The International Monetary Fund (IMF) on Wednesday approved a disbursement of $174.2 million to South Sudan under the Rapid Credit Facility (RCF) to address Covid-19 pandemic-related effects to the economy.
The IMF executive board approved the fund which is the second financial assistance to South Sudan since it joined the international financial institution in 2012.
The disbursement will help finance South Sudan's urgent balance of payments needs and provide critical fiscal space to maintain poverty-reducing and growth-enhancing spending.
South Sudan has been greatly affected by a sharp decline in international oil prices triggered by the pandemic and devastating floods have eroded economic gains of the peace process which resulted in the decline of the economy by 4.2 percent in the 2020/2021 financial year.
The economic downturn widened the fiscal and the balance of payments deficits, opening large financing gaps in the absence of concessional financing. In the past, the monetization of the fiscal deficit resulted in high inflation and significant exchange rate depreciation.
A modest economic recovery is projected in FY21/22 on the heels of oil price recovery.
Mr Mitsuhiro Furusawa, IMF Deputy Managing Director and Acting Chair, said South Sudan has been hit hard by the Covid-19 pandemic, lower international oil prices, and severe floods in recent months.
The challenges have led to urgent balance of payments and fiscal financing needs and reversed early economic gains from political stability.
“The IMF's emergency financing under the Rapid Credit facility would help meet priority spending needs, catalyse donor support, and foster critical economic reforms envisaged under the Staff-Monitored Program. Prudent fiscal and monetary policies are necessary to promote macroeconomic stability,” Mr Furusawa said.
He said restoring fiscal discipline is key to macroeconomic stabilisation and debt sustainability, adding that it is important that the authorities remain committed to executing the remainder of the FY20/21 and FY21/22 budgets without arrears accumulation and no recourse to monetary financing.
“Revenue mobilisation measures and expenditure rationalisation would ensure adequate resource allocation for priority expenditure, including vaccinations, salaries, and critical investments. To maintain debt sustainability, the authorities must remain committed to nonconcessional financing and limiting external borrowing to only finance critical infrastructure and Covid-related spending,” said the deputy managing director.
Mr Furusawa said discontinuation of deficit monetisation is critical to enhancing the credibility of the macroeconomic framework and that foreign exchange reforms should aim to phase out economic distortions, reduce vulnerabilities, and support economic diversification.
He said strengthening governance is crucial for efficient use of public funds and building credibility with public and development partners.
“It will be important to accelerate public financial management reforms, including implementing steps that would strengthen the macro-fiscal framework and the budget process; implement the Treasury Single Account; and improve cash management. The authorities should remain committed to ensuring transparency in the use of RCF resources by publishing monthly reports on pandemic-related spending and making public quarterly audits by the Auditor General,” he said.
The South Sudan authorities have embarked on reforms to restore macroeconomic stability. Since October 2020, the authorities have stopped monetary financing of the deficit which, along with the forex auctions, have helped stabilise the exchange rate.
Revenue mobilisation measures, including phasing out some tax exemptions, have bolstered domestic non-oil revenue in recent months.
A Staff Monitored Program (SMP) will also help in creating the conditions for strong and inclusive growth by restoring fiscal discipline, implementing a rules-based monetary policy framework, and addressing distortions in the foreign exchange market to foster greater transparency of government operations and reducing vulnerabilities.