Businesses that have pegged their growth plans for the next five years on operations in South Sudan will have to go back to the drawing board as the political crisis in the country enters its second year.

A new report released last week shows that the businesses will be hit directly through closures and scaling down, and indirectly by the war, which will reduce Juba’s economic growth by up to 15 per cent.

The survey by Frontier Economics, a consultancy based in London, shows that it will cost South Sudan between $22.3 billion and $28 billion if the conflict continues for the next five years. South Sudan’s spending on security could reach $2.2 billion if the conflict lasts another five years. 

The report projects that 6.4 million people will face food insecurity between January and March 2015, and $1.81 billion will be needed over the course of the year.

Uganda, Kenya, Tanzania and Sudan, South Sudan’s biggest trading partners, would bear the brunt of the fighting, and potentially save $53 million if the conflict were resolved this year.

The report, titled South Sudan: The cost of war, quantifies the economic costs of prolonged conflict in South Sudan to the country, its neighbours and the international community, starting from this month.

“The conflict is raising the risk profile of the region. Investors who would have loved to venture into the region are looking at the geographical risk involved in the region. They are beginning to look at the broader regional dynamics, the heightened political security risk,” said Fred Muhumuza, economic adviser to Uganda’s Ministry of Finance and research fellow at Makerere University.

GDP growth in the neighbouring countries is projected to drop by 1 per cent, translating into a $1.2 billion loss, if the conflict continues for between one and five years.

Kenya, Tanzania and Uganda are projected to experience, in five years, GDP losses of 9 per cent, 4.7 per cent and 4.5 per cent respectively if the conflict intensifies beyond the current level.

READ: Kenya stands to lose $24b in South Sudan conflict

Reduced GDP growth

While Kenya is yet to register a drop in its economic growth, figures reported for Uganda, one of South Sudan’s biggest trading partners, indicate that total remittances to Uganda have fallen in the wake of the conflict by 30 per cent. This is estimated to have reduced Uganda’s GDP growth by between 0.2 and 0.3 per cent.

The director of research at the Bank of Uganda, Adam Mugume, told journalists during a monthly briefing that the conflict could shave 0.5 percentage points off Uganda’s GDP growth.

Last year, the government of Uganda raised its domestic borrowing ceiling to plug a budget deficit arising from, among other things, the military intervention in South Sudan.

Central bank sources said the domestic borrowing ceiling has been raised by Ush675 billion ($259 million), from Ush1.04 trillion ($400 million).

“Uganda, which has troops in the country, will also suffer loss through increased military expenditure,” Mr Muhumuza said.

The onset of the conflict saw the return of many Ugandan traders from South Sudan, and a corresponding drop in remittances. Kenya Commercial Bank (KCB), the largest bank in South Sudan by branch network, has closed three of its 19 branches because of the conflict. The closure is expected to hit the listed company’s bottom line.

READ: How South Sudan is minting money for Kenyan banks

“Like other businesses, our operations were affected by the South Sudan instability. We witnessed a slowdown in trading activities between Uganda and Southern Sudan, hence a fall in our forex and commission revenue,” said KCB Uganda managing director Joram Kiarie.

Uganda earned an estimated $1.3 billion from exports to South Sudan in 2012, a twofold increase from two years earlier. Kenya’s exports to South Sudan increased slightly, from $207 million to $210milion in 2012.

“Slow exports affecting both manufacturers and traders and foreign exchange, especially dollar shortages, have led to delayed payments and loss of sales for customers. This has affected loan repayments,” Mr Kiarie said.

The war in South Sudan broke out in December 2013 as a result of a political disagreement between President Salva Kiir and his former vice president Riek Machar. Regional governments and business leaders in the region had hoped the conflict would be resolved quickly.

The conflict has already derailed the participation of South Sudan in the regional Lamu-Southern Sudan-Ethiopia Transport Corridor infrastructure project being undertaken by Uganda, Kenya, Ethiopia and South Sudan. The project is to link the countries with a standard gauge railway, roads, oil pipeline and a new port at Lamu in Kenya.

Without a developed private sector, the South Sudan economy is driven by the government, meaning commitments to the war end up choking other sectors of the economy.

“The regional economies will survive the second year of the war, but it will reduce export revenues as it is limiting the free flow of trade,” the report says.

Suvrajit Ghosh, the general manager of Bidco Uganda, a regional manufacturer of edible oils and fats, said supplies to South Sudan have fallen by 60 per cent, and will continue to fall. Traders said since the war broke out, risk averse formal businesses have given way to the black market.

“This is because of the scarcity of the dollar. The dollar in the black market is now 20-25 per cent more expensive,” Mr Ghosh said.

While Uganda decided to intervene militarily to end the war, and Kenya opted for a diplomatic solution, both countries will incur losses in security spending.

“This is a war funded by the regional countries, it is not only limited to economic loss, but to expenditure on security,” said Mr Muhumuza.

The report notes that defence expenditure incurred by Uganda as a result of the conflict is almost double the development budget for health for the current financial year, and close to that for education. Uganda deployed its troops to South Sudan a year ago.

Defence Minister Crispus Kiyonga told MPs in June 2014 that the army had allocated $9.6 million for the deployment, and had not expected the war to last beyond four months.

With a supplementary request of $65 million in June, Uganda’s defence budget now stands at $318 million. Kenya, the report notes, will mostly likely spend $200million on security in South Sudan.

“Kenya is also likely to have concerns about the prospects of South Sudan becoming a failed state, especially in the light of the impact on the country of state failure in Somalia. A second failed state in the region is likely to increase the difficulty and costs Kenya faces in controlling insurgent activity,” it said.

Kenya has one of the highest levels of military expenditures in sub-Saharan Africa. Data provided by the Stockholm International Peace Research Institute suggests that since late 2011, when Kenya heightened its presence in Somalia, military expenditure rose by $200 million.

Greatest direct cost

While Uganda and Kenya may suffer economic losses, Sudan, according to the report, will face the greatest direct financial costs of the conflict.

Under an agreement concluded between the governments of Sudan and South Sudan in September 2012, and valid until March 2016, South Sudan is required to make payments to Sudan for oil transported through the country. However, the value of this payment is at risk because of the drop in oil production.

The two countries had also agreed on a finite payment of $3.028 billion. With a drop of 60,000 barrels per day, the financial loss to Sudan over the remaining term of the agreement, that is until March 2016, is estimated at around $300 million.

The report calls for increased pressure on the warring parties to end the fighting, by implementing targeted sanctions on individuals and an arms embargo on South Sudan.

The Igad-led peace talks in Addis Ababa have yielded little success, and both parties have violated the Cessation of Hostilities Agreement signed last year.