IMF says South Sudan must rein in monetary financing

South Sudan’s central bank provided the country’s government with funding equal to approximately 2.1% of GDP last year, and must resist pressure to lend more, the International Monetary Fund said.

“The country is in a serious economic crisis,” IMF staff said in a report, released on June 4. “A relapse into war in mid-2016 spread insecurity across the country and severely affected all economic activities and exacerbated the humanitarian crisis and food insecurity.”

The IMF’s executive board strongly endorsed the report. They called on the authorities to press on with “decisively implementing key reforms to restore macroeconomic stability, strengthen economic buffers, improve governance, and rebuild credibility with the international community”.

The report said the central bank’s financing of the government “was contained at 2.1% of GDP” in 2018, which it called a “modest” level. The report went on to note a number of factors that might well increase pressure on the central bank to increase its financing of the government. It said fiscal arrears “grew by an estimated 3.3% of GDP, and civil servants’ salaries were lagging by about three months”.

The Bank of South Sudan has been led by governor Dier Tong Ngor since May 2018, after his predecessor Othom Rago Ajak was fired by the country’s president, Salva Kiir. The president dismissed the previous governor, Kornelio Koriom Mayik, in January 2017.

There was a strong hint in the report that the central bank was resisting pressure to increase the institution’s financing of the government. “[IMF] staff supports the authorities’ zero-central bank financing policy, which is necessary to instil fiscal discipline,” it noted. The IMF staff said they would back efforts aimed at “providing incentives to increase non-oil revenue, improve oil revenue governance and strengthen budgetary controls”.

But the report noted that this would not be easy. South Sudan’s government is largely dependent on oil exports for revenue. The IMF report makes it clear that the revenue available from this source has been strongly decreased by the government spending some of it in advance.

It said that the coming fiscal year would see South Sudan’s government face major constraints caused by “the repayment of past oil advances”. The authorities would face serious problems if they did not receive new foreign aid, the report said.

The IMF mission estimated that the South Sudanese government’s “resource envelope” for the coming quarter of the financial year “will decline by about one-third compared to the average of the first three quarters”. Staff did, however, predict a rise in resources available to the government for the fiscal year 2019–20, of about two percentage points of GDP.

The staff report recommended that if the government did boost its resources, it could use the added resources on “peace-related spending” and to pay arrears in public employees’ salaries. But it cautioned that this would need the government to hold down other types of spending.

The report also noted a further slide in the value of South Sudan’s currency. The South Sudanese pound’s black market rate “more than doubled in 2017–18”, the IMF staff said. The report did note that the fall in the currency’s value on black markets “moderated somewhat in the first quarter of 2019.”

South Sudan faces multiple economic, political and humanitarian challenges. The country seceded from Sudan in 2011, but is now in its sixth year of civil war. South Sudan’s state institutions were extremely weak when the country became independent, after years of armed struggle against Sudan. Observers have said institutions have since been damaged even further by the country’s escalating economic and political crises.