The post-separation economy - what are the scenarios at hand?

Many observers wonder today about the fate of the economic relations between Northern and Southern Sudan in the event of separation. The repercussions in case of an independent South Sudan will be great on the political, economic and social levels, for both the North and the South alike.

The likelihood of separation forces us to try imagining a scenario for after an independent South is accomplished. This scenario seems to be written in one language: Oil.

Under ground

Providing for over 50 % of the state budget has made oil the backbone of the Sudanese economy for the past couple of years. Since the global financial crisis, the budget has been very much affected by the sharp rise and decline in oil prices, giving oil a critical importance when dealing with the scenarios of a post-separation economy - if the result of the referendum on self-determination is the independence for South Sudan.

This critical role explains the intensity of the conflict between the two parties concerning the Abyei region, and though the land is of a greet importance, what is buried under it represents an essential source of wealth, and thus quite vital for both the National Government and the Government of Southern Sudan.

The Southern two-thirds

Two-thirds of Sudan's current oil production fields are located in the South. The North will thus lose half of its current oil revenues in the event of separation.

Figures show that two-thirds of the Sudanese oil production fall within the fields of Southern Sudan. The repercussions of this, in case of separation, mean that the northern oil revenues will decrease approximately by half, given that the North holds all the revenues of the Northern fields representing one third of the summed oil revenues, and receives the third of what the South produces. At the same time, the Southern oil revenues will double, as the South will be holding the totality of its oil production instead of sharing them with the North.

The Western Option

An oil field in Unity State - UN Photo / Tim McKulka

Resorting to extending the pipelines westward towards the Atlantic Ocean across both the Central African Republic and Cameroon may seem unlikely, because the internal stability of the two countries would greatly influence oil production, but this option is still on the table. Analysis points out that the United States of America aims to make  the African oil an alternative to the oil reserves in the Middle East, as these latter are threatened by the incessant conflicts through the region. This would be accomplished through extending oil pipelines from the East to the West of the continent.

Perhaps South Sudan would then be, according to this plan, the back station of this cross-continental pipeline. The Northern Sudanese fields might however not be part of this project for several considerations, including the limited productivity of the Northern fields compared with their Southern counterparts. The US will not make Northern Sudan part of this project because, first, it will surely prefer to avoid colliding with the Chinese interests there, and it would as well prefer to distance itself from the economic repercussions of Middle Eastern conflicts on oil prices. These conflicts will certainly affect Northern Sudan as well, because of its Muslim and Arab identity, which will be ever more expressed after the separation of the South.

Collision or cooperation?

The outcome of these data indicate that in case of separation, the relationship between North and the South will continue, centered around the production of oil and its export, for a period ranging between two to four years at least. During this time, South Sudan would work on building the necessary infrastructure from its own refineries to oil pipelines and even ports for exportation. It is true that this infrastructure will enable the South to free themselves from the domination of the North, but it would at the same time force a debt of billions of Dollars upon them. The North-South relationship will however not be broken off, as the South lacks sea ports while the North can offer its own ports for exporting oil.

Read the new reports on Sudan's oil issues by CMI, Global Witness and ECOS

Consequently, if the South considers its Northern neighbor as a strategic rival, all its strategies and approaches will be directed towards the weakening of North Sudan through depriving it from the benefits of managing the passage of the Southern oil, and would thus probably move eastward. Similarly, in case of separation, if the North views the South as a rival, it will make sure to raise the price of oil transport through its pipelines, to drain the capacities of its competitor, particularly in the early years after separation, as the South would lack any other alternatives.

But the scene may be different if both parties resort to cooperation and working for mutual benefit instead of competing to get the most out of the oil in the region. If the North agrees to keeping the current prices for the passage of the Southern oil, it will reduce the losses resulting from the reduction of its previous share in the Southern oil and would ensure the continued operation of the Bashair Port at the same capacity. The South would as well benefit through saving the expenses it would have to spend on the oil infrastructure, and invest these resources in strategic sectors needing the outmost attention such as  building roads and railroads, especially in the areas which become completely isolated during rainy seasons.

The fate of foreign debt

The North and the South will discover the great burden of the enormous expenditures caused by the significant expansion in the federal government and its departments. Both sides might thus opt for simplification through reducing the number of states in order to decrease expenditures and generate surplus for supporting productive projects.

The issue of the Sudanese foreign debt will be among the most controversial issues when the arrangements for the separation between the North And South will be in process. Such controversy has already taken place when the Secretary-General of the Sudan People's Liberation Movement, Pagan Amum, announced that the South refuses to contribute to paying off the external debt of Sudan as this money was used to kill Southerners during the civil war.

The North however considers the South as equally responsible for paying off foreign debt, as it has on the one hand contributed to increasing war expanses, and on the other hand holds two thirds of the overall Sudanese oil. The South will surely not be convinced of such arguments, and will certainly point out that half of its oil revenues have been allocated to Khartoum during the past six transitional years, contributing to development and economic rise in the North. The solution might come to be that each side would have to pay back the expenses put in projects implemented within its borders before the separation, which will of course require a long negotiation process, after the result of the referendum is announced.

About currency

Among the economic issues that will be raised in case of secession of the South concerns the currency presently in circulation. It is necessary to note that the process of changing currency is an expensive one. This process will be greatly influenced by the degree of trust and cooperation between the North and the South. If cooperation is opted for, the present currency could be kept and used on both sides of the border, as is the case with the Euro. However, if the relationship between North and South Sudan is conflictual, one or the other might announce changing its currency. The Ethiopian-Eritrean example holds a sinister precedent: Asmra decided to replace the Birr with the Nakfa following the deterioration of relations with Addis Ababa over border disputes. This change of currency has had economic and political repercussions and has worsened the crisis between the two countries and led to the outbreak of two regional wars between the two countries in 1998 and 2000 and their continuation as a proxy war in Somalia.

The apportionment of water

Satellite image of the River Nile - NASA

The parties will raise issues related to dividing the water, which is associated with the tributary of the Nile River (White Nile), especially after the escalation of the dispute between the Nile Basin states and the signing of the Cooperative Framework Agreement in Entebbe on 14 May 2010, isolating Egypt and Sudan. The White Nile and its tributaries provide for about 15% of the total revenue of the Nile water. Most major agricultural projects in Northern Sudan are primarily based on the tributary of the Blue Nile. Some water-related industries, particularly those based on the White Nile such as sugar projects in Kenana, Assalaya and the White Nile draft proposal, are of special importance. It is indeed a known fact that sugar projects consume large amounts of water.

Apart from the impact that could result from the establishment of new agreements on the apportionment of water which both Egypt and Sudan are very keen to keep, the latest of which is the 1959 agreement, the re-apportionment of the share of Sudan and the specific shares of the White Nile waters between the North and the South in the event of secession, will negatively affect agricultural projects in general, and the sugar industry located on the shore of the White Nile in particular.

It is crucial to note that any direct attempts to reduce the evaporation rate of the sub-tributaries of the Nile in the dams region or in Bahr el Ghazal will cause direct environmental impacts. Even if these tributaries are provided with additional quantities of water, their evaporation is thought by experts to cause an important reduction in the proportion of rainfall in the North.

Interdependence

Dr. Safwat Fanous, a political science professor at the University of Khartoum, predicted that common interests, especially concerning the production and marketing of oil upon which both governments in the North and the South depend, will force both countries, in the case of separation, to maintain peaceful relations. This is due to the fact that the South possesses most of the oil wells and that the North holds the key to marketing through the Bashair Port and from there to global markets. Prof. Fanous added: "So the two sides cannot do without oil and the relationship between them will be peaceful, although not completely free from issues concerning borders for example. A full-scale war will however not take place, because of the mutual dependence on oil, especially for the South. In addition, although the North does benefit from agricultural projects and from infrastructure, it still relies on oil revenues to guarantee an increasing growth rate ".

Click here for "Sudan Debt Dynamics" by the Center for Global Development

Dr. Fanous did not rule out the possibly of the South not seceding precisely to keep these interests intact. He as well pointed out that the Ethiopian-Eritrean example was different, as there was no case of interdependence there, while it is clearly the point in the North-South relations in Sudan. This interdependence will be the first reason behind keeping this relationship peaceful and dialogical.  

He noted, at the conclusion of his speech, to another aspect concerned with the time spent by the two parties learning to know one another and to understand each others' mentality beyond the limits of ideological hostility. The South and the North are slowly bridging their opposite projects namely the Project of Civilization and New Sudan respectively. Dr. Fanous added: "The ideological conflict no longer exists, the two projects coexist because the world does not function following ideology anymore, but rather reposes on competing interests."

Separation and its economic consequences and indicators will be closely linked to relations between the two neighbors. If improved, cooperation can help in reducing their mutual load of financial and economic hardships. However, if both parties chose to compete, they will most certainly both be weakened by their choice. Their interdependence should be privileged as a logical economic choice, avoiding thus the horrific consequences of economic deprivation on the people in both the North and the South.