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S.Sudan oil shutdown weighs as pound falls, tax hikes loom
March 26, 2012 / 11:21 AM / 5 years ago

S.Sudan oil shutdown weighs as pound falls, tax hikes loom

* New customs levies rolled out amid tax hike rumours

* Big opportunities but tax rumours hit morale: investors

* South Sudan shut down oil industry in January

* Dollars seen scarce, fuelling inflation fears

* South seen giving some ground in oil talks with Khartoum

By Ulf Laessing

JUBA, March 26 (Reuters) - South Sudan’s economy is buckling under the strain of an oil industry shutdown that followed a row with Sudan, hitting its currency and sending officials scrambling for ways to make up for lost revenues.

Some firms granted trade exemptions are suddenly being billed for customs duties, and tax increases are looming, weighing on confidence, executives attending an investment conference in the new African nation’s capital Juba said.

Oil production used to account for 98 percent of the budget in South Sudan, which became independent in July under a peace deal with Sudan that ended decades of civil war and opened up a potentially lucrative new frontier market to the international business community.

But the neighbours have been unable to agree how much Juba should pay to export its crude through Khartoum’s pipelines and port.

Juba halted oil output in January to stop Khartoum siphoning off part of the supply to make up for what the latter calls unpaid transit and other fees.

Southern officials, who say Juba can live off its foreign exchange reserves, last week sought to assure 180 foreign firms invited to the country’s biggest ever business conference that the row will not hurt the climate for badly-needed investments.

“The right policies will be applied...The central bank is very resourceful,” Commerce, Industry and Investment Minister Garang Diing Akuong told the event attended by 300 participants.

But executives say signs of strain are visible, with the South Sudanese pound losing ground against the dollar on the key black market.

One dollar now buys between 3.8 and 4 pounds compared to 3.55 before the shutdown, black market traders say. The official rate stands at around 3.1.

“There is a shortage of dollars. It gets noticed since the country totally relies on imports,” one banking executive said.

Banking sources said the central bank had sharply cut dollar supplies to commercial banks and foreign exchange bureaus to preserve its foreign reserves.

“We get around 20 percent of what we used to get allocated,” another banker said.

Central bank officials could not be reached for comment.

Thanks to oil revenues netting more than $2 billion since independence, the central bank had managed to bring down annual inflation to 42 percent in February from 78 percent in November.

But bankers say inflation is now likely to rise again as imports become more expensive and the government uses its dwindling reserves mainly to pay salaries.

The country’s stability hinges on the well-being of its sprawling army, composed largely of former militias.

HIGHER TAXES?

Battered by decades of conflict with Khartoum, South Sudan has practically no industry outside the oil sector. It imports almost everything, from sugar to furniture to cars, most of it trucked in for a premium on bad roads from Uganda or Kenya.

Some investors in South Sudan say authorities have started imposing more customs duties and are getting stricter about collecting taxes - even on firms granted waivers as an incentive to invest.

“We have a contract which says we are customs and duty-exempted for the first ten years as incentive to attract investors,” said Peter Schuurs at Concord Agriculture, a unit of Egypt’s Citadel Capital, which is growing crops in Unity state.

“And then all of a sudden you get a (customs) duty of 20 percent,” he said. “At the border between Uganda and South Sudan there is a problem at the moment.”

Another foreign executive, also attending the Juba conference, said he had been told informally by officials that his company will have to pay higher taxes.

“There is rumour about a new state tax revenue document ...(but) nobody will give you a figure. We hope it will be only a small increase but you don’t know until you see it,” he said.

Oil talks are scheduled to resume in Juba on April 3 with a summit between Sudan’s President Omar Hassan al-Bashir and his southern counterpart Salva Kiir.

Positions seem far apart with Juba willing to pay around $1 a barrel as transit fee and Khartoum demanding $36, though the South has recently struck a more conciliatory note.

Juba’s top negotiator Pagan Amum said on Saturday he hoped a deal could be reached within two months, a U-turn in rhetoric after attacking Khartoum for weeks.

Diplomats see this as a sign that some officials in Juba realise a hasty shutdown, which was completed within days, may have been a mistake.

Even in the event of deal it could take six months or more to resume full production as pipes have been flushed with water to avoid gelling, the main Chinese-Malaysian oil operator Petrodar says. (Editing by John Stonestreet)

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