CAIRO (Reuters) - Sudan’s new cabinet faces pressure to push through rapid currency reform or risk endangering its path to debt relief and to international financial support for its shaky political transition, diplomats and analysts say.
Failure to devalue the currency has already delayed hundreds of millions of dollars in aid for a flagship, donor-funded welfare programme intended to ease the pain of a long-running economic crisis and the removal of fuel subsidies.
A ministerial overhaul was completed on Monday to include representatives of rebel groups that signed a peace deal with the government last year, an important step in the political transition after the overthrow of Omar al-Bashir in 2019.
But a weak civilian administration is locked in an uneasy power-sharing arrangement with the military and has faced an array of challenges including record floods, instability on the border with Ethiopia, coronavirus, and violence in the western region of Darfur where international peacekeepers are pulling out.
An economic crisis that contributed to Bashir’s downfall has deepened. Inflation stood at 254% in December, one of the world’s highest rates, and the Sudanese pound has slid rapidly on the parallel market.
Informal currency traders were asking more than 400 pounds for a dollar on Monday, up from about 260 pounds on Jan. 1 and against an official exchange rate of 55 pounds to the dollar.
Protests over living conditions broke out in Khartoum last month, and spread to other cities this week. There are frequent shortages of fuel, electricity, bread and medicine.
“The economy remains the number one political risk to the country’s transition,” said Jonas Horner, Sudan analyst at the International Crisis Group. Failure to respond adequately “is likely to undermine the prospects for civilian rule”.
Sudan has removed fuel subsidies that cost the state several billion dollars per year, a key requirement of a 12-month Staff Monitoring Programme with the International Monetary Fund (IMF) endorsed last September.
But a delay in moving to a “unified market-clearing exchange rate”, another structural benchmark set by the IMF with a target date of September 2020, risks jeopardizing the programme, which Sudan must complete to get relief on $60 billion in foreign debt under the Heavily Indebted Poor Countries (HIPC) initiative and to unlock funding from international lenders.
The delay also imperils the delivery of bridge loans from the United States and Britain to clear $1.6 billion of Sudan’s World Bank and African Development Bank arrears.
The deadline is tight because the IMF is due to report to its board on Sudan by the end of March, and requires a satisfactory track record of six months when it makes its final report in September.
“The situation in Sudan is quite dire,” said a source close the process. “The longer it takes to get to debt relief, the sense is that, the higher the risk of not making it.”
But fear of public reaction, leftist resistance to IMF-led reforms, and the search for a buffer of foreign reserves have held up devaluation, officials, donors and analysts say.
Donors and lenders say unifying the exchange rate would not trigger significant further pressure on the currency or inflation since almost all transactions are already carried out at black market rates.
Sudan is printing less money, which should ease inflationary pressure and has made progress on other benchmarks including beginning to publicly list details of state-owned enterprises, they say.
The delay in exchange rate reform is also holding up the roll-out of a family support programme to pay a monthly $5 cash subsidy to 80% of Sudan’s population.
Some $400 million in aid and World Bank pre-arrears clearance grants for the first phase of the programme has been withheld because the money would be worth much less if converted at the official exchange rate.
Hiba Mohamed Ali, who was replaced as acting finance minister by Darfur rebel leader Jibril Ibrahim on Monday, told Reuters that the family support programme would be rolled out this month at the parallel rate.
But she added that Sudan would only move on currency reform when conditions were right and there were foreign reserves in the central bank.
Sudan’s central bank did not respond to requests for comment.
“The general sense among Western and like-minded donors is huge frustration,” said one diplomat from a donor country. The message from donors to Sudanese authorities was: “This will unlock huge amounts of financing, grants, assistance, development, investment, and the situation is just becoming worse and worse day by day,” the diplomat said.
The government took an apparent step towards currency reform last month by authorizing remittances to be brought in at the parallel exchange rate.
At a news conference announcing the new cabinet, Prime Minister Abdalla Hamdok said: “The new government’s programme allows us to overcome obstacles, chief among them handling Sudan’s debt.”
Reporting by Nafisa Eltahir in Khartoum and Aidan Lewis in Cairo; Additional reporting by Khalid Abdelaziz in Khartoum and Andrea Shalal in Washington, Editing by William Maclean
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