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The Twin Challenge of Sudan’s External Debt Problem

& Resource Gap

Presentation:

Dr. Mohamed ElHassan Mekkawi

Sudan Second ConsortiumSudan Second Consortium

19 – 20 March - Khartoum19 – 20 March - Khartoum

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Structure of the Presentation

• Chronological Background.

• Debt Management.

• Scope of the External debt.

• Debt burden indicators.

• HIPCs Initiative.

• The roadmap for resolving debt problem.

• The Challenges.

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Chronological Background

Sudan resorted to external borrowing in the past to bridge the external gap triggered mainly by quadrupling of oil prices during the 1970s and to finance the then, huge investment program.

• Historical Manifestation:

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Debt Accumulation:•The period before 1990s:

Economic mismanagement and limited scope, depth and coverage of macroeconomic policies and instruments.Failure to address foreign and domestic financial gap up to 1996.Lack of clear objectives and coherent debt management policies have led into a debt trap.

•The period of 1990s and beyond:Failure to secure concessional funding have engendered recourse to non-concessional loans from few sources.Most of the external borrowing contracted during 1990-2005 financed priority projects in infrastructure and essential services.Failure to service debt due to lack of resources.

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Frustrates economic management, macro- economic stability and growth. Undermines peace process and produce hardship. Impends poverty reduction, MDGs, social cohesion and economic development. Compels the government to contract non-concessional loans to honor peace obligations.

•The Consequences of Debt Over-hang:

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Objectives of Debt Strategy:

• The overarching objective is to exit from debt trap.• Achieving debt sustainability.

• Maintaining macroeconomic stability and growth.• Normalization of relations with the traditional creditors.

• Ensuring financing needs and payments obligations are met at the lowest cost and with minimum degree of risk.

• Ensuring transparency and accountability through disclosure of contracted loans and grants.

Debt Management

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Debt Management cont.

• Consultation with BWIs for any settlement of debt.

• Avoidance of preferential treatment to any of its bilateral creditors.

• Contracting concessional loans and repaying the loans as scheduled

• Updating debt strategy of 2005.

• Upgrading institutions managing debt and building human capacities.

• Drawing annual ceiling for non-concessional loans.• Resolving political issues protracting debt relief.

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•Debt management in Sudan is supervised by three high level committees mandated to perform development of policy framework, guidelines and directives, in addition to operational aspects:

Committee for the Organization of External Borrowing Operations (COEBO).

High Committee for Supervision of External Borrowing (HCSEB).

The Technical Committee (TC).

Debt Management Structure:

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• Directorate of Foreign Financial Cooperation at MOFNE.

• External Debt Unit at the CBOS.

• Directorate of Budget at MOFNE.

** Sharpening coordination among such administrations for possible unification in future

Management Structure cont.

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Magnitude of the Debt Problem as of Dec. 31th. 2005

Creditors DOD ContractualInterest

PenaltyInterest

Total

Multilaterals 3086 1094 281 4461Paris Club Bilateral 2525 1568 4437 8530Non-Paris Club Bilateral

4257 1232 4175 9664

Commercial Banks 1770 1735 - 3505Foreign Suppliers 846 - - 846Total 12484 5629 8893 27006

Scope of External Debt:

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Composition of debt & Arrears by Creditors category

Non-Paris Club35%

Com.13%

Foeign3%

Mult.17%

Paris club32%

Scope of the External debt cont.

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The Top 5 Creditors:

1. Multilaterals – In Billion US$

IMF 1.5

IDA 1.3

AMF 0.465

AFESD 0.396

ADF 0.265

28.9%

33.3%

5.9%

8.8%

18.3%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

IMF IDA AMF AFESD ADF

Scope of the External debt cont.

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The Top 5 Creditors Cont.

2. Non-Paris Club In Billion US$

Kuwait 3.9

SAMA 2.4

CHINA 1.0

IRAN 0.385

LIBYA 0.409

24.8%

40.4%

4.2%4.0%

10.3%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

Kuwait SAMA CHINA IRAN LIBYA

Scope of the External debt cont.

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The Top 5 Creditors Cont.

3.Paris Club In Billion US$

USA 1.5

Austria 1.4

UK 1.1

Italy 0.926

France 0.889

16.4%17.6%

10.4%10.9%

12.9%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

USA Austria UK Italy France

Scope of the External debt cont.

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Total External Debt in Arrearsas of Dec. 31th. 2005

CreditorsPrincipa

l

Contractual

Interest

Penalty Interest

Total

Multilaterals 1271 1094 281 2646

Paris Club Bilateral 2200 1568 4437 8205

Non-Paris Club Bilateral

2690 1232 4175 8097

Commercial Banks 1770 1735 - 3505

Foreign Suppliers 846 - - 846

Total 8777 5629 8893 23299

Scope of the External debt cont.

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Total Debt in Arrears Cont.

Contractual Interest24.0%

Principal38.2%

Penalty Interest37.8%

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External Debt Burden Indicators:

IndicatorsStandard

Thresholds2003 2004 2005

NPV of debt/ Exp. 150 1186 914 707

NPV of debt/ Rev. 250 950 670 510

Revenues/GDP 15 14 21 22

Export/GDP 30 16 20 21

Debt sustainability

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Net Cash Flow on External Debt

Years Disbursements

Repayments

Net Flows

2001 90.6 90.7 -0.1

2002 29.5 162 -132.5

2003 84.8 266.2 -181.4

2004 190.3 331.8 -141.5

2005 326.1 293.7 32.4

Debt Burden cont.

(in million US$)

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Debt Burden cont.

Net Cash Flow

-300

-200

-100

0

100

200

300

400

2000 2001 2002 2003 2004 2005

Years

Mil

lio

n U

S$ Disbursements

Repayments

Net Flows

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HIPCs Initiative

The initiative is intended to deal comprehensively with the overall external debt burden of eligible countries, reducing it to a sustainable level within a reasonable period of time. A country can be considered to achieve external debt sustainability if it is expected to be able to meet its current and future external debt service obligation in full, without recourse to debt relief, rescheduling of debts, or the accumulation of arrears, and without compromising growth.

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HIPCs Initiative cont.

•General Conditions of the Initiative:•Implementation of “A Support Programme” for economic reforms with IMF.•Attaining good governance and lasting peace.•Ensuring pro-poor policies including preparation of full-fledged PRSP.•Normalizing relations with International Financial Institutions.

•Sudan’s Current Situation:•Sudan has a good track record with IMF under the SMP since 1997 but no support programme of economic reforms with IMF and IDA. However, •CPA&DPA were singed, however consultation are still underway.•The PRSP is under preparation.

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Debt Policy Orientation:

Resolving political issues through diplomatic and action-oriented peace building.Avoiding individual debt relief with creditors.Improving relations with creditors and donors.Setting-up a borrowing strategy that encompasses areas of priority for the government, rules and regulations on contracting new loans.

The Roadmap for Resolving Debt Problem

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Debt Policy Orientation cont.Preparation of revolving borrowing programme taking into consideration the priorities of the government and sustainability of external debt.

Encouragement of foreign direct investment (FDI).

Encourage and support the utilization of the BOT system and new financing modes.

Encourage local investments to access to private windows of the International and Regional Financial Institutions and all that empower private operators.

Finalize Poverty Reduction Strategy Paper and streamline it with MDGs targets.

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Due to the complexity of Sudan’s external indebtedness and magnitude of the arrears, there is a very strong case to form an informal “Sudan Supporting Group” of key donors.•Stage I: Clearing arrears to the multilateral creditors.

As the Articles of Association (charter) of multilateral creditors (IMF, WB, …..Etc.) prohibit writing-off of outstanding claims, hence, the amount of debt owed to them should be paid.•International Monetary Fund (IMF): IMF arrears amount to US$ 1.5 billion. It could be cleared through:

•Bridge loan from bilateral creditors.•Grant resources from bilateral contributors. •Poverty Reduction Growth Facility (PRGF)•Rights Accumulation Programme (RAP).

The roadmap:

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The roadmap for resolving debt problem cont.

The World Bank (IDA): WB Arrears are US$ 355 million to be cleared through the following options:

• Grants to be provided by bilateral creditors.

• Bridge loans from commercial banks.

• Bridge loans from bilateral creditors/donors.

• Utilization of unused IDA funds allocated for Sudan under IDA 13/14 replenishments.

• Combination of above.

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The roadmap for resolving debt problem cont.

•African Development Bank Group (AfDB): African Development Bank arrears stand at US$ 151 million to be cleared as follows:

•Arrears reduction through PCC mechanism (the ADF should be requested to utilize the unused ADF allocation for under ADFIX/X replenishments in meeting a portion of Sudan’s contribution).

•Arrears to be added to the falling due and rescheduled for a period of 20 years with five years grace period.

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•European Investment Bank:

EIB arrears stand at US$ 113 million to be cleared as follows: Utilization of Cotono resources allocated to Sudan.

The roadmap for resolving debt problem cont.

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The roadmap for resolving debt problem

Stage II: •In this stage, Paris Club bilateral creditors provide traditional debt relief (Naples Terms; stock reduction of 67 percent and rescheduling the remaining balance for 23 years with 6 years grace period at market interest). A comparable treatment is expected from non-Paris club bilateral and commercial creditors on debt owed to them.

•After the adoption of the traditional debt relief, the debt sustainability indicators will be computed. If the Traditional Debt Relief is not sufficient for Sudan’s overall debt to become sustainable at the decision point. Hence, further assistance is required under enhanced HIPCs Initiative.

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The roadmap cont.

Stage III:

•In This stage Paris-club creditors provide flow rescheduling on Cologne Terms (including up to 90 percent NPV reduction). Other Non-Paris Club creditors and commercial creditors would be expected to offer at least comparable terms for the flow of rescheduling. On the other hand Multilateral Institutions provide financial assistance in the form of grants and concessional loans. External debt sustainability is expected to be achieved at this stage.

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•The Multilateral Debt Relief Initiative:

The G8 proposal for debt cancellation.

IMF, IDA and AfDB to cancel 100 percent of their claims to HIPCs countries upon reaching the completion point.

Eligible countries are required to have implemented satisfactory macroeconomic performance and good governance.

The cost of debt relief will be financed by bilateral contribution based on agreed burden sharing.

IMF debt relief will be funded through a combination of appropriations from its own resources and bilateral contributions..

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Challenges facing Sudan: (A) External Debt Problem

• Commitments from bilateral and other creditors to avail huge resources needed to clear debt arrears

• Large sums of money would remain to be paid by the GNU ensuing debt relief.

• Commitment of international community towards rehabilitation and development programme during the transitional period of peace restoration.

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Challenges facing Sudan’s external debt Problem cont.

• Adherence to the new borrowing strategy to avoid perpetuating debt problem.

• Enhancing fiscal efforts to minimize high dependency on oil export/revenues.

• Developing non-oil exports.

• Maintaining economic and political stability.

• Honoring obligations arising out of CPA, DPA and EPA.

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Macro-economic framework 2006 2007 2008 2009 2010

GDP in millions USD

Real GDP Growth Rate

36030

13.0

42339

10.3

47923

9.3

52913

8.7

85558

8.6

Inflation (Period Avg.) 7.3 5.0 4.0 3.0 3.0

Gross Inv. (in millions USD)*

As % of GDP

9079.6

25.3

11389.2

26.9

13274.7

27.7

14604.0

27.6

15810.7

27.0

Gross National Saving (in millions USD)

As % of GDP

7242.0

20.1

9695.6

22.9

11597.4

24.4

12381.6

23.4

13761.1

23.5

Resource Gap : (1873.6) (1693.6) (1581.5) (2222.4) (2049.6)

Current Account Balance (As % of GDP) -5.2 -4.0 -3.3 -4.2 -3.5

Financing of the Gap: -747.4 -592.5 -518.9 -528.8 -

Fiscal Balance (in millions USD)

As % of GDP

-324.3

-0.9

-169.4

-0.4

-95.8

-0.2

-105.8

-0.2

0.0

0.0

Net International Reserves (in millions USD)

As % of GDP

1116.9

3.1

1481.9

3.5

2060.7

4.3

2434.0

4.6

2986.5

5.1

Capital and Financial Account (millions USD)

% of GDP

3454.0

12.4

5639.5

13.3

4421.0

9.2

4296.0

8.1

4752.0

8.1

ODA - - - - -

Non-ODA (net average 5 years) -423.1 -423.1 -423.1 -423.1 -423.1

(2585.0) (2286.1) (2100.4) (2751.3) (2472.7)

)B (Foreign Sector Resource Gap: The Following Table depicts a Resource Gap of around US$ 2 billion a year on average: