Sudan: Historic debt relief unlikely to resolve Sudan’s liquidity situation in the short term
On 29 June, the IMF and the World Bank’s International Development Association announced that Sudan has fulfilled the requirements to begin the debt relief process under the enhanced HIPC initiative. The HIPC initiative was launched in 1996 to provide debt relief to the world's poorest and most heavily indebted countries. To date, Sudan is the 38th country to reach this milestone but it is by far the largest HIPC operation with a total debt relief of more than three times that of the second-largest HIPC case. If completed, this process will enable Sudan to clear a large part of its debt. The IMF estimates Sudan’s public external debt at 163% of GDP as of the end of 2020, a clearly unsustainable level for a low-income country. If the process is completed successfully, the external public debt would decline to around USD 6 billion (14% of GDP), which is expected to be around June 2024. In order to reach the completion point, the country has to put in place reforms to tackle, amongst other things, fiscal sustainability (total public debt was at 263% of GDP at the end of 2020) and exchange rate flexibility. A new 39-month IMF programme is being set up in order to achieve these goals. Other positive news was the announcement on 16 July that the Paris Club will provide an interim debt relief to Sudan. Once Sudan reaches the completion point (which is expected in June 2024), it will receive the remainder of the debt reduction. In the meantime, the Paris Club announced that no payments are expected from Sudan until at least 1 December 2024 given its very limited capacity of payment and provided that it continues to satisfactorily implement an IMF-supported programme.
The debt relief – though historic – is unlikely to solve Sudan’s economic difficulties and structural weaknesses . Indeed, despite the fact that trade and investment will likely increase, major economic imbalances remain such as large current account deficits (expected at -11% of GDP in 2021), shortages of basic goods, high unemployment (officially standing at 27% at the end of 2020) and hyperinflation of 379% (year-on-year in May 2021). More importantly, liquidity is extremely low. The risk of foreign exchange reserve shortages is very high in the case of Sudan, which could expose businesses operating in the country to the transfer risk. The main reason of the liquidity squeeze is the split with South Sudan in 2011, leading to a loss of 75% of its oil reserves, which previously accounted for 95% of its current account revenues. Also, US sanctions have hurt export revenues as Sudan was on the US list of states sponsors of terrorism. That being said, Sudan has been removed from the list in December 2020, which is gradually improving the current account revenues. Lastly, the recent move in February 2021 to a market-determined exchange rate is expected to boost export revenues and investments, though a re-emergence of multiple-currency practices is possible.
Next to the economic challenges, political tensions will also remain high in Sudan. The population will remain wary of any attempts by the military to seize power. Indeed, the current government was only formed after long-running protests and international pressure against the ruling military, which came to office when President Bashir was overthrown by a military coup in April 2019. A power-sharing deal between the military and civilians was signed in August 2019 and a largely civilian government has been appointed since then. Moreover, social tensions might also increase in the coming months. Retail gasoline and most fuel subsidies were removed in December 2020 and electricity tariffs were increased, while there was also a sharp exchange rate devaluation required by the IMF to enter the HIPC initiative. These reforms and further reforms requested to reach the HIPC completion point might worsen the hardship of the population in the short term, triggering protests and political instability.
Credendo is in category 7/7 for both the MLT and the ST political risk rating. Credendo does not envisage upgrading Sudan in the near future as long as the short-term liquidity situation remains precarious.
Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com