Sudan currency close to record low as oil talks in stalemate

KHARTOUM Mon Jan 28, 2013 10:50am EST

KHARTOUM Jan 28 (Reuters) - Sudan's currency fell close to a record low against the dollar on the black market on Monday after talks with South Sudan failed to restart crucial oil flows, worsening a dollar scarcity and an economic crisis fuelling dissent.

There is little foreign trading in the Sudanese pound but the black market rate is an important indicator of the mood of the business elite and ordinary people exhausted by years of economic crises, ethnic conflicts and wars.

Sudan avoided the "Arab Spring" revolts which unseated rulers in Egypt and Libya but soaring inflation has sparked small protests against President Omar Hassan al-Bashir, in power since 1989.

The Sudanese pound has more than halved in value since South Sudan became independent in July 2011, taking with it three-quarters of the united country's oil output.

As well as being a major source of revenue for Sudan, oil also provided dollars needed for imports. A scarcity of hard currency drove up annual inflation to 44.4 percent in December.

The currency crisis has been worsened by the shutdown of landlocked South Sudan's oil output a year ago in a dispute over how much the new nation should pay Sudan to transport crude to port using northern pipelines.

The former civil war foes agreed in September to resume oil exports but have been unable to agree on setting up a border buffer zone - a precondition for Sudan for resuming flows.

A meeting between Sudan's Bashir and South Sudanese President Salva Kiir in Ethiopia on Friday, their second summit this month, failed to end the stalemate.

The next round of talks is scheduled for Feb. 15 but diplomats expect no breakthrough due to mutual mistrust on both sides after fighting one of Africa's longest civil wars.

On Monday, a dollar bought 7 pounds on the black market, dealers said. This is close to the record low of 7.1 hit in late December. The official rate stands at around 4.4.

To stop the slide, the government declared war on the black market four weeks ago by arresting dozens of street dealers.

The clampdown brought the rate briefly back to 6.5 but it fell again as import firms depending on the black market ran dry of dollars needed to pay for food items.

"There is now a huge demand for dollars," said one black market dealer in the capital Khartoum. "The clampdown only made things worse because it cut off dollar supplies."

The rate is watched by foreign firms such as telecommunications firms Zain and MTN or Gulf banks who sell products in pounds and then struggle to convert profits into dollars. Gulf investors also hold pound-denominated Islamic bonds sold by the central bank.

STATE TV PROTEST

Finance minister Ali Mahmoud said this month a $1.5 billion loan from Sudan's main trading partner China would help to stabilise the currency.

But analysts said the loan would be most likely project development aid, not badly needed deposits for the central bank.

"There were several statements from officials before the end of the year to reassure us ... but it seems the (foreign currency) market has lost any trust in the optimistic official statements," Sudanese daily al-Ayam wrote in an editorial.

"What is even worse is that the citizen loses trust in statements from officials and their promises," it said.

The dollars crisis has resulted in some foreign-made drugs and food items becoming scarce in shops, adding to people's hardship.

On Sunday, dozens of state television staff staged a demonstration in front of their main building to complain that they had not been paid some of their benefits, a witness said.

"There is a big financial crisis at state television," said one senior staff member, declining to be named. (Reporting by Khalid Abdelaziz and Ulf Laessing; Editing by Pravin Char)