December 2009 Public Disclosure Authorized Sudan The Road Toward Sustainable and Broad-Based Growth Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized THE WORLD BANK Poverty Reduction and Economic Management Unit | Africa Region Poverty Reduction and Economic Management SUDAN THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH December 2009 Poverty Reduction and Economic Management Unit Africa Region Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without written authorization from the World Bank. TABLE OF CONTENTS ABBREVIATION AND ACRONYMS ............................................................................................................ ix ACKNOWLEDGMENTS ................................................................................................................................ xi SUMMARY: SUSTAINING RAPID GROWTH IS IMPORTANT, BUT BROADBASED GROWTH IS AN IMPERATIVE...................................................................................................................... 1 A. Oil-led Growth Has Changed the Sudanese Economy, But Will It Last? .................................................................1 Economic Threats from Oil Dependency and External Volatility ............................................................................3 Political Threats from Conflicts and Unbalanced Development ..............................................................................5 B. Toward a New Growth Vision ................................................................................................................................6 Ensuring Macroeconomic Stability and Effective Fiscal Management .....................................................................7 Broadening Private Sector-led Growth ...................................................................................................................8 Recovery and Growth in the Agriculture Sector ....................................................................................................10 Developing a Comprehensive Growth Strategy for the South ...............................................................................11 Complementing Technocratic Reforms with Good Governance ...........................................................................12 15 .................................................. ﻣﻠﺨﺺ: اﺳﺘﺪاﻣﺔ اﻟﻨﻤﻮ اﻟﴪﻳﻊ ﻫﺎﻣﺔ، وﻟﻜﻦ اﻟﻨﻤﻮ واﺳﻊ اﻟﻘﺎﻋﺪة أﻣﺮ ﴐوري CHAPTER 1. MACRO AND FISCAL MANAGEMENT IN A VOLATILE WORLD ECONOMY .......... 25 A. Sudan’s Oil Driven Boom and Bust Cycle .............................................................................................................25 B. Managing External Imbalance Pressures................................................................................................................26 C. Symptoms of Resource Curse? ..............................................................................................................................29 D. Effective Fiscal Management .................................................................................................................................30 The Need to Counter Pro-cyclical, Volatile and Unsustainable Fiscal Policy .........................................................31 Toward a More Reliable and Sustainable Fiscal Framework ..................................................................................34 CHAPTER 2. BROADENING PRIVATE SECTORLED GROWTH ..................................................................................................41 A. The Importance of the Investment Climate ..........................................................................................................41 B. From Investment to Broad–Based Growth ............................................................................................................42 Investment Is Creating Pockets of Growth but Also Driving Up Costs .................................................................42 Low Competitiveness Has Contributed to Poor Economic Integration ................................................................44 Characteristics of the Enterprise Sector ................................................................................................................45 Regional Variations in Performance ......................................................................................................................45 Regional Differences in Firm Size, Capital Intensity, and Skills ............................................................................47 Manager Perceptions of Constraints .....................................................................................................................48 Poor Market Integration .......................................................................................................................................49 Administrative Barriers .........................................................................................................................................49 Formalizing the Informal Sector ...........................................................................................................................50 Private Sector Development in Conflict-Affected Regions: Southern and Western Sudan .....................................51 Summary and Agenda for Policy Reform ..............................................................................................................53 iv SUDAN — THE ROAD TOWARD SUSTAINABLE AND BROAD-BASED GROWTH CHAPTER 3. EFFECTIVE MANAGEMENT OF THE OIL SECTOR ...................................................... 57 A. Overview of the Sudanese Oil Sector ....................................................................................................................57 B. Institutional Structure ..........................................................................................................................................62 C. The Petroleum Sector and the CPA .......................................................................................................................63 D. Key Policy Issues ...................................................................................................................................................64 Exploration and Production .................................................................................................................................64 Domestic Consumption .......................................................................................................................................66 Institutional Structure ..........................................................................................................................................66 CHAPTER 4. RECOVERY AND GROWTH IN THE AGRICULTURE SECTOR .............................................................69 A. Introduction .........................................................................................................................................................69 B. Sub-Sector Performance and Cross-Cutting Issues ................................................................................................71 Crops: Irrigated, Semi-Mechanized Rainfed, and Traditional Rainfed Systems .....................................................71 Forestry ................................................................................................................................................................76 Livestock ..............................................................................................................................................................79 Key Agro-Industries: Sugar, Leather, and Vegetable Oil ........................................................................................80 Impacts of Productivity and Marketing Costs on Export Competitiveness of Agriculture .....................................83 Cross-cutting Issues: Agricultural Credit, Land Use, and Research and Extension ................................................85 C. Policies, Investments and Actions .........................................................................................................................87 Strategy for Competitiveness and Poverty Reduction ............................................................................................88 Short Term Actions for Northern Sudan ..............................................................................................................88 Medium- to Long-Term Actions ..........................................................................................................................91 Government Partnerships with the Private Sector .................................................................................................95 Sustainable Natural Resource Management ..........................................................................................................96 CHAPTER 5. MAKING SERVICES COMPETITIVE: THE CATALYST OF NONOIL GROWTH ..... 97 A. Introduction .........................................................................................................................................................97 B. Finance .................................................................................................................................................................98