Country Report June 2003

Sudan Sudan at a glance: 2003-04

OVERVIEW The peace process between the government and the leading southern rebel force, the Sudan People’s Liberation Army, will be kept alive by international pressure, although little of substance will be agreed in the short term. A ceasefire remains in effect until the end of June, while talks have been suspended until July. A US presidential report to Congress on the commitment of the Sudanese government to peace avoided calling for sanctions, signalling US support for ongoing dialogue. A significant rise in oil exports and a recovery in non-oil exports in 2003 are expected to ensure strong real GDP growth of 5.9%, slowing marginally to 5.3% in 2004. The current-account deficit, however, will widen over the forecast period to US$1.74bn by end-2004 (9.6% of GDP).

Key changes from last month Political outlook • With halting progress in the peace talks, the political outlook is dependent upon the continued commitment to negotiations. Many obstacles remain, not least the role of the opposition groups not included in the talks and the growing unrest in the west of the country. Economic policy outlook • The government will not veer from its commitment to IMF-led policies, although expenditure may stray beyond agreed limits. Economic policy will continue to centre on balancing the budget through subsidy cutting and raising taxes. These measures, combined with a revised oil price forecast, will result in a reduced budget deficit of SD5.5bn (US$21.1m; 0.1% of GDP) in 2003, which will then widen in 2004 to SD33bn. Economic forecast • Real GDP is set to grow sharply in 2003-04, driven by increased oil output and rising non-oil exports. The Central Bank of Sudan has in effect pegged the dinar to the dollar in an attempt to maintain price stability. Inflation will remain high but stable, averaging around 10% in 2003-04.

June 2003

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Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2003-04 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

18 Economic policy

21 The domestic economy 21 Economic trends 22 Oil and gas 26 Agriculture

27 Foreign trade and payments

List of tables 9 International assumptions summary 12 Forecast summary 19 Budget balance 28 Trade balance 29 Import spending 31 Export revenue 31 Official reserves

List of figures 6Money supply 6Foreign trade 12 Gross domestic product 12 Consumer price inflation 21 Inflation, 2002 22 Exchange rate

Country Report June 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003

Sudan 3

Summary June 2003

Outlook for 2003-04 The peace process between the government and the leading southern rebel force, the Sudan People’s Liberation Army, will be kept alive by international pressure, although little of substance will be agreed in the short term. A ceasefire remains in effect until the end of June, while talks have been sus- pended until July. A US presidential report to Congress on the commitment of the Sudanese government to peace avoided calling for sanctions, signalling US support for ongoing dialogue. A significant rise in oil exports and a recovery in non-oil exports in 2003 are expected to ensure strong real GDP growth of 5.9%, slowing marginally to 5.3% in 2004. The current-account deficit, however, will widen over the forecast period to US$1.74bn by end-2004 (9.6% of GDP). The political scene The war in Iraq diverted international attention from the Sudanese peace process, which is no closer to a resolution. Despite the slow progress, the US chose not to implement sanctions under the Sudan Peace Act in April, and also praised Sudan for its improved co-operation over international security issues, despite remaining on the list of state sponsors of terrorism. The ceasefire has broadly held, although a new conflict has broken out in the far west of the country. Sudan has stepped up its support for Eritrean opposition groups as relations with Eritrean government have continued to deteriorate. Economic policy The economic reform programme has yielded significant results, according to a new World Bank report, which shows Sudan to be one of Africa’s fastest growing economies. A privatised telecommunications company, SudaTel, became the first Sudanese firm to be listed on an overseas capital market, and the government has moved ahead with the liberalisation of the telecoms sector. Sudan has taken over as chair of an African free-trade organisation, but its efforts to boost regional trade continue to face significant non-tariff barriers. The domestic economy Oil production is set to rise strongly following an upgrade to the export pipeline that has boosted capacity. A Canadian oil company, Talisman, has finally completed the sale of its stake in the foreign consortium developing the oil sector, although it will face a court case over allegations of human rights abuses. Mobil has also sold the remainder of its assets in Sudan, and a Swedish firm, Lundin, has reduced its presence significantly. Aid agencies report that the food situation is less precarious than had initially been feared, although areas of acute shortage remain. Agreements between the government, the rebels and the UN have significantly improved the humanitarian relief programme in the south. Foreign trade and payments Despite an increase in export earnings, Sudan’s trade balance moved into deficit in 2002, as import spending soared. Nevertheless, official reserves rose strongly during the year, ending 2002 at record levels. The reserve stock remains dwarfed by outstanding foreign debt, however, which new data show to be overwhelmingly in arrears. Editors: Philip McCrum (editor); James Reeve (consulting editor) Editorial closing date: June 6th 2003 All queries: Tel: (44.20) 7830 1007 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 Under the constitution, sharia (Islamic law) is applicable countrywide in both civil and criminal cases. In practice, much of southern Sudan is exempt

National legislature A 400-member National Assembly (parliament), of which 264 members are elected and 136 are appointed by the president

National elections December 2000 (presidential and parliamentary); next elections due to be held in 2005

Head of state Lieutenant-General Omar Hassan Ahmed al-Beshir, who took office following the 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; next elections due in 2005

National government A joint military-civilian cabinet, the Council of Ministers, last reshuffled in February 2001

Main political parties All political parties were banned following the June 1989 coup that was backed by the National Congress (NC). The NC, known as the National Islamic Front (NIF) until it changed its name in January 1999, is the ruling party

Main opposition groups The Sudan People’s Liberation Movement (SPLM) and the Sudan People’s Liberation Army, its military wing, are led by Colonel John Garang. The National Democratic Alliance (NDA) brings together Mr Garang’s SPLM with the Democratic Unionist Party (DUP) and the Sudan Allied Forces (SAF), another southern guerrilla force. The Popular National Congress (PNC) and the Umma Party are leading northern opposition groups

The cabinet President & prime minister Omar Hassan Ahmed al-Beshir First vice-president Ali Uthman Mohammed Taha Second vice-president Moses Machar

Key ministers Agriculture & forests Mazjoub al-Khalifa Animal resources Riek Gai Kok Cabinet affairs Al-Hadi Abdalla Culture & tourism Abdel-Basit Abdel-Majid Commerce Mekki Ali Balail Defence Bakri Hassan Salih Education Ali Tamim Fartak Energy & mining Awad Ahmed al-Jaz External trade Abdel-Hamid Musa Kasha Federal relations Nafie Ali Nafie Finance & national economy Zubayr Ahmed al-Hassan Foreign affairs Mustafa Uthman Ismail Health Ahmed Ballal Uthman Industry & investment Jalal Yousif al-Dagir Interior Abdel-Rahim Mohammed Hussein Justice Ali Mohammed Uthman Yassin Labour Alison Manani Magaya Social welfare & development Samia Ahmed Mohammed Science & technology Al-Zubar Beshir Taha Transport Mogo Ajak

Central bank governor Sabir Mohammed al-Hassan

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Economic structure

Annual indicators 1998a 1999a 2000a 2001a 2002b GDP at market prices (SD bn) 2,062.1b 2,541.0 2,832.2 3,127.9 3,571.8 GDP (US$ bn) 10.3b 10.1 11.0 12.1 13.6 Real GDP growth (%) 6.1 6.9 6.9 5.3b 4.1 Consumer price inflation (av; %) 17.1 16.0 10.0b 3.0b 8.4a Population (m) 29.8 30.4 31.1 31.8b 32.5 Exports of goods fob (US$ m) 595.7 780.1 1,806.7 1,698.7 1,949.1 Imports of goods fob (US$ m) 1,732.2 1,256.0 1,366.3 1,395.1 2,152.8 Current-account balance (US$ m) -956.5 -464.8 -556.8 -618.3 -960.4 Foreign-exchange reserves excl gold (US$ m) 90.6 188.7 247.3 117.8 478.4a Total external debt (US$ bn) 16.8 16.1 15.7 15.3b 15.9 Debt-service ratio, paid (%) 5.2 4.0 2.6b 2.4b 3.1 Exchange rate (av) SD:US$ 200.8 252.6 257.1 258.7 263.3a a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 1999a % of total Components of gross domestic product 1999a % of total Agriculture 42.6 Private consumption 85.7 Trade, transport & communications 25.9 Government consumption 4.7 Other services 15.3 Gross fixed capital formation 12.6 Industry & mining 9.8 Change in stocks 4.1 Construction 6.4 Exports of goods & services 8.1 Imports of goods & services -15.2

Principal exports 2001 US$ m Principal imports cif 2001 US$ m Crude oil 1,370.0 Machinery and equipment 442.5 Sesame 104.5 Manufactured goods 296.5 Cotton 44.4 Transport equipment 202.9 Gum arabic 24.3 Wheat and wheat flour 138.1 Livestock 2.0 Chemicals 77.0

Main destinations of exports 2001 % of total Main origins of imports 2001 % of total China 42.3 China 11.9 Japan 14.1 Saudi Arabia 8.8 Saudi Arabia 7.4 Germany 8.1 South Korea 4.9 UK 7.2 a IMF staff and Sudanese Ministry of Finance estimates.

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Quarterly indicators 2001 2002 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Prices Cotton Liverpool index (US cents/lb) 59.73 49.53 43.38 39.35 42.76 41.58 48.33 52.32 Financial indicators Exchange rate SD:US$ (av) 258.7 257.4 257.9 260.8 261.7 262.9 264.7 263.9 Exchange rate SD:US$ (end-period) 257.3 257.4 258.6 261.4 262.4 264.3 265.0 261.7 M1 (end-period; SD bn) 236.9 254.6 259.0 271.4 285.3 307.8 322.0 352.3 % change, year on year 29.9 29.6 27.1 15.7 20.4 20.9 24.3 29.8 M2 (end-period; SD bn) 366.0 411.9 424.3 432.2 474.5 500.7 532.4 563.3 % change, year on year 27.4 39.2 36.6 24.7 29.7 21.6 25.5 30.3 Balance of payments (US$ m) Goods: exports fob 430.6 428.1 439.2 400.8 438.9 n/a n/a n/a Goods: imports fob -293.1 -392.0 -351.3 -358.7 -399.2 n/a n/a n/a Merchandise trade balance fob-fob 137.5 36.1 87.9 42.1 39.7 n/a n/a n/a Services balance -167.8 -163.7 -161.5 -152.7 -137.5 n/a n/a n/a Income balance -143.3 -133.5 -145.1 -132.2 -122.5 n/a n/a n/a Net transfer payments 72.6 67.2 66.6 71.5 127.5 n/a n/a n/a Current-account balance -101.0 -193.9 -152.1 -171.3 -92.8 n/a n/a n/a Reserves excl gold (end-period) 178.5 152.0 154.4 117.8 166.9 224.0 304.1 478.1

Source: IMF; International Financial Statistics.

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Outlook for 2003-04

Political outlook

Domestic politics It is highly likely that the president, Lieutenant-General Omar Hassan Ahmed al-Beshir, will retain his hold on power, given the support of the military and his authority over the ruling National Congress. The state of emergency imposed at end-1999 was extended for a further year in January 2003 and, as a result, Mr Beshir will continue to wield full executive power, curbed only by the demands of important allies within his support base. The Inter-Governmental Authority on Development (IGAD, an East African regional body designed to promote security and economic integration) will continue its efforts to maintain momentum in the ongoing peace talks held in Kenya over the last year. Underpinning the ongoing negotiations lies the Machakos Protocol!signed by the government and the leading southern rebel force, the Sudan People’s Liberation Army (SPLA)!which directs the peace process towards a referendum on southern self-determination, to be held six years after the signing of an accord. Of equal significance to the talks is the establishment of a ceasefire, insecurely held together by a Memorandum of Understanding, the limits of which have been sorely tested, with both sides seeking to blame each other for breaches of the agreement. However, despite deep mutual suspicion and antipathy, the two warring parties have just about managed to honour most of the commitments laid out in the ceasefire accord, which was extended until the end of June. The talks, however, have failed to produce any agreement of substance and, after a fifth round ended incon- clusively in late May, negotiations were suspended until July. Although international pressure for the continuation of the talks waned somewhat before and during the US-led war on Iraq, it still remains the key factor in keeping the combatants at the negotiating table. Most notably, at the end of April the US president, George W Bush, under the conditions of the Sudan Peace Act, presented his biannual report on the conduct of the Sudanese government to the US Congress, which favoured the continuation of dialogue rather than the imposition of sanctions on the regime in Khartoum. The US administration’s stance reflects the belief that keeping the talks alive!even though the results to date are desultory!still represents the best chance for peace, and it is likely that the US will pursue this course of action unless the Sudanese government upsets Washington. Not only are the peace talks themselves in a precarious state, with many difficult issues yet to be tackled, but the prospects for peace are clouded by further downside risks. Of note are those posed by opposition groups not directly involved in the peace negotiations. They have long stated that their ratification of an agreement between the two principal protagonists would not be automatic and are continually pressing for a seat at the negotiating table. Additionally, growing tribal unrest in Sudan’s western Darfur region has led to the establishment of a new rebel group!the Darfur Liberation Front (DLF). Having subsequently changed its name to the Sudan Liberation

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Movement/Army (SLM/A), it has called for the replacement of Khartoum’s Islamic government, demanding a “united democratic” polity in its place. It is clear that the talks cannot go on indefinitely!the process is a finite one, with a limit to the patience and expectations of all involved. It is therefore likely that the talks will come to an end at some stage during the forecast period. However, given the outstanding differences between the two parties and the depth of entrenched attitudes, the outcome is uncertain. Sudan could easily slide back into war; equally, an accord could be agreed that would hold together an uncertain peace. Nevertheless, given the understanding that inter- national resolve will ensure every effort is made to keep the two parties at the table, the Economist Intelligence Unit believes, on balance, that the latter of the two outcomes is more likely.

International relations The US will remain Sudan’s key interlocutor over the forecast period. Sudanese intelligence support for the US in its “war on terror” has softened US policy towards Khartoum, although the Sudan Peace Act provides a pretext for the US administration to harden its stance should it feel the need to do so. Washington will be reluctant to resort to imposing sanctions in the knowledge that such a step would in effect put an end to dialogue. Closer to home, relations with Egypt are warming, with both Sudanese factions in regular contact with Cairo. The Egyptian government, despite its public utterances, remains cool about the Machakos Protocol, fearing it could lead to southern secession and the abrogation of the 1959 Nile water-sharing agreement, which is favourable to Cairo. Any peace accord, although not dependent upon Egyptian support, would certainly benefit from it. Relations with Eritrea remain frosty amid Sudanese concerns that the authorities in Asmara have been fomenting violence on Sudan’s eastern border. Although relations are tense, it is unlikely that either side will resort to armed conflict. Meanwhile, ties with Uganda continue to seesaw, although the current climate offers a more positive outlook, with military co-operation leading to wider political rapprochement.

Economic policy outlook

Policy trends Economic policy will continue to be set within the framework of the IMF-sup- ported reform programme begun in 1997, which emphasises macroeconomic stability as the central policy objective, in order to achieve sustained economic growth and, ultimately, poverty reduction. To this end, the main policy objec- tives are: achieving annual real GDP growth rates in excess of 6%; reducing consumer price inflation to around 5%; and strengthening the external position, notably international reserves. Structural reform will be integral to this pro- gramme, with the aim of raising efficiency and productivity and maximising government revenue streams.

Fiscal policy In line with the goals agreed with the IMF, the government has undertaken to implement further cost-cutting and tax-raising measures to bring the budget deficit to within the target range of less than 1% of GDP. In 2003 we forecast

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that the government will demonstrate continued success in this area, with the budget deficit dropping to 0.1% of GDP. Increasing crude oil production will more than offset the decline in oil prices, with government oil earnings anticipated to rise by 15%. This will be further augmented by an increased tax take, raising total revenue by 21%. Although expenditure will also rise, the pace of growth, at 14%, will not match the growth in revenue, thereby reducing the budget deficit considerably to SD5.5bn (US$21.1m). In 2004 fiscal discipline will slip, however, as expenditure growth does not slow sufficiently to offset the drop in revenue growth, which, squeezed by declining oil receipts, will fall from 22% to 7%. As a result, the deficit will expand, although, at SD33bn, will remain well under the 1% of GDP mark.

Monetary policy The main aims of monetary policy are to reduce inflation and to maintain the currency’s informal peg with the US dollar. The main risks to this policy stem from institutional weaknesses, which undermine the ability of the Bank of Sudan (the central bank) to manage broad money growth. However, the central bank has been promoting minimum reserve requirements and capital adequacy levels for banks, and has begun to expand its open market operations in order to curb monetary growth and develop the interbank market. These moves have contributed to the reduction of inflation from the high rates experienced for much of the 1990s. The objective of increasing domestic credit to the private sector is also being advanced, reflected in the 76% rise in lending to the private sector in 2002. This change indicates the development of a more positive environment for business, but we expect it to have some inflationary consequences.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2001 2002 2003 2004 Real GDP growth World 2.2 2.9 3.1 3.8 OECD 0.9 1.8 1.7 2.4 EU 1.5 1.0 0.9 1.8 Exchange rates ¥:US$ 121.5 125.3 116.2 115.5 US$:€ 0.896 0.946 1.148 1.183 SDR:US$ 0.785 0.772 0.711 0.703 Financial indicators ¥ 2-month private bill rate 0.17 0.10 0.10 0.10 US$ 3-month commercial paper rate 3.61 1.70 1.24 2.44 Commodity prices Oil (Brent; US$/b) 24.5 25.0 24.5 18.2 Cotton (US cents/lb) 48.0 46.2 62.4 69.3 Food, feedstuffs & beverages (% change in US$ terms) -1.9 12.7 5.8 3.0 Industrial raw materials (% change in US$ terms) -9.7 2.2 10.2 3.5 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

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Many of the world’s largest economies have weakened dramatically in recent months, with the global economy now experiencing its second serious slowdown in two years. Consequently, we expect the world economy to remain extremely sluggish in 2003, with real GDP growth only reaching 2.1% at market exchange rates. In 2004, however, the outlook will start to improve, pushing real growth up to 2.9%. Crude oil prices tumbled between mid-March and late April, as the markets reacted to the collapse of Saddam Hussein’s regime in Iraq and the risk of the conflict affecting other oil-producing nations subsided. However, during May oil prices rose sharply, although they remained far below their pre-war highs. OPEC’s 2m barrels/day (b/d) production cut, scheduled to kick in in June, looks to have been sufficient to support oil prices. However, we believe further cuts will be needed before the end of 2003 to prevent a renewed sharp decline in oil prices. Under our baseline scenario, after eradicating wartime quota-busting, OPEC will cut production by a further 1.5m b/d from its new quota of 25.4m b/d in 2003. This should prevent a rapid fall in the price of dated Brent Blend, which will average US$24.01/barrel in the second quarter of 2003, falling to US$21.73/b in the third and US$20.67/b in the fourth. Although growth in global oil demand will pick up in 2004 by 2.8%, benefiting from a combination of the slowly recovering global economy and cheaper oil, fundamental oversupply will continue to plague the global oil market. Continued quota-busting by key producers will push the global oil market further into surplus in the second quarter of 2004, although OPEC will once again make a determined effort to regain control of the market, bringing it back into deficit towards the end of the year. Despite OPEC action, however, we expect Brent Blend to fall to an average of just US$18.2/b, a drop of more than 25% on 2003.

Economic growth Sudan’s reliance on imported inputs for many of its economic development needs hindered growth in 2002. Indeed, full-year data for 2002 indicate a 54% rise in import spending, resulting in a drop in real GDP growth from 5.3% in 2001 to an estimated 4.1% in 2002. Although the growth in import demand will remain strong, it is forecast to slow to (a not inconsiderable) 11% in 2003. Consequently, real GDP growth will remain buoyant over the forecast period, driven largely by developments in the nascent oil industry, which will continue to attract significant foreign investment inflows. Sustained production levels will maintain export volumes. Sizeable injections of foreign capital into the power industry are also expected in 2003, as capital spending on the large Merowe dam and other projects begin. Available monetary data also point to marked rises in domestic investment and strong domestic demand, which are likely to persist throughout 2003 as recent high oil earnings continue to flow into the local economy. An expected improved harvest this year, coupled with the end of the Gulf Arab states’ ban on Sudanese meat exports, will boost non-oil exports by 20%, which will amount to 23% of total exports. Domestic incomes will therefore be augmented and, as a result, consumption will widen, pushing up real GDP growth to 5.9%. Real growth will fall back slightly in 2004, to 5.3%, as growth in export volumes slows and growth in domestic consumption is squeezed slightly owing to the impact of lower oil prices.

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Inflation According to the IMF, strong monetary growth persisted throughout 2002, with M2 growing by 30%. This had an impact on prices, with month-on-month inflation rising from a low of 3.5% in July to a high of 10.5% in October, although price growth eased during the last two months of the year, resulting in average consumer price inflation in 2002 of 8.4%. Inflation over the first quarter of 2003 averaged 7.8% and further increases are likely in 2003, particularly if the government continues to reduce subsidies on core goods and services and given the expected rise in the global price of non-oil commodities of almost 8% during the year. Price increases, although significant, will be contained, how- ever, with average consumer price inflation rising to 10.3% in 2003, edging up to 10.5% in 2004. Although the inflationary environment is a vast improvement on the recent past, the discrepancy between these rates and the government’s target of 5% will be marked.

Exchange rates The central bank operates a tightly managed float of the dinar against the US dollar, as is evident by the minimal movement of the currency over the past few years. In mid-1999 the dinar was set at SD257:US$1, and by early June 2003 the currency had only slipped 2% to SD261:US$1. It is clear, according to the latest data, that a de facto peg to the dollar has emerged and this trend is expected to continue as the government prefers to use its reserves to encourage monetary stability and offset inflationary pressures. We expect the dinar to hover around its present level throughout the forecast period, although the currency will still be vulnerable owing to the paucity of international reserves held by the central bank. Although the reserve stock jumped by 306% in 2002 (albeit from a very low base) to US$478m, it still only offered the government two months of import cover.

External sector In 2003 export earnings are forecast to rise by 15.2% to a record US$2.2bn, as an 18% rise in oil export volumes more than compensates for the slight drop in oil prices. This hike in earnings will be on top of an estimated 14.7% rise in the value of exports in 2002. The value of imports in 2003 is also expected to increase, although, at 11%, this remains below the expected export growth rate. This rise will come on the back of a 54% spike in the import bill in 2002. Sudan’s trade deficit will therefore narrow only slightly to US$140m, down from an estimated deficit of US$204m in 2002. In 2004, however, the expected 26% slide in global oil prices will drive a 10% decline in export earnings. With import spending remaining buoyant, the trade deficit will widen to US$584m. The current-account deficit will expand to US$1.5bn in 2003 (although as a percentage of GDP it will shrink from 7.3% in 2002 to 9.3% in 2003), as services and income debits continue to far outstrip credits. This is owing to Sudan’s virtually non-existent service industry and negative net foreign assets. With the further decline in oil prices in 2004, income debits (in the form of oil operators’ profit repatriation) will decrease, but not sufficiently to halt the ongoing rise in the current-account deficit, which will grow by 16% to US$1.74bn, or 9.6% of GDP.

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Forecast summary (% unless otherwise indicated) 2001a 2002b 2003c 2004c Real GDP growth 5.3b 4.1 5.9 5.3 Oil production ('000 b/d) 230.0 245.0 280.0 310.0 Crude oil exports (US$ m) 1,370.0 1,510.9 1,720.6 1,470.4 Consumer price inflation (av) 3.0b 8.4a 10.3 10.5 Government balance (% of GDP) -1.0 -1.0 -0.1 -0.7 Exports of goods fob (US$ bn) 1.7 1.9 2.2 2.0 Imports of goods fob (US$ bn) 1.4 2.2 2.4 2.6 Current-account balance (US$ bn) -0.6 -1.0 -1.5 -1.7 Current-account balance (% of GDP) -5.1 -7.1 -9.3 -9.6 External debt (year-end; US$ bn) 15.3b 15.9 16.3 16.7 Exchange rate SD:US$ (av) 258.7 263.3a 261.3 263.3 Exchange rate SD:¥100 (av)d 212.9 210.1a 224.8 228.0 Exchange rate SD:€ (av) 231.7 249.1a 300.1 311.4 Exchange rate SD:SDR (av) 329.4 341.1a 367.6 374.6 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Series is implied exchange rate calculated from IMF staff report data on nominal GDP (lcu) and nominal GDP (US$) values. Rate of exchange is Sudanese Dinars to US$.

The political scene

June deadline for peace deal Peace talks between the Sudanese government and the Sudan People’s missed Liberation Army (SPLA!the main southern rebel grouping in the 20-year civil war with the regime) have continued over recent weeks, but have shown little sign of progress. At a meeting between the Sudanese president, Omar Hassan Ahmed al-Beshir, and the SPLA leader, John Garang, in early April, the two leaders said they expected a peace deal to be reached before the end of June this year. However, following the conclusion of the most recent round of talks in late May, the presidential adviser on the negotiations, Ghazi Salal Eddin Attabani, conceded that the prospects of reaching an agreement so soon were “rather remote”. The pessimistic outlook was restated more forcefully by the lead Kenyan facilitator for the talks, Lazaro Sumbeiywo, who told journalists

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that a deal by the end of June was “not feasible” given the outstanding issues between the two sides. This was confirmed when he later announced that talks would not resume until July. The May negotiations were the fifth round of talks to be held under the Machakos Protocol. Signed in the Kenyan town of Machakos in July 2002, the protocol is a framework for a peace settlement that commits the two sides to hold a vote on self-determination, allowing the people of the south to chose between secession and remaining part of a confederal Sudan. The vote is to be held after a six-year interim period, during which Sudan will be governed by an elected, national unity administration drawing together all political forces. During the interim period, the south is also to be exempt from Islamic law, which will continue to apply in the north. The protocol was drawn up under the auspices of the Inter-Governmental Authority on Development (IGAD)!the East African regional organisation that has been leading talks between the two sides since 1997. However, the driving force behind the breakthrough agreement at Machakos was the US, which, together with other Western actors (notably the UK and Norway), has significantly increased its involvement in the peace process and has stepped up pressure on the participants to bring the conflict to a close.

Latest rounds of talks show The lack of progress in the most recent set of negotiations held over the past little progress three months is likely in part to be a result of other, more pressing developments in world politics. In particular, the intense diplomacy and extensive military preparations in the run-up to the outbreak of war in Iraq in late March absorbed the energies of the US and UK governments and continued to dominate their foreign policy agendas over the following weeks. This has pushed the Sudanese peace process into the background, reducing pressure on the two sides, particularly the Sudanese government, which has been able to focus attention instead on its co-operation with the US in it “war on terror”. However, the slowdown in the talks is also a reflection of the wide gulf that separates the two sides, which will remain difficult to bridge even if Western engagement resumes at previous levels. The Machakos Protocol was agreed only because its terms were left vague, particularly over the arrangements for the lengthy interim period. The protocol committed the two sides to the “equitable” sharing of power and wealth, for example, but left the definition of how “equitable” should be determined for later talks. The term, however, is central to the imbalances that have fuelled the war over the past two decades, and consensus has, as a result, been very difficult to reach. Although the details of the talks have largely remained confidential, in an April interview Mr Garang said that the SPLA were insisting that the south receive 60% of the proceeds of the oil industry, as most of the reserves are located in the region. The government, however, maintained that oil is a national resource, and therefore 90% should go to the central government. On the question of political power, the SPLA were reported to have proposed receiving 40% of the seats in the lower house of parliament, but 50% in the upper house to reflect their status as equal partners in the new constitutional arrangement. The gov- ernment, however, has pressed its case that, as the south makes up just 20% of

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the total population, their representation in a democratic structure must reflect this demographic reality. The recent rounds of talks have also thrown up a range of other disputes over issues that are only touched upon in the protocol. These include questions over the nature of the presidency and who should hold it, with the government eager to ensure that executive power remains strong and in the hands of the north for the entire six-year interim period. An agreement on the location of the capital is also outstanding, with the SPLA adamant that if Khartoum remains the centre of government, it must be exempt along with the south from Islamic law. Additionally, the issue of security arrangements for the interim period have come to the fore in the most recent rounds of talks. In both the fourth and fifth round, the government is understood to have pressed its case for the creation of a single national armed force!an arrangement that would in effect require the SPLA fighters to come under central government control, with other militias obliged to disarm. Unsurprisingly, the SPLA has strongly rejected this approach, which would necessitate it giving up military command of the large swathes of the south it currently controls, and would place it at a significant military dis- advantage if the interim government broke down and fighting resumed. The two sides have also proved unable to reach agreement on which parts of the country constitute “the south” and thus should be afforded the right of self- determination. The government has insisted since the beginning of the talks that the 1956 provincial borders drawn up at the end of the colonial period should be used, whereas the SPLA have sought to extend the boundary to include three other parcels of territory!Abyei in Western Kordofan, the Nuba Mountains in Southern Kordofan and Angasana in Blue Nile. The SPLA argue that they have substantial support in these areas, and thus a mandate to negotiate on the inhabitants behalf. The government, however, insists that the territory is not only outside the 1956 boundaries but is also predominantly under its control and thus not subject to negotiation. To that end, the government threatened to boycott talks early in the year when the disputed territories were on the agenda. The stand-off was resolved when the two sides agreed to discuss the issue at separate meetings outside of the formal IGAD Machakos process. Those negotiations were held in March, with separate teams from each side discussing each of the three areas. The mood between the two parties appears to have been sour, however, with talks focusing on what the IGAD described as “modalities of future negotiations” and offering no sign of compromise.

Egypt revives contacts in peace Perhaps sensing that deadlock in the talks offers an opportunity to rebuild its role influence, Egypt has stepped up its contacts with all parties in the dispute in recent months. Egypt rejected the Machakos Protocol when it was unveiled, opposing any agreement leading to southern independence, a move it fears would jeopardise the 1959 Nile water-sharing agreement, which gives Egypt the right to more than 80% of water flows. Egypt was also angered not to have been consulted over the peace deal for Sudan, a country in which it takes a close interest owing not only to the strategic importance of the Nile, but also to its status as a fellow Arab government and former colonial power. In partnership with Libya, Egypt had fostered its own peace initiative (offering no

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prospect of independence for the south), which it still had ambitions to pursue before it was pushed off the table by the Machakos deal. As a result, there was a marked cooling of relations between the Egyptian government and the warring parties after Machakos was signed, with Cairo refusing offers of observer status at subsequent rounds of talks. Over recent months, however, Egypt’s approach has softened, and it has held a series of meetings with all the parties in the dispute. In early May this saw the Egyptian president, Hosni Mubarak, make his first visit to Khartoum since the 1989 coup, holding talks with Mr Beshir and stressing Egypt’s commitment to boosting co- operation with the regime. Meanwhile, Mr Garang travelled to Cairo for talks with Mr Mubarak, and Egypt’s ex-foreign minister, Amr Musa, led the Arab League’s first ever full delegation to the south to “build understanding and confidence” with the SPLA leadership. In late May Egypt hosted talks between the SPLA and northern opposition groups not included in Machakos talks.

US holds back from new Despite disappointing progress in the talks, the US delivered a relatively sanctions optimistic assessment of the prospects for the negotiations when the administration issued its first report on the process under the Sudan Peace Act. Under the terms of the US law, the president, George W Bush, is required to give Congress his assessment of the negotiations every six months and, in particular, his view on whether the government is negotiating in good faith. Should the report conclude that this is not the case!or judge that the government is obstructing the delivery of humanitarian aid!then Congress could consider imposing new sanctions. These include a possible downgrading of diplomatic ties, the introduction of a UN arms embargo, efforts to prevent Sudan gaining access to World Bank or IMF funds, and measures to deny it use of oil export proceeds. However, Mr Bush’s report, issued in April, said that talks were progressing, albeit imperfectly, and that they represented the best opportunity for bringing peace to the country, and still had a reasonable chance of success. The report said that this view was shared by IGAD mediators and other international observers, and that consequently sanctions would not be brought into effect at this stage. The report also noted that although the government’s co-operation with the humanitarian programme was poor, it had shown some improvement and the government had greatly reduced its obstruction of the relief effort (see The domestic economy: Agriculture).

US praises Sudan for support Although the assessment angered the large anti-regime lobby in the US, it had on “anti-terrorism” drive been widely expected at a time when US attention remained focused on Iraq. The US is also aware that to implement sanctions would in effect bring the Machakos process to a close, ending what remains!despite its shortcomings! the best prospect for a settlement in many years. The decision not to impose new sanctions is also likely to reflect US reluctance to jeopardise Sudanese co- operation over international “terrorism”, which appears to be strengthening. Although Sudan was included on the State Department’s list of “state sponsors of terrorism”!published in April in its annual Trends in Global Terrorism report!because of “concerns” over Sudan’s links with some hardline anti- Israeli groups, commentary in the report also noted that “the United States is pleased with Sudan’s co-operation and the progress being made in their anti-

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terrorist activities”. The comments were amplified in late May when a spokesman for the State Department, Richard Boucher, spoke of the “very good " and I think increasingly good co-operation with Sudan on issues of counter-terrorism”. That the comments were made after a direct meeting in Washington between the US secretary of state, Colin Powell, and the Sudanese foreign affairs minister, Mustafa Uthman Ismail, is also indicative of the credit Sudan has earned by supporting the US over the issue. In a further sign of Sudan’s changing stance, a US transporter plane forming part of the US’s regional “anti-terrorism force” even landed in Khartoum in late May!the first US military aircraft to land in the capital since 1993. It was greeted by the US defence liaison officer in Khartoum, Dennis Giddens, who praised Sudan’s “proactive work in the war against terrorism”.

Sudan takes cautious approach The improvement in bilateral relations came despite Sudan’s clear opposition to to Iraq war the US-led war on Iraq. Mr Beshir told parliament that the US invasion was “unjust, aggressive and illegitimate” while also “saluting fraternal Iraq " and the firm resistance of the Iraqi nation”. Notwithstanding the rhetoric, Sudan sought before and during the conflict to ensure that there was no repeat of the severe damage done to its ties with the West and the wealthy nations of the Arab Gulf by its approach to the 1990-91 Gulf war. At that time, Sudan was one of the few nations to not only refuse to join the US-led coalition to liberate Kuwait, but also to associate itself with the Iraqi leader and his invasion. On this occasion, its opposition was far more muted, leaving it firmly within the regional mainstream. Indeed, there were even reports that Sudan secretly allowed the US access to its airspace for the campaign!an unconfirmed rumour that if correct would have also won it plaudits in Washington. Furthermore, Sudan offered support to a UAE proposal for the former Iraqi president, Saddam Hussein, to go into exile before the war began!a scheme endorsed by the US. However, the war did generate protests in Khartoum and elsewhere, and led to some violent clashes between the security forces and demonstrators seeking to attack the US embassy in the capital. There were also clashes on several university campuses, as Islamist groups opposed to the regime sought to use the war as a rallying point against the government. Student activism is not uncommon in Sudan, but should not be considered a threat to the stability of the regime.

Ceasefire holds in south but Washington’s decision not to implement the punitive measures permissible new fighting emerges in west under the Sudan Peace Act was aided by the decline in fighting between the government and the SPLA. Alongside the Machakos talks, the two sides agreed a comprehensive ceasefire in October 2002, although this was broken by a major offensive led by government-allied militias in January and February this year (March 2003, page 14). Following that campaign, the US brokered terms for a more closely monitored disengagement, warning that further violations would not be tolerated. Although some aspects of this accord have not been fully honoured!declarations of all troop and militia force positions and movements, for example, are not forthcoming!it has led to a marked downturn in active hostilities.

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However, a new area of conflict has emerged, centred on the Northern Darfur province in the far west of Sudan, close to the border with Chad. The fighting erupted in February when a group calling itself the Darfur Liberation Front captured Gulu in the Jebel Marra region from the government. Shortly afterwards, the group changed its name to the Sudan Liberation Movement (SLM) and issued a political agenda announcing that they had begun an armed campaign to end Darfur’s political and economic marginalisation and to combat the programme of “ethnic cleansing” being carried out in the area. The SLM later mounted a successful attack on the provincial capital, Al-Fasher, in which more than 70 government soldiers were reportedly killed, and several aircraft destroyed. The SLM also attacked government positions in the second city of the province, Melit, and there were reports of smaller clashes in other towns in Jebel Marra. The SLM pose little threat to the stability of the regime and appear to have a fighting force of under a thousand. The government claimed that the group was being supported by hostile regional states led by Eritrea, and was working with the SPLA, which it claimed was seeking a means to continue the war by proxy while the ceasefire remained in effect. Khartoum described the SLM as “armed robbers” and refused offers of talks. Instead it sacked its senior security officials in the region and deployed additional forces, succeeding in retaking most of the territory that had fallen to the SLM. However, maintaining order in the area will prove difficult given its topography, scale and distance from Khartoum. Moreover, the “rebellion” is being fuelled by deep-rooted grievances in the region, which has a long history of bloody conflict between nomadic Arab and sedentary African tribes that the government has done little to counter. Indeed, the attack on Gulu followed an upsurge in tribal clashes in the area between October and January that a report by the London-based human rights organisation, Amnesty International, claimed had led to scores of deaths, widespread rape and destruction of property. Until local differences are addressed, discontent will simmer, with manifestations of resentment likely to be directed against the government.

Sudan steps up support for The claims of Eritrean involvement in the Darfur conflict is indicative of the Eritrean opposition sharp deterioration in bilateral ties between the two countries. The downturn has been apparent since October 2002, when Sudan accused Eritrea of direct participation in an opposition offensive across their shared border that led to the capture of Hamshkoreb (December 2002, pages 16 and 17). Since that time, the border has been closed, with Sudan rebuffing offers of mediation by the African Union and others (March 2003, page 18) and warning Eritrea that it will “respond in kind”. This has been most apparent in the growing support that Sudan has provided for the opposition Eritrean National Alliance (ENA), which has held a series of meetings in Khartoum. In April this led to the formation of a single ENA “military force” to which Sudan offered support for its proposed guerrilla campaign against strategic targets in Eritrea. Sudan has also held a series of meetings with Yemen and Ethiopia!the two other regional states that have poor relations with Eritrea!adding to Asmara’s sense of isolation. Neither its support for the ENA nor its links with Yemen and Ethiopia are a prelude to a

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direct conflict as some have speculated, but recent developments harden the divide between the two sides.

Uganda promises to end In contrast, ties with neighbouring Uganda, although volatile, have improved of support for rebels late, and may have begun to yield Sudan some significant political returns. After almost a decade of mutual antipathy and suspicion, efforts to broker an improvement in relations have produced results; notably since March 2002, when Sudan agreed to allow the Ugandan People’s Defence Force (UPDF) to cross into Sudanese territory to attack the Lord’s Resistance Army (LRA)!a guerrilla opposition group previously backed by Khartoum against the Ugandan government. Sudan has regularly extended the mandate for the UPDF operation for three month periods since that time, most recently in late February. The extension was agreed at a meeting between the Sudan defence minister, Bakri Hassan Salih, and his Ugandan opposite number, Amama Mbabazi, after which the Mr Mbabazi made a statement to parliament announcing that the government would no longer provide military support for the SPLA. The statement was in line with commitments made in a treaty brokered by a former US president, Jimmy Carter, in 2000, which opened the way for the restoration of diplomatic ties. It went much further than previous comments, however, with Mr Mbabazi saying that Uganda would not allow the SPLA to carry arms in, or move arms through, the country or “plan or prepare to wage war or hostile propaganda against Sudan from Uganda”. How well honoured this commitment will be is open to question given the latent suspicion that remains, particularly in Kampala, the Ugandan capital. The real test would come in the event that the peace process breaks down and fighting escalates, particularly if this occurs after the UPDF campaign against the LRA has been completed.

Economic policy

World Bank lauds economic In an interview in April to mark the release of the World Bank’s new statistical reform programme handbook, African Development Indicators, the chief economist for the Africa region, Alan Gelb, pointed to Sudan as one of the continent’s economic success stories. Although parts of Africa have shown anaemic economic growth that has driven down real average earnings, Sudan!along with Uganda, Tanzania and Ethiopia!was selected by Mr Gelb as a country where economic reform had sparked several years of real growth and rising average income levels. The assertion is backed up by data in the report, notably figures showing average real growth of 6.2% in Sudan over the past decade, compared with a regional average of just 2.7%. The performance makes Sudan the fifth fastest growing economy in Africa over the period. Economic growth has occurred from a low base, with gross national income per capita standing at only US$340 in 2001 (the most recent year for which data are available), although this remains some US$40 ahead of the average for Sub-Saharan Africa (excluding South Africa). The performance is all the more remarkable given the economic costs of the ongoing civil war. The data show positive immediate consequences associated with the economic performance, with life expectancy rising from 50 to 56 years over the period, while the Sub-Saharan average has declined from 49 to 47.

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Other indicators of development, such as access to health care, rates of illiteracy and school enrolment ratios, have also shown significant improvement.

Government finances have The World Bank report highlights the performance of Sudan’s government strengthened considerably finances, which show that the fiscal deficit averaged just 0.7% of GDP between 1997!when the IMF-approved economic reform programme began!and 2001, compared with 5.4% for the ten years prior to 2001 and more than 12% in the 1980s. The performance also compares well with a regional average of more than 4% of GDP for the period of Sudan’s reform programme. The report gives less positive indicators for the privatisation programme, with data showing that of the 32 divestments reported to have taken place in the period to end-2000 all occurred before 1997. The data are an accurate reflection of the slow pace of reform over recent years, despite commitments under the IMF reform programme to deepen the privatisation process. High-profile sales of assets such as Sudan Airways!now promised for more than five years!have been particularly tardy. If the data had extended to 2002, however, the figures would have appeared more positive, with the sale of assets such as the Free-Trade Zones Company and the Atbara Cement Company having been successfully transferred. The first privatisation in the financial services sector!the sale of the Bank of Khartoum!is also understood to be close to completion.

Budget balance Annual 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 average % of GDP -18.8 -10.1 -4.4 -1.9 -1.5 -0.5 -0.6 -0.8 -0.8 -1.0 -4.0

Source: World Bank, African Development Indicators.

Expansion and liberalisation The success story of Sudan’s hesitant privatisation programme, however, of telecoms sector continues remains the Sudan Telecommunications Company (SudaTel), which was formed from the Sudan Telecommunication Public Corporation in 1993 and privatised in 1994. Since that time, SudaTel has led an impressive and rapid expansion of the country’s telecoms infrastructure. In 1995 data from the International Telecommunication Union (ITU) show that there were just 75,000 main telephone lines in the country, the equivalent of just 0.28 lines per 100 persons. By end-2002 newly released ITU data show that the number of lines had increased almost ninefold to 670,000!an annual compound growth rate of more than 30%, the fastest of all the 200 countries surveyed by the organisation. Although provision of 2.1 telephone lines per 100 persons still stands slightly below the average of 2.7 for the Middle East and Africa as a whole, the ratio is significantly ahead of neighbouring countries of comparable wealth, such as Kenya, Uganda, Eritrea and Ethiopia, where the fixed-line networks are still!or were until recently!in state hands.

Foreign capital raised for Funding for the expansion has come almost entirely from the private sector, infrastructure development including from a considerable number of foreign investors that have taken significant stakes in the company. This long-established strategy has seen telecom operators in the Gulf!the Qatar Telecommunications Company and Etisilat of the UAE!acquire equity in the firm, facilitated in part by the government’s steady reduction of its stake in SudaTel from 100% at its foundation to around 35% at end-2002. The process is ongoing, with reports

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suggesting that officials had travelled to Riyadh in April in an effort to sell some 5m shares worth around US$75m to Saudi investors. The process accelerated, however, with SudaTel’s decision in April to be listed on the Abu Dhabi Stock Market, making it the first Sudanese firm ever to gain an overseas listing. In what is likely to have been a related development, Etisilat was reported by the UAE press to have increased its share in the firm to almost 10%. In addition to the expansion of SudaTel, the government is also promoting the expansion of telecoms infrastructure through increased competition. This has already seen SudaTel lose its position as the monopoly Internet service provider with the licensing of other operators in recent years. More substantially, however, the government has over the past nine months been preparing for the launch of a second mobile phone service provider to compete with MobiTel, the subsidiary of SudaTel that currently runs the sole mobile licence. (September 2002, pages 23 and 24) More than 20 firms are known to have bid for the contract, and in late May, Mustafa al-Tayeb, the director of the National Telecommunications Company, said that the deal had been awarded to an unnamed Arab consortium that included the Yemeni company, Saba Fon, and Saba Bank, as well as local investors. No further details of the consortium’s US$130m bid, were released, although the director said that a final signing ceremony would take place in early June, with the new network due to be operational within nine months.

New foreign bank to open in In a further sign of the gradual acceptance of foreign private-sector investment Khartoum into the economy!and, in particular, of the growing connections between the Sudanese economy and the Arab world!another Arab bank announced that it was establishing operations in Sudan in the coming weeks. The new bank! Byblos-Sudan!will be 65% owned by the Lebanese bank, Byblos, with the remainder held by local investors. In line with Bank of Sudan (the central bank) requirements, the bank will have US$12m in capital and will operate in accordance with Islamic financing norms. The expansion into Sudan is the Lebanese bank’s first venture outside of Europe, and, in comments to the Lebanese press, Byblos Bank said it had been attracted by the extensive opportunities available in the retail and corporate sectors, arising in part from the growing wealth associated with the development of Sudan’s oil sector. The liberalisation of financial services regulation in recent years, and the rapid expansion in lending opportunities associated with it, is also likely to have attracted the bank to Sudan. Byblos-Sudan is scheduled to open its first branch in Khartoum in June, but has indicated that it will seek to expand into other cities. The bank will become the fourth foreign bank to establish operations in the country, joining Habib Bank of Pakistan, Al Mashriq Bank and the National Bank of Abu Dhabi, which has had a presence in Sudan since the mid-1970s. There are also long-standing joint ventures in the sector, such as the Sudanese French Bank, which is majority locally owned.

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The domestic economy

Economic trends

Inflation picks up but remains New data from the Bank of Sudan (the central bank) show inflation averaged under 10% 8.4% over 2002, slightly below the five-year average of 10.9%, but significantly ahead of the average of 3% reported for 2001. The trend has also been upwards during the year, with consumer price growth averaging close to 10% over the last fourth months of the year. Rapid liquidity growth is likely to have contributed to the pick-up, with M1 and M2 both expanding by close to 30% last year, compared with 15% and 25% respectively in 2001, despite the estim- ated slowdown in real economic growth. A more immediate factor, however, is likely to have been reductions in government subsidy payments, notably a mid- year increase in fuel prices that will have fed through into higher production and transportation costs. The poor harvest reported for 2002 may also have added to higher food costs, although as the central bank has not released a breakdown of trends within its goods basket, this cannot be confirmed.

Dinar appreciates in real terms The pick-up in consumer prices might have been sharper but for the stability of the dinar, which traded at an average of US$263.3:US$1 in 2002!a nominal depreciation of under 2% and a marked strengthening in real terms given prevailing inflation trends. The dinar appreciated slightly to an average of around SD261:US$1 over the first five months of 2003. The performance is part of a longer-term trend that has seen the dinar trade at close to SD260:US$1 since early 1999. Although the dinar is not officially fixed against the dollar, a de facto peg has clearly emerged, despite warnings from the IMF and others that this risks pricing Sudan’s non-oil exports out of its markets and creating the conditions for a slump in the dinar’s value given the very limited resources at the central bank’s disposal to protect the currency should it come under pressure (for example, from a sharp drop in oil prices). The central bank, however, has made clear its preference for stability in order to encourage confidence in the currency and offset inflationary pressures. It can also argue that the real appreciation has not affected its external account position

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adversely, with official foreign-exchange reserves and non-oil exports both showing strong growth over 2002 (see Foreign trade and payments).

Oil and gas

Oil prices weaken as political International oil prices have eased in recent weeks, with the benchmark dated tensions ease Brent Blend averaging around US$25/barrel between mid-March and mid-May, compared with around US$31/b over the first three months of the year. The trends have been driven largely by political factors, notably the US-led war in Iraq. Ahead of the widely anticipated campaign, there had been fears on the oil market that the invasion could trigger a prolonged conflict that could escalate into a broader regional war, threatening oil supplies from the Gulf. There were also concerns that given the regional opposition to the war other oil producers would prove unable!or unwilling!to make up the shortfall in global supply caused by the suspension of Iraqi exports and the output difficulties being experienced simultaneously by two other leading producers, Venezuela and Nigeria. These fears, which kept Brent above US$30/b from late December, eased once the war began in late March, with prices falling almost immediately to below US$25/b. Supported by an OPEC agreement in April to cut production, Brent stabilised at this level, although the underlying pressures remain downward given the slow pace of global economic growth and consequent weakness of world oil demand. When Iraq resumes production!probably in the third quarter of this year!the market is likely to weaken once again.

Nile Blend tracks global oil Little price data are available for Sudan’s own export oil!Nile Blend!which is prices sold in limited quantities on the spot market. New trade figures released by the Bank of Sudan, however, suggest that the average price for Nile Blend stood at US$22/b in 2002!a discount of around US$3/b on Brent. The performance marked a fall of 0.7% in the value of Nile Blend year on year!a surprising trend given that Brent strengthened by more than 2% during the same period. The official figure also appears to be contradicted by data included in the financial reports of a Canadian company, Talisman, which until recently was a prominent member of the foreign consortium leading the development of the oil sector. The firm’s data show that the average export price for Nile Blend

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actually strengthened during 2002 to an average of C$37.8/b (US$24.3/b) com- pared with C$32.7/b the previous year, although the discrepancy may be a result of the higher price the firm was able to achieve for its share of the consortium’s output through the Dutch trading company, Trafigura. Such uncertainties aside, the Talisman financial data show that Nile Blend benefited from the strength of the international oil market over the first quarter of this year, with the average price rising to C$43.9/b!an increase of almost 50% on the price it reported for the same period the previous year.

Pipeline expansion to boost There is greater consensus over production volumes, however, with the energy production capacity and mining minister, Awad Ahmed al-Jaz, claiming that average output stood at 240,000 barrels/day (b/d) in 2002!close to the figure of around 235,000 b/d implied by the Talisman data. Bank of Sudan data, meanwhile, put crude oil exports at an average of around 171,000 b/d, indicating domestic consumption of some 65,000-70,000 b/d!little changed on the previous year. According to Talisman, production was broadly unchanged over the first quarter of 2003, although for several months output has been held below potential as a result of capacity constraints in the 1500 km pipeline linking the consortium’s producing fields in central-southern Sudan to the export terminal near Port Sudan (March 2003, page 23). This constraint on output appears to have been resolved, however, following the installation of a new pumping station north of Khartoum. According to Mr Jaz, the US$20m facility has lifted maximum throughput to 300,000 b/d, which the minister was confident would be reached in the second half of this year. In interviews with the oil industry press, Mr Jaz also repeated previous claims that total output would rise to 450,000 b/d by 2005.

Chinese firm reports fresh oil Prospects for Sudan reaching!and sustaining!this level of output were finds enhanced by reports in March that the Chinese National Petroleum Company (CNPC) had discovered new reserves in Block 7. CNPC is the leading member of the Greater Nile Petroleum Operating Company (GNPOC), which is running Sudan’s existing producing fields. However, it also has a leading 41% stake in the Petrodar consortium, which is separately developing Block 7 and Block 3, both of which have yet to begin production. According to a report in the industry journal, Energy Compass, in March, CNPC has recently made two substantial field discoveries in Block 7 that have lifted recoverable reserves in the Petrodar concession area to 700m barrels. The new finds are reported to be spread over several accumulations, which would add to the complexity!and cost!of bringing the reserves on line. However, the journal suggests that Petrodar expects production to begin in 2005, at an initial rate of at least 50,000 b/d, which would rise as development continued. CNPC did not confirm the finds, but the reports were given greater substance by articles in the Chinese press in May indicating that the firm was in advanced negotiations with the Sudanese government over a new investment programme valued at close to US$1bn. Of this, some US$700m was understood to be for the construction of a new pipeline linking the Petrodar concession area to the export terminal. There had previously been discussion of building a spur linking the blocks to the existing pipeline, but a decision to build a

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dedicated route would support speculation that reserves and production are sufficiently high to make a separate pipeline commercially viable. The remain- ing US$300m of CNPC’s proposed investment package is reported to be for the expansion of the Khartoum refinery to lift capacity by 80% from 50,000 b/d to 90,000 b/d. The modern refinery, which only came on stream in mid-2000, was built by CNPC in a joint venture with the government. The government mooted the possibility of increasing capacity late last year (December 2002, page 25) as part of a broader expansion programme that would also see capacity at the Port Sudan refinery enhanced.

Further concessions under The government is in negotiations with other foreign firms over the discussion development of vacant concession areas where it is confident substantial reserves remain to be exploited. In April the government said it had signed an agreement in principle for the exploration and development of Block 9 with two Russian firms, Altonsa International and Russian Engineering. The Korean National Oil Company (KNOC) has also held further talks with the government in recent weeks, with KNOC officials indicating that after examining available survey data they were interested in developing Block 8. The block, which covers around 66,000 sq km from Rabak to the Eritrean border, had previously been researched by a US company, Sunoco, which decided not to proceed. KNOC would be likely to work on the concession with Daewoo, a Korean firm, which already has contacts in the non-oil sector through its work in the power industry. A Romanian company, RomPetrol, is also assessing Block 8.

Talisman completes sale of The state-owned Indian Oil and Natural Gas Company (ONGC Videsh) finally Sudan assets took ownership of Talisman’s 25% stake in GNPOC in March, almost six months after the deal was first announced. The long delay appears to have been the result of disputes within the consortium, as existing firms sought to exercise their pre-emption rights over changes to the company’s composition. Diplomatic tensions between India and China are understood to have prompted CNPC to initially object to ONGC’s purchase of the Talisman stake and to launch a counter-bid for at least part of Talisman’s Sudan holdings. The Malaysian company, Petronas, also appears to have tried to secure part of the Canadian company’s stake in GNPOC, although neither firm is likely to have matched the high price of US$750m paid by ONGC. The Sudanese government was also reluctant to see either firm acquire a majority holding in the consortium (CNPC currently has a 40% stake; Petronas has 30%), although its attitude towards the Talisman sale may have been complicated by its apparent preference for an Arab Gulf company to take a position in the consortium. The purchase has been greeted with great enthusiasm by ONGC (the Indian deputy prime minister, Lal Krishna Advani, travelled to Mangalore to officially receive the first batch of Sudanese oil to arrive in the country from GNPOC) and forms part of the state-owned firm’s drive to secure overseas supplies for India’s energy deficient economy.

Canadian company to face For Talisman, the sale represents something of a relief, bringing to a close!at a lawsuit over Sudan role handsome profit!a four-year involvement in Sudan that had made it the focus of a sustained campaign from a broad range of powerful lobby groups in the US, Canada and elsewhere, which claimed that the development of the oil

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industry was fuelling the civil war and leading directly to widespread human rights abuses. The campaign had seen the company flirt with US sanctions (an early version of the Sudan Peace Act had sought to bar firms that invested in Sudan from listing on US stockmarkets). It also led to Talisman’s shares trading at a substantial discount, owing to the perceived political risk and as a direct result of a divestment campaign mounted by the pressure groups on fund managers not to hold Talisman shares. Talisman’s share price strengthened when the sale was completed, but, although its withdrawal from the consortium has eased problems associated with Sudan, the issue is not fully closed. At a shareholder meeting in March the company’s announcement of strong first quarter earnings was overshadowed by a series of questions from the floor calling for compensation to be paid to southerners adversely affected by the development of oil resources in the region. Of potentially greater damage was a ruling from a US court in March that a case against Talisman alleging that the firm had promoted human rights abuses, war, and “genocide” in Sudan could go ahead. Talisman had sought to argue that the class action suit!filed in November 2001 on behalf of all non- Muslim Sudanese living within an 80-km radius of the oilfields!should be dismissed, claiming that the case was invalid and beyond the court’s jurisdiction. Prosecuting lawyers are now set to begin a six-month discovery phase, before attempting to initiate a full trial seeking extensive damages. There is a consensus among investors that the trial will not be successful, and that no liability will be established, despite the successful track record in similar cases of the high-profile prosecuting team. However, even if this proves to be the case, the trial will lead to extensive public discussion of human rights abuses in the oil region, and is likely to further taint Talisman’s corporate reputation, despite its withdrawal from the consortium.

Lundin reduces presence in With Talisman’s departure, a Swedish company, Lundin, has become the only Sudan as Petronas expands Western company working in Sudan’s upstream oil sector. The firm announced in March that it was returning to its Block 5a concession area, south of the GNPOC position, some 14 months after withdrawing because of a deterioration in the security environment in the region. The block, which centres on the Thar Jath field, has proven recoverable reserves of around 150m barrels, with production likely to begin in late 2004 at a rate of about 40,000 b/d. Lundin’s return to the area, which the company claimed was a result of “positive developments in the peace process”, is likely to proved short-lived, however, as within a month the company announced that it had agreed to sell its 40% stake and operator role in the block to Petronas. The block has been controversial, with the government’s drive to build and secure an all weather road to the concession area blamed for an upsurge in fighting in the region in the first weeks of this year. However, during its time in Sudan, Lundin has not been subject to the same sort of politically motivated campaign as Talisman, and its decision to sell its stake in Block 5a for around US$140m appears to have been driven by commercial factors, notably its need to raise equity funding for expansion projects in other countries. Lundin has also insisted that it will retain its 25% holding in the less developed Block 5b.

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Mobil sells upstream Sudan When the deal goes through, it will increase Petronas’s stake in Block 5a to assets almost 70%, and will alleviate the company’s disappointment at being denied a larger role in GNPOC. It also forms part of an ongoing drive to expand its position in the country and follows its purchase of Mobil Oil Sudan in March. Mobil’s assets are upstream, including a network of service stations that hold around 20% of the domestic oil product market, and three large petroleum depots. Mobil Oil Sudan had previously been owned by a US company, ExxonMobil, whose readiness to sell its assets may in part reflect the restraints of US trade sanctions on Sudan. In April the Treasury Department revealed that ExxonMobil was fined US$50,000 for transactions with Sudan that were deemed to violate the sanctions regime, although no further details were provided over the nature of the illegal trade.

Agriculture

Food situation poor but stable The most recent report issued by the multi-agency Famine Early Warning System (FEWS) paints a picture of poor but broadly stable food supply conditions across much of southern Sudan as the crucial “hunger gap”!the period between June, when locally produced supplies come under pressure, and the September harvest!approaches. The May report notes that food prices in many markets across the region have risen later, and more slowly, than many relief agencies had feared. Together with more recent survey work on the ground, FEWS suggests that shortages appear less acute than had initially been projected, indicating that the 2002/03 cereal harvest might not have fallen by the 35% forecast by the UN in a 2002 needs assessment report. (March 2003, page 25). However, there remains an substantial need for food support, with over 3m people likely to be reliant on emergency aid in the south. The FEWS report notes that there are pockets of acute food insecurity around areas such as Pibor, Akoba and Magwi, while a second layer of the south around Aweil, Gogrial, Ruweng and Torit are described as “moderately” food insecure. The assessment is supported by reports from other agencies, such as Medecin Sans Frontieres, which in April warned of high malnutrition rates in some parts of the Bahr al-Ghazal province, which had reached emergency levels around Old Fangak to the south of Malakal. The outlook for the September harvest appears broadly positive, with rainfall arriving on time across most of the south and at 80% or more of average seasonal levels. The exception was pockets of western Upper Nile (Unity) province, where FEWS reports rainfall at significantly below average levels. Prospects for the coming harvest have also been enhanced by improved seed distribution, which the report attributes to more effective co-ordination and planning by the UN Food and Agricultural Organisation. As well as higher volumes and more timely delivery of seed inputs, reports last year also suggested that the relief programme had begun to deliver improved seed varieties, which were generating higher yields!a factor that may have contributed to the stronger than anticipated 2002 harvest.

Relief effort boosted by Prospects for the relief programme also appear to be improving. The UN World political agreement Food Programme (WFP) indicated that delays in the release of donations to

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Operation Lifeline Sudan (OLS!the umbrella organisation that runs the food relief programme) had caused some difficulties and shortages in particular goods, but that these had been remedied in the short term through swaps with other programmes. Heavy rains have also impeded the delivery of aid to transport points in northern Kenya, putting the logistical system under some strain, but not jeopardising the immediate relief effort. The most significant gains in the relief programme, however, stem from the peace process between the government and the leading southern rebel force, the Sudan People’s Liberation Army (SPLA). Although progress in the negotiations has been slow (see The political scene), the talks!and, most importantly, US-led international pressure on the participants!have led to a series of agreements on enhanced co-operation in aid distribution. In early May this allowed the WFP to begin deliveries by barge to both government and rebel held villages between Malakal and Juba. The deliveries, which were expected to reach almost 500,000 people, were the first to be made by river since 1998, when attacks on a relief barge led to several deaths and forced their suspension. Delivery by barge is expected to be as much as 60% cheaper than the programme of air deliveries that the WFP initiated when river travel became too dangerous. Tripartite negotiations between the UN, the government and the SPLA have also allowed aid work to begin in areas of southern Blue Nile province previously excluded from OLS, partly because of poor security conditions in the area. In addition to deliveries of emergency food supplies, the agreement has also allowed the UN Children’s Fund (Unicef) to begin work in the area to rehabilitate essential infrastructure, including water supplies. The WFP has also begun aid deliveries across the rebel-government frontlines in the Nuba Mountain region, taking supplies by road between Kadgouli and Karakar in late March for the first time in almost 20 years. In addition, the government reported in early March that it had opened up some roads in Bahr al-Ghazal to allow food supplies to move from government- to rebel-held areas. As well as enhancing the humanitarian programme, the agreements have also won the support of donors, whose support for relief efforts has been undermined by frustration at the negative impact of the war. This was one of the factors that left the 2002 WFP appeal for Sudan underfunded, and may lead donors to be more willing to provide finance for future programmes, particularly if a full peace deal is finally agreed.

Foreign trade and payments

Sudan takes chair of African As part of its efforts to promote its trade position, Sudan became chair of the free-trade body regional trade organisation, Comesa (the Common Market for Eastern and Southern Africa), at its eighth annual summit held in Khartoum in March. All 20 members of Comesa are committed to preferential tariff rates with other members, but Sudan is also one of nine states that have joined the free-trade agreement (FTA), which the organisation hopes will eventually expand to include all member nations. Assessing the benefits that the FTA has generated for Sudan is difficult given the development of the oil industry, which has skewed its export profile heavily towards East Asian states that purchase the bulk of its crude. However, at the summit, Comesa officials claimed that trade

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within the organisation was growing at a faster rate than trade with those outside, and transactions within the FTA area had risen at an annual rate of close to 15% since the agreement was brought into effect in 2000.

Non-tariff barriers impede Sudan is keen to use Comesa as a means to expand its regional market for oil, regional trade liberalisation although the antipathy of some African governments towards the regime in Khartoum has led to non-tariff barriers being kept in place. Protection of local sugar industries (notably in Kenya) has also impeded the expansion of its regional presence in a sector where leading Sudanese sugar producer, such as Kenana, are technologically far ahead of most of their African competitors. In contrast, it had seemed that efforts to promote bilateral trade with Ethiopia had been successful, following a marked thaw in diplomatic relations over the past three years. This had opened the way for a series of direct trade agreements, notably on the export of Sudanese oil products to meet as much as 85% of Ethiopia’s demand for gasoline and diesel. However, although oil exports began amid much publicity in January (March 2003, page 17), reports in March said that exports had been suspended. There has been no indication that the deal has been permanently stopped, or that volumes had been officially downgraded, but reports in the Ethiopian press and regional media suggest that deliveries had fallen far behind agreed levels, in large part because of infrastructure shortcomings, and that alternative supplies were being sourced from the Gulf. Although a refurbished road was opened late last year, it has not been fully asphalted, apparently leaving it unable to move such large quantities of goods into Ethiopia. Planned exports of veterinary supplies from Ethiopia to Sudan by road are also reported to have been disrupted, and have been carried by air instead. Sudan has announced plans to fully asphalt the 350-km road linking Metema and Gedaref, and the proposed expansion of other routes to boost trade. The projects are estimated to cost some US$100m, for which Sudan is currently seeking finance from the EU, OPEC and Arab development agencies, and work, despite claims that it would be complete “within two months”, is still ongoing.

Data point to full-year trade The Bank of Sudan (the central bank) has yet to release capital and current- deficit for 2002 account figures for 2002, but it has issued new trade data for the year showing a marked deterioration in the visible trade account. The official figures are presented on an fob:cif basis (cif data for imports include associated costs, such as transport and insurance, that are excluded from fob data) and show a deficit of almost US$500m for the year, compared with a surplus of over US$100m in 2001. The Economist Intelligence Unit estimates that on an fob:fob basis, the trade account showed a deficit of around US$200m, compared with a surplus of over US$300m the previous year.

Trade balance (US$ m unless otherwise indicated) 2001 2002 % change Exports (fob) 1,698 1,949 14.8 Imports (cif) 1,585 2,446 54.3 Trade balance (fob:cif) 113 -497 -

Sources; Bank of Sudan; Economist Intelligence Unit.

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Import spending surges to The shift in the trade profile was driven by a massive increase in import record high spending, which rose year on year by more than 50% to a record high of almost US$2.5bn in 2002. The surge in import spending had been apparent throughout the year, but it accelerated in the fourth quarter, when the import bill rose to US$716m. This compares with a quarterly average of around US$580m over the first three quarters of the year, and is some 70% above expenditure for the same period the year before. The data show a rise in spending on all categories of imports, but US$260m of the US$860m increase was in demand for manufactured goods, which reached US$555m!a rise of almost 90% on annual spending over the previous two years. Expenditure on machinery and equipment!the largest component of the import bill!also increased markedly, albeit by a less dramatic 40%. The 35% rise in spending on petroleum products is more surprising, however, given the fall in average international oil prices during 2002 and the increase in Sudan’s exports of refined products. However, despite the rise in its refining capacity over recent years, there are clearly a range of products in which it is not self-sufficient, leaving it reliant on foreign- sourced supplies. The downturn in domestic agricultural production last year also fed through into higher import spending, notably on wheat, to meet domestic shortfalls. However, perhaps the most disappointing element of the import profile is the 64% increase in spending on textiles. As a significant producer of cotton, Sudan has the potential to more than meet its own demand, and could develop an export industry. However, the largely state-owned textile factories in the country remain in a poor state of repair, and continue to operate at far below capacity, forcing Sudan to rely instead on imported items.

Import spending (US$ m unless otherwise indicated) 2000 2001 2002 % change % total Machinery & equipment 323.5 442.5 620.8 40.3 25.4 Manufactured goods 293.7 296.5 555.1 87.2 22.7 Transport equipment 158.7 202.9 255.8 26.1 10.5 Wheat & flour 207.9 138.1 221.3 60.2 9.0 Chemicals 221.1 123.6 206.0 66.7 8.4 Other foodstuffs 89.0 121.3 172.5 42.2 7.1 Petroleum products 108.0 98.1 132.2 34.8 5.4 Textiles 60.5 85.7 140.3 63.7 5.7 Tea 28.7 31.1 30.6 -1.6 1.3 Beverages & tobacco 18.7 23.7 26.4 11.4 1.1 Coffee 13.9 11.5 16.1 40.0 0.7 Raw materials 29.0 10.5 68.6 553.3 2.8 Total 1,552.0 1,585.0 2,446.0 54.3 -

Source: Bank of Sudan.

Oil development boosts Such a dramatic increase raises doubts over the accuracy of official data, which, imports because of unregistered transactions across Sudan’s porous borders, have in the past been suspected to underestimate the true value of import flows. However, improved registration!stemming perhaps from the drive to boosting tax revenue through enhancements to the trade tariff system!is likely to account for only a small share of the rise. A more important factor is the ongoing

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industrialisation programme and, in particular, the expansion of the oil sector. In 2002 investment in the oil sector ran at around US$1bn, much of which!the expansion of the capacity of the oil export pipeline, for example!will have been reliant on imported capital and intermediate goods. Similarly, the construction of new power plants close to Khartoum and elsewhere will also have required substantial foreign inputs. Moreover, the rise in import spending reflects more robust local consumer and business demand, fuelled by the ongoing real appreciation of the currency, which continues to reduce the relative cost of foreign-sourced goods. This has been compounded by the liberalisation of the foreign-exchange regime and reforms to the banking sector, which have increased the availability of credit for trade purposes.

Imports financed by investors Clearly, with such a huge rise in import spending, the question of financing arises. Sudan’s funds are not sufficient to meet this gap, and, given that the country’s reserves have not been plundered and the currency has remained stable, it can be deduced that, in this instance, the import bill will have been financed by the foreign firms leading the development projects; when full external account data is released, the additional spending will be netted out by an increase in reported capital flows. However, although this reduces the immediate pressure on Sudan’s external accounts, the capital inflows will necessarily generate significant outflows over future years in the form of services and income debits, as the foreign firms repatriate profits and reclaim costs from their investments.

Non-oil gains boost export The rapid rise in import spending would have driven the trade account earnings to record high further into deficit but for a strong increase in export revenue during the year. Overall, the new data show that merchandise earnings rose by close to 15% year on year to almost US$2bn!a record high. The oil sector dominates the trade profile, as it has every year since oil exports began in late 1999. Taken together, oil and oil products generated US$1.5bn, or 77% of Sudan’s overall export revenue, a year-on-year increase of close to 10%. The rise was achieved despite a fall of slightly under 1% in the average unit price for its crude oil exports, which was more than offset by a 10% increase in volumes, reflecting continued gains in domestic production. The non-oil sector performed more robustly still, with total earnings rising by more than 35% year on year to US$440m, compared with US$320m in 2001. The gain was driven by the livestock sector, where earnings rose from just US$15m in 2001 to US$133m in 2002, following a massive increase in export volumes. The scale of the gain reflects the lifting of the ban by the Gulf states on the import of Sudanese meat and livestock, which was imposed in late 2001 and throughout 2002 following an outbreak of Rift Valley Fever in late 2000. However, the sector is nevertheless showing real growth, and the outturn for the year stands some 60% ahead of that for 2000. There have been reports that growth may slow this year, however, as a result of the unrest in Darfur, which may have compromised production. The US-led war in Iraq may also have undermined supply to the Gulf, although deliveries to Saudi Arabia!Sudan’s key market!should not have been affected.

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Export revenue (US$ ‘000 unless otherwise indicated) 2001 2002 % change Crude oil 1,269,222 1,396,455 10 Mogas 88,431 93,143 5.3 Kerosene 420 -100 Lpg 18,593 17,364 -6.6 Naptha n/a 2,760 - Cotton 44,387 62,154 40 Gum arabic 24,275 31,851 31.2 Sesame 104,490 74,575 -28.6 Grounduts 8,775 5,696 -35.1 Sugar 12,112 10,473 -13.5 Sheep 1 95,251 9,525,000.0 Goats 10 2,464 24,540.0 Camel 1,575 18,671 1,085.5 Meat 13,741 17,301 25.9 Gold 43,697 52,507 20.2 Total incl others 1,698,703 1,949,115 14.7

Source: Central Bank of Sudan.

The other elements of the agricultural sector fared less well according to the Bank of Sudan data, falling by around 3% year on year, largely as a result of weak prices. Despite a 70% increase in cotton export volumes, for example, earnings rose by only 40% year on year, as average prices fell by close to 20%. Similarly, a 17% fall in gum arabic prices partly offset the 57% increase in export volumes. Earnings from sesame!previously Sudan’s leading non-oil export commodity!fell by almost 30% as prices and production fell. The downturn was offset by increased gold earnings, however, with revenue rising by 20% as a result of higher extraction rates. The reported 5% fall in average prices during the year is surprising, however, given that international gold prices rose by an average of 15% in 2002.

Official reserves (US$ m unless otherwise indicated) 2001 2002 1Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Foreign exchange 178.5 152.0 154.4 117.8 166.9 224.0 303.6 478.4 Months of import covera 1.0 0.9 0.9 0.7 0.7 0.9 1.2 2.0 a Import cover for 2002 based on EIU estimates. Sources: Bank of Sudan; IMF, International Financial Statistics.

Reserves reach new high In apparent confirmation of speculation that much of the increase in import spending has been financed from non-national sources, new IMF data show that official reserves rose strongly during the year, despite the deterioration in the trade account. At end-2002, reserves stood at US$480m!an increase of US$360m (300%) on the end-2001 figure. The gain lifts reserves to a record high, and is part of a concerted drive by the central bank to establish a more robust foreign-exchange position (the average level of reserves over the previous decade was under US$100m) and enhance its ability to maintain currency stability. Even allowing for the rapid rise in import spending, the reserves have

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raised the central bank’s import cover to around two months!still below the international benchmark minimum level of around three months for a commodity-dependent economy, but nonetheless a marked improvement on previous levels.

Foreign debt remains high Sudan’s reserves, however, are dwarfed by the size of its external debt. According to new figures included in the recently released World Bank report, Global Development Finance, Sudan’s foreign debt stood at US$15.4bn at the end of 2001!a fall of some US$390m on the end-2000 figure, but still equivalent to 126% of estimated GDP. Of the total sum, around US$5.7bn is reported by the World Bank to constitute interest arrears, the majority of which relates to official bilateral and multilateral debt contracted before the current regime came to power in 1989. In addition, Sudan has principal arrears of over US$7bn, the equivalent of 80% of its medium- and long-term debt. Prospects for resolving this debt overhang are poor. Sudan reached an agreement with the IMF in 1997 over the repayment of its arrears to the organisation!a deal it has largely stuck to in the subsequent years, with World Bank data showing IMF repurchases as the only significant repayments made in 2001. However, the arrangement with the IMF has not opened the way to agreements with other creditors, despite Sudan’s attempts to open up such negotiations. Sudan’s arrears with the Fund have also undermined its prospects of gaining access to the heavily indebted poor country (HIPC) initiative, despite meeting!and indeed exceeding!most of the criteria for the programme. Its designation by the US as a “state sponsor of terrorism” also compromises its capacity to benefit from the HIPC. As a result of its heavy debt stock and poor servicing record, Sudan’s ability to tap new sources of borrowing to fund economic development programmes is severely limited. According World Bank figures, there were no new dis- bursements to Sudan in 2001, and the annual average since the current regime came to power in 1989 stands at just US$50m, compared with close to US$500m over the previous decade. The only significant sources of new debt that Sudan is likely to benefit from in the foreseeable future are the Gulf Arab development agencies, which have recently agreed to extend around US$750m to partially finance the construction of a new giant power generating plant on the Nile.

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