Analysis: South Sudan future dicey after oil money loss

JUBA Fri Feb 24, 2012 2:40pm EST

Factbox

Related Topics

JUBA (Reuters) - In an air-conditioned Toyota showroom packed with half a dozen off-road vehicles in South Sudan's capital, dealer Desmond McCue is wondering whether the shutdown of the country's oil production industry means the bonanza is over.

The cars on sale range from a basic $50,000 pick-up truck to the lavish GXR V8 model that costs $84,000 -- plus an extra $10,000 to have it flown in.

"Everybody is worried, but at this stage I don't know how it will affect sales," said McCue.

His Crown Auto Trade dealership has been selling between five and ten GXRs per month, mostly to top officials, who are said to be given an allowance of two cars each in a country the size of France with just 100 km (70 miles) of paved roads.

But seven months after declaring independence from Sudan under a 2005 peace deal, those days of lavish spending on cars may be over after Juba suspended its 350,000 barrels per day of oil production in a row with Khartoum over pipeline payments.

Having lost 98 percent of its income overnight, there are fears the government may struggle to fund salaries or to pay for imports in the coming months, threatening the stability of the world's newest nation.

"No one knows how long the government can hold out, but I don't know of any government that has smoothly shrunk its budget by 98 percent in a matter of months," Jean-Baptiste Gallopin, an analyst at Control Risks, said during a visit to Juba.

Much of South Sudan's stability depends on the morale of its bloated army, a constellation of former militia groups estimated by some officials to number 200,000 soldiers.

The government insists it will not cut salaries to the military though, apparently aware that any such move could be extremely dangerous.

"There's so little cohesion in the army that it's only the pay that keeps them loyal. Security forces will be the highest priority. They'll cut ministers' salaries before they touch the army," said a defense analyst who asked not to be identified.

Inflation, currently hovering around 50 percent, is likely to jump further, possibly stoking unrest in a country where 2.7 million people - or one third of the population - already rely on food aid.

"Before independence, malaria pills cost 15 pounds. Now it's 35," pharmacist Simon Fal said, while sipping tea in a makeshift road cafe.

Like most others, Fal supports the decision to shut down the wells in order to stop Sudan seizing southern oil as part of an ongoing struggle by the mainly Christian and animist South to cement its independence from the mostly Muslim north.

"All people agreed in the shutting down of the oil because it's about dignity. If we maintain our freedom we will gain dignity," he said.

But diplomats wonder whether Juba can survive longer than three or four months as talks stall over how much the landlocked South should pay Khartoum to use its pipelines and Red Sea port.

"The situation is very critical," said Eric Solheim, minister of environment and international development from Norway, which is advising both Sudans on oil issues.

"What is clear is if over time revenues will go down this way, they will have to make deep cuts," he said.

Social pressures could increase in the next few weeks with the return of 700,000 South Sudanese from Sudan where their legal status expires in April.

Juba will have to find housing and jobs for the returnees, stretching resources at a time when the government is struggling to build up functioning ministries.

Even if both sides do strike an oil deal, South Sudan might need substantial aid anyway as it could take up to six months to restart oil production after pipes were flushed with water to avoid sludge forming.

FIRST SIGNS OF STRAINS

Oil is the lifeline of both economies, but the South is more vulnerable because it has almost no other industries to fall back on beyond the oil sector. It also relies heavily on imported goods which are brought in for a hefty premium on unpaved roads from Uganda, Kenya and Sudan. More than 90 percent of its goods come in that way.

No public data exists on dollar reserves. Juba has contracted oil sales worth $3 billion since July but has not said where the revenues have gone. No reserves were mentioned in the 2011 budget.

When Information Minister Barnaba Marial Benjamin announced austerity measures after a cabinet meeting last week, he refused to allow journalists to look at the 2012 budget draft in his hands.

The government says it is confident it can weather the loss of oil with an austerity program and better tax enforcement. But the first signs of strain can already be seen.

The central bank has roughly halved dollar allocations to local lenders and restricted money transfers to Uganda and Kenya, bankers say.

"There is a sense of panic among government and central bank officials who meet with private banks every days to discuss raising new funds," said a senior banker in Juba.

"They have little experience with financial tools such as treasury bills and now need to learn it the hard way," he said, declining to be identified.

The cabinet plans to cut non-salary expenditure by 50 percent. But that might not be enough to make up for the loss of oil revenues as salaries make up roughly half the budget, meaning the total cuts only amount to 25 percent in real terms.

Even if Juba managed to keep paying army salaries, analysts fear the austerity plan will eat into funding required to build up efficient state bodies and fight corruption.

"There is a serious concern that funding for the operations of oversight institutions like the Audit Chamber and the parliament will be cut first, institutions which are ever more critical during times of austerity or crisis," said Dana Wilkins at transparency group Global Witness.

Rampant corruption and cronyism have hampered development in South Sudan, where few roads exist outside Juba. Power is concentrated in the hands of former guerillas who dislike scrutiny.

People in Juba's dusty streets say they back the oil shutdown and are confident they can cope as many basic services are provided by the United Nations and aid agencies.

"The oil doesn't reach normal people. We don't have power, running water or anything, so the shutdown won't affect us," said Malakal Dual, a local pastor.

"It will affect government institutions and those few people who drive cars," he said, sitting by a busy road while a boy polished his shoes.

But an Arab grocery merchant from Sudan working in Juba cautioned: "Without oil it will be very bad."

Norway's Solheim said the austerity measures will affect many people.

"There are many people in indirect dependency on the state budget because those who are on the state payroll support their family and others and it also may affect farming," he said.

FEW OPTIONS

Diplomats expect no quick breakthrough at oil talks in Addis Ababa, which restart on March 6, because the two sides' negotiating positions remain far apart. The South is willing to pay around $1 a barrel as a transit fee but Khartoum wants as much as $36.

South Sudan says it wants to build alternative pipelines to Kenya or Djibouti to end its dependency on Sudan. But Solheim is skeptical.

"I see very few people in the international community who consider this feasible in the short-term," he said during a visit to Khartoum.

As most oil fields were overpumped by Khartoum in the run-up to independence, a pipeline would probably be only viable if new finds are made.

The government hopes that France's Total will make new discoveries in Jonglei. But tribal violence there has hampered exploration. State funds to aid exploration in undeveloped places like Jonglei are likely to be less forthcoming under the new austerity plan.

Experts are also skeptical about plans to borrow abroad using oil as a guarantee since the oil cannot currently be sold.

"This would be possible only with very high interest rates," said Harry Verhoeven, a Sudan expert.

(Reporting by Ulf Laessing and Hereward Holland. Edited by Andrew Osborn)

FILED UNDER: