Mitsuhiro Furusawa, IMF Deputy Managing Director
The Executive Board of the International Monetary Fund (IMF) today approved a disbursement of SDR 123 million (50 percent of quota or about US$174.2 million or Shs638.3bn) to South Sudan under the Rapid Credit Facility (RCF).
This is the second IMF financial assistance to South Sudan since it joined the IMF in 2012. The disbursement will help finance South Sudan’s urgent balance of payments needs and provide critical fiscal space to maintain poverty-reducing and growth-enhancing spending.
A sharp decline in international oil prices triggered by the pandemic and devastating floods have eroded economic gains of the peace process. The economy is slated to contract by 4.2 percent in FY20/21.
The economic downturn widened the fiscal and the balance of payments deficits, opening large financing gaps in the absence of concessional financing.
In the past, the monetization of the fiscal deficit resulted in high inflation and significant exchange rate depreciation. A modest economic recovery is projected in FY21/22 on the heels of oil price recovery.
The authorities have embarked on reforms to restore macroeconomic stability. Since October 2020, the authorities have stopped monetary financing of the deficit which, along with the forex auctions, have helped stabilize the exchange rate. Revenue mobilization measures, including phasing out some tax exemptions, have bolstered domestic non-oil revenue in recent months. A Staff Monitored Program (SMP) will help in creating the conditions for strong and inclusive growth by restoring fiscal discipline, implementing a rules-based monetary policy framework, and addressing distortions in the foreign exchange market.
The authorities are committed to strengthening governance and accountability through public financial management reforms. The transparency of the use of the RCF resources will be achieved through regular reports and audits. The SMP will foster greater transparency of government operations while strengthening governance and reducing vulnerabilities.
At the conclusion of the Board discussion, Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, made the following statement: “South Sudan has been hit hard by the COVID-19 pandemic, lower international oil prices, and severe floods in recent months. These challenges have led to urgent balance of payments and fiscal financing needs and reversed early economic gains from political stability. The IMF’s emergency financing under the Rapid Credit facility would help meet priority spending needs, catalyze donor support, and foster critical economic reforms envisaged under the Staff-Monitored Program. Prudent fiscal and monetary policies are necessary to promote macroeconomic stability.
“Restoring fiscal discipline is key to macroeconomic stabilization and debt sustainability. It is important that the authorities remain committed to executing the remainder of the FY20/21 and FY21/22 budgets without arrears accumulation and no recourse to monetary financing. Revenue mobilization measures and expenditure rationalization would ensure adequate resource allocation for priority expenditure, including vaccinations, salaries, and critical investments. To maintain debt sustainability, the authorities must remain committed to nonconcessional financing and limiting external borrowing to only finance critical infrastructure and COVID-related spending.
“Discontinuation of deficit monetization is critical to enhancing the credibility of the macroeconomic framework. Foreign exchange reforms should aim to phase out economic distortions, reduce vulnerabilities, and support economic diversification. Effectively implementing the reserve money targeting framework and reducing distortions in the FX market would support monetary and financial stability.
“Strengthening governance is crucial for efficient use of public funds and building credibility with public and development partners. In this regard, it will be important to accelerate public financial management reforms, including implementing steps that would strengthen the macro-fiscal framework and the budget process; implement the Treasury Single Account; and improve cash management. The authorities should remain committed to ensuring transparency in the use of RCF resources by publishing monthly reports on pandemic-related spending and making public quarterly audits by the Auditor General.”