x Abu Dhabi, UAEThursday 27 July 2017

As Sudan breaks in two, more than oil will fuel economies

As Sudan fissions into two states tomorrow, the economic prospects for both North and South are not bad. Working together to generate oil revenue could set the stage for cooperation on economic diversification, for which some interesting possibilities exist.

Tomorrow will be a historic day for Africa. On that day, after decades of war and oppression, the Republic of South Sudan will be declared as the world's newest state, with its capital at Juba. Not since Eritrea's independence from Ethiopia in 1993 have the continent's borders shifted as dramatically.

Yet joy at independence is tempered by ongoing troubles in the South and North alike. On the UN's Human Development Index - a measure of overall quality of life and development - Sudan currently ranks 154th out of 169. South Sudan will start even closer to the bottom. The new state must overcome weak state capacity and chronic insecurity and manage a tricky post-conflict transition.

Since the peace agreement in 2005, oil has been central to the economies of both North and South. Most reserves are in the South, but the infrastructure to exploit that oil - pipelines, refineries and export terminals - is in the North. The current revenue sharing agreement, in which 50 per cent of monies raised by the sale of southern oil goes to Khartoum, is due to end with the South's independence.

Khartoum faces the loss of more than a third of its annual income. Conversely, southern revenues will swell, but managing the wealth will still be a struggle among many conflicting priorities.

Exploiting southern oil requires continued partnership between North and South, but negotiating a new deal beyond tomorrow has so far proved impossible. Given the mutual reliance, both sides accept the principle of oil revenue continuing to flow to both states in the near term. South Sudan knows that a fiscally stable North is in its interest, but consensus on the details of how wealth should be redistributed - how much and for how long revenue should be allocated to cover the North's financial gap - has been elusive.

In both North and South, the oil boom has lifted growth rates and filled treasuries. Measured by headline statistics, oil is indisputably the most important industry for both states. The South's independence may set off a new race among major oil companies, as contracts and concessions are reviewed. But new finds are far from assured, a fact that underscores the industry's limitations.

Sudan is only a middle rank oil producer, and most producing fields are already declining in production. Much of the oil is of low quality, trading at a substantial discount to global benchmarks. Only a small number of Sudanese are employed in the industry. New discoveries are possible on both sides of the border, but this is not a resource that will provide for generations. The extreme economic dependence on one industry is increasingly problematic; now is the time to pursue diversification.

Moving beyond oil is a prerequisite for the future stability of both countries, and necessary to broaden prosperity outside of the narrow elite at the centre. The majority of people in both North and South depend on agriculture, and the industry has considerable potential for growth. But neglect of the sector in the North has left productivity languishing. Production of cotton in 2010, for example, was less than a third of the 2005 harvest, itself a fraction of the production records achieved in the early 1970s.

Ravaged by war, most agriculture in the South is focused on subsistence. Little is mechanised and despite fertile land and ample water, tens of thousands of hectares of land lie fallow. Access to markets is still limited.

The transport infrastructure needed to move crops and other products is poor, often making it cheaper to bring basic foodstuffs from neighbouring Uganda and Kenya than to move local produce domestically. Amid chronic food shortages in the Horn of Africa, South Sudan could become a net food exporter to the region, and beyond.

For both North and South, agriculture and rural development must go hand in hand. Rural areas lag far behind development levels in the handful of major cities. Greater focus on the sector, broader opportunities for local farmers and increased agricultural productivity could bridge the hunger gap, allow self-sufficiency, raise average income and prove to be a more important export earner.

It is important that policy in this sector must be carefully harmonised with the pastoralist livelihoods of many Sudanese.

Development of the service industries is another path to diversification, but it is important that this sector does not grow exclusively in the capitals of Juba and Khartoum, but brings benefit to other regions. Other extractive industries can play a role too; mining is increasingly important in both North and South, while logging and wildlife tourism could be new earners for the South.

Reaching a deal over oil is crucial. But oil alone will not guarantee an inclusive and stable economy for either country. Economic diversification, with a renewed emphasis on agriculture, is necessary if a viable economic future is to be enjoyed by citizens of the two Sudans.

 

Aly Verjee is senior researcher at the Rift Valley Institute; Zach Vertin is Sudan analyst at the International Crisis Group