Transcript Slide 1

Responding to the fiscal crisis
Briefing to the NGO community in
Southern Sudan
1
Introduction and Outline
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Collapse of the global economy following subprime
mortgage crisis in US (Spain and UK)
Channels of transmission
Effect on GoSS revenue
Complications
Implications
GoSS response
Donors response
Challenges for NGO’s
Conclusion
Introduction and Outline
This ongoing financial and economic crisis could
potentially impact Southern Sudan through 4
channels:
 Reduced aid budgets
 Reduced trade and remittances through slowdown in
economic growth of developed countries
 A virtual drying up of inter bank lending and as a
result lending to business and individuals
 Decline in commodity prices: A drop in the price of
oil affecting GoSS’ revenue
Causes
Oil and Non-Oil Commodity Prices
(Jan. 2002 - Dec.2008)
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Oil Price - Left Scale
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Non-Oil Commodity Index Right Scale
250
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200
80
150
60
100
40
50
20
M
7
08
M
1
20
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M
7
20
07
M
1
20
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M
7
20
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M
1
20
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M
7
20
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M
1
20
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M
7
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M
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20
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20
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M
7
0
M
1
0
20
Non-oil commodity index
300
120
Oil price ($/Bbl)
350
Source: World Bank
Magnitude of the crisis
Source: World Bank
Oil revenue will be much lower than expected –
probably 40% less than is indicated in the 2009
budget – i.e. around SDG 2.2bn.
Further Complications
Even Less money
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Further arrears build up: Given the difficult economic situation in the
North, GoNU may not transfer entitled funds to GoSS. Arrears
$310mn. Borderfund $124 mn in arrears
Early 2009 revenues have been particularly low.
The revenue and conflict implications of the ICC indictment - EDF
funding
Higher expenditure
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Any further major GoSS military activity or a security crisis (like Abyei
in 2008; Malakal in 2009) would require substantial expenditure.
Food prices in the region are expected to rise given the poor harvests
in Kenya and Uganda.
Depreciation of the currency
Forex and Banking
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Lack of foreign currency in the South, as payments are made in
domestic currency
Potential collapse of banks - NCB
Implications for South
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Reduced economic activity and rising hardship:
Significant impact on economy in Southern Sudan.
 This will be via lower wages in the public sector.
 And fewer government contracts to business.
 GoSS spending will fall.
Conflict: Experience has shown that economic decline
is often a precursor to conflict in poor countries.
Southern Sudan is particularly at risk given the other
challenges.
 Inability to pay salaries, especially to armed forces.
 Increased North-South tensions (arrears).
 More widespread insecurity.
 Urban unrest.
Options
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Borrow money on the international money markets – this is
unlikely and in many ways is not a sensible option (due to poor
terms, un-sustainability, donor impact).
Draw down the reserves – GoSS has accumulated
approximately $360m in reserves, which it can draw upon to
cover short term ForEx, salary or other crises. But it should be
done sparingly due to the structural nature of the crisis and since
this will not provide a long term solution. It would certainly help if
GoNU could be encouraged to fully pay its $310m arrears to
GoSS.
Seek increased aid flows – Donors can help in some ways but
are unlikely to provide major new aid in the short term given the
existence of GoSS reserves, perceptions of uncontrolled military
expenditure and budget pressures at home.
Expenditure cuts – There are options to cut salaries, operating
and capital expenditures. This will need to be done sensitively,
but expenditure cuts will be a central part of any strategy.
Maximise non-oil sources of revenue – This would help at the
margins but the scope is limited in the short term due to capacity
constraints and the weak economic context. Longer term, such
efforts are vital.
Key Principles
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GoSS leadership. International experience shows that key
principles in selecting options are
 Conflict sensitivity – Prevention of conflict (NorthSouth, relating to the army or local insecurity).
 Minimising economic impact – GoSS should not make
cuts that will have important short or long term
impacts on the economy. Move away from import
heavy expenditure.
 Longer term economic growth and diversification of
the economy.
 Minimising social impact – Try to maintain the peace
dividend - expenditure on basic services(health
education, water).
 Ease of implementation – it is best to go for simple
(not complex) solutions.
A key issue issue is communication – across
government, formally and informally, and with the general
public.
GoSS’ response
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Try to get arrears from GoNU through political pressure
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Not use reserve … except in dire circumstances.
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Cut operating cost by 50%. Unlikely to be achieved
(GoSS always overspends on Operating costs) and will
likely effect basic service delivery
No Salary cuts apart from 5% for constitutional post
holders. Largely symbolic and does not yield significant
cost savings
PSR - Cleaning payrolls. Check contracts. Review
institutional needs. Impact longer term
Reduce state transfers to oil producing states by
10%
Place Nile Commercial Bank under joint control of
BoSS and MoFEP
Communication strategy.
And requests to donors
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Frontload MDTF contributions to meet MDTF
financing requirements in 2009. MDTF to fund
100% of planned projects in 2009-2010.
Increase funding to the CBTF to develop a
comprehensive payroll, including for the SPLA
Provide timely funding to support immediate
DDR for the first 35,000 combatants.
[Help fund the elections]
[Political support on the arrears issue with
GoNU]
Donors’ position
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Donors realize the extent of the crisis – the number
1 issue at the moment.
Donors can and will respond – differentiating
between short term and long term solutions – but
only after GoSS has formulated a coherent response
 Immediate TA (eg $1m to CBTF).
 Longer term, they are looking at ALL the options.
We are constrained by lack of normal IFI options
and G20 commitment unlikely to be accessible to
Southern Sudan.
Actually not many options actually help GoSS with
its (immediate) fiscal crisis.
Current GoSS plans are grossly insufficient.
Questions for NGO’s
1. Is funding of programmes at risk?
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A recent paper by the IMF (quoted by CGD) looked at
aid flows in four countries after a financial crisis. They
conclude that after the Nordic crisis of 1991, Norway's
aid fell 10%, Sweden's 17%, and Finland's 62%—from
peak to trough after adjusting for inflation.
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Are particular programmes vulnerable to
funding cuts?
Questions for NGO’s
2. No operating budget for key counterpart ministries
– reducing speed of implementation.
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There is a lot of anecdotal evidence that there is little
operating budget within ministries – this is likely to
hamper implementation of key programmes. Examples
JDT has come across include DDR commission, where
no salaries have been paid and which has not yet
received operating budget resulting in bottlenecks for
DDR of 35,000 SPLA “war heroes”; lack of operating
budget in ministry of education is hampering pay roll
development.
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What are the effects of this in ministries that you
working with?
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What can be done to mitigate the effects of this on
the speed of programme implementation?
Questions for NGO’s
3. Worsen security situation – reducing ability to
operate.
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Extensive research by Oxford Professor Paul Collier
shows that economic collapse often precedes increased
levels of conflict. Southern Sudan is not only facing
drastic economic contraction but the real prospect of non
payment of salaries to the armed forces. This will in all
likelihood result in increased levels of conflict, the recent
closure of borders is perhaps just an illustration what
can be expected going forward. This will, at the very
least, absorb a lot of attention and resources.
 How will this impact on your NGO to carry out its
functions?
Questions for NGO’s
4. Effects on humanitarian situation – increasing
demand.
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As a result of reduced economic activity, rising food
prices in the region and depreciating exchange rate
(increasing the cost of imported goods), collapse of
banks (BRAC might be dragged under by NCB) levels of
poverty are likely to raise the demand for essential
services and perhaps food aid.
 Is there vulnerability analysis?
 How can this be mitigated?
Summary Questions
Do your 2009 planning assumptions hold?
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Funding
Counterpart / GoSS operating funding
Security context /operating situation
Humanitarian needs
Any questions or feedback welcome