Sudan Country Economic Memorandum: Realizing the Potential For Diversified Development

Transcription

1 Sudan Country Economic Memorandum: Realizing the Potential For Diversified Development Public Launch Michael Geiger Khartoum 25 September 2016

2 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

3 What is structural transformation and where does Sudan stand? 3

4 Example Process Goal What is structural change? A shift of economic activities and employment from low to high productivity activities Low productivity activities Structural Change High productivity activities Traditional Non-Traditional Agriculture Manufacturing Agriculture Services Within sectors Firm Firm Informal Formal East Asian Model (Korea, China, Hong Kong, Vietnam) India, Bangladesh, Mozambique, Rwanda Most countries 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

5 But Sudan still stands at the beginning of structural transformation 100% Sudan s sectoral decomposition of GDP, % 80% 53% Services 50% 70% 60% Manufacturing 50% 40% 30% 7% 7% Industry, incl. extractives 8% 14% 20% 10% 33% Agriculture 28% 0% Agriculture Industry Manufacturing Services Source: World Bank, World Development Indicators (2015). 5

6 At the same time others have advanced in structural transformation Selected countries sectoral decomposition of GDP, % 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

7 Growth rate (percentage points) The long-term historical growth performance underscores the lack of lasting structural change in Sudan Growth decomposition of production factors in Sudan, Labor and TFP Growth 2. Physical capital dominates labor/tfp very low 3. Negative TFP growth Avg. growth 5.1% Avg. growth 6.7% Avg. growth 1.5% 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

8 What kind of growth and diversification methodology could be applied to Sudan? 8

9 Examples Approach Goal There are two approaches to diversify an economy: direct and indirect Structural Transformation / Diversification Direct Approach Indirect Approach Interventions in economic sectors Foundation for any economic activity to flourish Export promotion Tax holidays Macroeconomic policies Human capital and infrastructure Fertilizer subsidies Targeted import substitution Business enabling environment Source: Own visualization, based on World Bank (2014): Diversified Development. 9

10 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 Gold Petroleum 0 Agriculture Gold Petroleum Manufacturing Other industry Private Services Public Services Source: World Bank staff own calculations using the MAMS Sudan Model. 10

11 Development of the agriculture sector is also particularly poverty reducing CEM Simulation: Poverty Rate in 2012 and Various Scenarios Simulating an increase in agriculture productivity by 2 percent every year 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

12 Key Findings 12

13 Key finding 1: No lasting structural change

14 Manufacturing provides an almost negligible number of jobs in Sudan 3,500,000 Employment by sector, ,000,000 2,500,000 2,000,000 1,500,000 1,000, ,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

15 Key finding 2: High and volatile inflation, linked to budget financing

16 Sudan has a history of high, volatile inflation, which further increased after 2011 Average annual inflation in Sudan, % Food inflation 40% Average overall inflation ( ) Overall inflation 30% Core inflation 20% 10% 0% -10% Source: World Bank staff own compilation, based on data from Central Bank of Sudan, and IMF.. 16

17 Key finding 3: Weak resource revenue management, budget deficits and low savings

18 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, 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

19 Percent of GDP Sudan s budget has been in deficit since 1991 and only occasionally balanced during the oil-driven investment boom Overall budget deficit, Budget surplus Budget deficit Source: World Bank (2015 forthcoming): Sudan Country Economic Memorandum. 19

20 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, Private and Public Savings, Gross public savings Gross private savings Source: World Bank staff own compilation, based on data from Central Bank of Sudan; IMF; and World Bank WDI. 20

21 Key finding 4: Long history of overvalued real exchange rate

22 Sudan s Real Exchange Rate (RER) has been greatly overvalued over most of the past 40 years 0.2 Sudan s RER misalignment, Undervaluation above red line Overvaluation below red line -0.4 NB: Across all countries -0.5 and time, each 10 percent RER -0.6 undervaluation Misalignment -0.7 increases exports by 0.6 and GDP growth by percentage points 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

23 Export quantity index RER changes have a particularly large effect on agriculture exports in Sudan CEM Simulation: Real exchange rate and export quantity (index base = 100) RER index (SDG/Foreign currency) Agriculture Mining Manufacturing Private services Total Source: World Bank staff own calculations using the MAMS Sudan Model. 23

24 Undervaluation is a distinct feature of export success in other countries: China Undervaluation and export growth, China 0.6 Undervaluation above red line Overvaluation below red line Undervaluation Misalignment Export growth Source: World Bank staff own calculations, based on data from PENN World Tables. 24

25 Undervaluation also observable in India since the mid-1990s Undervaluation and export growth, India Undervaluation above red line Overvaluation below red line Undervaluation Misalignment Export growth Source: World Bank staff own calculations, based on data from PENN World Tables. 25

26 Key finding 5: Extremely low productivity in agriculture

27 The story of agriculture in Sudan is by and large a story of low productivity: wheat yields are indicative of the problem Sudan s wheat yields in perspective (kg/feddan), selected countries 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Source: World Bank staff own calculations, based on data from Central Bank of Sudan; the Ministry of Agriculture and Irrigation; and selected other country authorities. Note: Pavlovda and Kzylorda are places in Kazakhstan where climate is very extreme. 27

28 Low fertilizer usage is a key issue behind low productivity; centralized marketing and choice of grains are additional factors Some facts about low fertilizer usage In 2009 the average fertilizer use per hectare of cropland was 7.3 kg. Ethiopia, Sudan's poorer neighbor, used 17 kg. Sudan used as much as 80 kg/ha in the mid-1970s, and 70 kg/ha in the 1980s. Reasons for low usage today are unclear. But it seems that the decline in agriculture is associated to fertilizer usage. Additional factors Strong policy push for wheat and sugar production, which are foreign crops to Sudan. Seasonality and water availability impair productivity. Centralized marketing of agriculture products through state agencies leads to low prices for farmers and low productivity. Gum Arabic and Cotton benefitted much from relaxations since Source: World Bank (2015): Sudan Country Economic Memorandum. 28

29 Key finding 6: Very concentrated export markets

30 Maximum diversification Maximum concentration Sudan s export basket is very concentrated especially for it has coastal access and proximity to multiple large markets Herfindahl-Hirschman Index at the products level, Sudan and selected countries Average Average Egypt, Arab Rep. Ethiopia Ghana Indonesia Kenya Morocco Mongolia Uganda Sudan Source: World Bank staff own calculations, based on data from UN COMTRADE. Note: The HH index is calculated as the sum of the squared market shares for all products. 30

31 Export concentration is much lower when looking at non-oil exports, but has increased in 2012 with the emergence of gold Export concentration in terms of products, excluding oil 60% 50% 51% 54% % % 80 20% 60 10% 5% 8% 8% 10% % Share of Top 3 Products Share of Top 5 Products Number of Products Source: World Bank staff own calculations, based on data from UN COMTRADE. 31

32 Yet, Sudan s export concentration is also evident in the high share of its top destinations in overall exports Sudan s export concentration in terms of destination markets 94% 93% 92% 91% 94% 93% 90% 90% 89% 88% 88% 87% 86% 85% Share of Top 3 Markets Share of Top 5 Markets Source: World Bank staff own calculations, based on data from UN COMTRADE. 32

33 Main Recommendations 33

34 Main recommendation #1: Remove exchange restrictions to unify official and black-market rate

35 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 The official and black-market rates show an increasing spread confirming the overvaluation of the Sudanese pound Sudan's official and market exchange rate (SDG/USD), Official Exchange Rate Market Exchange Rate Source: World Bank staff own compilation, based on data from Central Bank of Sudan. 35

36 Advantage Challenges How to unify the exchange rates? Big Bang and Gradual devaluations Principle Considerations Big Bang Definition: Large, one-off devaluation overnight. Economic disruptions: Sudden change in relative prices, cheaper exports and more expensive imports. Value of foreign debt: Sharp devaluation to raise value of foreign currency denominated debt in domestic currency. Inflation: Sudden changes in import prices to lead to spikes in inflation. If perceived as a one-off event, no further expectation of devaluation. Gradual Definition: Incremental devaluations over a period. If further devaluation is expected: Possible hoarding of foreign exchange thereby creating a black market and worsening foreign exchange shortages. Speculative outflows could increase devaluation pressure. Incremental changes in relative prices: Important if high levels of external debt; and/or Large reliance on imports 36

37 Gradual devaluation preferred as it is associated with significant output increases and improvements in the trade balance Summary of Empirical findings Big Bang Gradual Variable Effect t0 t+1 t+2 Variable Effect t0 t+1 t+2 GDP Investment Consumption Negative Negative Negative Negative GDP Investment Consumption No impact No impact No impact POSITIVE Trade balance POSITIVE POSITIVE (less) Trade balance POSITIVE Manufacturing Logistics Central bank ind. No impact No impact No impact Manufacturing Logistics Central bank ind. No impact No impact No impact Poor vs. rich country Poor countries do better Poor vs. rich country Poor/rich does not matter Small vs. big country Small countries do better Small vs. big country Small/big does not matter Data and definitions: Country level panel data for 221 Countries and 233 Episodes between 1960 and Big Bang: More than 20% one-off nominal devaluation --- Gradual: Between 5 and 20% devaluation for at least 3 consecutive years. Poor country: Rich country: 123 Small country: Rich country:

38 Most Successful gradual devaluations started with a larger initial devaluation in year one followed by several smaller ones 10 most successful gradual devaluations with initial (first-year) devaluation Year Country First-year initial nominal devaluation Initial RER overvaluation Cumulative devaluation 1981 Bhutan 9.6% 61.1% 45.3% 2009 Sierra Leone 12.7% 29.2% 37.8% 1996 Cabo Verde 7.2% 70.5% 44.3% 1971 Korea 13.0% -17.3% 36.0% 1988 Bhutan 7.1% 11.5% 45.3% 1989 Solomon Islands 9.6% 15.8% 42.6% 1987 Chile 12.9% 14.7% 59.3% 1980 Mauritius 19.7% 36.3% 89.5% 1981 Norway 15.0% 4.2% 55.4% 1982 Nepal 7.1% 37.3% 54.3% Average 11.4% 26.3% 49.7% Data and definitions: Country level panel data for 221 Countries and 233 Episodes between 1960 and Cumulative devaluation for gradual devaluation period; length varies across countries

39 Exchange rate adjustment needs to be accompanied by complementary macro-policies to ensure success Keep core inflation low through lower budget deficits and less reliance on domestic deficit finance Real exchange rate will continue to appreciate as long as inflation is being driven by deficit financing and excess liquidity More resilient investment financing through higher domestic savings Facilitate domestic savings through low inflation and positive real interest rates Limit use of financial sector interventions for sector promotion Development banks/agriculture lending. Instead, increase access to finance for all sectors and businesses. Source: World Bank (2015): Sudan Country Economic Memorandum. 39

40 Main recommendation 2: Increase agriculture productivity through a set of key (policy) changes

41 Increase agriculture productivity through a set of key (policy) changes Agriculture policy changes Rethink centralized marketing of agriculture products and learn from gum Arabic and cotton experience Gradually decrease subsidy on domestic wheat production (capitalizing on the recent reform to abolish the preferential wheat exchange rate) Diversify wheat imports to lower the wheat import bill (next slide) Agriculture investments Promote fertilizer usage Establish modern state-level grain storage Prepare for rehabilitation of the Gezira scheme Pilot the move from agriculture to agro-processing Pilot gum Arabic spray-drying in combination with increasing the value of raw material Apply lessons from pilot for other successful raw exports such as sesame, cotton, and livestock. Source: World Bank (2015): Sudan Country Economic Memorandum. 41

42 Sudan s wheat import price is relatively high and there is scope to lower the wheat import bill by rationalizing the sources Sudan s wheat import price in perspective (US$/ton) / / / /2014 Sudan Import Price All US Grades US (Kansas City) US (Texas Gulf) Argentina Source: World Bank (2015): Sudan Country Economic Memorandum. 42

43 Increase agriculture productivity through a set of key (policy) changes (ctd). Agriculture policy changes Rethink centralized marketing of agriculture products and learn from gum Arabic and cotton experience Gradually decrease subsidy on domestic wheat production (capitalizing on the recent reform to abolish the preferential wheat exchange rate) Diversify wheat imports to lower the wheat import bill (next slide) Agriculture investments Promote fertilizer usage Establish modern state-level grain storage Prepare for rehabilitation of the Gezira scheme Pilot the move from agriculture to agro-processing Pilot gum Arabic spray-drying in combination with increasing the value of raw material Apply lessons from pilot for other successful raw exports such as sesame, cotton, and livestock (next slide) Source: World Bank (2015): Sudan Country Economic Memorandum. 43

44 Focusing on Sudanese exports with larger world market shares could be a good way to pilot the move towards agro-processing Sudanese products with larger world market shares, % 35% 30% Sheep: 35% Gum Arabic: 30% 25% 20% 15% Sesame seeds: 15% 10% 5% 0% Waste and scrap of primary cells: 4% Sheep meat: 4% -5% Source: World Bank staff own calculations, based on data from UN COMTRADE. 44

45 Main recommendation 3: Improve the management of natural resource rents

46 Establish a more realistic medium-term outlook on oil production Projected domestic crude oil production, bpd 180, , , , ,000 80,000 60,000 40,000 20,000 - Base High Low Source: Ministry of Petroleum (2013); and Wood Mackenzie (2013). Note: The High estimate equals the Government s estimate. 46

47 More broadly on natural resources, a strategic outlook is required to efficiently utilize the remaining resource wealth Contribution of oil and minerals to Sudan s economy: still important, but less dominant Source: World Bank (2015): Sudan Country Economic Memorandum. 47

48 Main recommendation 4: Address broader business constraints

49 Address broader business constraints to create space for structural transformation Regulate economic activity better: Sudan s ranking in selected Doing Business Indicators Enforcing Contracts Trading Across Borders Paying Taxes Protecting Investors Getting Credit Registering Property Starting a Business Ease of Doing Business DB2014 (out of 189 economies) DB2008 (out of 178 economies) Source: World Bank Doing Business Report, 2008 and

50 Main recommendation 5: Build human capital to support structural change

51 Build human capital to support skills-intensive modern services and reduce spatial disparities increase education levels 10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 Education levels by gender and location 0 Rural Men Urban Men Rural Women Urban Women No Education At Most Primary At Most Secondary Post-Secondary Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009). 51

52 Nonparticipation Nonparticipation Employed Employed Labor force non-participation is far higher for women than men; many educated women never enter the labor market Employment and labor force participation by cohort Rural men Urban men Rural women Urban women Source: World Bank staff own calculations, based on data from National Benchmark Household Survey (2009). 52

53 Summary of findings and recommendations 53

54 Six key findings lead to five interlinked recommendations to support diversification in Sudan Summary of key findings and main recommendations Findings Recommendations 1) No lasting structural change 2) High and volatile inflation 3) Weak resource revenue management, budget deficits and low savings 4) Long history of overvalued real exchange rate 5) Extremely low productivity in agriculture Remove exchange restrictions to unify official and black-market rate and enhance policy consistency Increase agriculture productivity through a set of key (policy) changes Improve the management of natural resource rents Address broader business environment constraints 6) Highly concentrated export markets Build human capital to support structural change 54 54