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Conflicts are hurting bloc’s business environment

Saturday July 23 2016
111748-01-02

Fighting broke out in South Sudan’s capital Juba recently resulting in the displacement of people and closure of businesses. PHOTO | FILE

The political crisis in South Sudan is expected to impact on the East African economies as the crisis disrupts businesses and trade, undermining the region’s prospects for growth.

The crisis is happening at a time when the region has yet to find a concrete solution to the Burundian political crisis, which not only raises the bloc’s risk profile but also dents investor confidence.

While South Sudan’s admission into the EAC earlier this year raised optimism about the potential economic gains from its integration — expanding the EAC Common Market to 162 million people — the recent violence has analysts warning that it could wipe out recent economic gains.

While definite figures are not readily available, Uganda and Kenya’s annual exports to South Sudan are valued at some $200 million and $180 million respectively.

However, political instability and the adverse impact of external shocks over the past two and a half years are expected to have a significant impact on South Sudan’s economy and the region.

Regional businesses, mainly from Kenya and Uganda, that have opened outlets in South Sudan are already feeling the pinch due to political instability, forcing them to rethink their business strategy.

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“Due to the recent disruptions in South Sudan, we scaled down our operations and we have been reviewing this stance as the situation improves,” said KCB Group chief operating officer Samuel Makome.

KCB was among the first regional banks to enter the South Sudan market.

“South Sudan is a key market for us and we are optimistic that long-lasting peace and stability will prevail so that the country can flourish and deepen its economic development agenda,” added Mr Makome.

On July 15, the Uganda People’s Defence Forces (UPDF) began the evacuation of over 5,000 Ugandans from South Sudan after renewed clashes erupted in the country.

Everest Kayondo, chairman of the Kampala City Traders Association — Uganda’s biggest and most influential trade association — said the political instability in the country has disrupted business, with some companies being forced to close down while others are reconsidering their investment decisions due to the rising risk profile.

The admission of South Sudan to the EAC not only offers a larger export market for member states but also increases the bargaining power of the bloc, creating greater economic leverage.

While the potential of South Sudan is enormous in terms of natural resources and abundant arable land, so too are the governance challenges. If peace is restored and governance improved, the country could become a magnet for more businesses.

East Africa is among regions on the continent that are most vulnerable to political and social upheavals due to rising unemployment and inequality.

The biggest challenge facing policy makers in the region is job creation and equal opportunities, because of the rapid population growth. Opportunities need to exist everywhere — both in cities and rural areas — so that people can make a choice about where they want to live and work.

“The need to have a rapid response force could be one way to address the issue, but unless we understand the root causes of the conflicts and address them, they will keep recurring,” said Antonio M A Pedro, the director of the Kigali-based United Nations Economic Commission for Africa (Uneca), sub-regional office for Eastern Africa.

“The investments that need to be made are more structural in nature, such as reducing poverty and enabling public participation in decision making and institutions to facilitate that,” added Mr Pedro.

Since the civil war started in December 2013, around two million people have been displaced, exacerbating an already dire humanitarian situation, according to the International Monetary Fund.

The decline in oil production by almost half and the sharp drop in international oil prices caused large shortfalls in foreign exchange receipts and government revenue.

“The country is experiencing an economic crisis with a sharp decline in national income and high inflation, which approaches 300 per cent. Moreover, the value of the South Sudanese pound has dropped by close to 90 per cent since the exchange rate liberalisation in December 2015, while Central Bank international reserves have dwindled to a few days of import coverage,” the IMF said in a statement issued on June 1.

The IMF cautioned that if macroeconomic policies do not change, the economic situation will deteriorate even further, resulting in more humanitarian suffering and potentially threatening the still-fragile peace process.

“The 2016/17 deficit could top $1.1 billion or 25 per cent of GDP and, if again financed through borrowing from the Central Bank or accumulation of arrears, would continue to fuel inflation and put further downward pressure on the exchange rate,” said the IMF statement.

Between 2005 and 2011, foreign aid and technical assistance amounted to about $500 million per year, focused on humanitarian support, health and education, IMF estimates show. Government spending amounted to about $2.5 billion per year amid large oil-related inflows, but its effectiveness was constrained by poor budget execution and governance problems.

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