Possible economic strategies to diversify the crude oil-based economy in South Sudan

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POSSIBLE ECONOMIC STRATEGIES TO DIVERSIFY

THE CRUDE OIL-BASED ECONOMY IN SOUTH SUDAN

Abe Khamis Kambamba

STUDENT No: 209910119

EDS 504

This study was presented in partial fulfilment of the requirements

for the degree of Master of Arts in Development Studies at

Nelson Mandela Metropolitan University

Supervisor: Dr Savo Heleta

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ABSTRACT

Post-independence South Sudan has many areas in which progress is required in order to develop the economy. South Sudan’s economy, for is still run largely (98%) on oil revenues. In order to improve the standards of living of the citizens, good governance, transparency and accountability are the key. These will help build confidence, stability as well as the credibility of the government. How to achieve diversification of the economy in order to move away from the overdependence on oil will be the focus of this research.

Diversification, especially in the context of small and fragile economies, has become an important topic. This research will investigate possible economic strategies to diversify the crude-based economy in South Sudan and will assess the circumstances under which economic diversification can be achieved. The research will identify and analyse the issues that impede and hinder economic growth in the non-oil sectors of the South Sudanese economy and explore how far the government has delivered the conditions necessary for the private sector to grow so that it can contribute considerably to the diversification and growth of the economy and the nation.

This research was started in 2012, one year after South Sudan got its independence from Sudan. The country’s first Development Plan was rolled out in 2011. Unfortunately, a war broke out in December 2013, disrupting life in the new country, especially economic activities. A peace treaty has since been signed to end the war. The government, however, still continues forward with just one source of revenue – oil. Nonetheless, the findings of this research will offer an analysis as well as recommendations for ways to diversify the South Sudanese economy once peace is firmly established in the country.

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DECLARATION

I, Abe Khamis Kambamba, student number 209910119, hereby declare that this Guided Research Report for MA in Development Studies is my own work and that it has not previously been submitted for assessment or completion of any postgraduate qualification to another University or for another qualification.

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ABBREVIATIONS

UN United Nations

NGOs Non-governmental organisations AU African Union

SPLM-DC Sudan People’s Liberation Movement - Democratic Change RSS Republic of South Sudan

FDI Foreign Direct Investment TTs Telegraph Transfer

BOSS Bank of South Sudan

GOSS Government of South Sudan SPLA Sudan People’s Liberation Army SSPS South Sudan Police Service NCP National Congress Party

DDR Demobilisation, disarmament and re-integration SSDP South Sudan Development Plan

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CHAPTER ONE

1.1 Rationale and background of the study

The economy of the Republic of South Sudan (RSS) is driven by one major revenue source – oil (SSDP 2011-13 2.4.2.1). South Sudan secured its independence from Sudan in 2011. The country’s population is just over 8 million people, while it has a total area of 644,329 sq. km. More than half (51%) of the population is below the age of eighteen; 72% of the population is below the age of thirty; 83% of the population is rural; 27% of the adult population is literate and 51% of the population live below the poverty line. Since the end of the war in 2005, however,55% of the population now has access to improved sources of drinking water (Kaplan, 2007). The communication and transportation networks are poor, with less than 200 km of paved roads. About 85% of the oil output, which before 2011 was controlled by Sudan, is located in the now independent South Sudan.(USAID JUBA 2011).

South Sudan’s strength at present lies in its unexploited natural resources. It is rich in oil. The country also has large deposits of minerals such as gold, copper, iron ore and zinc chromium as well as game parks with diverse flora and fauna for tourism. There is also an abundance of forest reserves and fertile land watered by the Nile River which comes with high rainfall. However, many of the natural resources and minerals, apart from the oil, are not economically exploited on a large scale.

The country’s weaknesses lie in its past, as it has been riddled by decades of conflict, violence and destruction, which have left neither industries nor an effective education and skills base amongst its peoples. The South Sudanese society is not homogeneous; it is comprised of 64 different ethnic and tribal groups. Furthermore, the country is effectively landlocked, with Ethiopia, Kenya, Uganda, the Democratic Republic of Congo (DRC) and the Central African Republic (CAR) surrounding it.

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underdeveloped, has inadequate infrastructure, and is dominated by an oil economy. Since 2005, 98% of South Sudan’s budget has come from oil revenues. The GDP in 2011 was estimated to be 13.227 US dollars; GDP per capita 1,546; inflation (cpi) 46.2% (July 2010-July 2011) (Danieiwitz, 2011). Oil export amounted to 71% of the total GDP in 2010, which was 30 billion Sudanese pounds, according to the National Bureau of Statistics 2011. The sector areas of agriculture and forestry, roads and road transport, energy (electrical power supply), mineral and mining, animal resources and fisheries, and water resources are underdeveloped. The country does not have any major industries apart from the oil industry. All processed goods are imported, and 78% of households depend on crop farming or animal husbandry as their primary source of livelihood. Oil and the public sector dominate the formal economy. The rates of unemployment and underemployment are very high, with little formal sector employment (Evans, 1999).

South Sudan has many areas in which progress is required in order to develop the economy. To improve the standards of living of citizens, good governance, including transparency and accountability, is the key. This can help build confidence, stability and the credibility of the government. Therefore, ensuring macroeconomic and fiscal stability and diversification of the economy in order to move away from the overdependence on oil will be the main aspects of this research (Evans, 1999).

1.2 Statement of purpose

A strong, growing and sustainable economy is the goal of every nation in the world. A sustainable economy enhances a nation’s standard of living by creating wealth and jobs, encouraging the development of new knowledge and technology, and helping to ensure a stable political climate. An economy needs to be based on a wide range of profitable sectors in a country. Economic diversity and sustainability are interlinked, can help reduce a nation’s economic volatility and assist in the creation of strong institutions, sustainability and service delivery (Rodrik, 2008).

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The purpose of this research is to identify and analyse the issues that impede and hinder diversification and economic growth in the non-oil sectors of the South Sudanese economy. The research will explore how far the government has delivered the conditions necessary for the private sector to grow so that it can contribute considerably to the economy.

1.3 Aims and objectives

The research aims to explore the factors that prevent or hinder economic diversification in South Sudan. It also aims to suggest the opportunities available to South Sudan to diversify its economy so that it can avoid depending only on oil resources. The objective of the research is to offer recommendations for possible economic diversification in South Sudan in the near future.

1.4 Scope of research

This research will focus on the attempts (or the lack of attempts) to diversify the South Sudanese economy, focussing specifically on South Sudan since independence (2011 to 2014) and with specific attention on the capital, Juba, which is the centre of national government. The research will focus on identifying government policies that either hinder or enable economic diversification and the economic growth of non-oil sectors, concentrating on the economic and policy environment.

1.5 Methodology

Using a qualitative research method, the study was carried out using desktop research for the policy analysis and field research through the use of semi-structured interviews with selected respondents in South Sudan. More specifically, respondents who were

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government officials in Juba. The respondents were purposefully selected due to their knowledge of the topic under discussion.

This exploratory and descriptive research is designed to acquire information on South Sudan’s economy since independence. The descriptive nature of the research will explain the current state of affairs, with a narration of facts and negative policies impeding the diversification of the economy. This description and narration will seek to expose the underlying factors that hamper economic development in South Sudan (Rodrik, 2004).

A non-probability sampling method was used to gather relevant data through semi-structured interviews. In this way, the researcher deliberately selected categories of respondents who would yield constructive and reliable responses to the research questions and suggest ways of diversifying and developing the economy.

Nine respondents in total were interviewed and their views evaluated:

1. Ministry of Finance, Director for Planning

2. The Chairman, Central Equatorial Business Corporation 3. Commissioner General, South Sudan Customs

4. Development Consultant, National Reconstruction and Development Commission, Juba

5. Chairman, Yei Business Association

6. Assistant Commissioner of Agriculture, Yei County

7. Advisor, Ministry of Cooperatives and Rural Development, Juba 8. Manager, Green Belt Seed, Yei County.

9. Official, Central Equatoria Chamber of Commerce

Data for this study was obtained from both secondary sources and semi-structured interviews. All interviews were administered after receiving informed consent from

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respondents, and the privacy and confidentiality of participants was fully respected. Names will not be mentioned in the research.

For the interpretation of data from the interviews and secondary sources, the researcher has used data coding to analysis the qualitative data. In addition, the provision of some basic evidence, such as pictures, helps to illustrate the current economic situation in South Sudan. The data will be arranged thematically with regard to the objectives of the research and the main observations will be synthesized, conclusions drawn and recommendations made (Brookings, 2011).

Five questions on diversification were discussed with the respondents:

1. What do we mean by economic diversification? 2. Why the concern with diversification?

3. What constraints are preventing the Republic of South Sudan (RSS) from diversification?

4. How much progress has RSS made in terms of diversification since 2011? 5. How does RSS move forwardwhen it comes to economic reconstruction,

development and diversification?

1.6 Limitations

The non-segregation of information on South Sudan from Sudan often means that data and statistics are not always available in a useful form. Most of the existing policy reports, comparative studies and academic articles cover what was Sudan before 2011. There is very little information on South Sudan’s economy and the attempts to diversify it since 2011. This has necessitated that the research be conducted in the capital, Juba, where the government ministries and other respondents are residing in order to get first-hand information that is not often available in reports and publications.

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CHAPTER TWO: LITERATURE REVIEW

This chapter will focus on the issues related to economic diversification and growth. In addition, the chapter will also explore literature related to the South Sudanese economic situation.

The ongoing global financial and economic crisis has revealed in many countries vulnerabilities to external economic shocks. Those who largely depended on the export of commodities suffered setbacks in economic growth. Economic diversification holds great potential to increase a country’s resilience and contribute to achieving and sustaining long term economic growth and development. Broadly-based economies, active in a wide range of sectors, and firmly integrated into their regions, are better able to generate robust and sustainable growth. As part of this process, underdeveloped economic sectors should be expanded. This is a significant challenge and requires a combined effort by governments, the private sector as well as the international community (Hare, 2008).

The Republic of South Sudan achieved independence from Sudan with a population of 8.26 million people on a total area of 644,329 sq. km. Today, more than half (51%) of the population is below the age of eighteen; 72% of the population is below the age of thirty; 83% of the population is rural; 27% of the adult population is literate; 51% of the population live below the poverty line; while 55% of the population has access to improved sources of drinking water. The communication and transportation networks are poor, with less than 200 km of paved roads. About 85% of old Sudan’s oil output is located in South Sudan (South Sudan Statistics Yearbook, 2010). This data indicates the many social and economic challenges faced by RSS since independence.

South Sudan’s strength at present, however, lies in its unexploited natural resources. It is rich in oil. The country also has large deposits of minerals, such as gold, copper, iron ore and zinc chromium as well as game parks with diverse flora and fauna for tourism. There is also an abundance of forest reserves and fertile land watered by the Nile River

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and rain is plentiful. The country also enjoys considerable international support due to the background of its liberation struggle.

Its weaknesses lie in its past which has left neither industries nor an effective education and skills base amongst its people. Its society is not homogeneous and it is effectively landlocked with Ethiopia, Kenya, Uganda, the Democratic Republic of Congo (DRC) and the Central African Republic (CAR) surrounding it. South Sudan is administratively divided into 10 states in the three regions of Bahr el Ghazal, Equatoria and the Upper Nile. The capital Juba is located on the White Nile.(see map below).

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The current economic statistics and indicators in South Sudan show that it is weak, underdeveloped, with insufficient infrastructure and dominated by an oil economy. Since 2005, 98% of the RSS budget came from oil revenues. The GDP was 13.227 US dollars (2011 est.); GDP per capita 1,546 (2011 est.); and inflation (cpi) 46.2 % (July 2010-July 2011) (Danielewitz, 2011). Oil exports amounted to 71% of the total GDP in 2010 which was 30 billion Sudanese pounds according to the National Bureau of Statistics Yearbook (2011).

The sector areas of agriculture and forestry, roads and road transport, energy (electrical power supply), mineral and mining, animal resources and fisheries, and water resources are underdeveloped. There are no significant industries apart from the oil industry. All processed goods are imported, and 78% of households depend on crop farming or animal husbandry as their primary sources of livelihood. Oil and the public sector dominate the formal economy. Unemployment and underemployment are very high, with little formal sector employment (Evans. 1996).

2.1 Oil revenues and government spending

Under the CPA (Comprehensive Peace Agreement with Sudan), the government of South Sudan (GOSS) received 50% of revenues from oil produced in the south between 2005 - 2011, which accounted for almost all the government’s revenue besides donor aid. Turbulent oil prices has meant that GOSS revenues have fluctuated greatly, most notably when they soared in 2008, then dropped back sharply in 2009 when, as a result, GOSS had to operate on a budget reduced by one-third from the previous year. Unfortunately, though, as South Sudan is a post-conflict country that requires recovery and re-construction, the GOSS faces huge demands to spend on building the social and economic infrastructure such as schools, hospitals and roads that the country lacks (Joseph, 2010). Such a sudden drop in the country’s budget is therefore highly detrimental to the country’s development.

Through the CPA period, South Sudan was also spending heavily on defence and security. In the three-year spending plan for 2008 – 2011 that the Ministry of Finance

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and Economic Development presented to donors, the government argued that it planned to spend 31% of its budget on security and rule of law (mostly salaries for armed forces), followed by infrastructure at 23% (mostly roads), education at 9%, transfers to the states at 9%, and health at 8%. The government expected oil revenues to cover 77% of its spending, and was looking to donors to fill the gap. During the CPA period, salaries took up a progressively larger share of government spending (OECD, 2010: 31).

Oil provides 98% of public sector revenue and almost all foreign exchange earnings, thus making the South Sudanese economy extremely vulnerable to changes in oil prices and oil production levels. Furthermore, oil production has peaked and is projected to decline sharply over the next 10 years. While oil production provides much needed revenue, the extreme dependence on oil creates a major challenge for macroeconomic and fiscal management and the pending sharp decline in oil income exacerbates this situation. Fiscal sustainability and stable public expenditures are the cornerstones of macroeconomic stability in the country (SSDP, 2011: 13).

South Sudan can be exposed to a potential significant reduction in fiscal revenues. This will result in the abandoning of vital projects that contribute to development such as schools, electrification projects and hospitals, curtailing public services and reducing the government payroll. Wage pressures and potential strikes are the likely outcomes of this move. A consideration may be the reduction of imports in order to offset additional oil revenue losses (Evans, 1996).

Due to the instability in the oil sector, upon which the country relies, the interest of this research is to see how South Sudan can move away from oil dependency. Oil income is intrinsically temporary because it is derived from non-renewable, depleting stocks. It is also unreliable because oil prices are highly volatile and this volatility is difficult to manage.

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Figure 1

The map above (Figure 1) shows the oil blocks, concession holders and the pipeline that goes from South Sudan through Sudan to the Red Sea. The independence of South Sudan has been financially costly to Sudan on whose territory the oil pipeline runs. However, the pipeline can be turned on and off by Sudan as deemed appropriate.

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Such control, especially the stopping of the flow, in turn, negatively affects South Sudan.

2.2 Oil industry challenges

South Sudan faces uniquely difficult challenges in relation to its oil sector. The government depends on oil revenues more than any other country in the world. At the same time it has an aging oil industry, limited professional capacity and has little time to prepare for managing the oil sector because of the prolonged separation negotiations with Sudan, leading to uncertainty about what share of the existing industry’s resources, infrastructure, and revenues South Sudan will hold. In addition, in the run-up to independence, there was a violent conflict in some of the oil-producing areas (Mutenyo, 2011). The country’s challenges, therefore, are a mix of urgent operational and structural issues.

Urgent issues include enabling the oil industry to operate securely. Fighting with various southern-based militia groups and concluding negotiations with the Khartoum’s National Congress Party on dividing the industry and its infrastructure has led to halts in oil production (Evans, 2010: 40). The top oil-related task for the government is to ensure security for oil workers and installations. Without safeguarding security at oil installations so that production can be maintained, the new country will face acute economic problems. As a result of all of the above and the insecurity it has brought, oil production has fallen sharply since December 2013.

Even assuming that South Sudan can create a secure environment for oil production and make certain which fields it owns and how it will export the oil, the country faces the political and economic challenges of natural resource dependency. As mentioned above, with 98% of its domestically generated income coming from oil, it is the most oil-dependent economy in the world (Evans, 2010). Furthermore, South Sudan gets 40 $ net per drum of oil while the country buys its fuel $100 plus per drum. This is a huge loss to the government, caused by a lack of infrastructure (Juba Monitor, 12/5/15).

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South Sudan emerged as a state with a mature oil industry potentially on the verge of sharp decline. Unless the previously discussed projected drop in output from 2015 is reversed, the new state will have a few years in which to use its oil wealth to lay the foundations for a non-oil economy. With little experience in running an oil policy and regulating oil companies, the government needs to jump-start its regulatory capacity. The challenges demand an integrated approach from the government and its international partners - multilateral institutions, donors, and oil companies - to address two overlapping problems. The first is how to use the country’s oil revenues to best achieve broad based economic development. This task is primarily but not exclusively for the Ministry of Finance and Economic Development (or its successor), supported by the International Monetary Fund (IMF) and multilateral and bilateral donors (Al Badawi, 2010).

The second critical problem is how to manage the oil sector to maximise government revenues from existing production fields and to incentivise the investment in oil exploration that might extend the lifespan of South Sudan’s oil industry. This is a task primarily for the Ministry of Energy and Mining or its successor ministry, though the Ministry of Finance and the security sector also have an essential role to play.

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CHAPTER THREE: FINDINGS AND DISCUSSION

This chapter discusses the state of affairs in the new Republic of South Sudan in the drive towards economic diversification. The discussion is based on material from interviews, reports, government documents and other literature. The chapter will focus on the key issues which are the prerequisites for the non-oil sectors, especially the private sector of the economy, to grow. Recommendations are also made on diversification based on the findings.

3.2 Key issues and challenges

A number of respondents suggested that the starting point for the Republic of South Sudan to effectively diversify its economy is the need to address the key nation-building, state-building and peace-building objectives of a new nation recovering from conflict and wishing to move onto a viable, sustainable development path. This bitter conflict was about identity, including religion, race and governance. The respondents suggested that these are the issues that should be dealt with first i.e. unity of the nation before development.

The following sections will consider whether it is possible, and how to, diversify the oil economy of South Sudan. Some possible activities that the South Sudanese government can embark on in order to aid in this process are then suggested.

3.3 The roadmap for economic diversification

Even if the country is an oil exporter, it needs to think about alternative areas of comparative advantage in a relatively short-term context. It needs to target high-productivity service sectors or sophisticated components of production chains as ways of diversification and in doing so raise the emphasis on investing oil income in the

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3.4 Why diversify?

Countries do not necessarily need to move from oil or resource-based sectors to develop, but if they do, there should be policies in place to direct the diversification. According to an official from the Ministry of Finance official (interviewed on 5/6/13 in Juba), for South Sudan, the policy should address the following:

1) Future income growth: use this by creating domestic sector capacities with dynamic learning that can substitute for oil when reserves decline and to act as an insuranceagainst the unforeseen.

2) Asset diversification: is important so that politically and strategically the future of the country’s assets should not only be to address and support oil operations.

3) Diversification for creating jobs: the policies should define which jobs, for whom, at which productivity and skill levels, and corresponding to what level of expected future income.

4) Industrialisation: this process should be started so that the country does not need to import all processed goods and because it can be a key factor in creating a more diverse economy. There should be criteria to ensure industrialisation is a good investment over the long term.

5) Building up good-quality complementary inputs: of human and governance capital and resources. This will provide a positive base for development. The policies to diversify should be made very clear so that the citizens understand the particular benefits that the diversification policy is trying to obtain for the country. 3.5 Economic freedoms

The following freedoms are the prerequisites for the economy to grow in several directions and it is the task of the government to provide these freedoms. The government of South Sudan has performed poorly in delivering freedoms according to

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the Freedom House 2012. The South Sudan Freedom in the World 2012 gives a grim assessment of the lack of key freedoms.

3.5.1 Trading freedom

In South Sudan, public finance management is very weak. An independent revenue authority does not exist at GOSS level, and some States have instituted their own structures. The tax administration is also disorganized with no clear assignment of tax collection responsibilities to the different levels of government. As an example, sixty-seven illegal tax points were discovered and closed down in the month of September, 2011 alone. The same tax can be collected repeatedly at National, State, County and Payam levels. These numerous taxes reduce the incentives of entrepreneurs to risk their capital and sacrifice their time and energy to earn higher incomes. High marginal taxes also interfere with the ability of individuals to pursue their goals, and this results in lower after-tax income for workers and therefore smaller disposable incomes. The results are fewer savings, resulting in lower capital formation for further investment. It is an important measure to establish an independent revenue authority, to which the necessary budget and skilled human resources should be allocated. The Audit Chamber should be given all support to make it operational. South Sudan is friendly towards small businesses but the biggest obstacle faced by would-be private businesses is the government itself. Governmental procedures are a major hindrance to the launch of new enterprises and private job creation. Starting a business takes a relatively swift 15 days in Juba, compared with an average 13.8 days in developed economies, but the cost of starting a business is high compared to other African countries (AFP, 2011).

Trade with East Africa is increasing, signalling a building confidence amongst all partners in the area. Free trade arrangements encourage the strengthening and deepening of democratic free market institutions (both in the government and in civil society). Since the only source of genuine and lasting development is from

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private-3.5.2 Financial freedom

The former Bank of Southern Sudan (BOSS) was established as a central Bank for South Sudan after the country’s independence and a new currency, the South Sudanese Pound, was issued. The banking system in South Sudan is conventional, as opposed to the Islamic banking system of Sudan. The Central Bank was, at the time of this research, still recruiting bank staff, who would be in need in-depth training (Bank of South Sudan Consultant Juba 2012).

The same respondent explained that the RSS has nine registered commercial banks, six micro finance agencies, a number of foreign exchange bureaus and six insurance agencies. The commercial banks provide loans, advances and trade finance with a low lending portfolio of 7% and there are 600 registered firms which give less than 1% of government revenue. The main challenges faced by the banks are poor capacity in terms of skills, controls, systems, management capacity and corporate governance. There is a lack of collateral due to poor structures for land registration as well as specific characteristics of business in South Sudan where credit is rationed according to the level of risk and the ability to recover assets.

South Sudan’s small financial system is underdeveloped and overall supervision remains weak despite the huge demand for finance. The largest portion of the population remains outside of the formal banking sector. The number of banks, their branches and their range of services, however, are rapidly increasing (Africa Development Bank 2010-2011, Sudan Country Brief).

Due to illiteracy the common practice is to carry out transactions in cash. For enterprises importing goods, cash is often physically transported abroad and payments made there for the goods to be shipped. Enterprises maintain current accounts in South Sudan banks so as to be able to draw local cheques. Banks do, however, receive and transfer funds by Telegraphic Transfers (TT’s). Individuals and some enterprises also use facilities such as the Western Union. Loans can be available from banks at around 14% - 18% per annum interest (Africa Development Bank Group 2010-2011 Sudan Country Brief).

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As the economy is heavily import oriented, there is a strong need to support trading enterprises and to reduce costs of operation by using the banking and microfinance systems competitively and reliably. Financial flexibilities attract foreign direct investment (FDI). All residents and non-residents may hold foreign exchange accounts. Some restrictions and controls apply to transactions involving capital market securities, money market instruments, credit operations and outward direct investment (Julius, 2011: 10).

3.5.3 Labour market

South Sudan’s labour market is underdeveloped. The nationals have a reputation for bad work discipline and as a result foreigners are often preferred by employers as they are happy to do all jobs in all sectors, even though the law requires foreigners to obtain work permits in order to work in South Sudan. This results in tension and ill-feeling towards the foreign workers (Official Civil Service Workers Grievances Commission, Juba, June 2013).

A large portion of the South Sudanese skilled labour is in diaspora and many are still reluctant to work in the South Sudanese context of conflict, instability and poverty. The Southern Sudanese are generally reluctant to work in hotels and guest houses. Rather they are, in large numbers, working in government offices, many of which are idle. Taxi driving and small bus operations are undertaken predominantly by people from the neighbouring countries, which further increases the negative attitude towards foreigners who are seen as having jobs while the locals are unemployed, even though many locals do not want to work those same jobs. Lack of the necessary skills contributes to the unwillingness to take up employment in areas where such skills are needed. Labour codes are not consistently applied as much of the labour force is employed in the informal sector. Wages, or the cost of employing a worker, are moderate but dismissing an employee is difficult and costly (Mutenyo, 2011).

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Some are cultural as people prefer communal ownership of property as well as employment in public organisations and offices rather than in private businesses. Military personnel also sometimes take the law into their own hands, and land grabbing is rampant with the judiciary often intimidated by the military and civil authorities and therefore not following due process to protect private property. There have been numerous disputes between the Central Government and States over property ownership. Better protection of private property rights would permit increased investment, including in the areas of food production and food security. Land across the country largely belongs to the communities, and this makes it difficult to obtain land for investment. Although it is possible, it takes a long time. This is a further obstacle to investment and growth (USAID Engagement Report, 2011).

3.5.5 Corruption

Corruption in South Sudan is perceived as rampant. Before independence in the country, official payments were made to unregistered vendors rather than through government agencies, rigorous controls over the signing of government contracts were not implemented, arrears accumulated, and accountability procedures for petty cash expenditure were not followed. Since independence, things have not improved. The opposition leader of the SPLM-DC party, Lam Akol, said in November 2011 that the level of services delivered in the last six years was “not commensurate with the amount of money that has come into the coffers of the south’’ (An Infrastructure Action Plan South Sudan, 2013).

The government has been receiving warnings from the international community on its corruption levels. On 14th December 2011 at the South Sudan Engagement Conference in Washington D.C., Robert B. Zoellick, President of the World Bank Group, remarked, ‘‘I also want to note one particular problem facing South Sudan is corruption. You are the founding fathers and mothers of your country. This is a great honour and opportunity and responsibility. Whether it takes the form of bribes at checkpoints, or officials taking cuts from deals, corruption gnaws away at political systems, weakens institutions, impedes the flow of commerce – and it is the people of South Sudan, your brothers and

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sisters, who pay the price’’. Mr. Kosti Manibe, the Minister of Finance in RSS, in an official statement indicated that he will tighten control over government spending with a series of reforms that limit monthly cash expenditure and increase transparency of payments (AFP, 2010).

The Audit Chamber is not yet strong enough to conduct independent auditing of public fiscal activities as it is at the establishment level. The South Sudan Anti-Corruption Commission, on 6th_{July 2011, tabled its 2010 annual report to the National Assembly} that revealed that it had investigated and closed cases involving more than 12 million Sudanese pounds worth of funds misused by unnamed ministries and one corporation. The commission report also indicated that cases totalling six million Sudanese pounds in alleged government graft were referred to other agencies. Relatives of high government officials often own companies that do business with the government and usually receive kickbacks for government business. These companies also know how to get blanket tax exemptions (The East African, 2010).

The result is an undermined ability of private entities to compete for outsourced government services. In the process, the quality of services being delivered to the government and to the public has been drastically reduced. This is most apparent to the citizens, such as the researcher of this thesis, when assessing the quality of performance. It is obvious that the government is not maintaining existing roads, bridges and other infrastructure properly.

Tribalism and nepotism play important roles in employment and this too causes a sacrifice in quality and erodes confidence in the government, both nationally and internationally. There are instances of family members, friends and associates enlisted on payrolls for positions they don’t actually hold. In other words they are ‘ghost workers’. These are mostly soldiers. The government has no effective corruption monitoring and law enforcement agencies, there is no drive for educational campaigns on corruption, and no true independence for organisations tasked with fighting corruption (Mutenyo,

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The passing by the South Sudanese Legislative Assembly of the 2009 Taxation Act paves the way for increased government revenues and a decreased reliance on volatile oil revenue. Implementation of this Taxation Act has begun, but there is still a long way to go (Athorbie, 2011). The Taxation Act of 2009 is not widely publicised as the revenue collecting units don’t comply with the constitutional requirement to remit all revenues collected to a central fund. Non-compliance continues to undermine non-oil revenues even though it is an illegal practice. In his 2011 budget speech, David Deng Athorbe, then Minister of Finance, noted that the Ministry of Finance and Economic Planning was finding it difficult to implement the new remittance procedures for 2011 that should have been making greater use of the commercial banking network that was spreading across Southern Sudan. The current tax remittance procedures allow temptation and opportunity to spend collected revenues directly (Athorbie, 2011).

South Sudan's President, Salva Kiir, has frequently highlighted corruption in government but no serious action has been taken over the years. In an open letter on 1st January 2013, President Kiir said “new measures, including regulation of land sales and publication of government officials’ finances, would lead to greater transparency and accountability’’ (The East African, 2011). It still remains to be seen if the government will implement this.

3.5.6 Provision of security

Insecurity undermines the rule of law and investor confidence. Insecurity and crime is affecting all business sectors in South Sudan and are significant deterrents to opening operations in the country. An insecure environment undermines government efforts and discourages potential investors from undertaking investment activities whilst also putting a stop to the investment activities that have taken off. There is rampant insecurity in South Sudan especially in the states of the Greater Upper Nile and Bhar-el-Ghazal (An Infrastructure Action Plan South Sudan, 2013). The main causes of insecurity are cattle rustling, resulting in death and loss of property along with generals who have rebelled for various reasons, also resulting in deaths and fear. The situation was volatile until it eventually erupted into an organised rebellion in 2013.

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Insecurity was highlighted by all respondents as a continuing concern and has numerous causes including clashes between communities over cattle and access to grazing land, the breakdown of cultural values and norms, the availability of arms, and the lack of economic opportunities. The consequences of insecurity include large numbers of displaced persons, continuing food insecurity, disruption to social services and increased poverty. The difficulties with fighting crime relate to corruption within the policing system which consists of a large number of soldiers and former combatants as well as reneged militias in many parts of the country. The question, therefore, on how to strengthen security in the context of Southern Sudan requires urgent consideration. There is a need for further peace building and security promotion through the establishment of effective and affordable DDR (Disarmament, Demobilisation and Reintegration) programmes to support transformation strategies for all organised forces, including the Sudan People’s Liberation Army Prisons, the South Sudan Police Service, the Fire Brigade and Wildlife Forces, and to provide ex-combatants and host communities with a sustainable future. This should also include the reintegration of women and children.

3.5.7 Reform agenda

Even though the country’s revenue from oil had been increasing until December 2013 when the recent rebellion started, the living standards of the general population had not improved to the same degree. When the current instability ends and peace comes, there must be reform so as to open more opportunities and to see livelihood improvements for the population.

South Sudan needs to undertake institutional reform in order to realise economic growth and development by:

Building a capable administration

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building and resources to execute their mandates (An Infrastructure Action Plan South Sudan, 2013).

Nation building

South Sudan needs a democratic governance system. Human rights must be respected with constitutionalism emphasised and the law system strengthened. The nation’s diversity creates difficulties that must be managed sufficiently and fairly in accordance with the SPLM slogan: Equal rights, opportunities and justice. The management of diversity is about securing human rights, equality and the peaceful coexistence of different people as well as tolerance and mutual respect among different groups, respect for women’s rights, protection of children’s rights, equality of opportunity for all members of society, protection of individuals and groups of people, both from the state sector and from the private sector, and equitable distribution of income and other benefits (Member of National Assembly, Juba, 2011).

To eliminate tribalism, the culture of organising community or tribal organisations must be dropped. Most of the chairpersons of these (sometimes) registered organisations are high-ranking government officials who can be easily tempted to abuse office for community or tribal interest. This culture promotes suspicion between tribes or communities and creates a feeling that one is plotting against the other. Politicians tend to use these organisations as political bases instead of their supposed cultural functions. Democratic rule should strengthen accountability, transparency, predictability, and a participatory approach to policy formulation and implementation. People should be encouraged to organise into civil organisations and associations. These groups should be given information about the direction of the changes taking place in the country as well as the benefits, costs and their duties in the process of nation building. Their positive input should be used for final policy formulation. (An Infrastructure Action Plan South Sudan, 2013).

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The establishment of the Public Private Partnership ventures is a good means of cooperation between the private sector and government (PPP). Both the government and the private sector in South Sudan lack the capacity to overcome all the economic problems in the country alone. The partnership states, however, that close working relationships with NGOs are important. NGOs have been undertaking important relief work under difficult conditions during the war and are now shifting their focus more to development programmes. About 78 international NGOs are operating in South Sudan undertaking 225 humanitarian and 183 development projects (Grawert, 2007: 397-398).

Judiciary and Law-Enforcing Institutional Reform

The law enforcement institutions like the judiciary, and commissions such as the Human Rights Commission, the Audit Chamber and the Grievance Commission, which are provided for in the interim in the Southern Sudan Constitution, are very weak and are not maintaining expectations. These need to be independent so that the extent of misuse of state power is checked as their role is to receive grievances from citizens and try to resolve problems in cooperation with other offices concerned (South Sudan Freedom in the World, 2013).

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CHAPTER FOUR: RECOMMENDATIONS AND CONCLUSION

Recommendations for diversifying the economy

These recommendations emerged after the interviews, a review of relevant literature and the analysis of the findings.

The key priorities on the road to economic diversification and growth should be upgrading the business environment for investors, key players and others in the private sector in South Sudan in order for them to see the benefits of the spirit of entrepreneurship in activities of their choice, with the aim of building a diversified economic base. This is discussed in more detail below.

4.1 Set the enabling environment

Government should improve the business environment by removing the obstacles identified earlier. Action must therefore be taken to reduce the cost of starting and running a business in South Sudan. The economic assistance and freedoms necessary need to be provided. The Ministry of Investment and the Ministry of Commerce and Industry should lead the development and implementation of a strategy to address key constraints, aiming to enable doing business in South Sudan. This is likely to increase foreign and domestic investments. Aggressive promotion and facilitation of domestic and foreign investorswould then help drive growth (Walzer, 2010).

The Ministry of Investment should establish a ‘one stop shop’ to provide for all business starting procedures. South Sudan should then undertake a cluster approach, using local and foreign specialists. Seven clusters can be identified including tourism, metallurgy, textiles, construction, agriculture and food processing, oil and gas machinery and buildings as well as logistics and transportation. These are currentlylagging behind, and yet should be the competitive edges of the economy. The potential problems with the development of these clusters includes the inadequate amount of qualified specialists and skilled personnel, a shortage of modern technology, the discrepancy between

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national and international standards as well as an inadequate financial allocation to support these clusters (Leila, 2008).

4.2 Manufacturing and industrial development

Factories cross-cut into the clusters mentioned above. South Sudan should, therefore, aim to initiate industrial development in order to speed up its economic diversification. These industries should be established by the private sector. Government should then facilitate these enterprises, enabling them to grow, and then raise taxes from them while they provide their products. Manufacturing and processing in areas such as oil, minerals and metals, as well as some areas of agriculture, can generate bulk exports and provide major opportunities for large scale employment and regionally balanced growth. Many vulnerable people can be absorbed into these industries, which may be located in the regions they live in and provide them with employment. It is suggested that the government facilitate and provide specific support in these areas in the interest of the public.

Industries should initially manufacture for domestic consumption, with only the surplus being exported. The processing of local raw materials should be the priority. Basic household needs like sugar, soap, cooking oil and milk should be processed in the country. The reserves of cement at Kapoeta and Kajokeji should be mined and processed locally for the construction sector.

South Sudan needs to simultaneously look into what industries were there in the past and re-activate them. Some factories were in their location due to the availability of raw materials in that area, mostly the agriculturally based ones such as the fruit processing unit near Wau, the Melut Sugar factory, the Yirol Oil factory and the Nzara Cotton Ginnery.

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the current practice of the generation of power from generators is a major contributor to the region’s lack of competitiveness. The setting up of hydro-electric power stations at sites such as Fulla Rapids and Beden Falls on the Nile has been under consideration for long time and needs to be implemented. While these large amounts of funding, the Government can also support small hydro power stations on the numerous rivers that exist, such as those in Yei, Morobo and Torit. These are smaller falls, but can be built quickly and with less funding. In addition, with the present considerable technological advancements around the world, the country can generate and make maximum use of solar and wind power. Money from the oil sector can then be invested to generate electricity that will power industries (Chaudhuri, 2011).

4.3 Role of government ministries

The Ministries of Agriculture, Forestry, Animal Resources and Fisheries

This ministry should increase the production of livestock and fish and should be able to phase out the importing of animal products such as milk, cheese and hides, exporting them as well as selling locally. This will make the livelihood of the animal keepers more profitable. Agricultural growth in the region was very disrupted during the war. Schemes like the Awail Rice Scheme, the Melut Sugar and Anzara Oil Mill are government owned. These, along with other schemes, had collapsed by 1989 and have not been re-activated. The farmers in these schemes had to flee their farms for refuge in the bush or across international borders. In effect, they have never been able to settle down in their villages in order to form productive economic functions.

Around the country, farming is for subsistence only. Government should mechanise farming so that enough ground nuts and simsim seed can be produced to for the factories to produce edible oil instead of importing from abroad. South Sudan has in the past grown tobacco, coffee, tea and vanilla. In addition, most fruit and vegetables can grow in South Sudan but not much is currently farmed on a large scale.

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The general constraints which affect the sector must be solved by the Ministry and sufficient funds must be allocated to address the technological requirements. While peace and stability have facilitated the growth of agricultural activity, there is need for the revitalising of existing units and for larger farms to be set up. In the absence of interconnected roads, an efficient and competitive system of river transportation by barges can facilitate produce reaching various regions within South Sudan. This will reduce the need for fruit, vegetables, eggs and poultry from being brought in from regions with direct road links to countries like Uganda, Kenya or Sudan.

South Sudan has been producing its food organically, to its own disadvantage when we calculate the produce. In Sudan and Kenya, where fertilizer is used, the produce is high and the farmers are rich. One hector of a planted maize field in Kenya produces 3,000 kgs of maize while in South Sudan the produce is 500 kgs. This gap is self-inflicted as the explanation is not convincing - if it is that there are chemicals in the food which can be dangerous to the South Sudanese, this is an irrelevant argument as we are still importing most of our food from fertilizer users and we import our seeds from the same sources.

To improve the agricultural sector where 78% of the population is profitably engaged, the issue around the use of fertilizers needs to be revisited. The impression is that the entire farm land will be sprayed with fertilizer but the truth is that the land should be tested first and the lacking nutrients added. This vicious circle of poverty must be broken so that the South Sudanese farmers do not remain in permanent poverty.

Fisheries

The Nile and other rivers have plenty of fish but the fishing is subsistence fishing and is carried out using traditional methods. As a result there is a low supply of fresh fish. Some fresh, dried and smoked fish do reach markets but in small quantities. Fishing for commercial purposes that will include exporting needs to be developed

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brought in from neighbouring countries with which various regions have direct road links. The national fishery programme should include the repairing of existing fish ponds and dams, introduction of commercial fishing techniques, the supplying of fingerlings as well as facilitating fishermen with motor boats and setting up joint ventures for large scale processing and exportation.

Animal based products

Animal husbandry practices remain traditional in South Sudan. Livestock is often kept as a source of wealth with little direct monetary advantage. Consequently, the size of the herd is often more important than the quality of the animals in terms of milk and meat production. There is considerable potential for the introduction of improved animal husbandry practices and herd genetics. These improvements will allow cattle owners to own and manage bigger and better herds, set up joint ventures and organise supplies to the domestic and international markets. Inputs can include the setting up of a suitably located leather technology institute. Horns, hooves and hide processing, meat sales, meat packing, milk sales and milk processing can all be done in South Sudan: there is no need to spend millions of dollars on importing the above products.

Develop trade, industry, investments and the private sector in South Sudan

The Ministry of Commerce and Industry should venture into the signing of regional and international trade protocols to take South Sudan into the global economy through regional and international integration, and establish internal standards by joining international bodies which support international economic activity. For example, country telephone code and internet domain registration (MTPS), Extractive Industries Transparency Initiative (MEM); COMESA, ITU, EAC.

Air transport

Government should for the short term open the markets for air transport by raising the standard of the airports of the ten States to ICAO (International Civil Aviation Standards) standards.

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River transport

Dredging of 1,500 km of navigable channels along the River Nile is necessary, as are the provision of navigation aids, the upgrading of Juba Port and the installation of cargo handling facilities which constitute additional activities for fostering trade and mobility.

Roads

In the area of road infrastructure, there are, at present, approximately 200 km of tarred roads in South Sudan. Most roads need reconstruction and the food producing areas need to be connected with the consumers in areas or markets with a concentration of people. Food, especially perishables, cannot be transported to the markets whilst still fresh due to the bad roads. The coping mechanism of depending on imports from abroad due to the better roads in neighbouring countries should be discouraged by investing in building good roads in the country itself. The current state of the roads is a disincentive to local production. Major towns should be linked to each other with good roads. State governments should therefore be in charge of constructing, rehabilitating and maintaining feeder roads for rural communities so that they can access markets. Good roads save time and vehicle spares, and make transport cheaper. Government should also begin to upgrade the highway system and, in the longer term, draw a strategic plan for investment in logistical infrastructure with a focus on linkages to neighbouring countries. It is well established that the infrastructure sector has played a very significant role in the growth and development of countries in the recent past.

The Ministry of Energy and Minerals (MEM)

The MEM should promote and improve the exploration, development, production and utilisation of more of South Sudan’s known minerals. The gold and cement at Kapoeta, the cement in Kajokeji, diamonds at Ezo and Colton on the Congolese border are all examples that could supplement the oil economy. By targeting the mineral markets, miners associations should be formed and the awards for new licenses for mineral and oil exploration companies should be increased. The geological and mineralogical maps

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The Ministry of Telecommunications and Postal Services (MTPS)

This ministry should increase coverage, access, usage and literacy of ICT and Postal Services in South Sudan, in all the counties, thus creating easy communication for businesses (SSDP, 2011).

Oil operations recommendations for South Sudan

The government of South Sudan is beginning oil operations with a blank slate. It knows very little of what was, and is, taking place within the industry and therefore it should first secure the oil facilities and operations and deal directly with the international oil companies. After securing the operations, it should then provide security for oil workers as well as for the oil installations themselves. The government should thereafter get an independent evaluation of South Sudan’s oil reserves and the options for increasing and extending production. Government should renegotiate and incentivise investment in increased production and in exploration, using high-calibre oil industry specialists to support the government in negotiations with oil companies in order to maximise government revenues from the existing contracts.

Government should also work with the oil companies to identify barriers to exploration and, addressing those barriers, it should demonstrate that South Sudan is a reputable oil state by making an immediate commitment to join the Extractive Industries Transparency Initiative (EITI) and becoming an official candidate country within one year. Government should explore the potential for oil-backed loans to finance development of the infrastructure needed to develop the agricultural and other sectors of the economy.

Government should also collaborate with donors to use their funds to help smooth out the inevitable fluctuations in government revenue due to instabilities in oil prices and production, and also explore ways of frontloading the spending of oil revenues on the priority infrastructure that will help build the non-oil economy, such as through oil-backed loans. The major oil companies active in South Sudan should actively cooperate with the government by promptly sharing technical and economic information, working

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together to identify how to increase and extend production, and supporting EITI membership.

Currently, South Sudan does not have an oil refinery in its territory even though it is one of the top African oil exporters. As a matter of urgency, South Sudan should build an oil refinery of its own so as to sort out the problem of selling its crude at an average of 40 USD net per drum while buying for its fuel needs at 140 USD per drum as mentioned earlier. Being landlocked, it should be able to set up its own pipelines for exportation instead of renting, and should start the processing of carbon rich oil wastes to manufacture plastics, bitumen and synthetic rubber for its needs (Evans, 1995: 16).

Construction services

There is major rebuilding and construction work in South Sudan in road development and repair, road upgrading to gravel and paved roads, construction of feeder roads in urban infrastructure improvements such as rehabilitation of public buildings, ministries, water supply and sanitation, liquid and solid waste management, street lighting as well as in the construction of private houses, shops, hotels and restaurants. However, in order to achieve all this, the country needs a lot of construction services in the form of quarrying to supply stone, stones chips, sand; metal fabrication; mechanised brick and block making; the manufacture of roofing and flooring tiles and the supervision and management of construction work, amongst other services. Each of these areas has the availability of an existing local skill base, the ability to absorb labour and considerable opportunities for growth and value addition (David, 2007).

Increase the human capital investment

One of the crucial elements of the country’s competitiveness is the quality of its human capital. The divorced Khartoum system (a mixture of Islam and Arabism) is no longer strategic for South Sudan for it to stay competitive globally. The country must start investing in human capital immediately, even though it will take time before there will be

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Investment in human capital will not only increase the country’s productivity, but will also help to lessen the income inequality caused by the oil revenues. Spending on education and health is one of the best indicators of a government’s desire to share the revenue from natural resources like oil with its people. As a result of the abundance of the direct revenue from natural resources, some government officials tend not to think about long-term investments, especially in education. For instance the public spending on education and health is insufficient, and the private sector is taking over. There are now private schools and medical facilities emerging due to the poor quality of service in the government facilities. There are also private primary, secondary and even university facilities, as well as medical facilities with good quality service being developed. The problem with these facilities is that only the minority can afford the services, while the majority suffers.

International cooperation in higher education plays an important role in this process. The government should provide scholarships that send outstanding students each year to study abroad. The number of these students, as well as the number of foreign faculty members teaching in universities, should also be increased.

The country should, furthermore, make the natural resource sector knowledge-intensive by spending more on employee training in that sphere. A number of university professors should be involved in natural resource development research. In addition, the educational level of professionals should be improved as new foreign technologies are being introduced in different sectors of the economy. Information technology should be made a universal component of education. South Sudan needs not merely to increase its investment in human capital but also to concentrate on the quality of the investment. Before making allocations for education and health in the budget, the government needs to have a comprehensive plan on reforming and restructuring educational and health institutions. Such a move can produce a quality work force over time.

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Utilise better the oil revenues

The government should develop medium and long-term plans for the expenditure of the oil revenue and ensure that those funds are spent efficiently. The expenditure plan should prioritise the financing of public investment. There are two choices for public investment. The government can invest in non-resource tradable sectors, including manufacturing, agriculture, and the development of natural resources. The second option is to invest in non-tradable infrastructure spheres such as health, education, communications, transport and housing.

Even though both of these options are targeted at diversification of the economy, investing in the non-tradable sector will take more time to reduce the economy’s reliance on oil revenues. The government needs to have a long-term plan that will balance the investment opportunities available in the country. An external audit report should be available to the public through the press, including publishing the results in national newspapers.

The current legal basis of the fund’s management by presidential decrees should be substituted with an Oil Fund Law that will ensure parliament’s power in governing the fund’s expenditure. The rules governing the oil fund should be approved by parliament first. This will guarantee that changes in the rules first have to be publicly discussed before an amendment of the law can be performed. In this way the system of checks-and-balances will govern the work of the Fund (Leila, 2008).

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Conclusion

It is not lack of money or a lack of capacity that keeps South Sudan from achieving its potential. It is the political will of national leaders and the policies that they pursue that will determine whether South Sudan achieves a future that is consistent with the desires of its long suffering people, international well-wishers and the positive sentiment expressed around the world when the country successfully gained independence in 2011.

A free economy under the rule of law correlates with greater degrees of democratic flourishing in which human rights and opportunity are realities that later generations are likely to (and hopefully will) accept as the norm. Achieving the normative goals of the ruling Sudan People’s Liberation Movement Party (SPLM), such as human dignity, economic opportunity and improved material conditions, must be assessed and measured against the soundness of the economic policy decisions made to achieve them. It is the duty of both the South Sudan opposition, civil society and ordinary people to hold them to account. The failure of South Sudan to address widespread poverty and hopelessness is a recipe for political instability within its borders and perhaps beyond (Dani, 2004). Under such a situation, institutional reform in political governance, economic governance and corporate governance needs to be a priority. The support of donors, United Nations (UN) agencies, NGOs, African Union (AU), and friendly countries needs to be sought. Ensuring the rule of law, strengthening peace and security, the rehabilitation and building of roads and other infrastructural services as well as removing the obstacles to economic growth should be the preoccupation of the government.

The future political and economic stability of South Sudan hinges on its ability to tackle the lack of economic opportunity, high unemployment, poverty, and the legacy of the Arab rule. South Sudan also needs a growing economy in order to address endemic challenges ranging from AIDS and crime to education and infrastructure development. Accelerated economic growth requires increased access for all South Sudanese to land and capital, limits on government intervention, incentives for private investment, and a strengthening of property rights and the rule of law (Walser, 2010).

Possible economic strategies to diversify the crude oil-based economy in South Sudan