Monday, 3 December 2012

When poverty reduction competes with state building: 

The case of South Sudan

The world’s youngest nation, South Sudan, has now had over a year of political economic autonomy, following a break away from Sudan in July 2011. Independence was preceded by the period after the signing of the Comprehensive Peace Agreement in 2005, during which it operated as a semi-autonomous government. South Sudan has since made significant progress in restoration of peace, political transition, establishment of governance structures towards building a stable state. There have also been improvements in the socio-economic wellbeing of the people of South Sudan.

However, this has not been without challenges some of which could negate the progress already made. Preliminary analysis on public expenditure and resource flows reveals critical resource management challenges that could have far reaching implications on fiscal sustainability, public accountability and the economic well being of the country’s poor.

Despite significant data limitations and methodological constraints, Kenneth Okwaroh analysed the flow of domestic revenues and Official Development Assistance (ODA) in South Sudan.  He used budget estimates for the period between 2006 and 2011 as a proxy to analyse the intentions, motivations and the character of resource allocation in the country with a specific focus on resource allocations for poverty reduction. The analysis revealed the following:

Acute dependance on oil revenues 
I – The Government of South Sudan (GoSS) acutely depends on oil revenues for its income. Between 2006 and 2011, oil revenues contributed over 98% of state income. This poses a risk to fiscal sustainability especially because the country’s oil production is projected to decrease by 10% by 2019, and by 50% by 2029 if no new reserves are discovered. This lack of diversity in the economy, together with increasing dependence on imports, increases the country’s vulnerability to fiscal turmoil in the face of external shocks. A classic example is the decision to shut down oil production in response to the dispute with Khartoum that lead to unprecedented inflation rates (80% in May 2012) and profoundly stifled growth. Besides undermining sound -economic management such dependence on oil revenue also impedes effective taxation with significant implications for governance and accountability.

Competing resource demands - Poverty missing out
II – Since the signing of the CPA in 2005, the country has experienced considerable growth in state revenues and ODA flows. However this has not been translated into significant progress in human development, poverty reduction and economic growth. Compared to other states in the East African region, South Sudan has the lowest life expectancy at birth (42 years), lowest adult literacy levels (27%), highest maternal mortality rate (2,054 per 100,000 live births) and one of the highest poverty headcounts (51%). Given these high poverty and welfare indicators, and the direction of government expenditure, it is deducible that, key priority areas for budget allocation are not efficiently and effectively aligned poverty reduction outcomes.

III – South Sudan could be struggling with mechanisms for balancing resource demands for state building with the urgent need to address poverty and human development. Despite government revenues and expenditure steadily expanding, pro-poor sectors such as agriculture, health and education, have been considerably under-funded. For example while state revenues expanded by 17.2% between 2008 and 2012, total expenditure on agriculture, education and health as a proportion of total spending grew by only 11.7%. These three sectors, which were identified as expenditure priorities, collectively received 12.5% of total average spending, compared with security, which received 28.2%. Conversely, public administration and justice, law and order, which were not considered priority sectors, reported higher outturns (11.5% and 11.4% respectively). Moreover expenditure in all three sectors fell short of international standards and targets set by peer states.

Prioritization far from actual spending
IV – There are significant gaps in the alignment of resources with identified expenditure priorities. Both budget allocations and donor commitments are not adequately synchronised with these priorities. For example, the education and health sectors, which the GoSS outlined as priority expenditure areas, received lower proportions of total spending (6.9% and 4.2% respectively) than public administration (11.5%) and rule of law (11.4%), which were not identified as priority sectors.
Okwaroh argues that the findings depict a largely unstable macro-economic environment that least guarantees fiscal sustainability, steady public revenues and predictable public spending. There is compelling evidence that abundant oil revenues in South Sudan coupled with aid could be impinging on effective domestic tax collection. With a small underdeveloped and less diversified formal economy, low capacity government institutions and inefficient tax collection, it risks becoming an import-dependent country afflicted with the ’resource curse’.  Fluctuating GDP growth and instability in the oil industry add to the fragility of a conflict-ridden state, faced with multiple resource demands for reconstruction, state building and poverty reduction. South Sudan must therefore streamline its management of oil and explore alternative, non-oil resource streams – such as agriculture – to ensure fiscal sustainability. It must institute mechanisms to ensure effective balancing of resource demands for state building with funding for poverty response. 

You can find the full report here and the data and analyses here

1 comment:

  1. A very enlightening read...especially for those of us who think that having oil deposits is everything for a country.