South Sudan’s massive infrastructure requires investments of $15 billion in the next 10 years but dependence on oil revenues poses serious risks.

The International Monetary Fund said capacity constraints means scaling up of public investment needs to be gradual, with priority given to transport and energy infrastructure as a way to enable other investments over time.

South Sudan’s economy is expected to grow annually by an average of six to seven per cent depending on normalisation of the political and security situation, regional stability and economic reforms in the next decade. In the medium term, agriculture and services will benefit from higher post-conflict spending to rebuild destroyed infrastructure while other activities could expand as investments in transport and energy begin facilitating economic diversification.

A World Bank study in 2011 estimated that South Sudan would need about $1.4 billion annually for infrastructure for 10 years, of which half would need to be spent on transport and 40 per cent on energy and water projects.

The infrastructure investment figures did not include the construction of alternative crude oil export pipelines through Kenya or Ethiopia and Djibouti, a project that could add on another $4 billion.

IMF’s country report on South Sudan said several factors linked to fragility and heavy dependence on oil revenues pose risks. Unresolved issues with Sudan led to a shutting down of oil production in January 2012.

Agreement with Sudan

“About 40 per cent of public spending goes to security and a similar share is devoted to public sector salaries, while infrastructure spending has been meagre and declining since 2011/12,” said IMF.

The dispute with Sudan was on pipeline transit fees for crude oil exported. Before the shutdown, the country’s oil output was about 330,000 barrels per day. A new agreement led to a resumption of production in April 2013.

South Sudan pays oil transit and pipeline fees of about $10 per barrel plus a cumulative $3 billion in direct financial transfers over about three and a half years. The financial transfers are linked to the flow of oil at a rate of $15 per barrel.

The agreement made by South Sudan with Sudan contains provisions for a demilitarised zone, forgiveness of bilateral claims and regularisation of cross-border and pension payments.

“While some progress has been made in these areas, the settlement of important border issues including the status of the disputed region of Abyei remains outstanding,” said the IMF.

After the January 2012 shutdown, oil output recovered to more than 235,000 barrels per day at end 2013, only to fall to about 160,000 barrels per day in early 2014 when a political struggle escalated into a civil war.

“The conflict left thousands dead, about 1.7 million people displaced, destroyed infrastructure, and worsened already poor humanitarian conditions, leading to a high risk of famine in coming months,” said the IMF.

South Sudan’s is an oil driven economy. Oil output is expected to reach 260,000 barrels per day in 2016/17, then decline until 2022 as production rates fall in ageing oil fields. Oil output could reach about 400,000 barrels per day by 2026, a result of assumed investment in enhanced recovery and exploitation of new fields in the early 2020s.

The IMF said unresolved territorial issues with Sudan and the expiration of the oil sharing agreement in 2016 could reignite tensions and threaten to disrupt oil production.

“Rent seeking behaviour and corruption, if not combated, would concentrate wealth and resources in the hands of a few and stifle development. A sustained decline in international oil prices would create serious macroeconomic tensions, possibly leading to fiscal and balance of payments crises,’’ it said.

The report recommends that South Sudan gives its priority to political inclusion, reform foreign exchange market, improve budget execution, over haul non-oil revenue administration, foster transparency and accountability in oil.

The Petroleum Revenue Management Act (PRMA), passed by parliament in October 2013 complements th ealready enacted Petroleum Law. These two pieces of legislation include provisions to prevent corruption and mismanagement as well as reporting and transparency requirements.

The PRMA prescribes that all oil revenue should flow through specific accounts, utilisation be approved by the National Legislative Assembly and flow through the budget and that key information and reports be regularly published.

The Act also provides for prudent financial management, with investment guidelines and auditing provisions for two reserve funds and an explicit prohibition against oil-guaranteed borrowing except in case of a national emergency. The PRMA is yet to be signed into law by President Kiir.