The secession of South Sudan changed the Sudanese economy dramatically. The vast majority of investments in the oil sector were located in what is now South Sudan. (Photo: George Osodi)
A World Bank report from 2009 stated that foreign direct investment (FDI) had become an important source of external financing for Sudan. FDI hit an all time high of 3,5 billion USD in 2006, but has declined ever since. Economic uncertainty and political instability, combined with poorly developed infrastructure, have discouraged foreign investments. Hassan Ali Gadkarim, independent consultant and associate research professor in development economics in Khartoum, works closely with researchers at the Chr. Michelsen Institute. He has analysed the inflow of foreign direct investments in Sudan, prior to and after the secession of South Sudan. According to Gadkarim, there is little reason to be optimistic at the moment.
From black gold to 24-carat
Economic uncertainty and political instability have characterized Sudan for decades. Yet, the prospects of making big money in the oil sector have attracted FDI to Sudan in spite of the unfavourable investment climate. Thus, oil has been the major arena for FDI in Sudan, and amounted to 3/4th of FDI inflows during the 2000s. Foreign investments in oil production had an important side-effect. It increased the presence of Asian countries, making Sudan less dependent on the West. It also spurred foreign investments in non-oil sectors.
The secession of South Sudan changed the Sudanese economy dramatically. FDI has been one of the main distressed sectors. The vast majority of investments in the oil sector were located in what is now South Sudan. According to official estimates, Sudan lost 75 % of the oil production, 36 % of budget revenue, more than 65 % of foreign exchange revenue and 80 % of total exports due to the secession in 2011 and the subsequent loss of major oil fields to the South.
-The economy has further deteriorated because the two neighbouring countries have failed to reach an agreement. When South Sudan, in an everlasting process of reciprocal retaliation, decided to close down the oil production, this meant the loss of anticipated revenue for processing and transporting South Sudan’s oil for Sudan, says Gadkarim.
Seeking alternatives, the Sudanese government has now turned its attention to the extractive industries. From January till July 2012, gold constituted 74 % of the country’s exports. According to Gadkarim, gold will, most likely, continue to compensate for a large portion of the missing oil revenue, at least until new oil producing fields are discovered and developed in Sudan. This may assist in slowing the decline of the economy, but not as a recipe for sustainable economic development.
Sudan’s vast natural resources could also make the country a major food supplier, through developing the agriculture and manufacturing sectors. These sectors previously attracted a relatively fair amount of national investments and FDI, particularly during the May regime. Yet, the government has not been well prepared in its efforts to realize this potential.
Lack of visions
Political and economic instability discourage foreign investments in Sudan, especially in the non-oil sectors. Gadkarim also pinpoints insufficient levels of capable human capital, poor infrastructure and an absence of policy towards FDI as significant obstacles to foreign investments.
-To re-establish the flow of FDI, the Sudanese government needs to work strategically. The success depends not only on establishing a viable oil, or gold, production, but also on a conducive investment climate, he says.
To achieve this and cater for the difficult economy, the government needs to build lasting peace within the country and with its neighbours. Sudan also needs accountable public institutions, improved governance and transparency.
-Policies regarding future foreign investments need to be based on a rigorous understanding of various aspects of Sudanese economy on the one hand and characteristics of FDI on the other. An analysis should include comprehensive considerations of, for example, the role of FDI vs. aid and other foreign resources, development vs. growth, which forms of FDI to target and into which sectors. This rigorous exercise should replace the current governments lack of a clear comprehensive vision of a role for FDI, except as a non-dispensable element of oil exploration and production, says Gadkarim.
Published January 29, 2013