UNCTAD

17th Africa OILGASMINE, Khartoum, 23-26 November 2015

Extractive Industries and Sustainable Job Creation

The role of the banking sector in enhancing extractive

industries in Sudan

By

Dr Mustafa Mohamed Abdalla,

Senior Researcher, Managing Director
Central Bank of Sudan

The views expressed are those of the author and do not necessarily reflect
the views of UNCTAD.
The role of the banking sector in
enhancing extractive industries
in Sudan

By: Dr Mustafa Mohamed Abdalla

Senior Researcher- Managing Director

Central Bank of Sudan
Khartoum- 23 November 2015

1
• The present paper outlines the role of the
banking sector in promotion of extractive
industries in Sudan, mainly by focusing on oil,
gas, gold and other mineral resources.
• Since the initiation of the oil exploration project,
the banking system played crucial role in
encouragement of investments in this important
field, settlement of foreign transaction related to
importation of equipments and tools deemed
necessary for oil exportation, production,
processing and exportation.
• The banking system enhanced oil and gold
investments, exports and imports operations

2
 Main theme
• The paper explores various policy
measures adopted to encourage
investments, which include
registration of capital, transfer of
profits, loans, provision of finance,
facilitation of foreign trade
operations in oil, gold and other
mineral resources.
3
 Gold partially replaced oil losses
• In spite of the fact that Sudan lost
considerable share in oil proceeds post
secession of South Sudan, which imposed
severe currency and inflationary pressures,
however, the banking system seemed resilient
to the shock and the economy featured clear
indicators for recovery, thanks to traditional
mining in gold sector which contributed
positively to meet the country’s basic goods.
4
 US sanctions and foreign debt
• Two factors had negatively affected
the development of extractives; first
US Sanctions which resulted in real
challenges to transfer of technology,
trade and investment, secondly
burden of foreign debt and limited
access to international financial
market.
5
 CBOS encourages investments in
extractive industries
• The CBOS will continue to encourage
extractive industries by facilitating finance,
opening foreign credit lines and adopting
investment encouragement schemes.
• The efforts will be excreted to create a
business and investment friendly environment

6
• From a banking perspective, the
unprecedented expansion in the extractive
industries in Sudan in recent years comes with
great investment opportunities to the
Sudanese banks. In fact, this rapidly growing
sector underlies huge potentials for banks in
the form of profits and deposits attraction.
From a broader perspective, the extractive
industries led by gold, oil and gas have
positive impacts on the creation of jobs,
foreign exchanges and economic development

7
 Stylized facts about Sudan economy
2013-2014
• Real GDP growth 4.4% in 2013 and 3.6% in 2014 .
Projected to grow by 6.3% in 2015
• Inflation 36% in 2013 and 37.1% in 2014 . About
17% average 2015, last published data October
2015, 13.3%.
• Balance of payments 17 million $ in 2013 and 15
million $ in 2014.
• Current account balance 5.4 billion $ in 2013 and
4.8 billion $ in 2014.
• Trade balance 3.9 billion $ in 2013 and 3.7 billion
$ in 2014.
 Continue Stylized Facts
• Exports 4.7 billion $ in 2013 and 4.4 Billion $
in 2014 .
• Imports 8.7 billion $ in 2013 and 8.1 billion $
in 2014.
• Foreign Debt 43.8 billion $ in 2013 and 46.6
billion $ in 2014.
• Government revenues 37.3 billion SDG in
2013 and 51 billion SDG in 2014 .
• Public expenditure 49.7 billion SDG in 2013
and 55.6 billion SDG.
• Government deficit 6457 million SDG in 2013
and 4417 million SDG in 2014.
• Money Supply (M2) 66.4 billion SDG in 2013
and 77.7 billion SDG in 2014.
• Money Growth 13.3% in 2013 and 17% in
2014.
Balance of Payments
 -500.0
0.0
1000.0
1500.0
2000.0

-2500.0
-2000.0
-1500.0
-1000.0
500.0
Q1 1998
Q2 1998
Q3 1998
Q4 1998
SERVICES

Q1 1999
Q2 1999
Q3 1999
Q4 1999
Q1 2000
Q2 2000
Q3 2000
GOODS

Q4 2000
Q1 2001
Q2 2001
Q3 2001
Q4 2001
Q1 2002
Q2 2002
Q3 2002
Q4 2002
INCOME: NET

Q1 2003
Q2 2003
Q3 2003
Q4 2003
Q1 2004
Q2 2004
Q3 2004
Q4 2004
TRANSFERS

Q1 2005
Q2 2005
Q3 2005
Q4 2005
Q1 2006
Q2 2006
Q3 2006
Q4 2006
Q1 2007
Q2 2007
Q3 2007
FINANCIAL ACCOUNT

Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
 10
15

0
5

-15
-10

-20
-5
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
CAGDP

1985
1986
1987
1988
deficit

1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
• Based on the price indicators shown below it
seems that gold and oil prices had dropped
massively , due to world economic recession
coupled with China slow growth and challenges
of emerging economies the prices may remain
low in near future, this has positive and
negative effects on Sudan economy. Definitely
the decline of gold prices will negatively affect
Sudan economy, while the decline in oil prices
will reduce the budget burden and positively
affect the balance payments because currently
Sudan is a net oil importer.
14
 0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
M6 2009
M9 2009
M12 2009
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Sudan monthly exports 2009- 2015

Dec-14
Mar-15
2009- 2015
Sudan monthly exports

15
Dependent Variable: INFLATION
Method: ARDL
Dynamic regressors (4 lags, automatic): EXCHANGE M2
Fixed regressors: C
Number of models evalulated: 100
Selected Model: ARDL(2, 1, 0)
Variable Coefficient Std. Error t-Statistic Prob.*

INFLATION(-1) 1.076522 0.06744 15.96257 0

INFLATION(-2) -0.20707 0.066572 -3.11042 0.0021
EXCHANGE 6.205342 1.707736 3.633665 0.0004
EXCHANGE(-1) -6.17654 1.702665 -3.627569 0.0004
M2 4.25E-05 1.77E-05 2.396157 0.0175
C 0.784248 0.733604 1.069034 0.2863

R-squared 0.935677 Mean dependent var 15.39764

Adjusted R-
squared 0.934069 S.D. dependent var 11.41436

S.E. of regression 2.930869 Akaike info criterion 5.017168

Sum squared resid 1717.998 Schwarz criterion 5.114097

Log likelihood -510.768 Hannan-Quinn criter. 5.056369
F-statistic 581.8626 Durbin-Watson stat 1.992816
Prob(F-statistic) 0 16
 -5
0
5

-10
10
M3 1998
M11 1998
M7 1999
M3 2000
M11 2000
M7 2001
M3 2002
M11 2002
M7 2003
M3 2004
M11 2004

Residual
M7 2005
M3 2006
M11 2006
M7 2007

Actual
M3 2008
M11 2008
M7 2009
M3 2010
Fitted
M11 2010
M7 2011
M3 2012
M11 2012
M7 2013
M3 2014
Actual and predicted inflation

M11 2014
0

17
10
20
30
40
50
 Bayesian impulse responses
Res pons e of IN FL ATION to C h o l e s ky
On e S.D . In n o va ti o n s
4

0
1 2 3 4 5 6 7 8 9 10

I NFL A T I ON E X CHA NGE M2

Res pons e of EXC H AN GE to C h o l e s ky

On e S.D . In n o va ti o n s
.1 2

.1 0

.0 8

.0 6

.0 4

.0 2

.0 0
1 2 3 4 5 6 7 8 9 10

I NFL A T I ON E X CHA NGE M2

Res pons e of M2 to C h o l e s ky
On e S.D . In n o va ti o n s
600

400

200

-2 0 0
1 2 3 4 5 6 7 8 9 10

I NFL A T I ON E X CHA NGE M2

18
 Actual and Forecasted Prices for Crude Oil & Gold for the
period (2013 – 2016)

1800.0 120.0

1600.0
100.0
1400.0

1200.0 80.0

1000.0
$/troy oz

$/bbl
60.0
800.0

600.0 40.0

400.0
20.0
200.0

0.0 0.0
2013Q12013Q22013Q32013Q42014Q12014Q22014Q32014Q42015Q12015Q22015Q32015Q42016Q12016Q22016Q32016Q4

Gold (($/troy oz)) Crude Oil ($/bbl)

19
 Effect of decline in oil and gold prices on Sudan economy

macroeconomic
instability
Deficit Currency (Inflationary
Decline in
in BOP depreciation pressures),capit
oil
proceeds al flight, FDI
flows , decline
in output

Deficit financing :
1- issuing certificates
Government 2- borrowing from Money
deficit abroad
growth
3- borrowing from
banking system

20
 The Production of Gold in Sudan during the Period
(1996 - 2015)
90.00

80.00 76.6

70.0
70.00

60.00 73.3

50.00
44.5
Tons

40.00

30.00
23.7
19.6
20.00 14.9
13.0
10.6
8.5 8.7 7.8 8.5
10.00 6.8 6.7 6.2 6.0
4.4 4.9 5.4

-
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015
21
 Contribution of Gold Exports to GDP
and Total Exports
Description
2011 2012 2013 2014

Gold export
contribution 2.1% 3.2% 1.5% 1.5%
to GDP
Gold exports
contribution
to total 15.1% 53.1% 21.9% 29.2%

Exports

22
 Central Bank of Sudan Role in Gold
Exports
• The Central Bank of Sudan (CBOS) is the sole
exporter of the gold produced by traditional
miners in Sudan.
• It purchases gold from traditional miners at
higher market exchange rates while the
proceeds from gold exports are provided at
lower official exchange rates.

23
 Imports of Strategic Goods
Comm
Unit 2010 2011 2012 2013 2014
odities
Quanti Quanti Quanti Quanti Quanti
Value Value Value Value Value
ty ty ty ty ty
Petrol
eum Million
Produ - 428 - 735 - 1,052 - 1,460 - 1,524
USD
cts

Wheat
M. T 2,560 945 1,673 690 2,053 811 2,314, 1,027 2,177, 1,046
Wheat
Flour M. T. 59 32 43, 21 46, 25 27, 15 64 36

Medici
nes,
Million
- 349 - 376 - 349 - 412 - 411
USD

Sugar
M. T. 1,024 502 670, 506 719, 529 1,118, 646 810, 460

24
• As revealed by the above table, the
purchases of gold by the CBOS were
quite helpful in providing foreign
exchange resources.
• This led to provision of strategic goods .
• Allowed Sudan to meet its obligation to
regional and international
organizations .

25
 Contribution of Oil Exports to GDP
and Total Exports
Description
2011 2012 2013 2014

Oil contribution
to GDP
5.0% 3.3% 2.7% 3.5%
Oil exports
contribution to
total Exports
75.6% 23.5% 35.8% 28.8%

26
 Petroleum Products in 2014
Furnace Jet Kerosene Nafta
5.5% 2.9% 0.4% 0.4%

Petroleum coal
6.4%

Heavy gasoline
7.8%
Gasoline
38.9%

Butagas
8.7%

Benzene
28.8%

27
 Natural Gas
• Natural gas is proven to exist in blocks 15, 8, 4
and 6 estimated at around 1.75 tcf; however
recent studies have shown a potential of at
least 5-7 tcf of natural gas. Currently, most
natural gas associated with crude petroleum is
being used to generate electricity to support
the oil processing operations at different
levels.

28
 The Geographical distribution of the
operating banks in Sudan in 2014
Item No. of banks
Khartoum State 260
Middle States (Sennar, Al Gazira,
126
Blue Nile and White Nile)
Eastern States (Gadarif, Kassala
78
and Red Sea)
Northern States (North and River
67
Nile States)
Kurdufan States (North, South and
63
Western States)
Darfur States (North, South, West,
56
Middle and East )
Total 650
29
 0
100
200
300
400
500
600
700
Khartoum State

260
Middle States (Sennar, Al Gazira, Blue Nile

126
and White Nile)

78
Eastern States (Gadarif, Kassala and Red Sea)
67

Northern States (North and River Nile States)

Kurdufan States (North, South and Western

63

States)

Darfur States (North, South, West, Middle

56

and East )
operating banks in Sudan in 2014

Total
650
The Geographical distribution of the

30
The Role of the Sudanese Banking Sector
in Financing Extractive Industries

• After the secession of South Sudan the CBOS

monetary and credit policies encouraged
banks to finance real sector and extractive
industries through different incentives
schemes. In line with those policies, the total
banks financing to the mining and energy
sector increased significantly from SDG 40.4
million in 2010 to SDG 361.3 million in 2014
by 795.6%.
31
• However, the contribution of the financing of the
mining sector to total banking finance remains
very small around 0.9% in 2014 which does not
match the great potentials of this important
sector.
• The small contribution of the mining and energy
financing to the total banks financing reflects the
presence of financial impediments that prevent
Sudanese banks to provide finance to this sector.
The lack of collaterals represents one of the main
obstacles that hinder the provision of finance to
traditional miners.

32
Financing Mining and Energy Sector
during the Period (2007 – 2014)
Banks Finance (1,000 Contribution to Total
End of Period
SDGs) Banks Finance
2007 69,774 0.6%

2008 51,990 0.4%

2009 51,447 0.3%

2010 40,347 0.2%

2011 31,125 0.2%

2012 85,111 0.3%

2013 188,623 0.6%

2014 361,340 0.9% 33

 Financing Mining and Energy Sector
during the Period (2007 – 2014)
400,000 1.0%
0.9%
0.9%
350,000

0.8%
300,000
0.7%
0.6%
250,000 0.6%
0.6%

200,000 0.5%
0.4%

0.3% 0.3% 0.4%

150,000

0.3%
0.2%
100,000
0.2% 0.2%

50,000
0.1%

0 0.0%
2007 2008 2009 2010 2011 2012 2013 2014

Mining & Energy Mining & Energy

34
 Investment encouragement schemes
• The current Investment Promotion Act allows foreign
investors to have the right to own investment project in
full and without the requirement for a partner in
Sudan.
• Law treats the national and foreign investors without
any discrimination in the granting of privileges,
guarantees and facilities.
• Gives full freedom in the transfer of capital invested in
the case of non-implementation of the project or
liquidated or disposed of in whole or in part, subject to
the obligations owed by a quorum

35
• Allows the transfer of profits and the cost of
financing in foreign capital or loans from the date
of maturity.
• Free Importation of raw materials needed by
investment projects and export products without
restrictions.
• In terms of the concessions, the law provides:
• Exemption from the business profits tax and
customs duties.
• The law also grants land for the establishment of
investment projects free of charge in the case of
strategic projects, and promotional price for non-
strategic projects.
• No nationalization or confiscation or seizure or a
guard on the money invested in the free zone.
36
 Policy Recommendation: Main
Challenges and Reforms
• Provision of necessary long and short term
finance to extractive industries.
• Opening foreign credit lines and facilitating
access of private sector to financial resources
from abroad.
• Attracting foreign direct investment and
providing incentives to foreign firms to
explore extractive industries.

37
• The US unilateral economic sanctions remain the
main obstacle that negatively affects extractive
industries in Sudan and hampers all efforts towards
sustaining economic development. Accordingly, the
United Nations and the International Community
should help the Sudanese government in lifting this
heavy burden.
• Guarantee the debt relief to Sudan under the HIPC
initiative to minimize the heavy external debt
burden.
• Address the collateral problems through accelerating
the Movable Credit Registry projects and Whole Sale
Guarantee Agency.
• Banks can form financing consortium to finance large
and medium scale mining and extractive projects.
38
• CBOS sterilizes the effects of gold purchases
and gradually allow more room to the
private sector in purchasing and exportation
of gold.
• Although Sudan concurrently enacted two
ordinances and six acts to protect the
environment, the enforcing institutions are
weak and fall under different ministries,
further reducing co-ordination efforts.
• Policies on the socioeconomic and
environmental impacts of small-scale gold
mining.
39
• Better manage mineral resources and
process them locally through better
coordination between the concerned
ministers and government bodies will
enable Sudan to achieve economic and
social development.
• Promote knowledge exchange to
increase the sector’s productivity, help
better manage mining operations to
adhere to national and international
environmental and health standards,
and prevent conflict through effective
community relations.
40
• Enhance institutional capacities through
putting in place effective strategies, policies
and legal frameworks that govern and
organize the extractive industries sector.
• Encourage partnership with the Sudanese
private sector through providing a
framework for working with the private
sector to put in place effective
environmental and social safeguards and
corporate social responsibility

41
• Create conducive business and investment
friendly environment with regulations and
incentives to enhance both domestic and foreign
investors.
• Registration of foreign capital and facilitate
transfer of profits and loans.
• Introduce advanced banking technologies and
improve the efficiency of the Sudanese payment
system.
• CBOS will continue buying gold and encouraging
traditional mining as well as to provide
incentives to gold mining by companies in close
collaboration with ministry of minerals and other
related institutions.

42
•Thanks for your attention ,,

Central Bank of Sudan

43