FEATURE-Dollar shortage hits investment in Sudan

Wed Jan 25, 2012 9:00am EST

* Loss of oil revenues hits hard currency supplies

* Black market currency rate rises above official rate

* Businessmen find it harder to operate

* But foreign interest in natural resources still high

* Government overhauling regulation to spur investment

By Ulf Laessing

KHARTOUM, Jan 25 (Reuters) - Sudanese entrepreneur Mohammed sees plenty of sales potential for pharmaceutical products in his country but has sleepless nights over how to pay his suppliers in Germany and Britain.

Like many Sudanese firms selling foreign products, he struggles to get his hands on dollars to pay for imports as the country grapples with an economic crisis.

"I don't know how to pay my partners for their next shipment," said Mohammed, a sales agent for several foreign pharmaceutical firms in Sudan, who asked to be identified only by his first name because he feared government displeasure if he talked about the crisis.

"I constantly worry about how to get dollars."

Doing business has never been easy in Sudan, which suffers from a U.S. trade embargo, poverty, high inflation and the legacy of years of armed conflict. Even so the country, home to 32 million people and rich in oil, minerals such as gold and copper, and vast areas of farmland, has always attracted investors who do not mind taking some risks.

But the investment climate has deteriorated further since South Sudan took away two-thirds of the country's oil production when it seceded in July. Since then, Sudan's oil revenues, which used to make up 90 percent of the country's exports and were the main source of hard currency inflows, have largely dried up.

As a result, the central bank is struggling to supply commercial lenders, trading firms and other companies with dollars to pay for foreign products and keep their operations going -- at a time when tensions in global financial markets are making it more difficult for weak economies to obtain international financing.

With not enough dollars available at banks, businessmen are turning to the black market, where demand has driven the dollar exchange rate to the Sudanese pound 60 percent or more above the official rate. A dollar bought around 4.8 Sudanese pounds on the black market in Khartoum this week, compared to the official rate of around 3.

"It's a nightmare," said an Indian investor who has been active in Sudan for many years. "It's become difficult to import spare parts or raw materials because you need to buy dollars for a premium on the black market."

Mohammed, the pharmaceutical trader, said his profit margin has dropped considerably because of his visits to the black market, a move which carried the risk of prosecution by legal authorities. "I sometimes have to reject deals because I cannot get dollars."

Even after dollars are obtained, the problems are not over in paying producers abroad.

Local firms need import certificates from the central bank, which are normally issued after dollars are changed there at the official rate. Since many firms rely on the black market, they struggle to get certificates and often have to pay hefty fees.

Because of the U.S. trade embargo, which was first imposed in 1997 for Sudan's past role in hosting militants such as Osama bin Laden, many foreign banks refuse to deal with the country. Western banks routinely reject bank transfers to Sudan, forcing firms to open bank accounts abroad. Even then, many foreign banks insist that Sudan should not be mentioned in transfer documents, bankers say.

"I pay my clients through a bank in Dubai or another African country," Mohammed said.

INTEREST IN OIL

There are no reliable, recent data for foreign direct investment in Sudan. According to the latest figures from the United Nations Conference on Trade and Development, the country attracted a net $1.6 billion of direct investment in 2010, the year before the South seceded, down from a peak of $3.5 billion in 2006.

Those amounts point to the attractions of Sudan's mineral wealth. Nearby Kenya, for example, attracted just $133 million of foreign investment in 2010 despite being a more modern and diversified economy, according to UNCTAD.

When the Sudanese oil ministry launched a bidding round this month to explore new oil and gas blocks within the country's new border, the biggest room in a luxury hotel in Khartoum was packed to the last seat with foreign executives from 41 firms.

Chinese, Indian and other Asian investors have been always active in Sudan, shrugging off U.S. sanctions. But the bidding conference for new oil blocks also attracted firms from Canada, Egypt, New Zealand and Spain, Sudanese officials said.

"Sudan is a sleeper. The investment environment is challenging but we see good opportunities," said Gregory Channon, a director at Canadian oil and gas exploration firm Statesman Resources, which is considering whether to bid.

The question is whether Sudan can overhaul its economic regulation and solve problems such as the hard currency shortage in order to maximise new investment. The government is reforming its investment law to reduce bureaucratic red tape and ease taxation of investors.

"There is a general consensus that there should be a tax relief for strategic projects to encourage employment or development," said Abdulrahim Hamdi, a former finance minister.

"Competing countries around us in the area are giving tax reliefs so we cannot say no. We need to do this."

But he said restrictions on foreign firms exporting profits in dollars were a big obstacle. Outside the oil sector, firms can only repatriate profits in hard currency in small amounts, as the central bank tries to halt the slide of the Sudanese pound by keeping dollars inside the country.

Analysts say foreign cell phone operators and airlines often sit on accumulated profits made in Sudan as they struggle to send the money to their headquarters.

"You need to be very creative in bringing out money," said one Sudanese financial consultant. "Some investors try smuggling out dollars in bags through the airport, though this is risky if they catch you."