IMF Concludes 2022 Article IV Consultation and IMF Management Completes Second Review Under Staff-Monitored Program with Republic

Washington, DC: On July 29, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with the Republic of South Sudan. On July 18, 2022, IMF Management also approved the completion of the second review as well as an extension of South Sudan’s Staff Monitored Program[2](SMP) which was approved on March 17, 2021.

Under the Revitalized Agreement on the Resolution of Conflict in South Sudan (R-ARCSS), the peace process to end South Sudan’s civil war has achieved some notable milestones since 2018. However, progress has been slower than anticipated, and the global pandemic and devastating floods have further impeded the recovery from the sharp contraction of the economy during the civil war years. South Sudan remains highly dependent on oil, which accounts for nearly all of exports and 90 percent of government revenue. This leaves the country exceptionally exposed to oil price fluctuations. Moreover, the population is critically reliant on international humanitarian aid. Off-budget support from international donors provides for most of South Sudan’s social spending but is set to decline amid shrinking aid budgets and the rising cost of providing such aid.

The authorities have taken encouraging steps to reform macroeconomic governance, liberalize the foreign exchange (FX) market and restore price stability. The removal of most FX restrictions and the authorities’ tight control of the money supply have made it possible for individuals and firms to buy and sell foreign currency at predictable and competitive rates since the start of the SMP in March 2021. This led to a dramatic reduction in inflation, at a time when inflation was rising in many other countries. Public Finance Management and governance reforms have also progressed, albeit slowly. As a result, many of the recommendations of the 2019 Article IV consultation have been implemented, demonstrating traction with respect to IMF ‘s advice, despite the challenging economic environment.

In the short term, the continuing fallout of flooding on oil production will cause a further contraction of output, while inflation is likely to rise temporarily due to the commodity shock from the war in Ukraine and a recent depreciation of the South Sudanese pound. However, the medium-term outlook is for economic recovery and contained inflation. This outlook is predicated on continued implementation of the R-ARCSS, which should deliver peace dividends to the non-oil sector, and prudent fiscal and monetary policies that keep the growth of money and prices in check. The authorities will also need to find ways to close the sizeable medium-term fiscal and BOP gaps that arise from the need to expand development and social spending, service a large volume of highly non-concessional debts, and tackle a legacy of payment arrears.

Executive Board Assessment[3]

“Executive Directors agreed with the thrust of the staff appraisal. While welcoming the projected medium-term economic recovery, they noted the negative short-term outlook and large downside risks due to external shocks and Russia’s invasion of Ukraine, political uncertainty, and extreme flooding that is exacerbating an already high level of food insecurity. In this context, they underscored the importance of advancing the implementation of the 2018 peace agreement as well as of continuing prudent macroeconomic policies to maintain economic stability and debt sustainability while enhancing social spending, implementing governance and transparency reforms, and building resilience.

“Directors welcomed the reforms implemented under the Staff Monitored Program (SMP) including improvements in macroeconomic management and the exchange market liberalization reforms, which have led to the unification of exchange rates and restored price stability. To sustain these reforms, they encouraged the authorities to establish the needed safeguards including replenishment of international reserves, maintaining steady reserve money growth, and gradually expanding the central bank’s toolkit and capacity. Furthermore, Directors encouraged the authorities to press ahead with their plan to address the issue of undercapitalized, non-systemic, banks. AML/CFT reforms in coordination with the Financial Action Task Force are also important.

“Directors encouraged the authorities to consolidate the gains under the SMP by keeping money growth stable and managing public finances prudently. They noted the delays in the implementation of public finance management reforms and encouraged the authorities to re double efforts to safeguard the integrity of the budget process and debt management, including avoiding the recurrent accumulation of salary arrears. To that end, Directors urged the authorities to enhance transparency and accountability in the management of public finances, especially in relation to the use of oil revenues. These include publishing regularly budget implementation reports, establishing mechanisms to ensure that spending is consistent with the approved budget, and protecting budgeted expenditures-most notably public sector salaries. Directors also urged the authorities to complete the audit of all outstanding external loan agreements and guarantees and to publish the results of the audit as targeted under the SMP. Directors noted that the authorities have indicated their intention to apply for an ECF alongside the final review of the SMP. While some Directors welcomed such a request, most Directors agreed that discussions about such a program would require satisfactory completion of the SMP and demonstrated capacity to implement a UCT-quality program, with a few Directors emphasizing the need for further progress on governance safeguards to monitor the use of funds.

“Directors agreed on the importance of financial and capacity development support from the international community and development partners in light of the very difficult humanitarian situation, significant fiscal gaps to address the country’s development needs, and limited implementation capacity. They welcomed the closer IMF engagement, particularly through IMF capacity development support. Directors were also encouraged by the authorities’ commitment to pursue economic reforms with a view to unlocking further support from donors and the international community.”