Can South Sudan Survive Another Year of Civil War?

By Chap Phan

February 21. 2017 (SSNA) — Many people, including this author, have expressed concerns many times about Juba’s regime inability to bring peace and show leadership in ending civil war. The regime has chosen to fight against the people with no victory in sight.  War has spread to the wider country since the second outbreak at the presidential palace in July 2016. It is not only Upper Nile region that has raging war, but Eastern and Central Equatorial states as well, and part of Western Bahr al Ghazal.

As reported by many sources, human rights violations have been recorded on a daily basis.  The regime deployed tactics that overwhelmingly target civilians all around south Sudan including U.N protective sites. The number of internally displaced people have surpasses 1.5 million with additional 2 million people internally displaced (UN Report, 2017).  The daily human rights abuses by the regime, the displacement of the citizens into refugee camps, the kidnapping of the opposition leaders, the silencing of the press, and the killing of journalists are clear evidence of power monopoly and true color of repressive regime.

Tri-factor   

South Sudan is destroying itself day by day; many people are convinced that South Sudan will bankrupt unless this senseless war come to an end. The war has put South Sudan economy in repetitive crisis, interlocking problems that required long term strategy. Running large budget deficits, depleting foreign reserves and printing money to pay for civil war will always lead to economic crisis. Large budget deficits increase cost of borrowing and put country at high risk in market place, which make borrowing difficult. Depleting foreign reserves devalue local currency, which make it expensive for import items. And for South Sudan which depends on imported items it means less buying power for South Sudanese.  Printing money creates hyperinflation and hyperinflation undermines purchasing power.  In the long run high inflation discourages capital formation and distorts investment in financial sector, it undermine long term economic growth. These kinds of policies ultimately fails because they are not sustainable, they weaken government and the economy.

For example, shortages of foreign currency and accelerating inflation rate forced South Sudanese government to abandon the peg against the US dollar in December 2015. Since then both inflation and exchange rate have continues to accelerates.  Refer to figure 1.1 and figure 2.1.  The pound has deeply depreciated against US dollar by over 90 percent since the crisis begun.  South Sudan inflation peaked at 835 percent in October driven mostly by rises in food prices.  All of this means that average South Sudanese wealth have eroded and poverty rate have increased. Many South Sudanese are poorer than they were in 2013 with debt in their back.  According to the data from International Monetary fund (IMF), real income has declined by over 70 percent since 2011.

Figure 1.1

Sources: Data from Bloomberg, domestic authorities and the World Bank

 

 

Figure 2.1

Sources: Data from Bloomberg, domestic authorities and the World Bank. 

South Sudan is mortgaged out

The war has ruined the economy, not only in the near term, but also for decades to come.  According to the data from International Monetary fund (IMF), debt to gross domestic product (GDP) ratios increased to 64 percent in 2015. By the end of the fiscal year, June 2017, South Sudan debt to GDP ratio is projected to top 91 percent, and it is projected to be 118 percent by the end of 2017 calendar year. Refer to figure 3.1.

The government relied on expensive loans to cover expenditures most of which went to military spending.  Financing war through debt is poor strategy that has long term consequences.  High levels of government debt undermine future economic growth.  High levels of government debt mean more government revenues must go toward paying interest on the debt.  That means fewer revenues for social projects and investment that would grow the economy.  The risk of South Sudan defaulting on its debt service obligation increases as long as war rage on. High national debt is grave national security issue; it has social, economic and political consequences.

Figure 3.1

Sources: Data form Bloomberg, domestic authorities and the World Bank

2017 debt to GDP ratio is projection.  It assumes that no changes in term of revenues and oil production while reflecting increase in interest rate and drop in the GDP. Rising US interest rate means that global investors will likely demand even higher returns for investment in South Sudan given elevated political risk. South Sudan can work with IMF and the World Bank to boost confidence and have access to discounted financing options, but only if the country genuinely ends war and takes strong economic reforms.

Sources of Revenues

South Sudan government main sources of revenues are derives from oil; about 95 percent of government revenues. Mismanagement and conflict have cut oil production from 350,000 barrels a day in 2011 to 130,000 barrels a day in 2016 (Reuters 2017). Decline in the world crude oil prices and high fixed transit cost for using North Sudan pipelines means that South Sudan is getting less than 10 dollar per barrel on average and some of the money goes toward paying interest on the existing loans.  Because of the conflict Juba lost most of financial aid its receive from development partners and friendly nations, its lost an estimates 100 million in remittances from South Sudanese overseas as well.  Juba regime has largely covers its operational expenses through borrowing on oil future revenues.

South Sudan needs inclusive peace to prevail

South Sudan should do all possible to bring inclusive peace. The regime needs to end war and come up with strategy to prevent conflict and foster political inclusion. Peaceful resolution would immediately increase economic activities and increase oil production while opening up country for foreign direct investment that is desperately needed.   This would allow South Sudan to focus on equitable development where priorities are given to agriculture productivity and non-oil activities.  First Priorities would include restoring depleted reserve and focusing public spending away from military spending toward social sectors and infrastructure project. For example, South Sudan has high potential in agriculture and forestry which are highly underdeveloped. This would minimize incentive for government to print money and give government a breathing room to balance its budget. It would help dampen inflation in the long run and gives government enough leverage in economic reform agenda.

Summary

South Sudan civil war has cost countless lives and the regime has mortgaged the country out. International community needs to do more to pressures the government to foster inclusive peace. They can apply appropriate economic pressure to the government to accept inclusive peace process that respect basic human right. International community should ensure that oil revenues are not used to fuel the conflict. An inclusive peace is the only path that will save South Sudan from impending economic collapse. Peace that addresses the underpinning of the conflict and that provide progress toward freedom and opportunity.

Chap Phan is Business Analyst; he holds master degree in Economics. You can follow Chap Phan in social media: [email protected]. Tweeter @pandeit1, Blog at Mannaath.com and facebook; Peter pan.

References

African development Bank Report, 2016

Bloomberg News, https://www.bloomberg.com/quote/SSP:CUR

IMF World Economic Outlook, April 2016

Trandingeconomics, http://www.tradingeconomics.com/south-sudan/inflation

UN Report, 2017

World Bank, 2017, http://www.worldbank.org/en/country/southsudan