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South Sudan oil production resumes but clock is ticking

The reality remains that the new country is landlocked and depends on Sudan’s infrastructure to finance its economy; so Juba can’t afford to turn off the tap every time it has a disagreement with its northern neighbour

Image Credit: AFP
A file photo taken on November 8, 2009 shows an aerial view of the Central Processing Facility (CPF) of the Thar Jath oil field in South Sudan. Singing and dancing marked South Sudan's revival of oil production this month, raising hopes the precious resource could finally benefit a nation that fought for decades to gain control of it.
Gulf News

On April 6, South Sudan announced that it would resume oil production following a 15-month stalemate with its northern neighbour Sudan. South Sudan depends on the North’s infrastructure to export its oil, yet in early 2012, Juba had stopped oil production accusing Khartoum of diverting oil from pipelines to its own facilities.

In March this year, the two countries finally reached a deal to restart exports following months of negotiations. The settlement is a step forward in thawing frosty North-South relations and will alleviate South Sudan’s fiscal crisis brought about by lack of oil revenues. But the clock is still ticking for South Sudan; it needs to ensure steady and sustainable flow of oil by stabilising the relationship with the North, while efficiently utilising oil revenues and foreign aid to build a sustainable economy.

Following the split between the North and South in 2011, 75 per cent of the estimated five billion barrels of proven reserves have come to be located within South Sudan’s borders. Though the countries are now separate, they are inevitably tied together.

The reality remains that South Sudan is landlocked and will depend on Sudan’s infrastructure to finance its economy. The South has been looking to develop an alternative oil export route through Uganda and Kenya, which could become a strategic lever for North-South relations; but it is unlikely to replace the Northern route entirely. As such, relations between Khartoum and Juba will continue to be of strategic importance for the development of South Sudan.

Oil is at the centre of North-South relations, but there are many other reasons why the two countries need to become better neighbours. Critical areas of cooperation were outlined in a set of agreements signed in September 2012 under the auspices of the African Union.

One of them addresses the question of citizenship and the status of nationals, stipulating the freedom of all Sudanese to reside and be economically active on either side of the border. These freedoms are vital to trade and the economic development of the border areas, and to ensure the legal status of South Sudanese residing in the North after independence.

Another issue covered in the agreements is the security and demarcation of border areas, which calls for the creation of a 14-mile demilitarised zone as well as the establishment of a committee charged with the demarcation process. The ongoing border conflict has been a major obstacle to finalising the peace process set forth in the 2005 Comprehensive Peace Agreement.

Last year, fighting resulted in a temporary closure of the border as well as a humanitarian crisis, forcing thousands of people to migrate towards southern refugee camps. Perhaps not surprisingly, the UN reported earlier this year that little progress has been made to implement the September agreements.

Mistrust runs deep between the two countries, and blame games tend to get in the way of translating high-level principles of cooperation into results on the ground. Moreover, some of the most divisive topics such as the status of the border region Abyei have been left unaddressed by both the September and the March agreements.

With the resumption of oil production, and Sudan President Omar Al Bashir’s recent visit to Juba, there is hope that the two countries will get back on track to genuinely move these issues forward.

The stakes are high for South Sudan to stabilise relations with its northern neighbour. Oil resources are a much needed catalyst for nation building and the economy, and Juba cannot afford turn off the tap every time the two countries face disagreements.

Today, 98 per cent of South Sudan’s government revenues and 82 per cent of its GDP depend on oil — a high degree of oil dependency even compared to most Opec countries. Moreover, according to most estimates, South Sudan has only around 10 years of extraction left — a very short time period for the youngest country in the world to begin standing on its own feet.

Using oil proceeds to develop non-oil sectors will be critical for ensuring sustainable economic growth going forward. In the medium term, the biggest growth driver will be the agricultural sector. South Sudan has a very high share of arable land, but less than 5 per cent of that is cultivated today, and agricultural exports constitute less than 1 per cent of GDP.

To capitalise on this immense resource, the government needs to mobilise the two basic ingredients for economic growth, capital and labour, at a much faster pace than it has been doing so far. The need for capital investments and especially roads continues to be enormous in a country the size of France which only has 100km of tarmac roads, an extremely low road density even for African standards.

None of this is new to the government of South Sudan. Faced with a myriad challenges from improving governance, ensuring security to providing basic services such as health and education, the government faces an intricate task of allocating its limited resources wisely.

As a fragile yet aspiring democracy, it also has to carefully manoeuvre the domestic political landscape to satisfy the plentiful yet divided stakeholders and meet their expectations following decades of conflict. Making the right budgetary decisions is difficult in such an environment.

Currently, the government is spending almost half of its budget on paying public sector wages, while only 6 per cent of its 2012 budget was allocated to capital expenditures. In other words, the government is buying short-term political stability by giving people jobs the private sector cannot provide, instead of investing in programmes needed for long-term growth.

South Sudan’s conundrum sounds all too familiar. Looking at other emerging countries around the world, history tells us that strong economic growth and democratisation are often difficult to juggle. The task is even more daunting for countries with resource wealth and weak institutions, such as South Sudan. The risk of South Sudan becoming a failed state could be real, and depends on the policy choices made in the next few years.

The government will need to find an equation that works for its future development, and allocate resources accordingly. Developing infrastructure and attracting foreign direct investment will play a pivotal role in breaking the dependency on oil and foreign aid. Eventually, this will also contribute to balancing the relationship with Khartoum.


Simona Foltyn has a Masters in Public Affairs from Princeton University focusing on economic policy, and has lived and worked in both Sudan and South Sudan.