Inflation biting Sudanese ahead of separation

Thu May 12, 2011 6:43am EDT

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* Rising prices hit shoppers and vendors

* Inflation makes economic crisis worse

By Ulf Laessing

KHARTOUM, May 12 (Reuters) - Sitting behind shelves full of canned tuna, chocolate bars, coffee powder and cookies, Abdul-Qader Nasser struggles to remember when business was as bad as now.

His usually busy small shop in Khartoum's central food market is almost deserted as the devalued local currency is driving up prices and deterring many of his customers.

"Fewer people come these days to buy because prices are rising and rising," he said. "Every time I buy supplies from traders I have to pay more and then charge more."

Two months before the oil-rich south of Sudan will become independent after a referendum in January promised under a 2005 peace deal, a surge in food prices is adding to the hardships faced by Sudanese already weary from years of conflict, violence and U.S. sanctions.

Sudan has escaped the mass protests that have swept the Arab world, but inflation hitting 16.5 percent in April is compounding an economic crisis in the north of the country where 80 percent of the population live. With north and south relying on imports, a foreign currency scarcity is biting.

"Despite rising inflation I haven't had a salary increase for eight years," said Sulaiman Mahmoud, who as a university lecturer makes about 1,300 Sudanese pounds ($485) a month.

"Inflation is a big problem."

Youth groups have staged sporadic small protests quickly ended by security forces but analysts say social pressures are building up in the countdown to July 9 when the south becomes independent and the north loses 75 percent of oil production.

"Rising food prices are certainly a risk to state stability," said Aly Verjee at the Rift Valley Institute.

He said the situation was still manageable but "the real test will come later this year when the state treasury has to deal with a sharp reduction in oil revenues while still trying to maintain stable macroeconomic indicators".

LOSS OF OIL

Analysts expect both sides to eventually agree on sharing oil revenues because only Khartoum has refineries and a port to sell the southern oil. But the north will take a hit in any case.

"Independence will have an immediate impact on North Sudan's fiscal and external revenues," the International Monetary Fund said in April, adding that oil revenue loss could widen a fiscal deficit by 3 percentage points of GDP.

"Capital inflows... could decline in the short term, contributing to the emergence of a financing gap that could reach 3-4 percent of GDP in 2012," The IMF said.

The government blames inflation and other economic woes largely on U.S. sanctions, in place since 1997 after Washington accused Khartoum of sponsoring terrorism, which make access for Sudan to many markets difficult.

Opposition activists and also some analysts blame it on overspending, mismanagement and failure to build up non-oil industries and agricultural capacities.

"Much was spent on the wrong projects, on corruption," said a youth activist who was involved in recent small protests.

"People realise it will get worse after the separation when the oil revenues will go down," he said, asking not to be named for fear of reprisals.

Inflation has jumped from 9.8 percent in November, when the central bank effectively devalued the pound to erase the need for a black market and pump liquidity in the financial system.

Bankers say the dollar flow has improved a bit because the government has benefited from high oil prices but many traders still struggle to foot the import bill and even local products have become more expensive.

"Maize has gone up in the past three months," said vendor Hassan, pointing to a pile of locally made maize.

"You need agricultural products like fertilizers from abroad to produce it so the dollar problem has an impact," he said, the same reason vendor Nasser cites for a price spike for sugar.

A meat vendor just up the narrow way, sandwiched by small shops selling everything from lemons to cookies, agreed: "A kilo of lamb sold for eight pounds three months ago. Now it costs ten pounds," he said.

The central bank said this week annual inflation eased to 16.5 percent in April from 17.1 percent in March. Food prices rose by 18.8 percent, a tick down from 20.4 percent in March but many Sudanese see no improvement.

"My husband and I both have state jobs but we spend much on food," said a woman who gave her name as Aiysha as she shopped in the market. "We spend every day 25 to 30 pounds ($10 to $11) on food only. It's very difficult."

(additional reporting by Khalid Abdelaziz)

(Editing by Giles Elgood)

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