Staff Assessment of Progress in Implementation

IMF, World Bank and UN

Sudan Consortium

Paris, March 9 2006

Overview

1. Macroeconomic and fiscal developments and prospects

2. Systemic constraints and suggested next steps Government of National Unity Government of Southern Sudan

3. Development Financing – Trends and Prospects Domestic Efforts Trends in Donor Assistance Financing Requests

Economic Developments Good Performance In 2005

2

4

6

8

10

12

14

Dec

-02

Feb

-03

Apr

-03

Jun-

03

Aug

-03

Oct

-03

Dec

-03

Feb

-04

Apr

-04

Jun-

04

Aug

-04

Oct

-04

Dec

-04

Feb

-05

Apr

-05

Jun-

05

Aug

-05

Oct

-05

Dec

-05

Feb

-06

y/y average

12-month pt to pt

...while inflation was contained

0

2

4

6

8

10

12

14

2001 2002 2003 2004 2005 2006

(in percent)

Total

Nonoil

Growth remained strong...

Economic Developments Good Performance In 2005

1.0

1.5

2.0

2.5

3.0

3.5

2004 2005 2006

1000

1400

1800

2200

2600

3000

In months of imports (lhs)

In millions of U.S. dollars (rhs)

International reserves rose...

0

400

800

1200

1600

2000

2004 2005 2006

to the Southto Northern States

...as well as transfers to the South and Northern states

(in millions of U.S. dollars)

Economic DevelopmentsDifficulties and Delays Overruns in fiscal spending, mainly because of

the unplanned fuel subsidy

Non-concessional borrowing target exceeded by large margin

Public financial management: Government Finance Statistics (GFS), capacity building

ProspectsThe Government Program for 2006

Lower fiscal deficit, reduce fuel subsidies, reorient spending

2004 2005 2006

Total revenue 19.8 21.8 24.0 of which: oil 10.3 13.3 14.3Total expenditure 18.3 23.6 24.9 of which: fuel subsidies ... 3.5 1.8 Transfers to the South 0.4 2.8 4.0 Transfers to other states 1.2 3.6 4.3Balance 1.5 -1.8 -0.9

Memorandum items: Consolidated capital spending 5.0 5.5 6.9 Pro-poor expenditures ... 2.8 5.1

(In percent of GDP)

ProspectsKey economic reforms in government program

Protect tax base Revamp tax incentives (VAT and profit tax

holidays)

Improve fiscal transparency GFS classification and reporting

ProspectsKey economic reforms in government programPublic financial management

Establish rules and procedures for the Fiscal and Financial Allocation and Monitoring Commission

Conduct Public Expenditure Review to strengthen expenditure management and allocations

Improve oil sector transparency Publication of detailed oil sector data Audits of Sudapet Regular and transparent profit transfers from oil companies to

the treasury

Economic Key economic reforms in government program

Implement CPA related banking reforms Proceed with restructuring of the central bankEnable dual banking Introduce new Sudanese Pound

Commercial bank restructuring

Raise capital adequacy ratios and minimum capital requirements

Addressing Systemic Constraints: GNU Ongoing conflict in Darfur and tensions in the East undermine efforts

to realize JAM priorities, and threaten further instability

Slow, and in some cases incomplete, implementation of the CPA

Limited public resources available for basic service delivery and infrastructure, despite some progress Budgets for development (pro-poor) purposes still limited, and

below commitments, both by government and donors Record on budget execution is weak, especially to states and

Three Areas

Increasing implementation efforts in disadvantaged regions – including Three Areas – are needed to get progress on track

Keys to Accelerating Progress on Poverty Eradication: GNU

1. Improving governance and transparency = the CPA agenda, esp.

Effective decentralisation, building on the increased planned fiscal transfers, is critical to improved basic service delivery:

Transparency and predictability on mechanisms and amounts of resources to sub-national levels

Review allocation criteria to improve distribution Improve budget execution (combat, e.g., salary arrears) Build local and national government capacities for policy

development and service delivery

Facilitate more open and consultative governance National Petroleum Commission must begin effective operation

Keys to Accelerating Progress on Poverty Eradication: GNU

2. Supporting rural development – especially small farmers and firms Abolish the monopoly on raw Gum Arabic and on livestock exports Reform agenda: Gezira and semi-mechanized farming Develop sustainable support services, including credit, with private

sector Support private investment in disadvantaged regions; re-establish

land use rights

3. Enabling private sector development & trade more broadly Reduce bureaucratic barriers facing business registration, customs,

land use; and streamline port procedures and logistics/transport Reduce tariffs, clarify tax authority of different levels of government

and broaden the tax base Facilitate access to long-term financing for firms

Systemic Constraints: GOSS

Severe lack of capacity constrains progress on key priorities; still need to establish core capacities within key line agencies and the cabinet, and at lower levels of government

Weak public financial management systems and controls pose a risk to the whole development program

Absence of an effective payroll system for both security forces and public servants

Lack of clarity on decentralisation: expenditure and revenue

assignments, & links between central line agencies and lower levels

1. Building core capacities and establishing the public service Establish a recruitment policy, and a payroll system Implement anti-corruption safeguards Provide support to state and local level institutions Improving coordination of development policies and programs

2. Establishing a base for sound public financial management Urgently attend to key decisions, especially to formalise systems of

payment and accounting, and to enact and enforce transparent procedures including for procurement

Treasury Single Account, public finance legislation and procurement rules Establishing processes and accounting for intergovernmental transfers

3. Enabling productive activities and delivery of basic services Facilitating access to micro-credit Expand access to basic healthcare and education, based on emerging

sector programs

Keys to Accelerating Progress on Poverty Eradication: GOSS

Development Spending: Domestic and External

Assessed needs in the JAM were huge, but increased domestic revenue due to high growth and oil prices, coupled with pro-poor efforts, and support from international partners can meet the needs

For the GNU and the GOSS, the budget is critical not only as a means of actually financing priority programs, but as a central signal of domestic policy priorities

Increasing pro-poor spending is key: defining and measuring ‘pro-poor’ is fraught with difficulty, but working definition developed (see next session)

Assessment of the nature and level of trends since 2004, on both domestic and external fronts, is broadly positive

Increased Domestic Efforts GNU – in the context of high economic growth and rising revenue

measured pro-poor spending has increased significantly in absolute terms since 2004 (baseline, which was very low)

In 2005 budget, transfers to states and the South increased substantially over 2004

The 2006 fiscal framework shows a large increase in transfers to states, and an increase in pro-poor spending, that approaches JAM commitments

GOSS –

For 2005, a transition year – formal budget process cycle, but experience underlines the importance of getting systems established – for payments and reporting

For 2006, a promising process was launched, and sectoral ceilings show close correspondence with JAM priorities, as these continue to evolve.

BUT public financial management poses a major challenge

Significant Increases in Donor Assistance since CPA

Total Reported Donor Assistance to Sudan by Region, 2003-05 (US$ million)

0

200

400

600

800

1000

2003 2004 2005

US$ m

illio

ns

Darfur Southern Sudan Rest of Sudan

2004: Estimated figures based on FTS Geneva and Darfur Funding Overview; assumes Southern Sudan received all non-Darfur funding for 2004.2005: Recorded by UN for 2005, MDTF contributions, and US and EC reports.

Humanitarian Aid Still Dominates (especially in Darfur, also in the South)

Reported Donor Assistance to Sudan by Category and Region, 2005 (US$ million)

0

100

200

300

400

500

600

700

800

National Darfur Southern

Sudan

US$

Mill

ions Recovery

Unspecified

Development

Humanitarian

Source: World Bank staff estimates based on all funding recorded by UN for 2005, MDTF contributions, and reporting by US and EC.Note: MDTF commitments are included under Development.

Assessment of Financing Requests:GNU

The JAM assessed financing requests based on domestic pro-poor efforts and development needs staff endorse this approach, including progress against the Matrix

GNU financing request of US$ 386 million in 2006 is appropriate on a commitment basis

If full execution of the pro-poor GNU budget = external financing request would cover 22 percent of pro-poor needs

Somewhat less than the JAM estimate of 36 percent — that is, 4:1, not 2:1, ratio of domestic to external effort

Role of the MDTF – North. US$48 million of donor funds in 2005, nearly fully committed via approved full program proposals Staff support Government’s request that development financing be directed

through the MDTFs to allow for maximum ownership of program design and implementation, and to strengthen links with the domestic budget

GNU Development Financing Trends and Plans, 2005 – 06 (US$)

0

200

400

600

800

1000

1200

JAM Estimated External Financing NeedsProjected External Financing of Pro-Poor Programs of w hich MDTFUN Work Plan of w hich Recovery and Development

2005 2006

Assessment of Financing Request:GOSS

Based on the emerging program for 2006 and the strong pro-poor efforts evidenced in the budget, the GOSS’s financing request of US$300 million is appropriate, but again, on a commitment basis

Slower than expected disbursement of donor commitments in 2005 related to delays in CPA implementation, and practical problems and delays in partners in getting started in Juba; progress expected to accelerate in 2006

Assuming full financing of this request and full execution of pro-poor spending per the budget, the external share would be about 37 percent (close to JAM estimate of 41 percent)

The MDTF for the GOSS received US$99.2 million in 2005, and has committed all existing funds, indicating that replenishments are needed

GOSS Development Financing Trends and Plans, 2005 – 06 (US$)

0

200

400

600

800

1000

1200

1400

Total JAM Needs of which Externally FinancedExternally Financed Development Assistance of which MDTFUN Work Plan of which Recovery

2005 2006

Domestic share of pro-poor needs higher than JAM projections, 2006

Share of Pro-Poor Needs Covered by Own Efforts, JAM vs. Revised Estimates, 2006 (%)

6459

78

63

0

10

20

30

40

50

60

70

80

90

GNU GOSS

JAM Estimate

Revised Estimate

Conclusions1. Progress in CPA implementation, but delays on key

institutions and lags in donor assistance 2. Economic developments in 2005 broadly favorable 3. GNU pro-poor spending broadly in line with JAM

commitments, but negligible transfers to Three Areas4. The 2006 modified budget framework (agreed with the Fund)

and government commitments on macro-structural reforms are promising

5. Good effort by GOSS, but steps needed to improve transparency and increase spending on critical services

6. Financing framework and requests for external assistance in 2006 appropriate; resources in both MDTFs nearly fully committed

In SUM: call for accelerated progress on all fronts, deepening partnerships and mutual accountability