Oil or Nothing: Dealing with South Sudan’s Bleeding Finances

International Crisis Group, Report No 305/Africa, 06 October 2021


Upon South Sudan’s independence in 2011, many hoped the country’s oil wealth would help build the state and lift citizens out of poverty. Instead, politicians have shunted these revenues toward patronage and personal enrichment, feeding internal conflict. Transparency and accountability are badly needed.

 

What’s new? South Sudan’s rulers keep a tight grip on its oil wealth, blocking outside scrutiny and obstructing reforms urgently needed to ease both popular hardships and political tensions. Along with International Monetary Fund support, a peace deal has kickstarted new efforts to fix the country’s broken finances.

Why does it matter? South Sudan’s five-year civil war killed up to 400,000 people and brought the young nation close to collapse. If President Salva Kiir’s government begins to clean up the country’s budget, as it has pledged to do, opponents will have fewer incentives to take up arms again.

What should be done? Reform-minded South Sudanese and their external partners should focus on making the oil economy more transparent and accountable by ensuring that revenue deposits go in a single public account and through other anti-corruption measures. Donors should press commercial lenders to disclose their payments to Juba and follow South Sudanese law.


Executive Summary


South Sudan’s rotten state finances are derailing the young country from its already fraught path to peace and stability after a brutal civil war. Top officials hold the country’s oil riches close, barring scrutiny of spending and allowing rampant misappropriation of funds. This slush-fund governance is at the heart of South Sudan’s system of winner-take-all politics and helps explain why so much went so wrong so quickly after independence in 2011. The peace deal signed in 2018 could help, as it includes reforms designed to combat corruption and build more accountable public finances. But, for the most part, the new government has slow-rolled or evaded implementation. Reform-minded South Sudanese and outside partners should narrow their focus to those measures that begin to pry open the lid on the country’s oil wealth, ensuring, for starters, that oil revenues are deposited in a single public account. Simultaneously, donors should consider commercial levers to make South Sudan’s finances more transparent and accountable to its people, a critical step in halting the country’s tailspin.

The South Sudanese people have suffered terribly from the failure of their leaders to forge a peaceful foundation for the new country. Just two years after independence, the country fell into a civil war that raged for years and left up to 400,000 dead, a shocking toll in a country of only some 12 million. Peace talks led by neighbouring leaders resulted in the 2018 agreement and a power-sharing arrangement between President Salva Kiir and his main rival, Riek Machar, though an insurgency continues in the south. But the government is riven by internal power struggles and its reluctance to lift the shroud from upon the oil economy is blocking reforms that could sustain a broader political settlement.

Oil has always been central to South Sudan’s political fortunes. The landmark 2005 peace deal that paved the way for its secession from Sudan granted Juba 50 per cent of the South’s oil revenues, pumping billions into the new semi-autonomous government as it prepared to stand on its own. The easy money quickly built a vast patronage system that helped unite rival camps but also papered over the country’s deep ethno-political divisions. This largesse abruptly ended as President Kiir moved to consolidate power after independence, sidelining his rivals and firming up his grip on the oil economy. The result was to fracture the country into warring ethno-political camps that continue to be a source of instability despite the formation of a unity government in 2020.

As South Sudan struggles to recover from civil war, its broken state finances are receiving renewed attention. During the war, Kiir mortgaged future oil exports for advance loans from a small group of commodity traders and commercial banks, piling up debt while hiding the country’s finances ever further from sight. Meanwhile, his loyalists diverted large portions of state revenue from the official budget, which is so leeched that the government routinely fails to pay salaries. The result is a cash-strapped state and a deeply aggrieved population with little confidence in its leaders, amplifying political and ethnic animosities.

Stabilising the country appears impossible without fixing its economy. South Sudan is a divided and fragile state that requires fairer power sharing in the centre and a devolution of authority outside Juba, but the parties cannot reach such a political settlement until they are adequately accounting for and sharing the oil funds. Frustrations are also boiling over among donors, who increasingly believe that their huge sums of humanitarian aid are sustaining a kleptocratic elite.

An acute economic crisis triggered by falling oil prices in 2020 opened a window to press for changes, but an uncoordinated approach could squander the chance. Over a ten-month period starting November 2020, South Sudan received some $550 million in relief from the International Monetary Fund (IMF), a lump sum equivalent to past annual budgets. The IMF received promises of some reforms but there were few strings attached. This support helped Juba stave off further slides in its currency but left many reform-oriented South Sudanese and donors frustrated that a government in such disrepute and so resistant to reforms received so much for so little.

A more coordinated strategy is needed. Drawing from the 2018 peace deal’s ambitious reform agenda, and the government’s technical commitments to the IMF, South Sudanese reformers and outside actors should pursue more select financial reform priorities that can redirect oil revenues back onto the books of the national budget. These should include the public disclosure of government revenues and debts, aided by the designation of a single oil revenue account, as well as efforts to shore up the weak guardrails that to date have permitted the looting of government deposits. Future IMF disbursements and donor support should require such transparency in total oil revenues, rather than simply accepting better management of funds that make their way into the official budget.

One further way for donors to boost their limited influence in Juba is through systematic engagement with the commodity firms, and their bankers and insurers, upon which South Sudan depends. For instance, donor governments should use the threat of regulation to encourage companies to disclose their payments to Juba, consistent with the way these companies increasingly disclose payments in other places. If they fail to do so, governments can consider demanding special licences that require such disclosure and certify compliance with South Sudanese law for companies under their jurisdiction to operate in South Sudan’s oil sector. Banks and insurers should protect themselves from legal and reputational exposure by requiring the same of their customers who do business in South Sudan.

At the same time, South Sudanese authorities and outside powers must start thinking now about South Sudan’s impending transition from a carbon economy as its oil production declines, new investment in it looks less attractive and the world sets bolder decarbonisation targets. In particular, donors should consider how their present and future support might help reconfigure, rather than reinforce, the top-down, centralised political economy that has led to such bloody destruction. Reform will not come easy, given the incentives for President Kiir and his allies to cling to South Sudan’s oil wealth. If the political class and outside powers do not succeed in convincing Kiir to enact these reforms, however, the country could squander an opportunity to find its footing before its wells run dry.


Juba/Nairobi/Brussels, 6 October 2021


For the full report, visit: https://www.crisisgroup.org/africa/horn-africa/south-sudan/305-oil-or-nothing-dealing-south-sudans-bleeding-finances

 Oil or Nothing: Dealing with South Sudan’s Bleeding Finances

International Crisis Group, Report No 305/Africa, 06 October 2021

 

Upon South Sudan’s independence in 2011, many hoped the country’s oil wealth would help build the state and lift citizens out of poverty. Instead, politicians have shunted these revenues toward patronage and personal enrichment, feeding internal conflict. Transparency and accountability are badly needed.

 

 What’s new? South Sudan’s rulers keep a tight grip on its oil wealth, blocking outside scrutiny and obstructing reforms urgently needed to ease both popular hardships and political tensions. Along with International Monetary Fund support, a peace deal has kickstarted new efforts to fix the country’s broken finances.

 

Why does it matter? South Sudan’s five-year civil war killed up to 400,000 people and brought the young nation close to collapse. If President Salva Kiir’s government begins to clean up the country’s budget, as it has pledged to do, opponents will have fewer incentives to take up arms again.

 

What should be done? Reform-minded South Sudanese and their external partners should focus on making the oil economy more transparent and accountable by ensuring that revenue deposits go in a single public account and through other anti-corruption measures. Donors should press commercial lenders to disclose their payments to Juba and follow South Sudanese law.

 

Executive Summary

 

South Sudan’s rotten state finances are derailing the young country from its already fraught path to peace and stability after a brutal civil war. Top officials hold the country’s oil riches close, barring scrutiny of spending and allowing rampant misappropriation of funds. This slush-fund governance is at the heart of South Sudan’s system of winner-take-all politics and helps explain why so much went so wrong so quickly after independence in 2011. The peace deal signed in 2018 could help, as it includes reforms designed to combat corruption and build more accountable public finances. But, for the most part, the new government has slow-rolled or evaded implementation. Reform-minded South Sudanese and outside partners should narrow their focus to those measures that begin to pry open the lid on the country’s oil wealth, ensuring, for starters, that oil revenues are deposited in a single public account. Simultaneously, donors should consider commercial levers to make South Sudan’s finances more transparent and accountable to its people, a critical step in halting the country’s tailspin.

 

The South Sudanese people have suffered terribly from the failure of their leaders to forge a peaceful foundation for the new country. Just two years after independence, the country fell into a civil war that raged for years and left up to 400,000 dead, a shocking toll in a country of only some 12 million. Peace talks led by neighbouring leaders resulted in the 2018 agreement and a power-sharing arrangement between President Salva Kiir and his main rival, Riek Machar, though an insurgency continues in the south. But the government is riven by internal power struggles and its reluctance to lift the shroud from upon the oil economy is blocking reforms that could sustain a broader political settlement.

 

Oil has always been central to South Sudan’s political fortunes. The landmark 2005 peace deal that paved the way for its secession from Sudan granted Juba 50 per cent of the South’s oil revenues, pumping billions into the new semi-autonomous government as it prepared to stand on its own. The easy money quickly built a vast patronage system that helped unite rival camps but also papered over the country’s deep ethno-political divisions. This largesse abruptly ended as President Kiir moved to consolidate power after independence, sidelining his rivals and firming up his grip on the oil economy. The result was to fracture the country into warring ethno-political camps that continue to be a source of instability despite the formation of a unity government in 2020.

 

As South Sudan struggles to recover from civil war, its broken state finances are receiving renewed attention. During the war, Kiir mortgaged future oil exports for advance loans from a small group of commodity traders and commercial banks, piling up debt while hiding the country’s finances ever further from sight. Meanwhile, his loyalists diverted large portions of state revenue from the official budget, which is so leeched that the government routinely fails to pay salaries. The result is a cash-strapped state and a deeply aggrieved population with little confidence in its leaders, amplifying political and ethnic animosities.

 

Stabilising the country appears impossible without fixing its economy. South Sudan is a divided and fragile state that requires fairer power sharing in the centre and a devolution of authority outside Juba, but the parties cannot reach such a political settlement until they are adequately accounting for and sharing the oil funds. Frustrations are also boiling over among donors, who increasingly believe that their huge sums of humanitarian aid are sustaining a kleptocratic elite.

 

 An acute economic crisis triggered by falling oil prices in 2020 opened a window to press for changes, but an uncoordinated approach could squander the chance. Over a ten-month period starting November 2020, South Sudan received some $550 million in relief from the International Monetary Fund (IMF), a lump sum equivalent to past annual budgets. The IMF received promises of some reforms but there were few strings attached. This support helped Juba stave off further slides in its currency but left many reform-oriented South Sudanese and donors frustrated that a government in such disrepute and so resistant to reforms received so much for so little.

 

A more coordinated strategy is needed. Drawing from the 2018 peace deal’s ambitious reform agenda, and the government’s technical commitments to the IMF, South Sudanese reformers and outside actors should pursue more select financial reform priorities that can redirect oil revenues back onto the books of the national budget. These should include the public disclosure of government revenues and debts, aided by the designation of a single oil revenue account, as well as efforts to shore up the weak guardrails that to date have permitted the looting of government deposits. Future IMF disbursements and donor support should require such transparency in total oil revenues, rather than simply accepting better management of funds that make their way into the official budget.

 

One further way for donors to boost their limited influence in Juba is through systematic engagement with the commodity firms, and their bankers and insurers, upon which South Sudan depends. For instance, donor governments should use the threat of regulation to encourage companies to disclose their payments to Juba, consistent with the way these companies increasingly disclose payments in other places. If they fail to do so, governments can consider demanding special licences that require such disclosure and certify compliance with South Sudanese law for companies under their jurisdiction to operate in South Sudan’s oil sector. Banks and insurers should protect themselves from legal and reputational exposure by requiring the same of their customers who do business in South Sudan.

 

At the same time, South Sudanese authorities and outside powers must start thinking now about South Sudan’s impending transition from a carbon economy as its oil production declines, new investment in it looks less attractive and the world sets bolder decarbonisation targets. In particular, donors should consider how their present and future support might help reconfigure, rather than reinforce, the top-down, centralised political economy that has led to such bloody destruction. Reform will not come easy, given the incentives for President Kiir and his allies to cling to South Sudan’s oil wealth. If the political class and outside powers do not succeed in convincing Kiir to enact these reforms, however, the country could squander an opportunity to find its footing before its wells run dry.

 

 

 Juba/Nairobi/Brussels, 6 October 2021

 

 

For the full report, visit: https://www.crisisgroup.org/africa/horn-africa/south-sudan/305-oil-or-nothing-dealing-south-sudans-bleeding-finances

 

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