Turtle Bay

World Bank to South Sudan: Are you out of your freaking mind?!

The World Bank delivered an extraordinarily blunt warning to South Sudan’s leadership over two months ago: their government’s decision to halt oil production threatens to cripple the country’s struggling economy, imperil its poorest citizens, and potentially bring about a total collapse of the state this summer. South Sudan decided in January to suspend its production ...

The World Bank delivered an extraordinarily blunt warning to South Sudan’s leadership over two months ago: their government’s decision to halt oil production threatens to cripple the country’s struggling economy, imperil its poorest citizens, and potentially bring about a total collapse of the state this summer.

South Sudan decided in January to suspend its production of oil, which accounts for over 80 percent of the economy (and 98 percent of government spending), accusing Sudan of stealing more than $800 million in oil transported through a Sudanese pipeline. South Sudan may have won the vast majority of the Sudan’s oil fields when it seceded last year, but marketing that oil requires transiting through the north’s pipelines. Juba announced that it will hold off production until Khartoum stops siphoning the south’s oil and agrees to more competitive terms to transit oil through Sudan’s pipelines or a new pipeline through Kenya be built, cutting Khartoum out altogether.

Marcelo Giugale, World Bank’s director of economic policy and poverty reduction programs for Africa, outlined this dire account in a briefing to South Sudan’s President Salva Kiir and some of his top ministers on February 29. Giugale then recounted his meeting with Kiir in a subsequent March 1 briefing to U.N. officials and representatives of several countries that provide financial assistance to South Sudan, according to a memo recorded and drafted by another participant at the meeting, and marked "Close Hold: not for distribution or attribution." The contents of the memo were first reported by the Sudan Tribune.

"In his opening statement, Mr. Giugale said that the World Bank has never seen a situation as dramatic as the once faced by South Sudan," according to a copy of the memo, which was obtained by Turtle Bay. "In is view, neither the president nor the senior ministers present in the meeting were aware of the economic implications of the shutdown. He candidly said that the decision was shocking and that the officials present had not internalized nor understood the consequences of the decision."

Those consequences, he warned, include a "dramatic contraction of the economy"  brought about by a "collapse of Gross Domestic Product," which is almost entirely dependent on oil revenue. The country’s economic straits, he added, will put "catastrophic pressure" on South Sudan’s currency, the pound.

"The currency will almost certainly collapse," triggering an "exponential" rise in inflation, Giugale said. "There will be a run for the dollars and families with dollars will almost certainly shift them outside the country — by walking them out if necessary."

Giugale said that the government ‘s fiscal reserves will likely run out in July if the government continues to impose a set of planned austerity measures "at which point state collapse becomes a real possibility.  Even if some of the more draconian measures which are being discussed are adopted, reserves will hold only through October."

The World Bank declined to explicitly confirm the authenticity of the Giugale memo but a bank official confirmed that the bank routinely provides "technical and economic analysis to the government, and recently provided an assessment of the economic situation as requested by the Government of South Sudan."

"The World Bank is deeply concerned with the economic and development impact of the unresolved oil issues and how this will affect the people of both South Sudan and Sudan, particularly the most vulnerable," the World Bank official told Turtle Bay in a statement. "The ongoing dialogue between the World Bank and South Sudan focuses on positive steps that can be taken to manage the different economic scenarios arising out of its oil dispute with Sudan."

The World Bank official said that the bank "will continue to work closely with both South Sudan and Sudan to support the countries through their economic difficulties, focusing on economic resilience, the protection of vulnerable people from economic hardship, as well as longer-term development needs." "Given the desperate living situation being faced by people in both Sudan and South Sudan, the World Bank’s economic analysis unambiguously shows that it is in the interests of both countries to resume talks urgently and resolve their ongoing dispute over oil payments and other issues peacefully," the official added.

South Sudan, which gained its independence last July, inherited the country’s major oil fields, but the landlocked states depends on Sudan’s oil pipeline to move its crude to Port Sudan on the Red Sea, The two countries have been engaged in a bitter quarrel over transit fees that has contributed to propelling the two countries to the brink of war.

South Sudan’s leader has argued that it has endured economic hardships for decades and it can withstand a few more of economic pain in order to ensure greater control over its oil wealth. "In their discussion with Mr. Giugale, the government reiterated its position that South Sudanese people have suffered for years and will be prepared to suffer again," reads the meeting notes of the World Bank briefing. "They evidenced little understanding of the impact of the oil shutdown and insisted that they will find a way forward."

Francis Nazario, South Sudan’s new U.N. representative, told Turtle Bay that "we are facing indeed some financial problems as a result of shutting of the oil production, but we have other options for raising revenues, including greater development of the agricultural and livestock sector. In the meantime, he said that South Sudan is working to build a new oil refinery and a new pipeline within the next two years to transit its oil through Kenya. Nazario said his government is willing to reconsider its position if Sudan, which has demanded around $36 dollar per barrel in transit fees, agrees to standard international fees, which he said are less than $1 a barrel. Khartoum’s terms, according to officials from the south, would make it impossible to benefit from its oil wealth.

In the memo, Giugale dismissed the government’s contention that it could absorb the economic shocks, saying that that the collapse of the economy is most likely to "result in social and political fragmentation, unrest and instability."

Notably, the move is set to bring about a rapid reversal of some of South Sudan’s most impressive development gains, increasing the proportion of the population living in poverty from 51 percent this year to 83 percent in 2013, and placing 3.6 million additional people below the poverty line, according to Giugale’s estimate.(90 percent of South Sudan’s population lived under the poverty line in 2004). The new measures would also bring about a doubling of child mortality rates for children under five, rising from 10 percent of live births currently to 20 percent in 2013 (yet still below 25 percent level seen in 2004).

"One of the most dramatic consequences will be deepening food insecurity linked directly to spiraling inflation," the memo stated. "Drawing on WFP data, the World Bank dismissed the idea that the large segment of the population which does not participate in the cash economy will be insulated from the impact of the shutdown."

Follow me on Twitter @columlynch

Colum Lynch is a senior staff writer at Foreign Policy. Twitter: @columlynch

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