Center for Global Development Working Paper 233, December. Benjamin Leo (2010).

Leo examines how Sudan’s external debt might be dealt with, both in status quo and southern secession scenarios.

External debt obligations weigh heavily in Khartoum’s consideration of the potential secession of Southern Sudan following a referendum in early 2011.  Leo examines what the implications of Sudan’s $35 billion in external debt obligations might be for a unified Sudan and in a secession scenario.  In this article, he first, reviews Sudan’s current debt situation and whether the country might qualify for debt relief.  Second, he explores how debt obligations might be divided in a secession scenario.  Third, he estimates external indebtedness ratios.  Finally, he suggests how Sudan might win comprehensive debt relief and clear its $30 billion in loan arrears.

Though Khartoum maintained low debt levels in the 1970s, it has been in continuous and growing arrears on its debts to Paris Club and IFI creditors since the 1980s.  Exchange rate policies in this period led to import reliance and debt accumulation.  Inflation, droughts, and the second civil war beginning in 1983 hurt economic growth as well.  Oil price shocks, rising interest rates, and the disappearance of concessional credits compounded the problems.  By 1985, debts exceeded $9 billion.  In 2009, Sudan’s external debt totalled $34.7 billion (in net present value terms).  As a benchmark, this figure totals 64% of Sudan’s GDP.  The World Bank and IMF have declared Khartoum to be in debt distress.  Leo notes that “the Sudanese government has mobilized scarce public resources to repay new obligations falling due for selected creditors – largely those that have continued to provide new loan financing” (8).

IFI arrears totalled $2.4 billion as of June 2010 ($1.5 billion with the IMF, $612 million with the World Bank, and $264 million with the African Development Bank).  Sudan must address these debts quickly.  It will owe $260 million in debt service payments over 2010 to 2015.

It is important to note that there are significant blind spots in the data that may complicate debt relief overall and particularly in the case of secession.  Sub-national data on GDP and exports do not exist.  Data on the “ultimate geographic beneficiary” of historical loans does not exist—problematic because “This information is central to either dividing external debt obligations or determining the sustainability of external debt ratios” (3).  Leo recommends that the World Bank, IMF, and other institutions work with Sudan to develop usable data.

If Southern Sudan were to secede, debt might be divided according to the final beneficiary, population, or GDP.  Leo reports that “Historically, creditors largely have utilized the final beneficiary principle in the event of a debt apportionment scenario. For unallocated debt obligations (i.e., budget support or IMF program assistance), governments and creditors typically use a hybrid approach” (10).  The dissolution of Yugoslavia and Bangladesh’s secession from Pakistan represent examples Sudan might follow.

Determining loan final beneficiaries would be difficult in Sudan, however, the World Bank does keep records of its loans to the country.  Under this system, Khartoum would assume $30-34 billion in debt and Southern Sudan $0.7-4.7 billion.  Under the population metric, Khartoum would assume $27.4 billion and Southern Sudan $7.3 billion.  Under an estimated GDP metric, Khartoum would assume $27.6-27.7 billion and Southern Sudan $7.0-7.1 billion.

Leo concludes with six policy recommendations.  First, traditional debt relief will seriously influence debt sustainability.  Paris Club type debt resolution according to Naples terms would “significantly reduce Sudan’s debt ratios” considering that 90% of Sudanese debt is held by bilateral and commercial creditors.  Second, Heavily Indebted Poor Country (HIPC) debt relief might be a way forward.  Sudan might qualify for HIPC assistance, which would be helpful but would not completely erase Sudan’s debt.  Third, the disputed Abyei region is geopolitically important but will not affect Sudan’s debt considerations even in the face of secession.  Fourth, debt sustainability in a secession scenario will be complicated.  Different measures of external indebtedness (net present value debt to GDP ratios versus export or revenue indicators) forecast different prospects for sustainability.  Fifth, secession could complicate Khartoum and Southern Sudan’s HIPC debt relief eligibility, as they must qualify for IDA-only status before they can receive such relief.  Both areas per capita income likely exceed the IDA cutoff, and therefore, they would have to navigate the World Bank process to determine creditworthiness and UN determination of LDC status before they could settle their IDA status.  Sixth, Sudan “should expect a long and difficult path to clearing unsustainable debt obligations” (3).  A minimum of three to four years should be expected.