Signal Risk on Sudan – A sigh of relief

PUBLISHED: Thu, 27 May 2021 10:07:06 GMT
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*This analysis was produced by the team at Signal Risk 

The International Monetary Fund (IMF) has recently claimed that it is making progress towards finalising a framework that will help mobilise the resources needed to cover its share of debt relief to Sudan.

The mid-May announcement followed a 26 March meeting between the World Bank and IMF, in which both institutions deemed Sudan eligible for the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative.

Sudan’s qualification for the HIPC initiative comes as it seeks relief for its approximately USD 56 billion external debt owed to international financial institutions, official bilateral creditors, and commercial creditors; 85 percent of this is in arrears. In terms of allocation, USD 2.8 billion is owed to the World Bank, IMF and African Development Bank (AfDB); USD 19 billion to countries in the Paris Club creditor collective; USD 21 billion to non-Paris Club members; and the balance to commercial creditors.

Outstanding requirements

Sudan’s pronounced eligibility for the HIPC is only the preliminary phase of the process. Following this, the country and its economic partners must work towards the actual beginning of the process (known as the Decision Point) and then towards the final Completion Point. Reaching the Decision Point requires the fulfilment of at least four conditions:

· A minimum six-month track record of satisfactory performance under the current IMF Staff-Monitored Programme

· Clearance of arrears with multilateral creditors or an agreement on a strategy to clear them

· An agreement on the reforms that are required to reach the Completion Point

· The provision of debt relief assurances by creditors at Completion Point

Once Sudan has reached the Completion Point, it would qualify for debt relief under the HIPC, and for debt relief under the Multilateral Debt Relief Initiative (MDRI) from the World Bank’s International Development Association (IDA) and the African Development Fund (ADF), together with beyond-HIPC assistance from the IMF. Paris Club creditors are also expected to provide further beyond-HIPC assistance at the Completion Point.

So far, so good

Sudan and its creditors have made significant progress towards reaching the Decision Point since March.

Raving review

The IMF completed its first review of Sudan’s Staff-Monitored Program (SMP) in early March. The SMP was initialised in September 2020, with the objective of supporting the government’s programme of reforms aimed at stabilising the economy, strengthening social protection, boosting the private sector, and strengthening governance. In this regard, the review concluded that “Sudanese authorities have made tangible progress toward establishing a strong track record of policy and reform implementation”. Substantial reforms undertaken to date include exchange rate unification, removal of fuel subsidies, various tax measures taken as part of the 2021 budget, and an increase in electricity tariffs.

Bridging the gap

Sudan’s creditors and the international community have also responded to Sudan’s need for the clearance of arrears as necessitated by the HIPC.

First, on 23 March, the World Bank announced that it had cleared Sudan’s debt following a USD 1.15 billion bridge loan from the United States government. Then, Sudanese officials stated on 05 May that the country cleared its arrears with the African Development Bank (AfDB) through a USD 425 million bridge loan – provided by the United Kingdom, Sweden and Ireland.

Most recently, French president Emmanuel Macron announced on 17 May that IMF member states have agreed to finance a USD 1.5 billion bridge loan for Sudan to clear its arrears with the IMF. Macron’s

announcement was made during the Paris Conference for Supporting Sudan’s Transitional Period and the Funding African Economies Summit, held between 17 and 18 May. The French president also expressed that his government would clear USD 5 billion owed to France by Sudan. Shortly after the summit concluded, Sudan’s ministry of foreign affairs also announced that both Germany and Italy had agreed to clear the combined USD 1.5 billion owed to them by Sudan.

Some creditors were not so dovish. During the summit, Kuwait – Sudan’s largest creditor at USD 9.8 billion – said it would support debt “resolution” discussions, while Saudi Arabia – Sudan’s third-largest creditor at USD 4.6 billion – expressed that it would be open to reaching a broad agreement.

The Signal

Sudan is expected to reach the so-called Decision Point for debt relief by the end of June. This much was forecast by the International Monetary Fund (IMF) in its initial press release regarding Sudan’s eligibility for the Enhanced Heavily Indebted Poor Country (HIPC) Initiative in March. This timeline appears achievable given that Sudan has already met the majority of conditions outlined by the IMF. Meanwhile, negotiations between the government of Prime Minister Abdallah Hamdok and key outstanding creditors, such as Kuwait and Saudi Arabia, are set to commence in the coming weeks. While this will unlikely result in complete debt clearance, it could see frameworks developed to reach this point over the longer term – an alternative to immediate debt clearance. While it is uncertain when Sudan will reach the Completion Point, the debt arears clearing process with the World Bank, IMF and African Development Bank (AfDB) will nonetheless unlock various financing opportunities, particularly for developmental projects and budget support. Indeed, following the clearance of arrears with the World Bank and AfDB, Sudan was approved to receive a USD 207 million grant from the AfDB, USD 215 million in direct budget support, and USD 420 million for a family support programme from the World Bank. The finalisation of the bridge loan with the IMF could see further such disbursements over the medium term.

This support should assist Sudan in achieving its forecast economic rebound in 2021. After experiencing a GDP contraction of 3.6 percent in 2020 – on the back of recessionary conditions in 2018/2019 and the externalities of the coronavirus pandemic – the IMF has projected that Sudan will register a growth rate of 0.4 percent in 2021. This outlook is predicated on increased agriculture, mining and oil exports – amid a global commodity rally – and increased domestic consumption. Equally beneficial is the anticipated uptick in foreign direct investment following the United States’ 14 December 2020 decision to remove Sudan from the State Sponsors of Terrorism list. This, in addition to HIPC-related processes, should serve to bolster investor sentiment amid improving political stability. While Sudan continues to battle with crippling inflation levels (363 percent in April, year-on-year), the prioritisation of public spending and tighter monetary policies in the coming year should reduce inflation to 129.7 percent in 2021 and then to 57.5 percent by 2022, as per the AfDB.

The clearing of debt should complement the political transition processes. Prime Minister Hamdok announced in November 2020 that the country’s fiscal challenges are impeding the government’s ability to finalise the Transitional Legislative Assembly – which is set to prelude an election in 2022 or 2023 – and implement the political, security, social and economic tenets of the October 2020 peace accord. As per Hamdok, such costs amount to roughly USD 7 billion. The clearing of arrears by creditors – such as the Paris Club, World Bank, IMF and AfDB – and associated servicing costs should free up fiscal space for the transitional government to expedite these processes. Accordingly, the formation of the Transitional Legislative Assembly (with all tenets complete) may be accomplished within the final quarter of 2021 or the first quarter of 2022.

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