Responding to the fiscal crisis Briefing to the NGO community in Southern Sudan

1. Responding to the fiscal crisis Briefing to the NGO community in Southern Sudan

2. Introduction and Outline • 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

3. 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

4. Causes Source: World Bank

5. 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.

6. Further Complications Even Less money 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 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 Lack of foreign currency in the South, as payments are made in domestic currency Potential collapse of banks - NCB

7. Implications for South • 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.

8. Options Borrow moneyon 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.

9. Key Principles • GoSS leadership. International experience shows that key principles in selecting options are • Conflict sensitivity– Prevention of conflict (North-South, 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.

10. GoSS’ response Try to get arrears from GoNU throughpolitical pressure Not use reserve … except in dire circumstances. 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.

11. And requests to donors 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]

12. Donors’ position • 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.

13. Questions for NGO’s 1. Is funding of programmes at risk? • 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. • Are particular programmes vulnerable to funding cuts?

14. Questions for NGO’s 2. No operating budget for key counterpart ministries – reducing speed of implementation. • 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. • What are the effects of this in ministries that you working with? • What can be done to mitigate the effects of this on the speed of programme implementation?

15. Questions for NGO’s 3. Worsen security situation – reducing ability to operate. • 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?

16. Questions for NGO’s 4. Effects on humanitarian situation – increasing demand. • 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?

17. Summary Questions Do your 2009 planning assumptions hold? Funding Counterpart / GoSS operating funding Security context /operating situation Humanitarian needs

18. Any questions or feedback welcome