By Piok Deng M. Mei
How will the funds be used— think about possible infrastructure development opportunities and the possible embezzlement of these funds.
The government of South Sudan has long aimed to use oil to build roads through President Salva Kiir’s “Oil for Roads” initiative. While some success has been attained over the last five years, the country has struggled to convert its vast oil wealth into cash on demand to fund the expensive road projects.
The $12.9 billion loan deal from Abu Dhabi’s HBK firm was received with largely negative feelings by netizens. However, the deal could become either a big win for South Sudan’s infrastructure projects or a catastrophic debt burden that could stir the country into economic ruin. How the funds are used, rather than the loan deal itself, holds the answers to whether the deal was a bad or a good move. For instance, if the money— in part or in whole— is embezzled, South Sudan will be embroiled in repaying the Emiratis for generations to come.
On the other hand, if the money is used correctly to develop the country’s infrastructure, it will be better off in the long run as its capital (infrastructure stock) will be improved. Thanks to the loan, South Sudan can increase its production capacities due to an improved infrastructure. In practical terms, this could mean easier movement of people and goods throughout the country because of an improved road network. The Solow Growth Model supports this claim. According to the Solow Model, a country’s output, Y (GDP), is a factor of its capital (K) and labor (L). i.e. Y= f(K, L). In that regard, if South Sudan spends this $13 billion in infrastructure development to improve its roads and other critical infrastructure, the country will see its GDP increase.
How realistic is the prospect that these funds are used correctly in a country riddled with corruption, even at the lowest levels of government? As things stand, the chances of this money being used correctly are nonexistent. Which brings me to my next point of analysis: how can this money—which holds implications beyond the current generation of leaders—be safeguarded from embezzlement and appropriately used for infrastructure development?
Corruption is a big problem in South Sudan that cannot be solved in one day. However, the magnitude of it and the levels of government at which it is allowed to flourish can be established with relative ease. To that end, I propose President Salva Kiir implements swift bifurcated reforms to the country’s vital economic institutions. Key financial institutions like the Ministry of Finance, Central Bank, National Revenue Authority, and Ministry of Petroleum must be free of corruption and follow a strict merit-based hiring system. Other institutions that are not directly related to how the country’s economy performs can be reformed at a more relaxed pace. If this monumental loan is to be safeguarded against corruption and mismanagement, the aforementioned institutions, especially the Ministry of Finance and Economic Planning, must see these reforms implemented. This method of economic liberalization— termed by political scientists Smart Authoritarianism— has been implemented spectacularly in countries like China, South Korea, and even oil-rich Gulf Kingdoms like the UAE. In these countries, non-democratic regimes that do not wish to liberalize their systems of governance implement liberal reforms to a limited number of institutions that are imperative to a country’s economic development. These institutions become cornerstones for excellence in a sea of incompetency, nepotistic hiring, and corruption.
Suppose South Sudanese and South Sudanese institutions prove to be stringent about reforms. In that case, I propose that President Kiir’s Administration consider using internationally recognized asset management firms, such as U.S. hedge funds and private equity firms, to manage these developmental funds.
The other question worth considering with this deal is the future of oil. Is the world heading to a green future where the value of oil is in decline? Despite significant strides in the green movement, OPEC countries and major economies like the United States have seen increases in their consumption of oil. So, is this futuristic EV-filled world with zero carbon emission a reality, or will oil still play the role it plays in today’s global economy? However, if it is indeed the case that EVs will replace fuel-reliant cars, then South Sudan just scored a jackpot. Many experts predict that the value and use of oil may decline as many countries pivot their energy reliance from nonrenewable energy sources to renewable options like wind, solar, nuclear, and electric. One of the biggest threats facing the future of oil, and by extension, oil-reliant economies like South Sudan, is the increased availability of electric cars. So if electric vehicles are to replace conventional fuel-powered cars truly, then the use and value of oil will decline— rendering our oil and the discounted oil, we will be selling to the UAE lender a lot less valuable than the $13 billion loan.
The last question to answer regarding this loan is whether there was an urgent need for a loan of this magnitude. Was South Sudan’s government urgently needing cash? What is wrong with our current revenue flow? Are there better ways of funding our country’s infrastructure projects? South Sudan’s oil is mainly exported via Port Sudan, and Sudan has been in a civil war for a year now. The instability in that country has significantly affected the flow of South Sudan’s oil. Oil leakages due to damaged pipes have been reported over the last months. In addition, the unpredictable nature of war zones has led to the devaluation of South Sudan’s oil in the world market. This is because customers, unsure of the steady supply of our oil, will opt or threaten to opt out of buying oil from us— rendering our oil price negotiators without leverage at the negotiation table of prices. The instability in the Middle East and Eastern Europe could have worked in South Sudan’s favor if we were stable and could reliably produce large amounts of oil. Unfortunately, South Sudan’s infant oil industry cannot, at least in the foreseeable future, be an oil-supplying supplement for the OPEC cartel. As such, the instability in Sudan— which threatens our sole revenue generator— makes the loan deal a viable revenue-sourcing alternative in the country’s best interest.
Simple [neoclassical] economics tells us that if the marginal benefit of something is equal to its marginal cost, it is rational to buy or go ahead with that deal. In the case of this loan, the benefit of $12.9 billion, equivalent to its cost, is a discounted sale of South Sudan’s oil at $10 per barrel for 20 years. A simple arithmetic comparison of what South Sudan could make in 20 years (the period of the loan deal) from selling its oil at the current international benchmark price gives a better picture of the cost/benefit analysis. For instance, South Sudan produced 25 million barrels of oil annually (70k per day). If you multiply that with the per barrel benchmark oil price, the country makes about $3 billion annually— and an estimated $60 billion over 20 years. The country would make this if we produce 70,000 barrels of oil a day, 25 million a year, and sell it at $90 per barrel.
On the other hand, if we are to sell our entire oil at the discounted rate agreed in the loan deal at $10 per barrel, the country ends up making a meager $4.5 billion throughout the 20-year loan period. However, I don’t know what oil South Sudan will sell to the UAE firm at the agreed discounted price. That information would help produce a more definitive cost/benefit analysis of the deal. Nonetheless, the above analysis helps demonstrate the difference discount makes in numbers.
These loan cost/benefit analysis numbers, coupled with the points above, such as the geopolitical atmosphere of the world and our region, the future of the oil industry, and how the funds will be utilized, should help one conclude whether the loan deal was good or bad.
Piok Deng Mayiik Mei is a third year college student at Dartmouth College in the United States. Piok is currently studying Economics, with a focus in Public Finance.