South Sudan

Overview

South Sudan marked its second year of independence on 9 June 2013.  Since becoming an independent state in 2011, substantial steps have been taken to institute a stable political environment.  Although the political environment is still mediocre, the country has at least managed to avoid a return to large-scale conflict.  Thousands of rebel fighters, including key rebel group leader David Yau Yau, have been offered amnesty.

With substantial support from international donors, estimated at US$1 billion per year, the country has started to refocus its priorities, gradually moving from humanitarian and emergency services to investing more in development-oriented programmes in health, education and infrastructure, and building the core of a functioning government at the centre and in the 10 states (Upper Nile, Jonglei, Unity, Warrap, Northern Bahr El Ghazal, Western Bahr El Ghazal, Lakes, Western Equatorial, Central Equatorial and Eastern Equatorial).  Government institutions, however, still lack basic capacity and remain riddled with challenges ranging from depleted resources to a scarce and oftentimes untrained administrative and support staff.

Further, the government’s core resource envelope, oil revenue, which would have complemented donor efforts

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Overview

South Sudan marked its second year of independence on 9 June 2013.  Since becoming an independent state in 2011, substantial steps have been taken to institute a stable political environment.  Although the political environment is still mediocre, the country has at least managed to avoid a return to large-scale conflict.  Thousands of rebel fighters, including key rebel group leader David Yau Yau, have been offered amnesty.

With substantial support from international donors, estimated at US$1 billion per year, the country has started to refocus its priorities, gradually moving from humanitarian and emergency services to investing more in development-oriented programmes in health, education and infrastructure, and building the core of a functioning government at the centre and in the 10 states (Upper Nile, Jonglei, Unity, Warrap, Northern Bahr El Ghazal, Western Bahr El Ghazal, Lakes, Western Equatorial, Central Equatorial and Eastern Equatorial).  Government institutions, however, still lack basic capacity and remain riddled with challenges ranging from depleted resources to a scarce and oftentimes untrained administrative and support staff.

Further, the government’s core resource envelope, oil revenue, which would have complemented donor efforts in building infrastructure and expanding growth of key sectors of the economy, has been dwindling, following the shutdown of oil production in January 2012.  To help deal with the void created by the shutdown, an austerity budget was passed and implemented with strict measures, including a 50% reduction in non-salary expenditure, elimination of unconditional block grants to state governments and streamlining the tax collection system.  While the approved austerity budget was guided by a cautious fiscal policy, high public expenditures led to large budget overruns, making approved budget lines of little significance in delivering the key priorities of the South Sudan Development Plan.  For example, in 2011/12, the Ministry of Defence exceeded its budget by SSP1.23 billion (US$279.5 million), primarily because of salary increments which were approved in April 2011 but not reflected in the budget. Government has since instituted stringent budget control procedures for the 2012/13 budget, which are in line with the Public Finance Management and Accountability Act of 2011.

South Sudan’s economy is one of the weakest in the world. The economy is fragile, underdeveloped and highly dependent on oil and imports, and its domestic capacity to produce goods is extremely limited.  According to the African Economic Outlook (2013), the government of South Sudan has limited capacity to forecast key macroeconomic parameters, though plans are under way to develop a comprehensive macroeconomic framework, encompassing all sectors of the economy.

Nominal GDP rates differed marginally during the last two financial years, increasing from SSP 42.9 billion (US$14.3 billion) in 2010/11 to SSP 43.1 billion (US$14.4 billion) in 2011/12.  However, real GDP growth rates receded by 27% in 2011/12, and by a further 16.3% in 2012/13 because of government’s decision to shut down all its oilfields as part of efforts to resolve post-secession issues with North Sudan.  With the resumption of oil production in mid-2013, the International Monetary Fund has projected that the South Sudanese economy will be among the fastest growing in Sub-Saharan Africa for the 2013/14, at a rate of 32.2%.

The oil sector is the largest contributor to GDP, both in terms of direct value add to the economy and the associated investment boom and boost to the services industry.  Oil exports accounted for 65% of total GDP in 2012. However, oil reserves are finite, and are estimated to decline sharply by 2035.  Efforts to build good institutions for managing the country’s oil wealth should therefore be reinforced if oil revenues are to continue to contribute significantly to GDP.

The economic policy dialogue has turned to the need for balanced growth and the strengthening of non-oil sectors, which are key to sustainable growth of the economy.  To this end, non-oil revenue has been growing from about SSP 100 million (about US$22.7 million) per month in 2011 to SSP 145 million (about US$33 million) per month to July 2013, providing a better cover for oil revenues.

According to the World Bank, GDP per capita in 2011 was estimated at SSP 6 131 (US$1 858) from SSP 3 654 (US$1 363) in 2010 and SSP 3 541 (US$1 321) in 2008.  In early 2012, however, following the sudden suspension of oil production, GDP per capita receded to levels well below those registered before independence – SSP 3 454 (US$785).  South Sudan’s current GDP per capita is nonetheless still the highest in the East African region, largely due to its oil revenues.  On other development indicators such as education and health, however, South Sudan performs worse than its neighbours in the region, with just over half (50.6%) of its population living below the poverty line.

Since December 2011, the South Sudanese economy has recorded very high inflation rates, reaching levels as high as 74% in May 2012. The expensive and scarce foreign currency contributed significantly to the exceptionally high inflation rates.  The high inflation rates had a negative effect on the exchange rate, depreciating on the parallel market, since the Central Bank of South Sudan was holding substantial amounts of foreign currency to build up its own reserves.  This created an imbalance between the demand for and supply of foreign currency.  The depreciation of the exchange rate further fuelled inflation by raising the prices of goods imported into the market.  Rising prices of goods on the market impact negatively on people’s welfare through reduced purchasing power, and tend to increase food insecurity and poverty, even among rural populations that are not directly involved in the modern cash economy.

Access to finance

The banking sector is still in its infancy and vulnerable.  There are 16 banks operating in South Sudan, of which the largest is Kenya Commercial Bank (KCB), which intends to double its presence to 30 branches, covering 100 000 people by 2015.  Nile Commercial Bank, Buffalo Commercial Bank, Ivory Bank, Equity Bank, Commercial Bank of Ethiopia, Agricultural Bank of Sudan, Mountains Trade and Development Bank, Bank of Khartoum Juba, CFC Stanbic Bank, Diamond Trust Bank (South Sudan), Ramciel National Bank, United Bank (South Sudan), Cooperative Bank of South Sudan, Family Bank (South Sudan) and Qatar National Bank make up the rest of the banks in Sudan.

The commercial banks’ lending portfolio is small, covering only a small percentage of the estimated market in the country.  Presently, there are 0.5 commercial bank branches per 100 000 adults, and outstanding loans from commercial banks as a percentage of GDP accounted for 0.82% by the end of 2012.  This percentage is low by regional standards.  In Uganda, for example, by the end of 2012, 80% of the commercial banks’ deposit base had been lent out to the private sector, and private sector credit as a percentage of GDP was estimated at 15%.

Commercial banks are generally reluctant to lend, largely because of the structure of their deposits.  The majority of the deposits are short term (less than a month), and drawn upon regularly.  Deposits on savings accounts are still few.  Some banks have instituted measures to encourage customers to save more by offering an interest rate of up to 1.75% on savings accounts.  This rate is low by regional standards and reflects the nascence of the banking industry in the country.

Generally, the formal savings culture in the country is poor, and the country has been labelled by several authors as a primordially cash economy, due to the high ratio of costs to salary levels and a preference for informal or traditional savings methods.

Loan tenures are short term (three to six months) and at high interest rates (15% to 18% per annum).  Collateral for loans is in most cases not available, though some banks have innovatively sought other forms of guarantees as security for the loan, such as leasing (keeping the purchased asset in the name of the bank until complete repayment), or direct payment by the employer or final purchaser of the good (arrangements where an external party pays the bank directly such as in the case of government procurements or salary loans).

According to the World Bank’s 2011 Doing Business report, the only criterion used by banks in the capital city of Juba to appraise their clients is the ‘KYC’ rule: know your customer.  Banks rely on other customers who know the community to give information about prospective debtors.  Loans are advanced based on personal connections and not necessarily on the likelihood of repayment.  Generally the lack of credit history is a major constraint to access to finance in South Sudan.  Most companies were established since independence and few have a past credit record. In the World Bank’s 2011 Doing Business report, Juba scores 0 out of 6 on the depth of credit information index.

As a result, non-performing loans are a common feature on several banks’ portfolios, and worse still, the banks do not have adequate methods of enforcing repayment.  The judiciary system, which would play a key role in such scenarios, is severely constrained in terms of both capacity and resources, and is untested in the dispute resolution of loan defaults.

In early 2013, the government of South Sudan approved the establishment of a US$200 million mortgage lender, the Housing Finance Bank, through a public private partnership to help address the shortages of housing in the country. Some 40% of the Housing Finance Bank will be owned/financed by foreign investors (two foreign venture capital companies have expressed interest in investing in the bank), 31% will be owned/financed by domestic financial institutions and 29% will be owned/financed by the government.  Prior to establishment of the Housing Finance Bank, an enabling law will be drafted to regulate the mortgage industry. A timeframe of one year has been set for the enabling law to be enacted and the bank to be established.

It is envisaged that the Housing Finance Bank will offer mortgages at an interest rate of 10% to 15%.  The bank will enter into agreements with private developers to construct various classes of houses in all 10 states for purchase by government employees and the general public.

Housing supply

South Sudan’s current housing supplies are basic, of dismal quality and unique to a post-conflict country, which has not had well functioning institutions for a relatively long period of time.  Almost 90% of houses are made from mud or sticks (known as Tukul/gottya), 5% are made from straw mats, 3% from wood and only about 2% of houses are made of brick or concrete.  About a third of the population (31%) live in houses with only one room, 64% live in houses with two to four rooms, and 5% of the population live in houses with five to nine rooms.

The present housing types and supplies are also a reflection of low income levels and the use of personal savings to build homes incrementally over time.  The vast majority of the population (93.3%) live in houses they own, 2.7% in rented houses, 0.6% in houses provided as part of work and 3.4% in houses provided free of charge.  Housing consumption remains very low; the average consumption per person per month, whether in urban or rural areas, is estimated at about SSP 100 (US$37.30), and of this amount, housing materials for maintenance of the dwelling and repair of household appliances constitute only SSP 4 (less than US$1.50).

While the government is committed to addressing the dismal state of housing in the country, there are more urgent and competing concerns, such as maintaining peace and security at this crucial time of transition.  For the 2012/13 budget, the government slashed the budget for housing construction projects planned under the Ministry of Housing and Physical Planning from SSP 23 million (US$8.5 million) in 2010/11 to SSP 12.5 million (US$2.8 million).

Private sector housing delivery has also slowed due to the nascent investment climate and elements of insecurity, both within and along the border with North Sudan.  For example, a relatively large-scale housing project launched in 2008 in the Central Equatorial State, in partnership with Abu Malek Companies & Agencies Limited (the mandated project promoters for the government of South Sudan), has not yet kicked off.  The project was estimated to cost US$650 million to set up a master plan community project in the cities of Juba and Kajo Keji.  The project was estimated to cover 16km2 and would have featured an initial 9 000 housing units (more were anticipated), commercial areas that would facilitate marketing and trading activities, industrial areas that would enable products manufacturing, and agricultural projects that would guarantee local food supply for domestic and export marketing.

Other private housing projects have also stalled.  The Rock City Development Project and the Buluk Premier Housing Project, both in Juba, were planned to deliver just under 350 units of various sizes and a shopping mall of about 23 000m2 in 2010, but have not happened.  A US$452 million housing deal between the government and Kenya Commercial Bank Group’s mortgage subsidiary, S&L, to fund construction of 1 750 housing units for civil servants has also not gotten off the ground.

South Africa’s Pretoria Portland Cement Company Limited (PPC Cement), with eight manufacturing facilities and three milling depots in South Africa, Botswana and Zimbabwe and Ethiopia, entered the South Sudanese real estate market in 2013 to tap into the growing demand for concrete (cement and lime, among others) products.  It is hoped that this reduces the very high cement prices in the country.

Property markets

The residential property markets in South Sudan are still under-developed, unsophisticated and hard to estimate, both in qualitative and quantitative terms.  On the other hand, the commercial property markets have gained momentum, driven mainly by immigrants from Eritrea, Ethiopia, Somalia, China and North Sudan, and international companies like UAP Insurance.  The latter, through its South Sudan Property Company, UAP Properties Limited, signed a US$5 million loan financing agreement with the International Finance Corporation to develop Equatoria Tower, a 12-storey ultra-modern, landmark commercial office development, in Juba.  The Tower should be ready to let out office space by 2014.

Commercial properties are built on leased land (up to 99 years).  In a typical leasing agreement, ownership of the development will revert to the landlord upon expiry.  However, because of low capacity to supervise and enforce building standards, there are fears that tenants may hand over worthless structures upon expiry of leasing agreements.

Affordability

The majority of the people of South Sudan (about 90%) live in rural areas and are employed informally in mainly the agriculture sector (smallholder agriculture, farming, livestock and fishing). Only 10% of the workforce is formally employed, and half of them are employed by government.  The majority of public servants (54%) are low income earners, with monthly incomes ranging between SSP 300 (US$ 112) and SSP 999 (US$ 372).

Housing affordability is consequently very limited, and the housing developments planned misunderstand the constraints.  The following calculations are based on prices of houses that would have been constructed under the Abu Malek Project.

Households earning between SSP 8 000 and SSP 15 000 (US$2 985 and US$5 597) include members of parliament, presidential advisors, ministers, the President of the Supreme Court, under-secretaries and legal counsels.  There are 346 such individuals in the government workforce.  Individuals that earn above SSP 10 720 (US$4 000) would comfortably afford houses of US$$200 000, which were targeted for middle income earners.  However, none of them would afford houses of US$300 000, which were targeted for their income levels.

Households earning between SSP 4 001- SSP 7 999 (US$1 493 – US$2 984) include the Justice of the Court of Appeal, High Court judges, and the first, second and third legal counsels.  There are 434 such individuals in the government workforce. Individuals that earn above SSP 5 025 (US$1 875) would comfortably afford houses of US$96 000.  However, none of them would afford houses of US$200 000, which were targeted for their income levels.

Households earning between SSP 2 000 and SSP 4 000 (US$746 and US$ 1 492) include first lieutenant generals, lieutenant generals, major generals, brigadiers, assistant legal counsel and public servants in grades 1 to 6.  There are 2 031 such individuals in the government workforce. Individuals in this income class would comfortably afford houses of US$45 000, which were targeted for low income earners.  However, none of them would afford houses of US$96 000, which were targeted for their income levels.

Households earning between SSP 300 and SSP 1 999 (US$112 and US$745) include colonels, lieutenant colonels, majors and captains, lieutenants, sergeants, corporals, privates and public servants in grades 7 to 17.  There are 22 781 such individuals in the government workforce.  Individuals in this income class would not be able to afford houses of US$45 000, which were targeted for low income earners.

Policy and regulation

Since its establishment, the Ministry of Housing has been working tirelessly to design and implement a legal and regulatory framework that will enable the government to mobilise public and private sector resources to build affordable and decent houses for the population, and rehabilitate the existing war-ravaged public buildings and utilities, with a special emphasis on urban areas.

In mid-2013, Parliament passed the national housing policy, which seeks to attract direct foreign investments in the country’s housing industry. Currently, banks in South Sudan do not provide long-term loans for housing, making investments in housing projects an expensive venture.

A Land Act was enacted and approved in 2009. The Land Act espouses three systems of tenure: customary, freehold and leasehold.  Land is classified as public (held by government), community (held by communities) or private land (leaseholds of up 99 years and freeholds).  The Land Act effectively details ownership rights proven by legal title for all short-term leases a decentralised system of land registry maintained by the Ministry of Housing, Physical Planning and Environment, the right for title holders to use the land as a surety to secure debt (where mortgage contracts are to be registered in the land registry,, and the right for creditors to foreclose on land title in case of default.  While the Land Act allows creditors to foreclose on land as collateral, no laws currently detail the creditor’s rights, nor is there an appropriate registry for other types of collateral.  The availability of fixed asset based lending will depend on the establishment of such legal frameworks (the equivalent of a Mortgage Act), as well as an associated system of standardised collateral evaluation and registry.

Although the Land Act delineates the institutions and mechanisms for titling, registry and the right to use land as collateral, the institutions in place are still at an early stage of development, and have not yet been tested adequately.  For instance; the institutions which currently register titles have low capacity and lack appropriate IT systems, procedures and support (especially at state level).  Other structures will also need to be developed for compensation for expropriation and the application of customary practices/laws as described in the Land Act.

In the past, because of the absence of a clear system for land titling and registry, some banks have been reluctant to accept land as collateral, while other banks accept the so-called ‘British leasehold’ with 30 remaining years as collateral.  Some other banks accept land titles for Juba-based property only.

Opportunities

South Sudan offers green field opportunities for all housing sector players, and those who first enter the market will realise the most significant rewards.  The number of commercial banks need to be scaled up to allow for more competition and dynamism within the banking industry.  Further, there is a need to institute long-term finance schemes within the banking system if the lending culture of banks is to appreciate.  Clearly, the housing sector offers substantial opportunities, if affordability constraints are understood.

Given the affordability constraints, opportunities to grow the housing microfinance market are also suggested.  There is a need to facilitate and support the establishment of housing co-operatives in which individuals would obtain houses under conditions that suit their incomes.  The insurance, capital markets and social security sectors have not been tapped into.  These sectors are key in the provision of long-term funds to the mortgage industry.

Author: Duncan Kayiira

 

Sources

Africa Business Initiative, US Chamber of Commerce (2011).

African Development Bank (2013). South Sudan Economic Outlook.

African Development Bank (2012). A Study on South Sudan’s Competitiveness and an Assessment of the Country’s Cross-border Trade with Neighboring Countries .

Atil, M. (2011). Access to Finance in South Sudan.

Government of South Sudan (2009). Poverty in Southern Sudan: Estimates from National Baseline Household Survey.

Government of South Sudan (2010). South Sudan Growth Development Plan (2011-2013).

Government of South Sudan (2011). Statistical Yearbook for Southern Sudan.

Government of South Sudan (2013). 2012/13 Budget Speech.

Kameir, E. (2011). The Political Economy of South Sudan: a Scoping Analytical Study.

Kasende, L. (2013).Speech on Uganda’s Financial Sector at 50 – Achievements, Challenges and Expectations for the Future.

New Vision Newspaper. 2 June 2009.

Southern Sudan Centre for Census Statistics and Evaluation (2009).

South Sudan National Bureau of Statistics (2011).

The East African Newspaper. 20-26 July 2013.

USAID (2009). South Sudan: Post Conflict Economic Recovery and Growth.

World Bank (2011). Doing Business in Juba.

World Bank (2010). World Development Indicators.

World Bank (2012). South Sudan Economic Brief: Inflation in South Sudan.

World Bank (2013). South Sudan Economic Brief: Public Expenditures in South Sudan; Are They Delivering? February 2013.

Websites

www.africareview.com

http://allafrica.com

http://fas.imf.org/

www.gurtong.net

www.migrationheritage.nsw.gov.au

www.newsouthsudan.com/

www.newvision.co.ug

www.sudantribune.com

www.unsudanig.org

www.worldbank.org

www.wvafrica.org