Assessment of Progress in Implementation

1. Assessment of Progress in Implementation Briefing prepared by the Staffs of the World Bank and the International Monetary Fund Sudan Consortium Khartoum, March 20 2007

2. Overview 1. Government of National Unity (GNU): • Economic developments and outlook • Pro-poor spending efforts • Systemic constraints and priority steps • Three Areas 2. Government of Southern Sudan (GOSS): • Budget efforts • Systemic constraints 3. Trends in development financing 4. Update on MDG prospects

3. 1. Government of National UnityOverview of Key Messages • High growth and some important pro-poor efforts in evidence, but performance in 2006 was dominated by: • Serious shortcomings in fiscal decentralization and state and local pro-poor efforts, especially in marginalized areas • Lags in some key structural reforms needed to promote broad-based growth • The ongoing crisis in Darfur – large numbers of displaced and vulnerable, requiring costly humanitarian efforts  Review of experience needed in order to learn lessons to improve performance in 2007 and beyond

4. Government of National UnityMacroeconomic Developments • Real GDP growth about 11 %, bolstered by oil output, a good harvest, and a continuing boom in construction & services. • However, inflation pressures developed (12-month rate of inflation rose from 5.6% at end-2005 to 15.7% at end-2006). • And the dinar appreciated by 21% in real terms (with adverse impacts on poor farmers and the size of SDD transfers to the GOSS)

5. Government of National UnityStructural reforms • Progress made on oil sector transparency, budget classification, decentralisation and reduction of domestic fuel subsidies • Pending reforms: fiscal reporting, audits of Sudapet, rationalization of tax exemptions, marketing monopolies for gum arabic….

6. Government of National UnityMacroeconomic Prospects • Government Debt • External – improved indicators reflect higher exports and GDP, but nominal debt keeps rising and it remains unsustainable • Domestic – deficit also financed by domestic borrowing (e.g. bonds) and the inflation tax • Challenge is to address these imbalances (increasing fiscal and external current account deficits)  Fiscal deficit in 2007 could rise to 5-6% of GDP • Possible actions: rationalization of tax exemptions and revision of spending increases (while protecting pro-poor spending and transfers related to peace agreements • Real exchange rate appreciation pressures need to be offset by fiscal restraint and removal of barriers to private sector growth.

7. Government of National UnityTrends in Pro-Poor Spending* Actual Non-South Expenditure Trends 2000-2007 • GNU pro-poor allocations, excluding transfers to the GOSS, estimated at 4.7% of GDP in 2006 : • Above 2005 level (4%), but well below budget (5.7%), JAM commitments (5.9%), and HIPC average (8%), and, for example, neighboring Ethiopia (19.1%) and Uganda (11.1%) • JAM expenditure performance – overall 71%, 41% without infrastructure • 2007 budget promises jump in pro-poor share to 6.4% of GDP, mainly through higher transfers to Northern states * Caveat on definition.. work advancing under PER, but still in-progress … and relative to JAM commitments

8. Government of National Unity Trends in Pro-Poor Spending GNU getting more money to sub-national level… …but less than planned (2006) • GNU/PER work has improved poverty dimension in budget dialogue : • Increased attention to defining pro-poor allocations in MOFNE planning/execution analysis • State case studies completed jointly with government in six states and action plans agreed to address identified weaknesses. • Serious analysis of budget deviations, both for pro-poor and overall expenditures.

9. Federal Pro- poor 12% Pro-poor Transfers Non- Poverty 19% Reducing 69% Government of National Unity Pro-Poor Spending as Share of Non-South Budget 2000-04 2005-06 2007 Budget

10. Government of National Unity Systemic Constraints • Unbalanced growth – economic expansion is not broad-based due to administrative and regulatory constraints, tax induced distortions, government supported marketing monopolies, lack of clarity on land and property rights, adverse effects of appreciation on domestic competiveness, and limited access to finance for the private sector. • Delays in fully operationalizing key CPA commissions,including NPC and FFAMC,has prevented greater transparency in the use of public resources • Continuedinsecurity in Darfur undermine efforts to realize JAM priorities and distracts from needs of other marginalized parts of the country, including the three areas

11. Government of National Unity Priorities to Accelerate Progress • Good Governance and Transparency: • Public expenditure reforms & initiating fiscal reporting according to international standards (GFS) • Full operationalization of the NPC and greater transparency in the oil sector • Improving information sharing and introducing participatory budgeting measures • Progress on fiscal decentralization – in particular, the legal framework, intergovernmental transfers and state capacity • Basic Social Services: • Realize constitutional commitment to free primary health care • Improve access to education through reform of teacher qualifications, investments in school infrastructure and strengthening of parent-teacher associations • Deepen efforts to promote girls’ and women’s access to services • Improve resource availability and accountability measures at sub-national levels • Enhancing broad-based and equitable growth: • Improve productivity of traditional crops, reform marketing arrangements for livestock and transition to free export market for gum arabic • Establish National Land Commission and review legislation and tenure agreements • Improve access to finance for the private sector, as well as agriculture financing • Support trade and private sector development, rationalise VAT, customs and profit tax exemptions as well as import tariff rates

12. Progress in the Three Areas As recognized in Paris, progress significantly behind CPA/JAM schedule: • Development transfers increased but far short of JAM target • Delays in 2006 included SKS State constitution and integrating civil service Significant capacity constraints at state and locality level also prevent progress Example of Southern Kordofan budget • Expenditure increasingly dominated by wages and salaries and development funding severely constrained. • Limited own revenue, due to security problems, weak collection capacity, depressed economic activity.

13. 2. Government of Southern SudanOverview of Key Messages • GOSS has made important progress including in terms of: • Establishment of institutions at all levels since July 2006 • More active accountability (eg. Parliamentary engagement in review during 2007 budget process) • Capacity building efforts (eg. State Parliaments) • Sectoral programs launched, representing major partnerships with international community through MDTF • Increased and renewed commitments in 200 Day Action Plan • However, delays in civil service appointments and some key decisions created lags, and progress insufficient relative to the scale of the task.

14. Government of Southern Sudan Budget Efforts • 2006 budget plans broadly consistent with JAM targets, and included sector programs in infrastructure, health, education and water and sanitation • Government finances characterized by weak management and accountability –difficult to effectively track budget execution due to the lack of a system of ex ante controls, significant extra-budgetary expenditures and long lags in reporting – still no clarity on levels of spending on, for example, the payroll – and lack of clarity around new borrowing • Concerns partially alleviated by progress on “Paris Commitments”, including : • Appointment of accounting and procurement agents • Single Treasury System operational since late 2006 • Large MDTF co-financing of major sector programs, which follow WB procedures for procurement and financial management

15. Southern Sudan Systemic Constraints • Lack of capacity, including at lower levels of government, remains an overriding constraint • Weak public financial management systems and controls pose a risk to the whole development program, although important measures have been taken in terms of outsourcing accounting, auditing and procurement functions and establishing key oversight functions • Fiscal decentralization not operationalized given lack of clarity on functions and finances at different levels of government, low transfers from centre, below payroll needs, and low capacity in states and counties • Civil service effectiveness undermined by the lack of a functioning payroll, shortages of qualified staff and the absence of proper procedures for recruitment and incentives, and difficult working conditions • Productivity, investments and economic activity constrained by lack of progress in clarifying key regulations and legislation, including on taxation and property and land user rights

16. Government of Southern Sudan Priorities to Accelerate Progress • Building public institutions for good governance: • Establish the legislative and regulatory framework for the public service and establish core capacities to enable the proper functioning of GOSS • Actively use and manage mechanisms for fiscal accountability , including through ex ante approval of any extra-budgetary spending, and using appropriate systems and structures for regular reviews of public expenditure and pro-poor spending by Cabinet, Parliament and the public • Review existing transfer modalities and build local public financial management capacity alongside operationalization of the Southern FFAMC • Support accountability roles of parliament, media and civil society • Establishing basic infrastructure links, enabling productive activities and delivery of basic services: • Enhance rural development efforts through transforming livelihood strategies from subsistence to commercially oriented activities and provision of community services • Continue infrastructure investments – both major and rural roads • Expand education services at the county level through construction of multi-purpose education centers and teacher training • Develop core systems and capacities for basic health care • Support Land Commission’s work, and adopt legislation to enable land markets to function

17. 3. Domestic and External Financing of Development Efforts What we know: • Increased domestic efforts – increased share of JAM/pro-poor in GNU spending : in 2006, about 22 percent of national budget (of $9 billion). • By now, firm commitments to MDTFs are close to Oslo pledges, with additional donors also contributing. • Other development efforts ongoing, eg USAID, EC • Ongoing humanitarian operation very costly – Darfur largest in the world and above US$1 billion in 2006 But several issues require further consideration • Whether overall development assistance is in line with the Oslo development pledges • Financing needs for JAM Phase II – through 2011. • Design of external borrowing strategy, for GNU and GOSS

18. 4. Are MDG Prospects Improving for the Sudanese People? • Despite several years of rapid growth and per capita income approaching US$1,000 in 2006 (compared to US$150 in Ethiopia), limited improvements evidenced • Major challenges persist in the sharp regional inequalities in outcomes and limited access to services : • Net primary school attendance 53%, ranging from above 90% in River Nile State to 4% in Unity State • Births delivered by skilled personnel 55%, ranging from above 90 % in Khartoum to less than 20% in North Bahr El Gazal  Marked differences by household economic status – eg. primary enrolment, below 5% for bottom wealth quintile, compared to above 80% for top quintile • Availability of new data from first nationwide Household Health Survey in two decades provides new info on current status Deeper analysis needed of trends and regional disparities, but preliminary findings indicate that Sudan remains well behind target for most MDGs • Apart from HHS, limited progress in building better monitoring systems to track progress in key indicators over time, including local monitoring activities

19. Acceleration needed to reach key MDGs

20. Conclusion • Progress made towards CPA / INC vision, but some key structural and institutional reforms have lagged Review of experience usefully reveals implications for achieving poverty reduction and MDGs • Efforts are now needed to ensure that the intended scale-up for phase II of the JAM is achieved. This will require: • Accelerated reforms on the budget, fiscal management and governance, pro poor growth and service delivery • Assurance of macro stability • A sustainable solution to the Darfur crisis