South Sudan faces impending economic collapse

By Havard Bergo,

Global Risk Insight

May 03,2015(Nyamilepedia) —  Oil production has been slashed and oil revenues hurt by falling prices, depriving the government in Juba of most of the money it desperately needs. The UN warns that South Sudan’s economy is edging towards a complete collapse, as authorities begin printing money to fund state services.

The power struggle between President Salva Kiir and former Vice President Riek Machar has caused tens of thousands of civilians deaths and displaced nearly 2 million people, all but destroying any progress made in South Sudan, the world’s youngest nation.

The struggle started as a political conflict within the SPLM, the liberation movement-cum-main political party, stemming from serious dissatisfaction over Kiir’s governance and disagreement over party leadership. The war has since largely been fought along ethnic lines – Kiir being Dinka and Machar being Nuer – and has seen ethnic cleansing and civilian massacres on a large scale.

South Sudan is now facing a complete economic collapse, with the Juba government reportedly printing money to cover their expenses. Toby Lanzer, the top UN humanitarian official in the country, recently warned of the financial dangers of this practice, emphasizing that “printing money when there is nothing to back the value of that currency usually leads to hyperinflation.”

Oil revenues are down 75%, partially from output reductions due to the ongoing violence and as a result of the sharp drop in global prices. This has made it increasingly difficult for the government in Juba to fund their bills and pay their salaries, the large majority of which goes to the army and the police.

Oil production seriously hit

South Sudan has the third largest oil reserves in Sub-Saharan Africa, and oil exports account for virtually all government revenues.

Output was at 350,000 barrels a day in 2011, shortly before Juba shut down production due to a payment dispute with Khartoum, the seat of the Sudanese government. South Sudan is dependent on Sudanese pipelines, refineries, and port facilities in the Red Sea, and the northern government, having lost major parts of their reserves when the south seceded, demanded a transit fee of $32-36 per barrel in an attempt to cover some of their losses.

The two countries resolved the dispute in 2013 (settling at $24-26/bbl) and production reached 240,000 barrels by the summer. Then, fighting broke out, and rebels seized large swaths of the oil fields, reducing output to an average of 160,000 barrels in 2014.

The government barely made $3.38 billion in oil revenues last year, of which $884 million was spent on costly transit fees to Sudan. A major strategic and economic goal for South Sudan is to lessen their dependency on Khartoum by developing alternative outlets for their crude oil exports.

The Toyota Tsusho Corporation has undertaken a feasibility study for constructing pipelines through Ethiopia to Djibouti and to the Kenyan port of Lamu, and the South Sudanese government has signed MoUs with all three countries to explore these possibilities. However, the projects were put on hold due to security concerns, and foreign investors and construction companies are not in a hurry to get involved anytime soon.

A political conflict turned ethnic

Serious clashes occurred last week in Malakal, the capital of the oil-rich Upper Nile state, which has changed hands numerous times since fighting broke out. Fighting is still ongoing, despite four failed peace agreements signed in the last year and a half.

Halle Jørn Hanssen was invited by President Kiir to mediate in Juba in October before the war broke out, when a conflict between Kiir and several of his deputies had already been brewing for months. “It was essentially about who should lead the country after the 2015 election, about who should have power in the country,” Hanssen, a former leader of the aid organization Norwegian People’s Aid that worked for decades in the country, told GRI.

He claims that widespread dissatisfaction with the corrupt and inefficient leadership of Salva Kiir quickly spread in the years after independence: “It was very visible that a few people in Juba became immensely rich, while most people saw little or very little development.”

Hanssen dismissed the official argument that Machar and the rebels were planning a coup before the war broke out. Having participated in several projects for democratic development in South Sudan, he instead stressed the increasingly authoritarian tendencies of President Kiir and his unwillingness to share power with his war-time allies. The president, Hannsen said, faced huge pressure from within his own tribe, in particular from the informal Dinka Council of Elders, to fight for their “special rights” to rule in the new South Sudan.

This tribal factor led to the decision to secretly raise a militia of thousands of Dinka youths outside of the capital. ”The Dinka leaders had taken the decision to massacres the Nuers in Juba. They had secured maps and lists of names showing where the Nuers lived (…) killing probably more than 20,000 in Juba alone”.

Economy might be a solution to war

The inequitable distribution of oil revenues was a key factor behind the war. With exports falling and government finances in an abysmal condition, it is increasingly difficult to fund even the scarce state services, let alone the huge costs of running a war.

It is estimated that the war could go on to cost the country $28 billion over the next five years, as well as $53 billion in neighboring countries for refugee expenditures and spillover effects. The dire economic situation might give the warring parties an incentive to reach a temporary solution, yet huge progress must be made to reconcile the underlying causes for the conflict.

• Global Risk Insight