South Sudan economy in shambles

South Sudan’s decision to shut down its oil flow was either extreme brinkmanship or economic suicide.

A woman pushes her way through the bread line at the Konyo Konyo market in Juba, South Sudan in early May.

JUBA // On the black market, currency traders operating out of their homes and street-front restaurants have increased their price for US dollars by 30 per cent since December.

Bakeries have quadrupled the price of a piece of bread to 1 South Sudanese pound. The cost of fuel is soaring.

South Sudan's economic crisis is looming just nine months after it became the world's newest country when it separated from the Republic of Sudan.

It didn't have to be this way. South Sudan was established with great potential. Three-quarters of the once-united Sudan's oil ended up within its borders when it seceded last July, enough to pay for an ambitious development programme in a region that had long been neglected by Khartoum because of a 21-year civil war that ended in 2005.

But the country now is embroiled in a deadly border conflict with Sudan over territory and oil rights.

The Sudanese Peoples' Liberation Movement, a rebel group that became South Sudan's dominant political party with all the top ministerial positions, shut down the oil flow in January over what South Sudan should pay to use the Sudanese pipelines and export facilities. All the oil South Sudan produces must be exported through two pipelines in Sudan.

That dispute, along with simmering animosity and disagreements over borders, led to a sporadic war between the two sides that has seen hundreds killed and thousands become refugees this year.

Whether the decision to shut down the oil flow was extreme brinkmanship or economic suicide is the question now quietly being discussed by NGO workers, representatives of the foreign governments and South Sudanese businessmen in Juba.

The government of South Sudan funded 98 per cent of its budget through oil sales before the shutdown. Its cash reserves are falling fast, and South Sudan soon may not be able to pay its teachers, soldiers and government workers. One western diplomat, speaking on the condition of anonymity, said the country could last until September at the latest on its current holdings, according to briefings its embassy had received.

The World Bank warned on Tuesday that it was "deeply concerned" about the effect of the unresolved oil dispute on both countries.

"Given the desperate living situation being faced by people in both Sudan and South Sudan, the World Bank's economic analysis unambiguously shows that it is in the interests of both countries to resume talks urgently," it said in a statement.

South Sudan officials say the disputes can be resolved and the country will survive.

Government spokesman Barnaba Marial Benjamin said South Sudan was prepared for economic hardship and had already introduced austerity measures to slow down the depletion of its cash reserves. He said South Sudan was in negotiations with several countries, which he would not name for reasons of national security, for "budgetary support". It is seeking US$10 billion (Dh36bn) over three years.

"We can last two years with our current reserves and budgetary support," he said in an interview, adding that the government was trying to fast-track agricultural development and boost tax collection. "We already have many promises of support from our friends."

The government is also planning to bulk purchase consumer goods, such as cooking oil, fuel, flour and rice to prevent inflation caused by "hoarding", Mr Benjamin said.

The country's plans for new roads, power stations and infrastructure will largely be paid for by an $8 billion loan from China announced last month, but none of that money will be used for the budget, he said.

Even as Sudan and South Sudan say they are following a road map laid out by the African Union to cease the border conflict and return to the negotiating table, the South Sudan government appears unwilling to reconsider shipping oil through the old pipeline.

That may exacerbate tensions even further because Sudan was planning to make up the loss of its oilfields through revenue from a transit fee. Sudan's oil minister said on Monday that the shutdown has cost the government $2.4 billion so far.

South Sudan is, instead, forging ahead with a plan to build a new pipeline within two years through Ethiopia to Djibouti.

Stephen Dhieu, the oil minister, said representatives of the three countries met last week to negotiate fees and terms for using their territories. Discussions have also begun with Chinese and Malaysian companies about construction, which Mr Dhieu said would begin in six months.

Within a year, South Sudan will also try to ship 10 to 15 per cent of its oil production through lorries. But that cannot begin until new highways are finished.

"We know that to depend on Sudan is unrealistic," he said. "When we took the decision to shut down, it was a last option. We realised it was necessary for our economic independence."