The Answer – South Sudan’s Economy will Collapse without Oil Revenues

As if the problems for those threatened in the southern states of Sudan were not bad enough already, South Sudan may well be forced to comply with demands made by Khartoum in order to survive. The Sudan Tribune published an article about the fact that the World Bank is warning the government in Juba that its economy will collapse if the situation between the countries is not remedied.

The crisis began with Juba’s decision to shut down its oil production in a dispute with Khartoum over the fees Sudan was charging. Since that time fighting has broken out and Khartoum has pledged never to allow South Sudan’s oil to flow through its pipeline. 98% percent of South Sudan’s revenues came from sales of that oil. The World Bank was briefed on March 1st by Marcelo Giugale,the World Bank’s Director of Economic Policy and Poverty Reduction Programs for Africa, who noted that even if non-oil revenues in South Sudan triple this year, it will not be good enough to avert a crisis by the middle of 2013.

So here, alas, must be the reason why the UNSC and United States have been pushing Juba to meet the demands of Khartoum.

According to the article, Guigale told representatives of the major donor groups including the United States, United Kingdom, European Union (EU), Norway and the International Monetary Fund (IMF) among others that:

“[T]he World Bank has never seen a situation as dramatic as the one faced by South Sudan.”

The article notes that Guigale went on to say that:

The decision (to halt oil production) was shocking and that officials present had not internalized nor understood the consequences of the decision.

There is a near certainty of the collapse of South Sudanese currency if things do not change rapidly:

As a result of “sharp” drop in influx of hard currency and once citizens in South Sudan realize that value of their local currency is slipping “there will be a run for the dollars and families with dollars will almost certainly shift them outside the country.” Giugale pointed out that because most South Sudanese are not fully financial literate the run on the point has not yet happened. “Once it starts, the currency will almost certainly collapse,” Giugale says.

South Sudan’s foreign cash reserves could possibly last a little over a year or even up to a year and a half with significant austerity measures put in place. During this time poverty will rise dramatically and expenditures on things such as healthcare and education will fall significantly, impacting daily life. Large scale famine and disease would be a real possibility. The World Bank would shift its aid to South Sudan from economic development to humanitarian aid, crippling the economic growth of the nation.

There are two alternatives to this that I can see. South Sudan tried one and may well have been trying the other.

The first option is to build an alternative pipeline that does not run through Sudan. Salva Kiir met with Chinese leaders to propose this. China rejected it as an option, not simply because of the political cost in its relationship with Sudan and other Arab nations or because of the significant expense involved, but because it could take years, not months, to create. Additionally, the report from the World Bank of which China was well familiar could lead China to believe that the government of South Sudan could collapse before any pipeline could be completed, thus potentially rendering useless any investment in it. Salva Kiir returned from China with loan guarantees, quite possibly ones contingent upon improved relations with Khartoum and a renewed flow of oil.

The second option may have been to take Heglig from Sudan in an attempt to force Khartoum to accept significantly less for oil flowing through the pipeline. I cannot say with any certainty that this was the purpose behind taking control of Heglig because there are other potential reasons, however, the thought may have been that:

Ultimately Khartoum gets a share of all the oil flowing through the pipeline, so it really doesn’t matter one way or another whether or not it owns the wells along the way. If we (South Sudan) control all of the oil flowing in, Khartoum will have to deal with us or they will suffer.

Sudan would have suffered for certain, but Sudan can easily hold out far longer than South Sudan. This plan might work if Juba had several years worth of reserves and a broader economy not almost entirely dependent upon oil revenues, but it never could have worked swiftly.

This all may then explain why the international organizations and the United States reacted so strongly against South Sudan concerning Heglig. They likely believe that Juba’s sole option in averting an existential crisis is to mend relations with Khartoum and that millions of lives are at stake if that does not happen.

A third option is not being discussed and probably will not be, namely a US or UN led effort at regime change in Sudan. There are too many factors to list right now, but suffice it to say that the bottom line is that a large scale invasion would create a dramatically increased humanitarian crisis without solving any part of the existing one in the near term.

The significance of this understanding for those concerned about the suffering in South Kordofan, Blue Nile, and Darfur as well is that there is no pressure that may be exerted upon Khartoum by Juba that will be of help. Worse, intervention, even strong sanctions, by the UN, US, AU or any other body against Sudan would likely jeopardize its willingness to allow transit of oil and military intervention could, likely would, result both in a dramatically worsened humanitarian situation and in the pipeline being shut down for an extended period of time almost certainly leading to the economic collapse of South Sudan predicted by the World Bank.

Thus, South Sudan has no choice but to work with Sudan in order to get the oil flowing once again. It can spend a few months determining which concessions are best for it to make, but it has little or no choice but to make some significant ones.

This is a very bleak picture. The survival of the people in the Nuba Mountains who are being persecuted by the Khartoum government will then depend upon non-governmental organizations raising funds and sending in large quantities of humanitarian aid without the help of major international agencies and certainly without any help from the government of South Sudan. It is up to us to Help Nuba!

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