Sudan Country Economic Memorandum: Realizing the Potential ...pubdocs.worldbank.org/en/654851474822813187/Sudan-CEM-2016... · Sudan Country Economic Memorandum: Realizing the Potential

Sudan Country Economic Memorandum:

Realizing the Potential For Diversified

Development

Public Launch

Khartoum

25 September 2016

Michael Geiger

Outline

2

What is structural transformation and where does Sudan

stand?

What kind of growth and diversification methodology could

be applied to Sudan

Key findings

Key recommendations

What is structural transformation and

where does Sudan stand?

3

4

What is structural change? A shift of economic activities and

employment from low to high productivity activities

Agriculture

Manufacturing

Agriculture

Services

Within sectors

Firm Firm

Informal Formal

Pro

ce

ss

Traditional Non-Traditional

East Asian Model

(Korea, China,

Hong Kong,

Vietnam)

India, Bangladesh,

Mozambique,

Rwanda

Most countries

Exam

ple

Low productivity

activities

Highproductivity

activities

Structural Change

Go

al

Source: Own visualization, based on McMillian et al. (2014): Globalization, Structural Change, and Productivity Growth, with and Update on Africa;

Page (2012) - Can Africa Industrialize?; Zeufack et al. (2015): Structural Transformation and Productivity Growth in Africa: Uganda in the 2000s;

Ghani & O’Connell (2014): Can Service Be a Growth Escalator in Low Income Countries?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Agriculture Industry Manufacturing Services

5

But Sudan still stands at the beginning of structural transform-

ation

Sudan’s sectoral decomposition of GDP, 1980-2013

Source: World Bank, World Development Indicators (2015).

Services

Agriculture

Manufacturing

Industry, incl.

extractives

50%

8%

14%

28%

53%

7%

7%

33%

6

At the same time others have advanced in structural

transformation

Selected countries’ sectoral decomposition of GDP, 1980-2013

Source: World Bank, World Development Indicators (2015).

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sudan (1990) Sudan (2013) Kenya (1980) Kenya (2013) Vietnam (1980)Vietnam (2013)

Agriculture Industry Manufacturing Services

7

Growth decomposition of production factors in Sudan, 1989-2012

-10.0

-5.0

0.0

5.0

10.0

15.0

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Gro

wth

ra

te

(pe

rce

nta

ge

po

ints

)

Total Factor Productivity Human Capital per Labor Labor

Capital Stock Real GDP Growth

1. Labor and TFP Growth2. Physical capital dominates

– labor/TFP very low

3. Negative

TFP growthAvg. growth 5.1% Avg. growth 6.7% Avg. growth

1.5%

The long-term historical growth performance underscores the

lack of lasting structural change in Sudan

Source: World Bank, World Development Indicators (2014). Note: TFP is a measure of total output growth relative to the growth in traditionally

measured inputs of labor and capital (in other words: Output = TFP + Capital input + Labor input).

What kind of growth and diversification

methodology could be applied to Sudan?

8

9

There are two approaches to diversify an economy: direct and

indirectG

oal

Structural Transformation / Diversification

Ap

pro

ach ‘Direct Approach’ ‘Indirect Approach’

Interventions in economic sectorsFoundation for any economic activity to

flourish

Exam

ple

s

Export promotion Tax holidays

Fertilizer subsidiesTargeted import

substitution

Macroeconomic

policies

Human capital and

infrastructure

Business enabling

environment

Source: Own visualization, based on World Bank (2014): Diversified Development.

10

Agriculture will be the key sector in the economy until 2030 and

any diversification effort needs to recognize the sector

0

50

100

150

200

250

300

Agriculture Gold Petroleum Manufacturing

Other industry Private Services Public Services

Agriculture

Gold

Petroleum

CEM Simulation: Aggregated sector GDP (Index; 2012=100)

Source: World Bank staff own calculations using the MAMS Sudan Model.

46.5

38.4

29.4

34.2

37.4

35.8

31.4

20

22

24

26

28

30

32

34

36

38

40

42

44

46

48

2012 Base Crop+ TofT+ Aid+ Debt- Normal

11

Development of the agriculture sector is also particularly poverty

reducing

Simulating an

increase in

agriculture

productivity by

2 percent every

year

CEM Simulation: Poverty Rate in 2012 and Various Scenarios


Notes: TofT+ simulates increased terms of trade; Aid+ simulates additional inflows of aid; Debt- simulates debt relief; Normal simulates the

combined effects of normalization of relations with the rest of the world.

Key Findings

12

Key finding 1:

No lasting structural change

14

Manufacturing provides an almost negligible number of jobs in

Sudan

Employment by sector, 2009

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

Rural men Urban men Rural women Urban women

Agriculture Other industry Manufacturing Services

Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009).

Key finding 2:

High and volatile inflation, linked to

budget financing

16

Sudan has a history of high, volatile inflation, which further

increased after 2011

Average annual inflation in Sudan, 1999-2014

-10%

0%

10%

20%

30%

40%

50%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: World Bank staff own compilation, based on data from Central Bank of Sudan, and IMF..

Food inflation

Core inflation

Overall inflationAverage overall inflation (1980-2012)

Key finding 3:

Weak resource revenue

management, budget deficits and

low savings

18

Oil revenues contributed more than 50 per-cent to total fiscal

revenues at its peak during the oil years, but this changed in 2011

Fiscal revenues and composition (SDG mn)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2008 2009 2010 2011 2012 2013

Tax revenues Oil revenues Other non-tax, non-oil revenues

Source: World Bank staff own compilation, based on data from Central Bank of Sudan; IMF; and World Bank WDI.

19

Sudan’s budget has been in deficit since 1991 and only

occasionally balanced during the oil-driven investment boom

Overall budget deficit, 1991-2013

-25

-20

-15

-10

-5

0

5

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Pe

rce

nt o

f G

DP

Budget surplus

Budget deficit

Source: World Bank (2015 forthcoming): Sudan Country Economic Memorandum.

20

Financing the deficit is one of the key challenges now, but

options for foreign financing are limited given Sudan’s debt crisis

Domestic savings matter for Sudan’s economic transition and savings are low

-40

-30

-20

-10

0

10

20

30

199119941997 20002003 20062009 2012-40

-30

-20

-10

0

10

20

30

1991 1994 1997 2000 2003 2006 2009 2012

Gross publicsavings

Gross privatesavings

National Savings in Sudan, 1991-2014 Private and Public Savings, 1991-2014

Source: World Bank staff own compilation, based on data from Central Bank of Sudan; IMF; and World Bank WDI.

Key finding 4:

Long history of overvalued real

exchange rate

22

Sudan’s Real Exchange Rate (RER) has been greatly overvalued

over most of the past 40 years

Sudan’s RER misalignment, 1970-2011

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

Misalignment

Undervaluation above red line

Overvaluation below

red line

Source: World Bank staff own calculations, based on data from PENN World Tables.

Note: The real exchange rate is the nominal exchange rate adjusted for the effects of inflation. The RER measures real purchasing power of the

Sudanese Pound; this equals international competitiveness of a country’s exports.

NB: Across all countries

and time, each 10

percent RER

undervaluation

increases exports by 0.6

and GDP growth by 0.9

percentage points

23

RER changes have a particularly large effect on agriculture

exports in Sudan

CEM Simulation: Real exchange rate and export quantity (index base = 100)

100

110

120

130

140

150

160

100 105 110 115 120 125

Exp

ort

qu

an

tity

in

de

x

RER index (SDG/Foreign currency)

Agriculture Mining Manufacturing Private services Total


24

Undervaluation is a distinct feature of export success in other

countries: China

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Undervaluation Export growth


Overvaluation below red line

Undervaluation and export growth, China

Misalignment


-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Undervaluation Export growth

25

Undervaluation also observable in India since the mid-1990s


Overvaluation below red line

Undervaluation and export growth, India

Misalignment


Key finding 5:

Extremely low productivity in

agriculture

27

The story of agriculture in Sudan is by and large a story of low

productivity: wheat yields are indicative of the problem

Source: World Bank staff own calculations, based on data from Central Bank of Sudan; the Ministry of Agriculture and Irrigation; and selected other

country authorities.

Note: Pavlovda and Kzylorda are places in Kazakhstan where climate is very extreme.

Sudan’s wheat yields in perspective (kg/feddan), selected countries

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2012 2013

28

Low fertilizer usage is a key issue behind low productivity; centr-

alized marketing and choice of grains are additional factors

Source: World Bank (2015): Sudan Country Economic Memorandum.

Some facts about low fertilizer usage

• In 2009 the average fertilizer use per hectare of cropland was 7.3 kg.

• Ethiopia, Sudan's poorer neighbor, used 17 kg.

• Sudan used as much as 80 kg/ha in the mid-1970s, and 70 kg/ha in the 1980s.

• Reasons for low usage today are unclear.

• But it seems that the decline in agriculture is associated to fertilizer usage.

Additional factors

• Strong policy push for wheat and sugar production, which are foreign crops to

Sudan. Seasonality and water availability impair productivity.

• Centralized marketing of agriculture products through state agencies leads to

low prices for farmers and low productivity. Gum Arabic and Cotton benefitted

much from relaxations since 2009.

Key finding 6:

Very concentrated export markets

30

Sudan’s export basket is very concentrated – especially for it has

coastal access and proximity to multiple large markets

Herfindahl-Hirschman Index at the products level, Sudan and selected countries

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Average 2000-2006 Average2007-2012

Egypt, Arab Rep. Ethiopia Ghana Indonesia Kenya Morocco Mongolia Uganda Sudan

Source: World Bank staff own calculations, based on data from UN COMTRADE.

Note: The HH index is calculated as the sum of the squared market shares for all products.

Ma

xim

um

co

nce

ntr

ation

Ma

xim

um

div

ers

ific

atio

n

31

Export concentration is much lower when looking at non-oil

exports, but has increased in 2012 with the emergence of gold

Export concentration in terms of products, excluding oil

5%8%

51%

8%10%

54%

0

20

40

60

80

100

120

140

160

0%

10%

20%

30%

40%

50%

60%

2006 2011 2012

Share of Top 3 Products Share of Top 5 Products Number of Products


32

Yet, Sudan’s export concentration is also evident in the high

share of its top destinations in overall exports

Sudan’s export concentration in terms of destination markets

90%

88%

94%93%

85%

86%

87%

88%

89%

90%

91%

92%

93%

94%

2006 2011

Share of Top 3 Markets Share of Top 5 Markets


Main Recommendations

33

Main recommendation #1:

Remove exchange restrictions to

unify official and black-market rate

35

The official and black-market rates show an increasing spread

confirming the overvaluation of the Sudanese pound

Sudan's official and market exchange rate (SDG/USD), 2009-2014

0

1

2

3

4

5

6

7

8

9

10

Ja

n-0

9

Ap

r-0

9

Ju

l-0

9

Oct-

09

Ja

n-1

0

Ap

r-1

0

Ju

l-1

0

Oct-

10

Ja

n-1

1

Ap

r-1

1

Ju

l-1

1

Oct-

11

Ja

n-1

2

Ap

r-1

2

Ju

l-1

2

Oct-

12

Ja

n-1

3

Ap

r-1

3

Ju

l-1

3

Oct-

13

Ja

n-1

4

Ap

r-1

4

Ju

l-1

4

Oct-

14

Official Exchange Rate Market Exchange Rate

Source: World Bank staff own compilation, based on data from Central Bank of Sudan.

Principle Considerations

36

Big Bang Gradual

Definition:

Large, one-off devaluation overnight.

Definition:

Incremental devaluations over a period.

Economic disruptions: Sudden change

in relative prices, cheaper exports and

more expensive imports.

Value of foreign debt: Sharp

devaluation to raise value of foreign

currency denominated debt in domestic

currency.

Inflation: Sudden changes in import

prices to lead to spikes in inflation.

Ch

all

en

ge

s

If further devaluation is expected:

Possible ‘hoarding’ of foreign exchange

thereby creating a black market and

worsening foreign exchange shortages.

Speculative outflows could increase

devaluation pressure.

If perceived as a one-off event, no further

expectation of devaluation.

Ad

va

nta

ge

Incremental changes in relative prices:

Important if high levels of external debt;

and/or

Large reliance on imports

How to unify the exchange rates?

Big Bang and Gradual devaluations

Summary of Empirical findings

37

Big Bang Gradual

Gradual devaluation preferred as it is associated with significant

output increases and improvements in the trade balance

GDP

Investment

Consumption

Trade balance

Manufacturing

Logistics

Central bank ind.

Poor vs. rich

country

Small vs. big

country

Negative

Negative

Negative Negative

POSITIVE POSITIVE (less)

No impact

No impact

No impact

Poor countries do better

Small countries do better

VariableEffect

t0 t+1 t+2

GDP

Investment

Consumption

Trade balance

Manufacturing

Logistics

Central bank ind.

Poor vs. rich

country

Small vs. big

country

No impact POSITIVE

No impact

No impact

POSITIVE

No impact

No impact

No impact

Poor/rich does not matter

Small/big does not matter

VariableEffect

t0 t+1 t+2

Data and definitions:

Country level panel data for 221 Countries and 233 Episodes between 1960 and 2015.

Big Bang: More than 20% one-off nominal devaluation --- Gradual: Between 5 and 20% devaluation for at least 3 consecutive years.

Poor country: 98 --- Rich country: 123

Small country: 115 --- Rich country: 106

10 most successful gradual devaluations with initial (first-year) devaluation

Most Successful gradual devaluations started with a larger initial

devaluation in year one followed by several smaller ones

Year Country

First-year

initial nominal

devaluation

Initial RER

overvaluation

Cumulative

devaluation

1981 Bhutan 9.6% 61.1% 45.3%

2009 Sierra Leone 12.7% 29.2% 37.8%

1996 Cabo Verde 7.2% 70.5% 44.3%

1971 Korea 13.0% -17.3% 36.0%

1988 Bhutan 7.1% 11.5% 45.3%

1989 Solomon Islands 9.6% 15.8% 42.6%

1987 Chile 12.9% 14.7% 59.3%

1980 Mauritius 19.7% 36.3% 89.5%

1981 Norway 15.0% 4.2% 55.4%

1982 Nepal 7.1% 37.3% 54.3%

Average 11.4% 26.3% 49.7%Data and definitions:

Country level panel data for 221 Countries and 233 Episodes between 1960 and 2015.

Cumulative devaluation for gradual devaluation period; length varies across countries

Keep core inflation low through lower budget deficits and less reliance on

domestic deficit finance

Real exchange rate will continue to appreciate as long as inflation is being

driven by deficit financing and excess liquidity

More resilient investment financing through higher domestic savings

Facilitate domestic savings through low inflation and positive real interest

rates

Limit use of financial sector interventions for sector promotion

Development banks/agriculture lending. Instead, increase access to finance

for all sectors and businesses.

39

Exchange rate adjustment needs to be accompanied by

complementary macro-policies to ensure success


Main recommendation 2:

Increase agriculture productivity

through a set of key (policy) changes

Agriculture policy changes

• Rethink centralized marketing of agriculture products and learn from gum

Arabic and cotton experience

• Gradually decrease subsidy on domestic wheat production (capitalizing on

the recent reform to abolish the preferential wheat exchange rate)

• Diversify wheat imports to lower the wheat import bill (next slide)

Agriculture investments

• Promote fertilizer usage

• Establish modern state-level grain storage

• Prepare for rehabilitation of the Gezira scheme

Pilot the move from agriculture to agro-processing

• Pilot gum Arabic spray-drying in combination with increasing the value of

raw material

• Apply lessons from pilot for other successful raw exports such as sesame,

cotton, and livestock.

41

Increase agriculture productivity through a set of key (policy)

changes


42

Sudan’s wheat import price is relatively high and there is scope to

lower the wheat import bill by rationalizing the sources

Sudan’s wheat import price in perspective (US$/ton)


372

414397

445

0

50

100

150

200

250

300

350

400

450

500

2010/2011 2011/2012 2012/2013 2013/2014

Sudan Import Price All US Grades US (Kansas City) US (Texas Gulf) Argentina

Agriculture policy changes

• Rethink centralized marketing of agriculture products and learn from gum

Arabic and cotton experience

• Gradually decrease subsidy on domestic wheat production (capitalizing on

the recent reform to abolish the preferential wheat exchange rate)

• Diversify wheat imports to lower the wheat import bill (next slide)

Agriculture investments

• Promote fertilizer usage

• Establish modern state-level grain storage

• Prepare for rehabilitation of the Gezira scheme

Pilot the move from agriculture to agro-processing

• Pilot gum Arabic spray-drying in combination with increasing the value of

raw material

• Apply lessons from pilot for other successful raw exports such as sesame,

cotton, and livestock (next slide)

43

Increase agriculture productivity through a set of key (policy)

changes (ctd).


44

Focusing on Sudanese exports with larger world market shares

could be a good way to pilot the move towards agro-processing

Sudanese products with larger world market shares, 2013

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%Sheep: 35%

Gum Arabic:

30%

Sheep

meat:

4%

Sesame

seeds: 15%

Waste and scrap of primary cells: 4%



Improve the management of natural

resource rents

46

Establish a more realistic medium-term outlook on oil production

Projected domestic crude oil production, bpd

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

Base High LowSource: Ministry of Petroleum (2013); and Wood Mackenzie (2013).

Note: The High estimate equals the Government’s estimate.

47

More broadly on natural resources, a strategic outlook is required

to efficiently utilize the remaining resource wealth

Contribution of oil and minerals to Sudan’s economy: still important, but less dominant



Address broader business

constraints

49

Address broader business constraints to create space for

structural transformation

Regulate economic activity better: Sudan’s ranking in selected Doing Business Indicators

0 25 50 75 100 125 150 175

Ease of Doing Business

Starting a Business

Registering Property

Getting Credit

Protecting Investors

Paying Taxes

Trading Across Borders

Enforcing Contracts

DB2014 (out of 189 economies) DB2008 (out of 178 economies)

Source: World Bank Doing Business Report, 2008 and 2014.


Build human capital to support

structural change

51

Build human capital to support skills-intensive modern services

and reduce spatial disparities – increase education levels

Education levels by gender and location

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

Rural Men Urban Men Rural Women Urban Women

No Education At Most Primary At Most Secondary Post-Secondary


52

Labor force non-participation is far higher for women than men;

many educated women never enter the labor market

Employment and labor force participation by cohort


Rural men Urban men

Rural women Urban women

Em

plo

yed

Em

plo

ye

d

No

n-

pa

rtic

ipati

on

No

n-

part

icip

ati

on

Summary of findings and

recommendations

53

54

Six key findings lead to five interlinked recommendations to

support diversification in Sudan

54

Summary of key findings and main recommendations

1) No lasting structural change

2) High and volatile inflation

3) Weak resource revenue

management, budget deficits and

low savings

4) Long history of overvalued real

exchange rate

5) Extremely low productivity in

agriculture

6) Highly concentrated export

markets

Findings

Remove exchange restrictions to

unify official and black-market rate

and enhance policy consistency

Increase agriculture productivity

through a set of key (policy)

changes

Improve the management of natural

resource rents

Address broader business

environment constraints

Build human capital to support

structural change

Recommendations

Documents

Sudan Country Economic Memorandum: Realizing the Potential ...pubdocs.worldbank.org/en/654851474822813187/Sudan-CEM-2016... · Sudan Country Economic Memorandum: Realizing the Potential