As Sudan’s civil war entered its sixth month in October, the brief exotic secondary trading run up from decades unpaid commercial bank debt three years ago has been long forgotten. Then a civilian-military interim regime succeeded the previous dictator Omar al-Bashir, who was to be handed over to an international criminal court to face human rights abuse charges in Darfur and elsewhere.

The US and EU hailed this turnaround and lifted business and diplomatic sanctions, and the Paris Club joined with Gulf donors to agree on initial halving of outstanding official debt arrears to $28bn as Khartoum reached the so-called decision point under the decades old Heavily Indebted Poor Countries (HIPC) initiative. As a condition it entered a program with the International Monetary Fund (IMF) to slash subsidies and stabilize the currency overseen directly by the Prime Minister, a well-known economist. In 2024 the HIPC schedule called for reaching completion point, when only $5bn due would remain, equal to foreign aid promises the current junta would forego as it again seized total power two years into the sharing arrangement.

The decision-making hierarchy between the normal army and the paramilitary Rapid Support Force (RSF) notorious for slaughter in Darfur was never worked out. More importantly, the vast empire of state-owned commodity producers in charge of gold, gum Arabic, and animal exports was a figurative battle over spoils, as both sides tried to obstruct even partial privatization that was explicitly tied to US assistance in formal legislation.

The RSF chief Mohamed Hamdan Dagalo, widely known by the moniker Hemedti, was from a business elite family with ties all over the Sahel and into Egypt and Libya. Holdings included legitimate banking and commercial outlets, illicit gold trading mainly to the United Arab Emirates which remains a close ally, and arms and human smuggling throughout the continent. A main stand-alone revenue source for the force was the dispatch of mercenaries to fight in Yemen, where a ceasefire now in place between the Iran-backed Houthis and the Saudi Arabia-supported recognized government ironically resulted in jobless return home stoking animosity toward career army counterparts.

The April conflagration that erupted has killed thousands, displaced over 4mn internally and sent 1mn refugees to neighbouring countries, with roughly one-third each to South Sudan, Egypt, and Chad. More than half the population, 25mn people, are food insecure, and an initial $2.5bn United Nations humanitarian appeal is only one-quarter funded. The IMF predicts 20% gross domestic product (GDP) contraction and 250% inflation this year.

Sudanese economists have more dire estimates, and calculate $100mn daily in war damage, with rebuilding costs in the $50bn range. The central bank and commercial banks have been attacked and looted, the currency has depreciated one-third with the official rate at 650 and parallel one 850 to the dollar. Salaries have not been paid for months, payment apps are spotty with daily limits imposed, and budget revenue is down 30%.

The Bank of Sudan chief attributes depreciation to an oil import price spike and speculation blamed on the enemy paramilitary. In October he ordered banks to freeze accounts associated with forty companies they control across all sectors. Foreign multinationals stocked up on gum Arabic used in cosmetics and confectionary products before the conflict and claim sufficient reserves through next year if necessary.

The balance of payments lifeline more than ever is remittances, but delivery is erratic with previous channels offline. The war has wreaked total devastation at home with scant international community relief and business distance, and also endangered the BB credit rating of the regional Trade and Development Bank, with 10% of its portfolio in the country in the form of a sharia-compliant line only partially guaranteed. More broadly the reverberations extend to neighbours Chad, Egypt and South Sudan with their own humanitarian, extreme poverty and debt crises that will force public and private sector institutions to develop a comprehensive solution as the fighting festers.

South Sudan after a decade of independence has taken in 300,000, including refugees previously escaping its own incessant battle between the forces of President Salva Kiir and Vice President Riak Machar. The first elections after regular postponement are scheduled for December 2024, but the influx has diverted government attention and thin resources as it asked the UN for an initial $350mn to handle crowding in Juba and border towns.

Flooding has already displaced half a million internally this year, after double that number in 2022 as climate change takes its toll. Oil production at 150,000 barrels per day (bpd) with China, Malaysia and India joint venture partners continues, but the main export terminal is Port Sudan in the north which may eventually be under siege, as outgoing ships are already delayed even if they can afford the war insurance premium.

The government is looking for other outlets through Djibouti and Kenya, but neither are a large-scale short-term fix. With the oil industry that accounts for 95% of exports in such a vulnerable state, the original timetable for local takeover in 2027-28 has been interrupted, and Asian investors asked to stay on for their expertise and funding.

Economic policy has been erratic at best as President Kiir regularly replaces the central bank chief and Finance Minister. Billions of dollars may have been borrowed commercially against oil collateral with no records, and then diverted to government and business elite crony networks. The US State Department issued a report several months ago warning of reputation and misappropriation risks from doing business with these groups. The President’s merry-go-round in top financial posts is in part due to frustrating scrutiny of political and military allies in this web, and the newest Treasury boss recruited from the IMF was careful to downplay insider concerns when the country held its first international investment forum in September.

The pound has settled around 130/$ after the central bank instructed normal street trading to be carried out in local currency to safeguard around $200mn in FX reserves, after a cycle in which they were completely depleted with foreign aid lags two years ago. A nine-month, no money Fund staff-monitored program runs through year's end, and in February South Sudan qualified for $115mn under the new Food Shock Window. It agreed to clear domestic salary arrears, and to refrain from non-concessional foreign and direct government borrowing from the central bank with public debt/GDP at 45%. Non-oil growth is due to pick up this year to 7% on 10% inflation, but these estimates preceded Sudan’s meltdown.

Chad hosts the most Sudanese arrivals at over 400,000, and in September the World Bank provided a $350mn line mostly for refugee infrastructure and social protection. It is in a 3-year $575mn extended credit facility with the IMF, with the latest review in May critical after over half of the targets were missed. The team cited civil and military spending overshoots with flooding and precarious security. President Idriss Deby came to power in a soft army takeover after his father was assassinated by Islamic rebels who remain a pervasive threat. He has allegedly beaten back another round of coup attempts, and looked to ties with Sudan’s paramilitary and its UAE patron to preserve his position. Under this dubious bargain, he has allowed a field hospital to open to treat wounded RSF members, in return for a reported few strings attached $1.5bn Emirates loan dwarfing the Fund’s.

Headline inflation will remain in high single digits on 4% GDP growth according to the May update, which points out oil export momentum from global prices and state takeover of former Exxon fields after a rocky initial transition. Chad was the first and so far only country to complete debt restructuring under the G20 official-commercial comprehensive framework, but the deal is hardly a breakthrough. Its biggest single $1bn creditor was the trading house Glencore, which had previously reset a collateralized oil structure of the same size before the global concept for low-income countries was rolled out. In the final resolution which encountered serial delays as Chadian officials could not reconcile figures, $2bn total repayment was extended without any outright reduction.

Egypt with the highest debt/GDP among major emerging markets at 95% and close ties to both Sudans is the main headache for investors. However, they should not lose sight of pincers from the surrounding Sahel under perennial coup danger, Ethiopia with a looming bond default in rating agency and market spreads after its own war, and the once promising turnaround in Khartoum that has turned into a displaced person and trade nightmare for the neighbourhood.  

–  Gary Kleiman, senior partner, Kleiman International Consultants, Inc.