Sudan Country Economic Memorandum: Realizing the Potential For Diversified Development Public Launch Michael Geiger Khartoum 25 September 2016
Outline What is structural transformation and where does Sudan stand? What kind of growth and diversification methodology could be applied to Sudan Key findings Key recommendations 2
What is structural transformation and where does Sudan stand? 3
What is structural change? A shift of economic activities and employment from low to high productivity activities Low High Goal Structural Change productivity productivity activities activities Traditional Non-Traditional Process Within sectors Agriculture Agriculture Firm Firm Manufacturing Services Informal Formal Example East Asian Model India, Bangladesh, (Korea, China, Mozambique, Most countries Hong Kong, Rwanda Vietnam) Source: Own visualization, based on McMillian et al. (2014): Globalization, Structural Change, and Productivity Growth, with and Update on Africa; Page (2012) - Can Africa Industrialize?; Zeufack et al. (2015): Structural Transformation and Productivity Growth in Africa: Uganda in the 2000s; Ghani & O’Connell (2014): Can Service Be a Growth Escalator in Low Income Countries? 4
But Sudan still stands at the beginning of structural transform- ation Sudan’s sectoral decomposition of GDP, 1980 -2013 100% 90% Services 50% 53% 80% 70% 60% Manufacturing 50% 8% 7% 40% Industry, incl. 7% 14% extractives 30% 20% Agriculture 28% 33% 10% 0% 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Agriculture Industry Manufacturing Services Source: World Bank, World Development Indicators (2015). 5
At the same time others have advanced in structural transformation Selected countries’ sectoral decomposition of GDP, 1980 -2013 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Sudan (1990) Sudan (2013) Kenya (1980) Kenya (2013) Vietnam (1980)Vietnam (2013) Agriculture Industry Manufacturing Services Source: World Bank, World Development Indicators (2015). 6
The long-term historical growth performance underscores the lack of lasting structural change in Sudan Growth decomposition of production factors in Sudan, 1989-2012 2. Physical capital dominates 3. Negative 15.0 1. Labor and TFP Growth – labor/TFP very low TFP growth Avg. growth 6.7% Avg. growth Avg. growth 5.1% Growth rate (percentage points) 1.5% 10.0 5.0 0.0 -5.0 -10.0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Total Factor Productivity Human Capital per Labor Labor Capital Stock Real GDP Growth Source: World Bank, World Development Indicators (2014). Note: TFP is a measure of total output growth relative to the growth in traditionally measured inputs of labor and capital (in other words: Output = TFP + Capital input + Labor input). 7
What kind of growth and diversification methodology could be applied to Sudan? 8
There are two approaches to diversify an economy: direct and indirect Goal Structural Transformation / Diversification ‘Direct Approach’ ‘Indirect Approach’ Approach Foundation for any economic activity to Interventions in economic sectors flourish Examples Macroeconomic Human capital and Export promotion Tax holidays policies infrastructure Targeted import Business enabling Fertilizer subsidies substitution environment Source: Own visualization, based on World Bank (2014): Diversified Development. 9
Agriculture will be the key sector in the economy until 2030 and any diversification effort needs to recognize the sector CEM Simulation: Aggregated sector GDP (Index; 2012=100) 300 Agriculture 250 200 150 100 Gold 50 Petroleum 0 Agriculture Gold Petroleum Manufacturing Other industry Private Services Public Services Source: World Bank staff own calculations using the MAMS Sudan Model. 10
Development of the agriculture sector is also particularly poverty reducing CEM Simulation: Poverty Rate in 2012 and Various Scenarios 48 46.5 46 44 42 Simulating an 40 38.4 increase in 37.4 38 agriculture 35.8 36 productivity by 34.2 2 percent every 34 year 31.4 32 29.4 30 28 26 24 22 20 2012 Base Crop+ TofT+ Aid+ Debt- Normal Source: World Bank staff own calculations using the MAMS Sudan Model. Notes: TofT+ simulates increased terms of trade; Aid+ simulates additional inflows of aid; Debt- simulates debt relief; Normal simulates the combined effects of normalization of relations with the rest of the world. 11
Key Findings 12
Key finding 1: No lasting structural change
Manufacturing provides an almost negligible number of jobs in Sudan Employment by sector, 2009 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Rural men Urban men Rural women Urban women Agriculture Other industry Manufacturing Services Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009). 14
Key finding 2: High and volatile inflation, linked to budget financing
Sudan has a history of high, volatile inflation, which further increased after 2011 Average annual inflation in Sudan, 1999-2014 Food inflation 50% Average overall inflation (1980-2012) 40% Overall inflation 30% Core inflation 20% 10% 0% -10% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: World Bank staff own compilation, based on data from Central Bank of Sudan, and IMF.. 16
Key finding 3: Weak resource revenue management, budget deficits and low savings
Oil revenues contributed more than 50 per-cent to total fiscal revenues at its peak during the oil years, but this changed in 2011 Fiscal revenues and composition (SDG mn) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2008 2009 2010 2011 2012 2013 Tax revenues Oil revenues Other non-tax, non-oil revenues Source: World Bank staff own compilation, based on data from Central Bank of Sudan; IMF; and World Bank WDI. 18
Sudan’s budget has been in deficit since 1991 and only occasionally balanced during the oil-driven investment boom Overall budget deficit, 1991-2013 5 Budget surplus 0 Percent of GDP -5 Budget deficit -10 -15 -20 -25 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: World Bank (2015 forthcoming): Sudan Country Economic Memorandum. 19
Financing the deficit is one of the key challenges now, but options for foreign financing are limited given Sudan’s debt crisis Domestic savings matter for Sudan’s economic transition and savings are low National Savings in Sudan, 1991-2014 Private and Public Savings, 1991-2014 30 30 20 20 10 10 0 0 Gross public -10 -10 savings -20 -20 Gross private savings -30 -30 -40 -40 19911994199720002003200620092012 19911994199720002003200620092012 Source: World Bank staff own compilation, based on data from Central Bank of Sudan; IMF; and World Bank WDI. 20
Key finding 4: Long history of overvalued real exchange rate
Sudan’s Real Exchange Rate (RER) has been greatly overvalued over most of the past 40 years Sudan’s RER misalignment, 1970-2011 0.2 0.1 Undervaluation above red line 0 Overvaluation below red line -0.1 -0.2 -0.3 -0.4 NB: Across all countries and time, each 10 -0.5 percent RER Misalignment -0.6 undervaluation increases exports by 0.6 -0.7 and GDP growth by 0.9 percentage points -0.8 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 Source: World Bank staff own calculations, based on data from PENN World Tables. Note: The real exchange rate is the nominal exchange rate adjusted for the effects of inflation. The RER measures real purchasing power of the Sudanese Pound; this equals international competitiveness of a country’s exports . 22
RER changes have a particularly large effect on agriculture exports in Sudan CEM Simulation: Real exchange rate and export quantity (index base = 100) 160 150 Export quantity index 140 130 120 110 100 100 105 110 115 120 125 RER index (SDG/Foreign currency) Agriculture Mining Manufacturing Private services Total Source: World Bank staff own calculations using the MAMS Sudan Model. 23
Undervaluation is a distinct feature of export success in other countries: China Undervaluation and export growth, China 0.6 Undervaluation above red line 0.4 0.2 0 Overvaluation below red line -0.2 -0.4 -0.6 -0.8 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Undervaluation Misalignment Export growth Source: World Bank staff own calculations, based on data from PENN World Tables. 24
Undervaluation also observable in India since the mid-1990s Undervaluation and export growth, India 0.3 Undervaluation above red line 0.2 0.1 0 -0.1 -0.2 Overvaluation below red line -0.3 -0.4 -0.5 -0.6 -0.7 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Misalignment Undervaluation Export growth Source: World Bank staff own calculations, based on data from PENN World Tables. 25
Key finding 5: Extremely low productivity in agriculture
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