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Why oil is not the whole story

The newly independent Republic of South Sudan may top the list of the world's fastest-growing economies in 2013.

 

The main reason for this is that last year South Sudan experienced one of the most spectacular economic contractions of any state in modern times -- a situation that is expected to reverse in the year ahead.
 
The South Sudanese economy crashed 12 months ago when, during a dispute with northern Sudan, the South Sudanese government shut down the nation's entire oil production. Until then, oil revenues, totaling about $400 million per month, had represented 82 percent of South Sudan's gross domestic product and 98 percent of government revenues. The oil companies were stunned by the shutdown; their revenues fell to zero. A World Bank director commented that the bank had never seen such a dramatic collapse. The IMF, meanwhile, estimates that South Sudan's GDP contracted by 55 percent in 2012.
 
South Sudan is scheduled to resume oil production soon, but it will take four to six months to reach pre-shutdown levels. Assuming no further delays, South Sudan's economic growth during 2013 could reach an astonishing 70 percent.
 
OIL'S NOT WELL
 
South Sudan seceded from Sudan in July 2011, taking with it 75 percent of Sudan's oil production. However, the export infrastructure -- pipelines and ports -- is in the north.

 

The two countries failed to settle a number of border issues and did not agree on tariffs or fees for use of the north's pipelines. In December 2011, northern Sudan began unilaterally diverting South Sudanese oil to its own refineries for illegal sale on international markets. South Sudan responded by shutting down its wells.
 
In Juba, South Sudan's capital, the government was immediately in trouble. Its non-oil revenue was miniscule, mostly gained through business licenses and import taxes.

 

The minister of finance's 2012 budget projected the government's monthly expenditure to be $250 million and its income to be $25 million. By September 2012, government revenue had reached only $12.6 million monthly. Juba appealed for international assistance, but donors could not fully fill the gap. Officials instead proposed austerity measures, including across-the-board cuts of 26 percent, but exempted the military, which had constituted 55 percent of the pre-shutdown spending. For the past year, the government has gotten by thanks to a few loans and some discreet foreign handouts. It has also saved money by neglecting to pay out salaries and service debts.
 
As Sudan and South Sudan teetered on the brink of all-out war in April 2012, the African Union and the United Nations developed a plan to ease the tension, resolve outstanding disputes, and restart oil production and export. At a summit meeting in Addis Ababa in late September 2012, Salva Kiir Mayardit, the South Sudanese president, signed several agreements with Omar al-Bashir, his Sudanese counterpart. As part of the deal, Mayardit agreed to pay a commercial tariff to pump southern oil through the north. He also agreed to make several payments to the North -- amounting to just over $3 billion -- in recognition of the north's own fiscal crisis brought on by the loss of petroleum revenues following the secession.
 
The deal immediately increased confidence in the South Sudanese economy, but its prospects in the coming year depend on whether the September agreements are implemented. At the moment, the prospects look grim: Khartoum has dug in its heels. Two major issues were left unresolved. One is an ongoing conflict in two Sudanese states near the border with the south, where rebels are fighting Khartoum, demanding a secular and democratic state. As long as such conflicts persist, the prospect of the south being dragged back into the fighting remains a possibility. A second issue is the status of the disputed area of Abyei, which both the north and the south claim. The African Union proposed holding a referendum at the end of this year to let the residents of Abyei decide. All evidence suggests that they would vote to go south. No surprise, then, that Khartoum's generals are blocking the implementation of the agreements.
 
Festering grievances have reinforced South Sudan's unwillingness to deal with its northern neighbor. Juba is developing plans to build a new oil pipeline that would go eastward toward the Kenyan coast. Preliminary estimates put a $3 billion price tag on the pipeline, and South Sudan has entered negotiations with potential contractors. But sinking funds into that pipeline would be a major gamble.
 
For one, pessimists fear that South Sudan's oil production may have already passed its peak. According to industry estimates, the country's known reserves will last only another decade or so. And some of the wells that were closed in January 2012 will never reopen because they were already almost dried up. The pipeline to Kenya, meanwhile, faces its own obstacles. China, on which South Sudan had pinned hopes for funding, has showed little interest. Beijing was dismayed by Juba's decision to shut down oil production.

 

In turn, it has politely rebuffed requests for financing, observing that China had already built one serviceable pipeline (the one that heads north) and that South Sudan would be advised to use it. Meanwhile, other potential investors have expressed wariness of a South Sudanese government that has proved ready to take enormous commercial and political risks against the advice of international partners.
 
BEYOND BLACK GOLD
 
In the long term, given the problems with South Sudan's oil sector, the country's most valuable resources will be agricultural land and water. The country has already attracted large-scale agricultural investors, notably from the U.S. and Egypt. A company from the Emirates is promoting ecotourism. Since 2010, meanwhile, South Sudan has made long-term leases of more than five million hectares. Yet relatively little of that has yet been converted into productive enterprises for farming and biofuels.
 
The question now is how to attract international investment in key sectors other than oil production. In December 2011, Washington hosted an investment conference for South Sudan.

 

Due in part to strong connections between South Sudan and influential U.S. constituencies, including churches, celebrity advocates, and Israel, the United States is an active proponent of aid and investment in South Sudan.

 

Businessmen attending the conference, however, were disappointed that the enthusiasm had yet to yield feasible commercial projects or even proposals for them. In practice, most of the investment in South Sudan is still from neighboring countries, especially Kenya (for banking and transport), Uganda (for retail and telecoms), Ethiopia (for hotels), and Eritrea (for retail and hotels).
 
Somewhat surprisingly, there are potential investments coming from northern Sudanese, too. Much of the population of South Sudan lives near the border with the north. South Sudanese obtain most of their consumer goods and food from the north, and many families rely on northern migrant labor. This population was hard-hit by the closing of the border in early 2012 and by the exodus of northerners.

 

Agreements made last September, to reopen border trade and to provide the "four freedoms" (the right of all South and northern Sudanese to live, work, move, and own property in either country), will bolster the border region's economy -- when they are implemented. And a provision of the September agreements to create a standing conference of the 11 governors of border states, both north and south, to focus on cross-border cooperation and infrastructure, should further assist development of these areas.
 
Over the last few years, the people of South Sudan have displayed remarkable tenacity. Last March, the World Bank made dire predictions about an economic crisis that would result from the oil shutdown, which would include rampant inflation, the collapse of essential services, and increasing food insecurity. Although inflation did surge to more than 60 percent, massive fuel shortages ground the country to a halt, and hundreds of thousands of people were left dependent on food aid, there was no total state collapse.

 

One reason was aid from international donors, notably the United States, which went toward paying for essential government functions. Another was that the majority of the South's oil income had never previously reached the people but had been siphoned off and ferreted abroad by members of the ruling elite, including the army's 600 generals. For the average citizen, conditions were much the same.
 
South Sudan has approximately a decade to enjoy substantial oil revenues, with oil production potentially returning to 300,000 barrels per day during 2013. During this period, it must establish sound internal governance and the basis for a productive economy in the long term. The U.S., determined not to see South Sudan become a failed state, is assisting.

 

The country has the advantages of some of the world's best agricultural land, a globalized population, and a tremendous reservoir of goodwill. It also has the opportunity to bank the peace and cooperation agreements with its northern neighbor. It is remarkable that both countries' strategy of putting military and financial pressure on the other, hoping that their neighbor will bend, has not led to battle. Even if no shots are exchanged, though, that strategy will eventually break both. More than any other single factor, South Sudan's prospects depend on its ability to build a mutually beneficial relationship with its difficult northern neighbor.
 

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