 2006/07 season, 78% of which is expected to be sorghum. This forecast is 22% higher than last year!s harvest (which was also good by historical standards) and 36% above average annual production over the past five years. As a result, and with high levels of carry- over stocks from last year, a substantial cereal surplus is expected this year. The main reasons for the prospective large harvest are the sufficient rains and the relatively low number of outbreaks of pests and diseases last year, although the absence of major conflict in Southern Sudan has also helped. Meanwhile, livestock and pasture conditions are currently good across most of Sudan, thereby benefiting the substantial section of the population who depend significantly on livestock for food and livelihoods. Despite the forecast bumper harvest"and an expected fall in cereal prices"foo d insecurity will still remain a problem for many poor and displaced people.

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Indeed, the FAO and the WFP estimate that a total of around 4.6m people (roughly 12% of the population) will need some level of food assistance during 2007. Those needing assistance include the urban and rural poor, as well as migrant or displaced people living in peri-urban areas. In Darfur, for example, some 2m people have been displaced by the conflict over the past four years, and many of them are now living in displaced persons camps, cut off from their former means of living. Food security will also be problematic in parts of the south. In late December the Famine Early Warning Systems Network (FEWS Net, which is funded by the US Agency for International Development and which provides information to relief agencies in Africa) warned that food insecurity could increase in parts of the south as a result of local conflicts and the return of displaced populations. FEWS Net warned that improvements in food security in Gogrial, in Northern Bahr al-Ghazal, were unlikely to last beyond February because of reduced cultivation caused by insecurity last year. FEWS Net also expects food security to deteriorate from April onwards in more densely populated areas of the south, as a result of the return of increased numbers of displaced persons. In addition, it has warned about the possible impact of still larger population returns later in the year, which may occur in anticipation of the national census planned for November.

Reducing food aid will require The paradoxical combination of bumper harvests, food surpluses and a major

concerted efforts requirement for humanitarian assistance is not new in Sudan. Given the country!s present strong economic growth, however, as well as the end of large- scale conflict in the south and other areas (such as the Nuba Mountains, Southern Blue Nile and the east of the country), pressure on the government and the local private sector to take more responsibility for ensuring basic food security is likely to increase. The FAO and the WFP issued a report on the crop and food supply situation in February, in which they argued that "the central government and local institutions need to be encouraged to take more responsibilities in caring for the chronically food insecure". At the same time, international relief agencies providing food aid will be encouraged to scrutinise whether all of that aid is actually needed"in conflict-ridden Darfur as well as in other parts of the country. The FAO-WFP report suggests that an excess of food aid may be being wrongly targeted in Darfur because of poor data on local production, population and incomes. As a result, The FAO and the WFP recommend that the state-owned Sudan Strategic Reserve Corporation should play a greater role, and that international agencies prepare to scale down and phase out food assistance in eastern and central Sudan. In order to reduce wastage and market distortion, they also recommend that relief agencies should improve their targeting of food assistance by reviewing their "beneficiary lists". Ultimately, however, any substantial reduction in Sudan!s international food assistance requirement would require a concerted strategy agreed between agencies such as the FAO and the WFP and the Sudanese authorities. It would also depend on an end to the conflict in Darfur, which is not currently in sight.

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Financial and other services

The financial sector continues The government has increased the minimum own-funds liquidity requirement

to develop for banks in Sudan from US$12m to US$24m. The measure comes as part of the second phase of a 2006-08 government programme to restructure and develop the banking sector, in an effort to improve financing options for local and foreign businesses. Meanwhile, the prospect of underwriting further privatisations, and the availability of financing, is encouraging some new investment in the sector. In January the Kuwait-based Global Investment House (GIH) announced that it had purchased one of Sudan!s leading financial services companies, as part of its plan to establish a new investment bank in the country. The company, now renamed GIH Sudan, which has a paid-up capital of SD6bn (US$28m), will continue to provide brokerage services in the Khartoum Stock Exchange as well as investment banking and asset management services. Sudan!s banking sector has long been dominated by banks with links to the Gulf and Saudi Arabia, as a result of close economic ties and the large number of Sudanese that go abroad to work in the region. However, although there are some 30 banks, some privately owned, resulting in a degree of competition, the levels of technology and capabilities are poor, and the weakness of banking services in the country are an obstacle for foreign companies doing business in Sudan. In addition, some European companies accepting contracts or sub- contracts in Sudan have recently run into financing problems because banks in Europe are refusing to offer them financing services that would support their work in Sudan, on the grounds that they themselves may then be penalised by US sanctions that prohibit investing in companies that do business in Sudan. Further development of the local financial sector will therefore be welcome to companies operating in the country, although the growth in investment banking, in particular, is unlikely to be rapid. One indication of how far Sudan has to go is the relatively small size of its stockmarket, the Khartoum Stock Exchange (KSE). At end-2005 the total market capitalisation of the KSE stood at just SD747m (US$3.4m)"the equivalent of around 11% of GDP, compared with an average of 115% across the Middle East region.

Competition in mobile Mobile telephony provision is rapidly improving in Khartoum and the central

telephony is growing areas of Northern Sudan. The Kuwait-based MTC recently announced plans to spend #140m (US$185m) on expanding the network of Mobitel, Sudan!s main mobile operator and service provider, which currently has around 65% of the mobile market. Since its purchase of Mobitel in February 2006 for US$1.3bn, MTC has already spent some #300m on upgrading Mobitel!s network and systems. Mobitel now aims to have 4.5m subscribers by mid-2007, with net- work coverage in 70 towns and cities and along some 4,300 km of main roads" an area that Mobitel believes will cover some 80% of the Sudanese population. Competition is growing, though. At present Mobitel!s main competitors are Sudani (a subsidiary of Sudatel, in which the government has a 35% stake) and Areeba (which is owned by a South African firm, MTN). However, one of the existing fixed-line operators, Canar Telecommunication Company"a consortium headed by a UAE firm, Etisalat, and established in April 2005"has announced plans to seek a mobile licence. Canar, which recently also launched

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a wireless broadband service, has stated that it is technically ready to launch mobile services through its CDMA (code division multiple access) network.

Foreign trade and payments

Small trade surplus recorded In the third quarter of 2006, according to figures from the Bank of Sudan (the

in the third quarter of 2006 central bank), export proceeds rose by 36% year on year, to US$1.8bn. This rise was driven by a 44% increase in the value of oil exports (accounting for 93% of total export earnings) compared with the July-September period of 2005. Import spending also rose on a year-on-year basis, but less sharply, by around 13%, standing at just under US$1.8bn in July-September 2006. As a result, Sudan showed a small trade surplus in the third quarter"the first since early 2003. The overall value of trade also increased by around 23% compared with the same period of 2005. These trends are likely to have continued in the final quarter of the year, owing to the coming on stream of new oil from the Petrodar concession (see The domestic economy: Oil and gas).

Trade account (US$ m unless otherwise indicated) 2005 2006 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr % changea Exports (fob) 1,321.8 1,194.6 1,267.5 1,282.9 1,800.2 36.2 Oil 1,165.2 1,018.4 1,083.6 1,148.8 1,682.3 44.4 Imports (fob) 1,578.0 1,917.5 1,590.1 1,884.3 1,778.8 12.7 Trade balance -256.2 -722.9 -322.7 -601.3 21.4 -108.3 Overall value of trade 2,899.8 3,112.1 2,857.6 3,167.2 3,579.0 23.4 a Year on year. Source: Bank of Sudan.

The budget report published by the Ministry of Finance projects that the overall value of trade will continue to rise in 2007. Export proceeds are forecast to increase by 10% year on year, with import spending growing more slowly, by around 8%. As a result, the finance ministry projects that the trade account will record a deficit of around US$1.9bn, or around 4% of GDP, this year. By contrast, the Economist Intelligence Unit expects much stronger rises in the value of both exports (because of higher projections of oil production and prices) and imports (based on historical data showing average growth in value of 36% in 2001-05), resulting in a trade deficit closer to 5% of GDP in 2007.

The current-account deficit Despite the small trade surplus in the third quarter, Sudan!s current-account widens sharply deficit widened by 24% in the first nine months of 2006, compared with the same period of the previous year. The July-September trade surplus did not offset the large trade deficit recorded in the first half of the year, resulting in a year-on-year widening of the deficit by more than 126% for the nine-month period. The services deficit also widened sharply, tracking import spending. In addition, growth in income debits stayed strong, at nearly 36% year on year, owing to substantial repatriation of profits by foreign oil firms. Combined with a slight narrowing of the current transfers surplus, these flows resulted in a current-account deficit of almost US$2bn in January-September 2006.

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Current account, Jan-Sep (US$ m unless otherwise indicated) 2005 2006 % changea Trade balance -399 -903 126.3 Services credits 78 143 83.1 Services debits -1,280 -1,886 47.3 Services balance -1,203 -1,744 45.0 Income credits 31 59 89.7 Income debits -1,015 -1,379 35.9 Income balance -984 -1,320 34.2 Current transfers balance 1,022 949 -7.2 Non-merchandise balance -1,164 -2,115 81.7 Current-account balance -1,563 -1,944 24.4 a Year on year. Sources: Bank of Sudan; Economist Intelligence Unit.

Foreign-currency reserves fell Sudan!s current-account deficit continues to be financed largely by strong

sharply in 2006 foreign direct investment (FDI) in the country, which rose again by around 9% on a year-on-year basis in the third quarter of 2006. This resulted in total FDI of US$2.9bn in January-September"a strong overall increase of 77% compared with the same period of 2005. Nevertheless, given the widening of the current- account deficit and the fact that FDI stood at lower levels in the second half of the year, the central bank has also moved to draw on its foreign-exchange reserves. Official foreign-exchange reserves excluding gold were depleted by over US$200m in the third quarter, according to figures from the IMF!s International Financial Statistics, falling from US$2.6bn at the end of June to US$2.4bn at end-September. In the final quarter of the year, foreign reserves fell even more sharply, ending 2006 at just US$1.7bn"representing less than two months of import cover and an 11% drop compared with 2005. Although there has been no official explanation of this reduction in foreign-exchange reserves by more than US$1bn between July and December, some in-country financial-sector sources have speculated that the money may have been used by the government to meet targets under the Comprehensive Peace Agreement (CPA), or to address a capital-account shortfall in the fourth quarter. However, given that it is the stated policy of the central bank to make use of foreign-currency reserves in liquidity management, the fall may also be related to the need to rescue one of the country!s largest state-owned banks, Omdurman National Bank, which experienced severe liquidity problems in late 2006.

Official reserves (US$ m unless otherwise indicated; end-period) 2003 2004 2005 2006 % change Foreign-currency reserves 529.1 1,338.0 1,868.5 1,659.9 -11.2 Import cover (months) 1.9 3.5 2.9 1.8

Source: IMF, International Financial Statistics.

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