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Sudan to lift fuel subsidies to close budget gap

Central bank governor says the country will gradually roll back subsidies to offset the loss of economically vital oil reserves due to the south's secession

Reuters, Monday 31 Oct 2011
Sudan oil
Desperately missing oil: processing facility in Sudan's South Kordofan state (Photo: Reuters)
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Sudan will gradually end fuel subsidies to help offset the loss of oil reserves to newly-independent South Sudan as the African country is battling an economic crisis, the central bank governor said in remarks published on Monday.

Sudan lost around 75 per cent of the country's oil production of 500,000 barrels a day when South Sudan became independent in July after an referendum agreed under a 2005 peace agreement. Oil is the lifeline of both economies.

As a result, north Sudan has been thrown into turmoil with inflation spiralling as the loss of oil revenues has cut the inflow of hard currency. The capital Khartoum has seen small anti-government protests in the past few weeks.

Central bank governor Mohamed Kheir al-Zubair told al-Sudani daily that Sudan would gradually lift fuel subsidies, a sensitive issue for ordinary Sudanese hit by a U.S. trade embargo and years of conflict.

"Subsidies are a big burden for the state. The biggest subsidy is for fuel," he said, adding that a barrel of fuel was sold locally at $60 compared to a market price of $100.

"So far we didn't notice the difference, subsidies were no problem because the country had oil...(but) we cannot pay this anymore," he said, without giving a time-frame for the cuts.

He also hinted the central bank wants at some point to move away from its fixed exchange rate regime for the Sudanese pound to bridge the gap with the black market.

The pound has fallen against the dollar on the black market by up to 60 per cent below the official rate due to a shortage of hard currency since July.

On Monday, a dollar bought 4 pounds compared to the official rate of around 3, black market traders said. The black market rate hit 4.5 to 4.8 earlier this month.

"The goal for the exchange rate is to return to the situation in 2006 when prices were determined by demand and offer," Zubair said.

"We said we want to do this gradually. It would be easy to immediately liberalise the exchange rate but this would create difficulties," he said.

Last November, the central bank had tried to narrow the gap to the black market by effectively devaluing the pound but the measure has had little success.

Zubair also said Sudan expected landlocked South Sudan to pay $1.8 billion for arrears to use northern oil export facilities - a figure Juba is likely to reject as it expects only $2.14 billion from total oil sales from July to October.

South Sudan needs to export its oil via the northern Red Sea port of Port Sudan because is has no port or refineries. Bilateral talks to reach a deal on a fee have collapsed after the north demanded $32 a barrel which the South rejected.

Analysts say it is likely that both sides will agree on a fee than the 50-50 split of oil revenues so far.

North Sudan wants to cut expenditures by more than 25 per cent this year to make up for the loss of oil revenues and bridge a budget deficit. The central bank has asked fellow Arab states to put deposits worth $4 billion in the central bank and commercial lenders.

Zubair said Qatar, Saudi Arabia, the United Arab Emirates, Algeria and Iran had pledged some support to Sudan but he gave no details. 

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