Financing The Revival Of Sudan’s Troubled Transition

By International Crisis Group

Mounting economic turbulence is rocking Sudan’s delicate political transition. Without urgent donor assistance to provide economic relief to a suffering population, public support for the cabinet’s reform agenda could collapse. Any failure in the civilian-military government could have tragic consequences for Sudan and the region.

What’s new? Sudan’s hybrid civilian-military transitional government is being buffeted by economic headwinds that undermine public confidence in the civilian-led cabinet and risk provoking renewed popular anger. A donor conference scheduled for 25 June has raised hopes that Sudan’s international friends will step up to help.

Why does it matter? Without urgent donor assistance to provide economic relief to a suffering population, public support for the cabinet’s reform agenda could collapse. If popular frustrations at living conditions grow, the ensuing protests could destabilise a civilian-military government that barely hangs together, with possibly disastrous consequences for Sudan and the region.

What should be done? Donors should finance a cash transfer program to offset price rises following the cabinet’s decision to lift fuel subsidies, which have burdened Sudan’s economy and been used for corrupt purposes. The cabinet should introduce new controls to safeguard these funds and begin outreach to build popular support for such changes.

I. Overview
Mounting economic turbulence is rocking Sudan’s delicate political transition. Citizens yearning for an upturn in living conditions, following the popular revolt and military coup that toppled Omar al-Bashir in April 2019, may find their frustrations reignited. The installation of a civilian-military power-sharing government in August raised hopes of a dividend, but today’s civilian cabinet led by Prime Minister Abdalla Hamdok is struggling with a near bankrupt treasury. Meanwhile, his military partners in government retain the balance of real power, clinging to sources of money for which there is no accounting to Sudan’s people. Unless Hamdok finds funds to boost social spending, he could see a resumption of destabilising protests. A 25 June donor conference is an opportunity to mobilise financial support, allowing Hamdok to ease hardships facing Sudan’s most vulnerable and preserve the peace surrounding the cohabitation between the civilian cabinet and the generals. Sudan’s friends should open their purses to keep this transition on track as the country heads toward elections in 2022.

Sudan's state budget is deep in the red, amid crippling shortages of basic commodities, extended power outages and soaring inflation.

  • Sudan’s peaceful, diverse and sustained protest movement stirred public imaginations across Africa and beyond with its months-long campaign that precipitated the military’s ouster of the long-ruling strongman Bashir. That said, the transitional government that was formed with Hamdok, an economist, leading a civilian cabinet that shares power with military generals, has yet to provide relief to a population whose frustrations over a tanking economy spurred the protests that began in 2018 and continue sporadically. The state budget is deep in the red, amid crippling shortages of basic commodities, extended power outages and soaring inflation. Many sectors of the economy remain captured by elements of the previous regime and some within the current security forces. Much hoped-for donor assistance has not arrived. Despite progress toward rescission, Sudan’s U.S. State Sponsor of Terrorism designation remains in place. COVID-19 has heaped further restrictions on economic activity.

    Hamdok and Finance Minister Ibrahim al-Badawi face a difficult balancing act. They have sought to cut down on wasteful government spending that is bleeding the treasury dry. In so doing, however, they have been careful not to squeeze military expenditures too abruptly, lest they provoke a backlash. Instead, they have begun to reduce the country’s immense subsidy bill covering imported fuel, which lately has drained hundreds of millions of dollars from the treasury every month. A cut in fuel subsidies carries the added benefit of undercutting Bashir-era elites who had positioned themselves as designated importers and thus could take advantage of preferential foreign currency exchange rates available for fuel purchases while overstating the amount they imported, thereby profiting handsomely. Addressing fuel subsidies is thus a crucial step allowing Hamdok to save the treasury from bankruptcy and repair the broken economy.

    In taking these steps, however, the prime minister will need donors to step up, notably to help cushion the impact of lifting fuel subsidies, a policy that is already inflicting higher prices on a hungry street that could protest again if frustrations boil over. In turn, his donor partners will look for signs that he has the political support to keep reforms on track. While subsidy cuts were initially resisted by the Forces for Freedom and Change (FFC), the civilian protest movement that swept the prime minister into office, some in the movement are beginning to reassess. Even so, Hamdok will need to do more to shore up support from those in the FFC and public who worry that the subsidy removal will deliver more economic woe.

    A donor conference co-hosted by the EU, Germany, the UN and Sudan, and to be held virtually from Berlin on 25 June, affords the country’s partners a significant opportunity to support Hamdok as he keeps the economy afloat and co-pilots the country toward the 2022 elections envisaged by the 2019 agreement between the FFC and the generals. As Crisis Group has previously advocated, Sudan’s Western, Gulf, multilateral and regional partners should contribute funds to a multi-donor trust fund, or another appropriate mechanism, that can support a cash transfer program aimed at assisting the country’s most vulnerable people. Sudan’s donors should not abandon the country at this critical moment. Any further slide in the country’s economic fortunes will hurt the Hamdok administration’s standing with the public, possibly triggering street protests that could imperil stability. As donors ready themselves to boost their support, Hamdok and Badawi should redouble the cabinet’s efforts to convince the Sudanese people, starting with their political base, that their reforms are helping put the country on the right path.

    Why Sudan's fuel subsidies don't work. See Apendix A for more on how Crisis Group calculated the predicted effects of subsidy removal.

    II. Economic Woes and the Threat to the Transition
    Many of Sudan’s woes stem from decades of corruption and mismanagement under the government of Omar al-Bashir. Under his rule, Sudan’s economy was characterised by the capture of state resources by the ruling elites and corporate allies amid widespread government profligacy. Government-run companies or those owned by regime and military officials, their families and business allies dominated Sudan’s economy, entrenching monopolies and distorting the market. Despite accruing billions of dollars in oil revenues, Bashir’s government failed to invest in Sudan’s mostly agrarian and pastoralist economy, instead pouring money into the bloated security sector and bureaucracy and in the process racking up an international debt burden that is today valued at roughly $60 billion. With the secession of South Sudan in 2011, Khartoum lost a vital source of oil revenue, paving the way for an inflationary spiral and economic crunch that led to the 2018 mass urban protests that snowballed a year later into a revolution.

    Even with Bashir gone, life for ordinary Sudanese has grown only tougher over the past year, with citizens facing rampant inflation, long queues for basic commodities and major power outages. The ongoing U.S. listing of Sudan in the category of State Sponsors of Terrorism (SST) acts as one of several brakes on foreign direct investment into Sudan. Without its lift, Sudan is precluded from debt relief normally available through the Highly Indebted Poor Country (HIPC) initiative led by the International Monetary Fund (IMF) and World Bank. It is also blocked from almost all sources of new borrowing from these and other international financial institutions. When it comes to tackling COVID-19, the persistence of debt arrears and Sudan’s existing debt burden mean that Khartoum cannot even get access to an IMF, World Bank and African Development Bank package offered to Africa’s poorest countries to combat the pandemic.

    The ongoing U.S. listing of Sudan in the category of State Sponsors of Terrorism (SST) acts as one of several brakes on foreign direct investment into Sudan.

    • COVID-19 is meanwhile crippling the economy and worsening the plight of many Sudanese. Lockdown measures, including a ban on mass gatherings and closure of the international airport, markets, schools and universities, have badly hurt the millions of Sudanese who work in the informal sector and rely on daily subsistence wages. On 7 May, Finance Minister Ibrahim al-Badawi stated that government revenue was down 37 per cent from previous projections, tax revenue was 21 per cent less than projected and donor support was 36 per cent lower compared to amounts anticipated in the December 2019 budget. According to the IMF, Sudan’s economy will shrink by 7 per cent in 2020.

      In addition, government-backed subsidies on fuel, wheat and electricity, which by some estimates have absorbed more than 40 per cent of the national budget in recent years, have brought the national treasury to the breaking point. Unable to borrow money from international financial markets to cover budget deficits, the government had previously chosen to print money, which in turn precipitated rampant inflation. Subsidies, a relic of the Bashir era, kept some commodity prices down for consumers, but also perversely led to periodic shortages of key items, as many actors in the supply chain smuggled subsidised goods out of the country for sale at higher market prices in neighbouring countries. The end result was to undermine the policy’s stated aim of delivering cheap and available goods to Sudan’s masses.

      Ultimately, this system has benefitted politically connected business interests. Through their political contacts, they have secured licences to import commodities, profiting handsomely from preferential foreign exchange rates pegged in their favour while overstating the amount of fuel imported to benefit from the twenty-fold gap between the fuel import exchange rate and the black-market rate. So long as this system prevails, donors likely will be reluctant to come to Sudan’s aid. As one Western diplomat told Crisis Group, “Nobody wants to pour money into a context where the economy is so rigged in favour of those who manage these imports and subsequently benefit vastly from the inefficient system”.

      Several actors are waiting in the wings to take advantage of instability, including elements of the military.

      • These subsidies used to be affordable, given the vast income derived from oil, but with the loss of oil fields to South Sudan at the time of secession, they have become an existential threat to the economy. Hamdok accordingly undertook efforts to remove them, although doing so has proven divisive. The debate has pitted the finance ministry against the FFC, who were behind the protests that led to Bashir’s ouster and who oppose price rises that will hit Sudan’s consumers. With the onset of COVID-19 and a concurrent global recession that further eroded government revenues, however, many in the FFC now realise that the cost of subsidies to the treasury has become unsustainable and threatens an economic crisis that could cause even greater hardship than price rises themselves.In the past two months, authorities have lifted fuel subsidies – which account for over 80 per cent of all subsidy spending – with pump prices in Khartoum now nearing world prices. Other subsidies remain in place.

        The decision could nonetheless trigger unrest. The fuel subsidy lift has resulted in increased transport costs, which in turn has led to higher prices for basic goods in the market. Popular frustration may follow, potentially straining the already fragile alliance between the FFC and the cabinet. Unless the government can offset the higher costs to consumers, Hamdok’s popularity could erode, both on the street and among some of his FFC supporters. With many Sudanese losing patience with deteriorating economic conditions since the transitional government took office, limited and sporadic protests have already taken place in Khartoum and other cities in the last three months.

        Should those protests grow, they could threaten Hamdok. Several actors are waiting in the wings to take advantage of instability, including elements of the military, whose various components are locked in a power struggle among themselves. Simmering rivalry between the Sudanese Armed Forces led by Lieutenant General Abdel Fattah al-Burhan – chairman of the Sovereign Council and nominal head of the transition – and the Rapid Support Forces (RSF) units loyal to their leader Mohammed Hamdan Dagolo (known as Hemedti), Sudan’s most powerful figure, could boil over into the open if enough officers conclude that Hamdok has become expendable. Islamists tied to Bashir’s former National Congress Party likewise appear to be re-emerging into the political sphere. Meanwhile, Hamdok’s fragile position was already exposed on 9 March, when assassins tried to kill him as his convoy wound through the streets of Khartoum, underscoring just how rocky the transition has become.

        III. The Politics of Donor Intentions
        Mobilising assistance for Sudan is complicated by the divergent interests of international stakeholders, including those who make up the influential Friends of Sudan support group. Among the group’s members, there is broad agreement on the importance of the transitional government to future peace and stability in Sudan and the region. But members diverge over which actors in the transitional government – from among the civilian cabinet or the military – they consider reliable partners, as well as over their respective visions for the country’s future.

        For example, Egypt, the United Arab Emirates (UAE) and Saudi Arabia have demonstrated a preference for supporting Sudan’s military since Bashir’s exit. This preference reflects their greater familiarity with and confidence in the military, which they hope will continue to act as a bulwark against political Islam in the Horn of Africa, even within the current configuration of the transitional government. The African Union, EU and U.S., by contrast, from early on have voiced support for the civilian protest movement and were quick to condemn the security forces’ June 2019 massacre of civilians in Khartoum, while pushing for a civilian-led cabinet in the transitional government formed later that year.

        Rivalry between the UAE and Egypt, on one hand, and Qatar, on the other, also may be having ripple effects. In particular, the recent battlefield successes of Libya’s UN-recognised government in Tripoli, which is backed by Qatar – and, far more directly, Turkey – may well sharpen desire in Abu Dhabi and Cairo to deepen relationships with security actors in Khartoum, as their Libyan allies are in retreat. There also appear to be divisions between the UAE and Egypt: the former reportedly is backing Hemedti and the RSF, whereas Cairo favours Burhan of the regular army. Qatar, for its part, has remained largely sidelined in Sudan since Bashir’s ouster, but likely would be more inclined to support Islamist allies in order to loosen the military’s hold on power.

        If overseas political support to Sudan is fragmented, so, too, is the international financial architecture on which the country needs to draw for assistance. The U.S. SST designation, placed on Sudan in 1993 during Bashir’s rule, remains in place as a major obstacle to normalisation of international financial relations with Sudan. Washington has made its lifting partly subject to ongoing U.S. legal proceedings related to Sudan’s role in al-Qaeda attacks in Dar es Salaam and Nairobi in 1998. Until the designation is removed, private businesses seeking to invest in Sudan will remain reluctant to do so and international banks will not reconnect to the country’s financial system either. The SST designation and Sudan’s $3 billion in arrears and existing debt burden also preclude the World Bank and IMF from lending, although the EU has been actively exploring ways to circumvent this restriction. Saudi Arabia and the UAE, by contrast, have provided $750 million to Sudan since the fall of Bashir, although most of this money was channelled into the hands of the RSF and other military actors before Hamdok took office.

        Hamdok’s power may be limited when compared to Sudan’s generals, but his decision to cut subsidies shows that he is serious about reforming the country’s rigged economy and rescuing it from imminent fiscal collapse, even it if means going up against constituencies close to the military. In addition to tackling the removal of fuel subsidies, his government is targeting assets stolen by Bashir and his cronies for recovery. Still, any expectation that Hamdok can sustain a reformist agenda without international financial support is unrealistic. If Gulf and Western donors wish to shore up Sudan’s stability, they will need to come together and provide assistance so that the government can address the needs of an increasingly impatient public.

        IV. Financing the Revival of Sudan’s Transition

        Western donors have remained cautious in their approach since Bashir fell, while Gulf powers have slowed their financial support to Sudan since Hamdok assumed office. Inaction is likely to weaken Hamdok and his cabinet and embolden military and other actors who may wish to capitalise on the transitional government’s woes and potential collapse.

        The 25 June Sudan Partnership Conference is thus a significant opportunity for the Friends of Sudan and other partners to shore up the country’s fragile transition by funding a social safety net, especially as citizens begin to face higher costs resulting from subsidy removal. In bolstering the civilian cabinet’s position with the general public, donors would also be laying the foundations for longer-term economic recovery and poverty reduction, which regular donor conferences could assess going forward.

        The immediate priority for donors should be to take steps to cushion the impact of the subsidy reforms. The cabinet has initiated a Family Support Program that provides cash transfers to households in and around Khartoum, in tandem with the lifting of fuel subsidies. In April, the finance ministry increased civil servants’ salaries by an average of almost six-fold to help them cope with rising prices. But the extra cost of these increases has made it even harder for the state to simultaneously pay for the new Family Support Program unless it receives external assistance. Finance Minister Badawi has expressed hope that external partners will therefore step up and fund a World Bank-managed multi-donor trust fund to cover the $1.9 billion cost of the cash transfer program over a period of two years.

        Hamdok’s cabinet should in the meantime do what it can to build more confidence among donors and its own supporters. If the prime minister wants funds for the cash transfer program to flow through civilian ministries, he should improve bookkeeping and auditing of these funds, and ask for donor support to help his administration improve monitoring of funds by those ministries.

        Beyond immediate relief for the population, Sudan needs to tackle long-term under-investment in education, health care and infrastructure – notably irrigation – for its agricultural economy.

        • His cabinet should also make a serious effort to inform the public about the downsides of fuel subsidies, by highlighting for example what it stands to gain from their removal: notably a medium-term decrease in inflation as the need for government to print money to finance the subsidies eases, and the weakening of corrupt business elites who have profited from the schemes at the people’s expense. Past attempts at subsidy reform in 2013 enjoyed minimal public buy-in and were quickly reversed, at least in part due to the absence of an effective communication strategy. The transitional government, meanwhile, has repeatedly postponed a Sudanese economic summit to gather broad-based views from across society and has yet to undertake a listening tour it has been considering to hear the concerns of the Sudanese countrywide. The cabinet should restart preparations for these initiatives.

          Bridging the gap in public finances with a trust fund is only a first step in the right direction, but it is an essential one if donors want to sustain the transition and help Sudan to undertake deeper structural and political reforms. Indeed, beyond immediate relief for the population, Sudan needs to tackle long-term under-investment in education, health care and infrastructure – notably irrigation – for its agricultural economy, which has been starved of public investment for decades. The government will also need to address many other detrimental aspects of the economy, in particular its low-capacity tax system, the regime of multiple exchange rates that enables privileged importers to acquire foreign currency from the Central Bank at absurdly preferential rates, and gold exports that do not run through government coffers. A long-term peace settlement with armed groups would also allow donors to channel billions of dollars, now spent to support millions of internally displaced people, into regenerating the country’s economic foundations.

          V. Conclusion
          Sudan's transition could easily veer off course without a reinvigoration of the country's economy. Its government should focus on meeting the expectations of a tired and frustrated population, demonstrate that it can deliver benefits to the people and ease the short-term pain caused by overdue economic reforms. But to succeed, the civilian cabinet will require international support to bolster its position within the hybrid transitional government. Donors should come together and back Khartoum’s efforts. Failure to do so could jeopardise the transition, with tragic consequences for the people of Sudan and the region.

          Appendix A: Predicted Effects of Subsidy Removal and COVID-19

          Crisis Group calculated the predicted effects of subsidy removal and COVID-19 as follows. Of necessity, these calculations are rough estimates based on several assumptions, as it is difficult to obtain reliable information about the government’s budget or its exact plans for subsidy removal, and both local and international economic conditions continue to change in response to the coronavirus outbreak. The starting point is the 2020 Sudan government budget, as recorded in the IMF Article IV consultation. The monthly amount spent on subsidies in the December 2019 budget, which did not account for subsidy removal, was $300 million per month, two thirds of which were reserved for fuel subsidies. The best indication of the Sudanese government’s plan for lifting subsidies is that it will lift fuel subsidies, gradually for diesel and immediately for gasoline, starting in June 2020, while leaving subsidies on other basic commodities mostly untouched.

          COVID-19 will also affect Sudan’s government finances, particularly its tax revenue and its income from oil, which is likely to decrease with the fall in international oil prices.

          Taking into account fuel subsidy removal and the anticipated impact of COVID-19, our calculations indicate that the Sudanese government budget deficit will amount to anywhere between $0.5 to $5.5 billion. This range is exclusive of any spending not in the December 2019 budget on the Family Support Program or related to combating the virus.

          The wide range in predicted budget deficit is mostly due to uncertainty on the revenue side of the budget. According to the Sudan government budget, it will receive a $2 billion donation from security-sector actors and a further $2 billion in grants from anonymous donors. IMF estimates of the Sudan government budget include neither revenue source and provide a substantially lower figure for oil revenues. The $0.5 billion government budget deficit figure is based on Sudan government revenue estimates, while the $5.5 billion deficit figure is based on IMF revenue estimates.