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Key political risks to watch in north and south Sudan

The two states must reach agreement on key economic and political issues, including oil revenues, contested borders and Nile water resources

Reuters , Tuesday 2 Aug 2011
Sudan
South Sudan's president Salva Kiirr(left)and Sudan's President Omar al-Bashir (right)at the start of independence celebrations in Juba, South Sudan, Saturday, July 9, 2011 (AP)
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North and South Sudan still face disputes over sharing oil revenues and calming border regions after southern independence as both nations seek to overcome serious economic challenges.

Sudan's south became independent on July 9 after voting in a January referendum agreed under a 2005 peace deal to part from its former civil war foe.

But they have so far failed to sort out major economic issues such as dividing oil revenues and other assets, coordinating the launch of their new currencies and resolving outstanding disputes over the border or the contested Abyei region.

Assets at stake include millions of acres of fertile land, gold, oil and the waters of the river Nile.

Following are factors to watch:

Northern President Omar Hassan al-Bashir travelled to the south's independence ceremony and pledged to work with Africa's newest nation, allaying fears of a return to civil war.

But economic tensions have risen in the past weeks after both sides failed to reach an agreement how to divide up oil revenues, the lifeline for both economies. Around 75 percent of the country's 500,000 barrels a day oil production now comes from the South.

The South seeks to pay less than the 50 percent agreed under the 2005 peace deal but needs the North to use its pipeline, refineries and port to sell the oil.

The South accused the North of "daylight robbery" by demanding a pipeline usage fee that amounts to 20 percent of its export value, according to Reuters calculations.

The North has not responded yet to the accusations but assumed stable oil revenues in its 2011 budget -- suggesting Khartoum will be tough in any future talks.

Both sides have also failed to coordinate the launches of their new currencies. Unless they sit down and reach an agreement, billions of existing Sudanese pounds circulating in the south will be worthless, a blow to the new country.

But Khartoum also faces the risk of old notes trickling back to the north which could add to high inflation.

On the political front, both countries have not reached an agreement on the contested Abyei region into which the north sent troops and tanks in a power play in May, triggering the exodus of tens of thousands civilians. The U.N. Security Council has now deployed Ethiopian peacekeepers to Abyei.

There is also no end in sight to violence in the northern oil state of South Kordofan where fighting broke out in June between the army and armed groups allied to the south. The joint border needs marking, too.

Analysts say the violence could spread to other parts of North Sudan such as Blue Nile, home like South Kordofan to many former southern rebels, and Darfur, the scene of a separate insurgency.

What to watch:

-- Continued meetings. The worst moments of the past five years came when the parties stopped talking. A series of post-referendum meetings would promote confidence.

-- Oil revenues. Any details or signs of escalation over the transit fee the South will have to pay. Any signs that the North will stop southern exports.

-- Currency issues. Will both sides reach a deal of the existing notes in the south worth $700 million according to the south.

-- Abyei. Will both sides agree on a referendum that was supposed to happen with the southern independence vote?

-- Nile water. Sudan's split has created a new country in the Nile Basin. There is a bitter dispute between Egypt, which refuses to give up its major share of the Nile waters, and other basin countries which suffer drought and famine. South Sudan is likely to support its East African neighbours.

ECONOMIC CRISIS

After years of relying on oil revenues, which make up more than 90 percent of Sudan's exports, the growing import bill has caught up with Khartoum. Banks are unable to meet the demand for foreign currency in the country, forcing an effective devaluation of the Sudanese pound and driving up inflation.

Khartoum has avoided an "Arab spring" witnessing only small protests but many ordinary Sudanese fret about annual inflation which has shot up to 15 percent in June from 9.8 percent in November.

With oil revenues expected to fall it will be harder for the government to get foreign currency needed for food and other imports. Plans to diversify the economy are in an early stage.

With no end to a U.S. trade embargo in sight the North will continue to be shut off from international markets, making borrowing to fund its budget difficult.

What to watch:

-- Central Bank restrictions on exporting foreign currency remain, reducing the ability of foreign firms to repatriate profits. This will hit foreign direct investment, already down because of worries about the split.

-- Will inflation further rise? Can the central bank stop a fall of the pound ? It devalued the pound in November by telling banks to buy and sell foreign currency at a rate then almost equal to the black market, hoping to bring liquidity back into the official system but the policy has had little success.

-- Will Khartoum have to cut spending at a time of grave challenges as oil revenues are expected to fall?

SOUTH SUDAN

South Sudan in 2005 was one of the least developed regions in the world. The southern ruling Sudan People's Liberation Movement (SPLM) has struggled to find the calibre of people to run a government and to entice talented members of the southern diaspora back home. So development has been very slow.

Politically and militarily the south needs to ensure it opens a dialogue with the opposition to build the kind of multi- party democratic state donors will want to see in return for their financial support. But a transitional constitution gives President Salva Kiir wide powers.

The biggest challenge will be to build an economy that now depends by 98 percent on oil. Investors have been reluctant to commit money due to a lack of infrastructure, corruption and rampant rebel and tribal violence.

The growing numbers of rebellions in southern oil areas could create a humanitarian emergency in the region, soaking up aid meant for development.
What to watch:

-- Failed state syndrome. Some analysts believe the south without its northern enemy will descend into chaos amid ethnic rivalries, political meddling and cattle raiding.

-- The south must start from scratch to build a new nation with a small budget. Help from donors may be less forthcoming following the global financial crisis.

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