January 6, 2011 / 5:31 PM / in 8 years

ANALYSIS-South Sudan's economy to be vulnerable after split

* Economies of north and south likely to stay linked

* South’s currency weapon balances north’s oil dominance

* South to enjoy fresh start but costs of state to weigh * Foreign aid vital but may not be generous

By Opheera McDoom

KHARTOUM, Jan 6 (Reuters) - Sudan is heading for an acrimonious split but while southern leaders want political independence from the north, economic realities may keep them uncomfortably dependent on their former foes.

Most analysts expect the south — which produces almost 75 percent of Sudan’s 500,000 barrels per day of oil — to secede after a Jan. 9 referendum which is the result of a 2005 peace deal ending Africa’s longest civil war. Independence would take effect on July 9.

But both regions possess resources which will probably ensure ties between their economies unravel only very slowly, if the two sides can avoid a resurgence of armed conflict.

“In our case there is a forced economic cooperation if not a desired one,” said Sudan’s former State Minister of Finance Abda al-Mahdi. “If (the south) hurts the north in one area, the north will hit back in another area, so both parties need to cooperate economically to make things go smoothly.”

The south, which contains about 20 percent of Sudan’s population of 40 million, derives some 98 percent of its budget from oil revenues. This makes it hostage to the north, which has the infrastructure to refine and ship the oil; it would take years for the south to build its own infrastructure, even if it could overcome financing problems. [ID:nMCD437757]

South Sudan’s government will therefore have to douse expectations among its people and even some of its own ministers that it will enjoy 100 percent of its oil revenues after independence. The north will demand a high price in the form of rents and fees to use its refineries, pipelines and port.

But the south has its own trump card: its currency system. Although a monetary union would probably be the cheaper option for both countries, the south plans for political reasons to issue its own currency after secession. If it does so without close coordination with the north on issues such as the timing and the exchange rate, inflationary pressure on the Sudanese pound could be devastating.

“Both parties are perfectly set up to sabotage the other one, but also at the cost of sabotaging themselves,” said Espen Barth Eide, the deputy foreign minister of Norway who is advising both sides on oil.

FRESH START

Analysts estimate that the government of the south may be able to add $1 billion to its annual budget of around $2 billion by obtaining more revenues from oil after independence.

In some senses, the south will have the benefit of making a fresh economic start; it will not have the north’s problems of a debilitating external debt and a large, structural trade deficit. The south has so far refused to take on any of Sudan’s external debt and analysts think it is unlikely to do so. Excluding oil, merchandise trade in South Sudan’s capital Juba has been dominated by business with the relatively strong economies of neighbouring east Africa, rather than with the north, and that trend is likely to continue after independence.

But the south shares some economic problems with the north. The per capita gross national product of Sudan as a whole was just $1,220 in 2009, according to a World Bank estimate, and the level in the south is probably even lower.

Like the north, the south spends large sums to maintain a big army, which it has failed to demobilise despite peace. Delays in paying salaries have caused riots by unruly soldiers, and there are few jobs to offer them if they leave service.

“They should invest most of their petroleum money on developing agriculture, industry, and education and health services,” economist Hassan Satti, a former Sudanese finance ministry official, said of the south’s government.

“If they continue to spend on themselves they are going to be faced with a very difficult situation.”

There is little infrastructure in the south and just 60 kilometres (38 miles) of asphalted roads. Electricity is provided by costly diesel generators since there is no national grid, and running water is scarce is many areas. Because of poor facilities for education, one of the biggest problems is a lack of human resources.

GOVERNMENT SPENDING

Before investors come in, the government will need to get a grip on security after a history of army rampages, rebellions by militias and heavily armed civilians fighting in tribal clashes.

All of these problems will require high government spending. “The south needs a huge infusion of capital from outside,” said former Sudanese finance minister Abdelrahim Hamdi. “It will not come from investors; it should come from donors.”

Donors including Britain, the United States, Norway and Holland have pledged more than $4 billion in aid since 2005 to Sudan as a whole. World Bank-managed projects have spent more than $500 million in the south alone, and millions more in north-south border areas.

But donor nations on which the south has relied in the past say they will not be so quick to give aid post-secession. The global financial crisis has left less cash to give in some countries, and until Juba can control its rampant corruption and proves it can avoid war with the north, donors will be wary.

“They should not expect to be bailed out by donors — they have good friends but you can’t run the economy on development aid,” said Norway’s Eide.

However, the West may calculate that it cannot afford to have another failed state in east Africa so close to Somalia, and near Kenya, the region’s key economy. So help should be available, for a while at least.

“The south is very fragile,” said economic researcher Mohamed Kabaj, an independent economic researcher in Sudan who was an adviser to wealth-sharing talks for the separate conflict in Darfur.

“If the international community will not extend help to the south, this will be a very big mismanagement of the whole situation and everyone will suffer more.” (Editing by Andrew Torchia)

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