IMF warns of massive economic challenges in South Sudan

South Sudan faces massive economic challenges in the wake of prolonged internal conflict and subdued oil prices, the International Monetary Fund (IMF) said Tuesday.

An IMF team, which concluded its review mission in South Sudan, said decisive economic measures and lasting peace are key to rebuilding confidence in the economy, which has been ravaged by three years of conflict.

"Restoring of macroeconomic stability will require immediate reduction of the large fiscal imbalance that in the last couple of years has led to a rapid expansion in government borrowing from the central bank and the accumulation of significant arrears," Jan Mikkelsen, who led the IMF team, said.

"For this to be effective, it will require simultaneous efforts to promote reconciliation and address the security challenges and humanitarian emergency," Mikkelsen said in a statement issued in Juba, capital of South Sudan.

A relapse of violence in July following the formation of a unity government three months earlier compounded the crisis which started in December 2013 and challenged the peace process.

The conflict has led to nearly two million internally displaced, more than one million refugees in neighboring countries, and about five million food-insecure South Sudanese.

According to the IMF, South Sudan's real income, adjusted for terms of trade losses, has declined by about 50 percent since 2013 and the number of people in need of humanitarian assistance has risen to unprecedented levels.

Inflation has soared to about 500 percent (12 months through October), the exchange rate has depreciated steeply, and foreign exchange reserves are close to exhaustion, the lender said.

The IMF mission said the country's 2016/17 fiscal year budget recently adopted is an important step in the right direction towards restoring macroeconomic stability.

The budget reflects most of the revenue and expenditure measures proposed by the IMF mission in May 2016 and presents a substantial reduction in the deficit from about 30 percent of GDP in 2015/16 to about nine percent of GDP.

The mission commended the authorities' decision to stop direct loan advances from the Bank of South Sudan to the government and to limit overall domestic financing.

"The mission urges the authorities to adopt further measures, including eliminating fuel subsidies and ghost workers and reducing costs of foreign diplomatic missions," Mikkelsen said.

Given a substantial decline in real wages for civil servants in 2016/17, the lender recommended that wages for lower grades be raised somewhat to compensate for the loss of purchasing power.

"These additional measures would reduce the overall deficit and financing requirement, which would be closed through domestic financing, essentially Treasury bills. If implemented, this budget would contribute to lowering inflation substantially and to stabilizing the exchange rate," Mikkelsen said.

The IMF mission also backed measures taken by the government to improve the public financial management framework, particularly the establishment of the Cash Management Committee.

"To further strengthen expenditure control and ensure successful implementation of the budget, the mission recommends the following additional measures: strengthening the cash management framework, tightening commitment controls with a view to reducing arrears, and passing the Procurement Act," Mikkelsen said. Endit