Southern Sudan: Oil's Temporary Riches?
Tuesday, 12 February 2013
In ‘Sizzling South Sudan’ for Foreign Affairs, Alex de Waal raises a couple of interesting points on Southern Sudan’s economic prospects. Ever since the country decided to turn off its oil production after disagreeing with Khartoum over transit fees, its revenues collapsed and its economy contracted drastically: ‘A World Bank director commented that the bank had never seen such a dramatic collapse. The IMF, meanwhile, estimates that South Sudan's GDP contracted by 55 percent in 2012.’ Even though the north has a more diversified economy, its revenue situation was severely affected, too.

Despite several attempts, talks between both countries continue to falter on security issues and territorial disputes. If there are no further delays – and this is far from a given  , then de Waal estimates that it will take four to six months to return to full production, which would reverse Southern Sudan’s drastic economic contraction into a similarly spectacular GDP growth of up to 70%. However, Khartoum is unwilling to lose Abyei, and rebel groups in border states South Kordofan and Blue Nile have built an alliance with other rebel groups that are fighting the Khartoum regime.

Investment Climate and Government Stability

The article emphasises how Southern Sudan depends almost entirely on oil revenues: the country’s ‘non-oil revenue was miniscule, mostly gained through business licenses and import taxes. The minister of finance's 2012 budget projected the government's monthly expenditure to be $250 million and its income to be $25 million. By September 2012, government revenue had reached only $12.6 million monthly’. This has implications for investors who already deal with considerable costs of doing business in the country: As the only remaining source of revenues other than aid, the government will pursue them even more relentlessly. And, with military spending amounting to 55% of expenditures before the cut off, austerity measures may well threaten the stability or even existence of the government.

Eastern Africa Infrastructure

Kenya has developed its Northern Corridor/LAPSSET plans on the assumption that the newly independent Southern Sudan would seek an export route for its oil through Kenya rather than the north, and would also use Kenya as an import route for other goods. This has provided backing for the plans to build a new port at Lamu island, effectively the centre piece of the entire LAPSSET plans. Even though Kenya and Southern Sudan have agreed in principle to build a pipeline from Southern Sudan to Kenya, the implementation of these plans has been held up by the persistent instability in Southern Sudan: mostly the shut down and ongoing dispute with Khartoum, but threats from Southern Sudanese rebel groups have also highlighted the risks to any investors in the pipeline. However, the growing signs that Kenya may have commercially viable oil reserves itself have bolstered the viability of the LAPSSET plans even if the problems in Southern Sudan persist.

Non-Oil Economy

Importantly, de Waal draws attention to the fact that the Southern Sudanese government needs to look beyond oil, and urgently: ‘Pessimists fear that South Sudan's oil production may have already passed its peak. According to industry estimates, the country's known reserves will last only another decade or so.’ This may sound like a reasonably long time frame, but the past few years since Southern Sudan first became semi-autonomous, and then independent, show how difficult it is to create a new state, and how to build an economy beyond subsistence agriculture. And this will be the starting point for a non-oil economy, de Waal argues: ‘the country's most valuable resources will be agricultural land and water. The country has already attracted large-scale agricultural investors, notably from the U.S. and Egypt. A company from the Emirates is promoting ecotourism. Since 2010, meanwhile, South Sudan has made long-term leases of more than five million hectares. Yet relatively little of that has yet been converted into productive enterprises for farming and biofuels.’

Part of the problem is that these sectors are less niche economies, as oil and other extractive industries can be. And the south remains a challenging investment environment with little infrastructure (in itself potentially a huge investment opportunity), very limited qualified human resources, and weak institutions. This partly explains why the main investors come from neighbouring countries: ‘In practice, most of the investment in South Sudan is still from neighboring countries, especially Kenya (for banking and transport), Uganda (for retail and telecoms), Ethiopia (for hotels), and Eritrea (for retail and hotels).’ They have been hosts to Southern Sudanese exiles and are close enough to have a better understanding of the conditions on the ground. However, there have also been reports of East African nationals who pursue business in Southern Sudan coming under pressure and being harassed.


Southern Sudan’s outlook is challenging: First, there are the unresolved disputes with the north that will determine the resumption of oil production. But beyond that, Southern Sudan is also a young country with a long history of violent conflict, weak institutions, and internal fragmentation along ethnic lines. Corruption is entrenched and has hindered the development of meritocratic institutions. Even if the stand off with Khartoum is resolved, this will hinder development. However, de Waal also recognises the resilience of Southern Sudan:

‘Last March, the World Bank made dire predictions about an economic crisis that would result from the oil shutdown, which would include rampant inflation, the collapse of essential services, and increasing food insecurity. Although inflation did surge to more than 60 percent, massive fuel shortages ground the country to a halt, and hundreds of thousands of people were left dependent on food aid, there was no total state collapse. One reason was aid from international donors, notably the United States, which went toward paying for essential government functions. Another was that the majority of the South's oil income had never previously reached the people but had been siphoned off and ferreted abroad by members of the ruling elite, including the army's 600 generals. For the average citizen, conditions were much the same.’




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