Research Highlights Southern Sudan Macroeconomic and Business Environment Overview June 2011 AfrikaDit Research TABLE OF CONTENTS 1 EXECUTIVE SUMMARY 2 BACKGROUND 5 Economic and Growth Challenges 6 MACROECONOMIC SETTING 6 GDP Structure and Developments 7 Fiscal Developments and External Aid 12 Recent Inflation Developments and Monetary Policy 15 Exchange Rate and External Debt 18 BUSINESS ENVIRONMENT AND PRIVATE SECTOR OVERVIEW 20 Challenges facing the private sector 22 Financial Sector Review 26 FUTURE BUSINESS PROSPECTS AND OPPORTUNITIES 29 ANNEX 1: Doing Business in Juba 2011 Highlights 35 ANNEX 2: South Sudan--Major Macroeconomic and Business Indicators (2008-2010) 37 ANNEX 3: Sudan--Selected Macroeconomic Indicators (2007-2010) Helping bring the hopes and aspirations of the world’s youngest nation to fruition is Afrikadit’s singular mission. Southern Sudan: Macroeconomic and Business Environment Overview EXECUTIVE SUMMARY Background The Republic of South Sudan became the world’s newest nation on July 9, 2011 as it seceded from Sudan following a historic referendum on self-determination. Political stability in South Sudan has gradually been established in recent years though occasional setbacks remain a possibility given still unresolved issues with northern Sudan over oil rights, Nile waters, border regions, and external debts. South Sudan will be confronted with the wide array of challenges that face any new country, but the availability of significant oil resources, strong donor support, early signs of foreign investor interest (especially from the region), and good governance can all help to address and gradually overcome these challenges over time. Macroeconomic setting South Sudan’s formal economy is dominated by a single resource, namely oil, while a large portion of informal economic activity takes place through subsistence agriculture, livestock rearing, and small scale services. The overall size of the economy is very roughly estimated at $11 billion, which is about one-fourth that of North Sudan, about one-third that of Kenya (GDP: $32 billion) and Ethiopia (GDP: $31 billion), but notably larger than the regional economies of Rwanda (GDP: $6 billion), Malawi (GDP: $5 billion) or Burundi (GDP: $2 billion). South Sudan’s urban economy has expanded dramatically in recent years—from a very tiny base—particularly in the areas of hospitality services (hotels), building and construction, and finance. Current Business Environment and Private Sector Overview Though the formal private sector is still at a very nascent stage, and hampered by severe infrastructure and regulatory constraints, a fast-growing private business community is beginning to emerge. The government has, in its policy documents, very positively indicated that it intends to leave business and enterprise development to the private sector and is in the process of putting in place relevant laws, regulations, and institutions to make this possible. Partly reflecting such efforts, more than 7,333 businesses are presently registered in South Sudan according to government statistics, including several thousand foreign businesses in areas as varied as telecommunications, air transport, timber, oil production and distribution, farming, mining, building & road construction, importation of goods, road transportation, and hotels. Trade with neighboring countries—involving agricultural products such as maize, wheat, rice, and sugar—is growing fast. The financial industry is also expanding rapidly, with eight banks already in place alongside other financial institutions that include 5 insurance companies, 45 foreign exchange bureaus, and 49 Micro-finance outfits. Future Business Prospects and Opportunities Despite tough starting conditions, the Republic of South Sudan has the potential—given it’s very favorable natural resource base—to lay the basis for an open and fast-growing economy with a vibrant and gradually diversifying private sector. Besides business opportunities that will arise on account of the dominant oil sector, the economy offers huge potential growth in the following notable areas: agriculture (given excellent soil and climatic conditions); forestry, mining; infrastructure; and services such as hotels and banking. Capitalizing on these opportunities will, however, require a macroeconomic framework that is conducive to private sector growth and a business climate that is relatively transparent and predictable. Good political and economic governance on the part of South Sudan’s domestic leadership and external support from outsiders (including through large-scale technical assistance to build capacity in key economic institutions) will also make a critical difference. Assuming these are gradually put in place, there is a very wide and virtually unexploited range of business opportunities in South Sudan whether it is for the emerging pool of local entrepreneurs, for neighboring country investors ready to seize expansion opportunities, or for an even broader source of foreign investors—from the Middle East, Asia, Europe and beyond— that can contribute to and benefit from the transformation of the newly independent country. 1 Southern Sudan: Macroeconomic and Business Environment Overview BACKGROUND The Republic of South Sudan became United Nation’s 193rd member country on July 9th 2011, as it officially separated from Sudan following a historic referendum on self-determination that took place in January 2011. South Sudan is in its sixth year of peace following the 2005 Comprehensive Peace Agreement (CPA) that officially ended the 22-year North-South civil war1. The region has suffered from decades of underdevelopment, war, famine, drought and flood, resulting in the devastation of the region’s economic, political and social structures. According to the recent USAID engagement agenda for post-conflict economic recovery and growth in South Sudan (2009), only about 15 percent of the adult population is literate. Up to the mid-1990s, and even now, basic health and social services were provided mainly by a few non-governmental organizations (NGOs), faith-based organizations, and international humanitarian relief agencies. The limited physical infrastructure that existed in South Sudan was devastated during the conflict years. The official leadership of South Sudan, the Government of South Sudan (GoSS), emerged in 2005 at the signing of the Comprehensive Peace Agreement (CPA). Considering the short time frame since its establishment, the GoSS has made notable accomplishments in setting up basic institutions. Ministries and commissions are now operating, though with still limited capacity, and there are structures at central and state levels as well. These were all created nearly from scratch, including the need to build basic structures such as buildings and staff accommodations. These achievements were exceptionally difficult given the rudimentary nature of physical infrastructure (i.e., electricity, water, roads and communications). The Government of South Sudan (GoSS) has adopted a vision for equitable development and poverty eradication, but starts from a very low level in terms of institutional capacity and socio-economic development. Key education and health indicators, such as child and maternal mortality and primary enrolment, are among the worst in the world. Physical infrastructure is virtually non-existent, with no paved roads outside the main urban centers, and civil service and proper structures for service delivery is currently being created essentially from scratch. Some key socio-economic indicators of South Sudan are presented in Chart 1 below. The last six years under the 2005 peace deal—the Comprehensive Peace Agreement (CPA)—have yielded some institutionalization by South Sudan including growth in decision-making structures for the rich hydrocarbons sector (oil production). The GoSS already has an oil ministry in place and an embryonic national oil company Nilepet, mirroring to some extent the lines of responsibility in North Sudan. The Wealth Sharing Agreement provided a framework for resource allocation and sustainable decentralization, establishing comparative underdevelopment and war affected status as the key criteria for prioritization of public revenue allocations. The Agreement assigns a share of almost 50% oil and non-oil revenue that is collected in the South to GoSS, as well as the right to collect additional domestic revenue and external assistance, and the right to have its own banking system (and its regulator-- Bank of South Sudan-BoSS) within the framework of the Central Bank of Sudan (CBoS). With respect to the economy, this has primarily been based on subsistence agriculture and livestock rearing, with some local variations. According to WFP findings (2007) approximately 85% of households in South Sudan cultivate land and around 65% own cattle. While 53% of food consumed comes from own production, while market purchases stand at 32%--accounting for the next important food source. In some areas households rely on wage labor, and in others, consumption is supplemented by the gathering of wild foods, hunting and fishing. In rural areas, many of those who don’t cultivate are returnees without immediate access to land. 1The Comprehensive Peace Agreement (CPA) was signed in January 2005 between the Government of Sudan based in Khartoum and the Sudanese People’s Liberation Movement (SPLM) in the South, ending one of Africa’s longest civil wars. The CPA addressed some of the long-standing causes of North-South conflict by