When South Sudan became independent in 2011, many hoped that its oil wealth would provide a base for building the nation’s economy and lifting citizens out of poverty. Instead, politicians have purloined these revenues and put them toward patronage and personal enrichment, feeding internal conflict. Where the oil money goes is kept murky: Much of it is not included in the official government budget, and without transparency, there can be no accountability for wrongdoing. This report by the International Crisis Group, edited for clarity, suggests some solutions.
As South Sudan struggles to recover from civil war, its broken state finances are receiving renewed attention. Top officials hold close control over the country’s oil riches, barring scrutiny of spending and allowing rampant misappropriation of funds. This slush-fund governance is at the heart of South Sudan’s system of winner-take-all politics, and helps explain why so much went so wrong so quickly after independence in 2011.
Oil, which accounts for 85 percent of government revenue and over 94 percent of the country’s exports, has always been central to its political fortunes. The landmark 2005 peace deal that paved the way for its secession from Sudan granted Juba 50 percent of the South’s oil revenues, pumping billions into the region’s new semi- autonomous government as it prepared to stand on its own. That easy money quickly built a vast patronage system that helped unite rival camps, but also papered over South Sudan’s deep ethno-political divisions. This largesse abruptly ended as President Salva Kiir moved to consolidate power after independence, sidelining his rivals and tightening his grip on the oil economy.
The five-year civil war that erupted in 2013 left up to 400,000 dead, a shocking toll in a country of only some 12 million. Peace talks led by neighboring countries’ leaders resulted in the 2018 peace agreement and a power-sharing arrangement between President Kiir and his main rival, Riek Machar, though an insurgency continues in the south. But warring ethno-political camps continue to be a source of instability. The government is riven by internal power struggles, and its reluctance to lift the shroud from upon the oil economy is blocking reforms that could sustain a broader political settlement.
During the war, Kiir mortgaged future oil exports for advance loans from a small group of commodity traders and commercial banks, piling up debt while hiding the country’s finances even deeper. Meanwhile, his loyalists diverted large portions of state revenue from the official budget, which is so strained that the government routinely fails to pay salaries.
Stabilizing South Sudan appears impossible without fixing its economy. The parties cannot reach a viable political settlement until oil funds are adequately accounted for and shared. Frustrations are also boiling over among international donors, who increasingly believe that their humanitarian aid is sustaining a kleptocratic elite.
An acute economic crisis triggered by falling oil prices in 2020 opened a window to press for changes, but an uncoordinated approach could squander the chance. From November 2020 to September 2021, South Sudan received some $550 million in relief from the International Monetary Fund, a lump sum comparable to the nation’s past annual budgets. The IMF received promises of some reforms, but there were few strings attached. This support helped Juba stave off further slides in its currency, but left many South Sudanese and donors frustrated that a government in such disrepute and so resistant to reforms received so much for so little.
Oil and war
War has beset South Sudan for over half a century. Insurgents in the south took up arms against Khartoum’s rule on the eve of Sudan’s independence in 1956, ushering in protracted strife that left as many as two million people dead. But while the dominant narrative had the “African” south pitted against the “Arabized” north, Southerners were fighting among themselves as well, primarily along ethnic and communal lines.
The discovery of oil in the late 1970s intensified the conflict with Khartoum. In the late 1990s, under President Omar al-Bashir, Sudan escalated its counterinsurgency to clear the way for development of oil fields, most of which are located just south of today’s Sudan-South Sudan border. It won some battles but drew condemnation for its abuses of civilians, which also broadened Western and especially U.S. sympathy for the Southern cause. Regional peace talks and strong-arming by the George W. Bush administration finally helped convince Bashir, who feared U.S. military intervention, to accept a 2005 peace deal with the Sudan People’s Liberation Movement (SPLM), the political wing of the insurgent Sudanese People’s Liberation Army (SPLA), that made the South semi- autonomous and promised a vote on secession six years later. The oil revenues it gave were a bonanza for an area that is roughly the size of France but overwhelmingly rural, with a smattering of small market towns.
The SPLM’s rebels-turned-rulers could have not wished for more propitious timing: International oil prices reached new highs in 2004 and kept climbing, passing $100 a barrel for the first time in 2008, and hovering above that mark from 2011 until 2014. Led by Kiir, the SPLM quickly forged consensus behind independence by handing out plum positions and promising a broad-based government after secession, which was a foregone conclusion by the time of the 2011 referendum.
But the sudden wealth gravely compromised the country’s stability. The SPLM had always been a shoestring operation, with field commanders largely left to finance their own units through a mix of taxation, aid diversion, cattle rustling, artisanal mining, logging, and outright looting. Some top rebels enriched themselves enough to buy upscale homes in Nairobi and Kampala. The 2005 Comprehensive Peace Agreement and the accompanying oil money propelled the elite’s propensity for illicit self-dealing to new heights. Some officials justified it as recompense for decades of wartime suffering.
The pervasive corruption quickly helped erode Southern solidarity. Ethnic mistrust hardened, as oil revenues appeared to concentrate in the hands of the SPLM elite, which many viewed as dominated by Kiir’s ethnic group, the Dinka. Since many smaller Southern ethnic groups had spent decades resisting the SPLM’s dominance, they remained on the periphery of the new quasi-official patronage network. Resentment deepened after a string of corruption scandals, including the 2008 “Dura saga,” when the regional government awarded some $3 billion of contracts (at the official exchange rate) to a range of companies for the purchase and storage of cereals that mostly never arrived.
In 2012, Kiir said the government could not account for $4 billion. He accused dozens of senior officials of embezzling funds in the lead-up to independence.
That same year, in a dispute over how much South Sudan should pay Sudan for the use of a pipeline transporting crude oil from Southern oil fields to export via Port Sudan on the Red Sea, Juba shut down its oil production to force Khartoum’s hand. South Sudan’s army then captured the Heglig oil fields, just across the border inside Sudan, triggering a short-lived border war. Having cut off its only source of revenue, the government secured over $1 billion in oil-backed loans to tide itself over until exports resumed, a mechanism it would later deploy to fund itself during the civil war.
Government unity crumbled soon thereafter. Senior SPLM officials began maneuvering to challenge Kiir’s leadership. He abandoned his strategy of political inclusion and moved to consolidate power, tightening his own grip on the oil funds in the process. The dispute escalated in 2013, when Kiir sacked Machar, who was serving as his vice president, and many other top officials. In December that year, gunshots rang out after a party conference as Dinka and Nuer elements of the elite presidential guard assigned to protect both Kiir and Machar exchanged fire, plunging the nation into weeks of ethno-political bloodshed that descended into civil war.
The conflict disrupted oil production, and it erupted just as oil prices were descending below $80 per barrel. Since South Sudan had based its export-fee negotiations with Sudan on boom-time prices, that further eroded government income.
The ruling elite’s predation continues to threaten South Sudan’s stability. Despite the 2018 peace deal that eventually led to Kiir and Machar, the two main belligerents, again sharing power, the simmering insurgency in Central Equatoria state remains unresolved, in part because a rebel leader refused to sign out of frustration with Juba’s monopoly on the country’s oil wealth. More critically, Kiir has yet to fulfill many of the pledges he made in the peace accord, such as incorporating former rival fighters into the army, often on the grounds that his government lacks the funds. Opponents view these claims as proof that he has no intention of sharing the country’s wealth with non-loyalists. Riek Machar also faces accusations that he is hogging the spoils of peace.
Widespread discontent with the government’s failure to improve the people’s dire living conditions is putting the peace deal at further risk of collapse, and feeding perceptions that armed struggle is the only avenue for effecting political change.
Kiir’s hold on oil and power
Even South Sudan’s leaders acknowledge that the fight for petrodollars underlies much of its internal political strife, fanning the flames of its ethnic and regional divisions.
These problems owe much to decades of colonial and Sudanese neglect that left South Sudan one of the least developed places in the world. Yet oil-dependent countries often suffer from political pathologies, and South Sudan is no exception. The pot of oil revenues claimed by those atop its system dramatically raises the stakes of holding power, accentuating the winner-take-all nature of its politics. It also obstructs the political reforms the country so desperately needs, including, as Crisis Group has previously recommended, the adoption of a more consensual form of national governance and devolving authority and resources to state and local governments.
Kiir’s hold on oil revenues clearly works against more equitable power-sharing. His loyalists dominate the finance ministry, the Central Bank and the state-owned Nile Petroleum Corporation, known as Nilepet. Despite the 2018 peace deal’s power-sharing provisions, Kiir’s confidants, including close kin and loyal lieutenants, operate as a shadow government, bypassing the institutions that the formal administration controls in cooperation with the political opposition. That fuels discontent in Machar’s camp. The presidency’s centralized control of oil funds – and his desire to maintain it – also complicates efforts to meet widespread demands for greater decentralization, as the SPLM originally promised, or even to discuss what proportion of national funds should flow to state and local administrations. Little of the 5 percent of oil revenues that the constitution obliges the government to send to oil- producing states and counties appears to be reaching those destinations.
Kiir’s government has spent the bulk of the oil funds that did reach the official budget on the military and the security sector, instead of building basic services that could alleviate the population’s suffering. During the war, his administration predictably bolstered the army and the infamous National Security Services, while also backing government-aligned militias.
These institutions acquire additional off-budget funds through Nilepet, and through the operation of private security companies that guard the oil fields. These revenues both insulate much of the officer corps from oversight and give them powerful financial incentives to protect the status quo. The top brass itself sponsors militias across the country, undermining efforts to tame the violence that has persisted.
Better off without oil?
Given the scale of the problems, it seems entirely possible South Sudan might be better off without oil – and such a future could be nigh. Its production peaked at over 300,000 barrels per day at independence, but has decreased to half that, in part due to the conflict.
The government projects oil production to continue to halve roughly every five years.
Volatile oil prices, instability, and the poor quality of much of South Sudan’s crude, meanwhile, discourage the investment needed to repair damaged wells, extend their lifespan, and search for new deposits. The high costs and fraught politics of exporting that oil through Sudan further deter prospective investors.
Since oil underwrites the entire South Sudanese state, any move away from production clearly would precipitate a collapse in the government’s income and further diminish the authorities’ threadbare legitimacy. The challenge can hardly be overstated: The government has barely paid attention to the agrarian and pastoral economies, which sustain much of the population. It has also consistently failed to explore other potential sources of income, and has yet to build the roads and infrastructure that could spur economic growth. It is therefore difficult to imagine what a post-fossil fuel future would look like without significant external support, so South Sudan thus faces a critically short window to improve its relations with the outside world. Still, given how much of the country’s politics revolves around oil, moving away from it also presents the clearest opportunity to change the entrenched power dynamics that have proven so destructive.
Where does the money go?
South Sudan earns income from less than half of the roughly 150,000 to 170,000 barrels a day it produces. The proceeds of around 55 to 60 per cent of total output go to the three joint-venture oil producers in the country, as profit and to cover their costs.
According to the UN Panel of Experts, these costs likely include the producers’ contracts with security and other companies working in the oil fields, which are largely controlled by South Sudan’s security elite – one way in which they can likely tap into off-budget funds. South Sudan remains entirely dependent on Sudan to get its oil to international markets, which means that a further 28,000 barrels per day go to Khartoum for the use of its pipelines and to paying off a $3 billion compensation settlement agreed to after independence. (The Juba government has said it expects to settle that obligation by the end of 2021, though transit-related fees to Sudan will remain.)
That leaves South Sudan with the proceeds from up to roughly 35,000 to 45,000 barrels per day at present production levels, according to the best estimates available. Much of this money is vulnerable to diversion before it reaches the national budget, however. Nilepet regularly receives tens of millions of dollars in oil revenues from producing companies and the government, but these allocations are not reliably disclosed and have never been audited. The state-owned company, tightly controlled by Kiir loyalists and the security elite, appears to be funding parts of South Sudan’s security services and war machine.
Other ad hoc forms of budgeting obscure the country’s finances. In 2019, Kiir announced he was setting aside 30,000 barrels of oil per day for road projects with Chinese companies, overseen directly by his office, though the government can now only afford to fund the project with 10,000 barrels per day.
This opaque arrangement shields substantial revenues from oversight and has already led to accusations of mismanagement and corruption. Kiir has since promised to “dedicate” 5,000 barrels per day to pay government salaries, a move that would make little sense if South Sudan had a functioning budget.
Other oil revenues are used to repay hefty commercial loans, including from the Qatar National Bank, the Africa Export Import Bank, and commodity traders, including Sahara Energy.
A 2013 law stipulates that all oil revenue is to be deposited in a single Petroleum Revenue Account. The government’s failure to do so resulted in the 2018 peace deal ordering the closure of all its other petroleum accounts. Three years on, it has yet to do that.
In the past, the government instructed some buyers of its oil to make payments directly to third parties. This fragmented, ad hoc system creates an ideal climate for large-scale misappropriations of cash.
The management of funds that do reach the official budget is equally poor. Weak institutional guardrails and limited oversight facilitate fraud and embezzlement. The government did not even publish a budget for the 2020-2021 fiscal year, and its expenditure reports are typically late and incomplete.
Piling up debt
Oil-backed loans further cloud South Sudan’s financial horizons. Racked by civil war and hamstrung by limited access to international capital markets, it started using its future oil shipments as collateral in exchange for quick cash soon after independence. It appears to have received at least $2 billion in advances on oil sales since 2012. While these loans brought in new revenue, the government never disclosed their contract terms or repayment schedules. Repaying them deprived the treasury of revenue and foreign exchange, and lower oil prices meant that more oil was needed to pay off the same amount of debt. According to the Ministry of Finance, more than 86 percent of the country’s $1.51 billion in external debt as of 2020 was owed to commercial lenders.
The South Sudanese elite’s debt-acquisition habits started developing during the 2012 oil shutdown, when Juba borrowed over $1 billion against future oil production from the China National Petroleum Corporation and Malaysia’s Petronas, two of the main oil firms operating in the country. The government also started a commercial relationship with the Qatar National Bank, which eventually grew into a $650 million loan that Juba is still servicing with the delivery of two cargoes of crude oil per year.
South Sudan then started to turn to less orthodox lenders: commodity traders.
In the early days, Chinese firms purchased the bulk of South Sudan’s oil exports. But since 2013, a handful of trading firms have purchased most of them, and they have lent the government money through “pre-payment arrangements” that might add up to more than $1 billion. These payments work like the petrostate equivalent of a payday loan scheme: The government gets cash advances at high interest rates in return for future oil deliveries. As lenders typically prepay in dollars but get repaid in crude oil, price fluctuations can require the government to ship far more oil than it had anticipated. Discounts on the value of future oil and fees can make these deals even more expensive for Juba.
South Sudan has little to show for these secretive pre-payments. Only a handful of officials know their terms, and the growing debt pile shrinks future leaders’ capacity to arrest the country’s tailspin.
South Sudanese leaders have repeatedly pledged to halt those oil sales, including in the 2018 peace deal, but found the habit hard to kick. In June 2019, the government announced it had suspended pre-payment arrangements and set up a committee to investigate the practice, but the IMF found that such loans had continued until at least the following May. As of April 2021, South Sudan still owed Sahara Energy $99 million, but had reportedly cancelled its loan facility with the company and said it planned to clear the debt by September. In 2019, the Africa Export-Import Bank gave the government an additional $400 million credit line, to be repaid through the allocation of future oil cargoes.
In 2020, the Ministry of Petroleum identified nine companies as having purchased the government’s entire annual share of oil exports: All were either standalone commodity traders or trading arms of major oil companies, the majority of which have a strong presence in Europe. As a result, a small circle of traders, plus the multinational banks and insurers that underwrite them, have an outsize influence upon South Sudan’s finances and politics.
Crisis and IMF aid
South Sudan plunged into a fiscal crisis in 2020. Floods, locusts, and the COVID-19 pandemic had already precipitated an economic downturn when a steep drop in oil prices halved the government’s revenue, as well as doubling the amount of oil it needed to repay its creditors.
In August 2020, the Central Bank announced that it had run out of foreign reserves and would be unable to stop the South Sudanese pound from depreciating. As national and state authorities labored to keep down consumer prices on staples like water (which must be purchased because treated water is not publicly available) and food, the government decided to print money, which further fueled inflation. Internal documents said government revenue would decline 60 percent from previous projections. Civil servants and soldiers went without pay for months.
The IMF stepped in to provide relief, which eventually totaled more than half a billion dollars. In November 2020, it provided its first direct budget support to South Sudan by releasing $52.3 million in emergency assistance, citing the severe impact of the pandemic and falling oil prices on the country’s public finances.
It followed up quickly with a much larger disbursement of $174.2 million in March 2021, which came with a program that allows it to monitor the government’s commitment to carrying out reforms. The IMF identified eleven key measures it expects enacted, including monetary and exchange-rate adjustments, new anti- corruption provisions, a single treasury account, and improved cash management and cash forecasting. South Sudan then received a further $334 million from the IMF as part of a $650 billion disbursal to all of its 190 members, the largest of its kind in the fund’s history.
The combination of IMF stopgap relief and rebounding oil prices has thus far given respite to the government and prevented fiscal collapse, but South Sudan’s economic woes – declining oil production, meager to no foreign reserves, and high-risk debts – are hardly solved. The bailout has failed to extract major concessions from the ruling elite, and the program’s critics say future budget support should be tied more directly to verifiable changes.
Furthermore, the IMF loan appears to have aggravated political bickering, despite bringing about few substantive changes other than the rare semblance of transparency in how the funds are used. In particular, the government’s decision to use the money to pay only its own soldiers, and not former opposition forces loyal to Machar, added to the overwhelming disillusionment with the peace process in Machar’s camp, which has since split into two largely as a result of this discontent.
Yet South Sudan’s economic distress may actually have a silver lining. The government is less likely to launch expensive military operations or flagrantly skirt a UN arms embargo to buy new weapons. Insurgents may also have fewer incentives to rebel, as the government has a smaller pot of money with which to purchase peace. More critically, a protracted fiscal crisis may finally motivate its leaders to mend their fractured relations with donors.
The donors’ dilemma
The government’s failure to provide basic services to its populace is an especially sore spot for major donors, who foot the bills for aid agencies and organizations to provide education, health care, sanitation, and more.
Worse, diplomats see few options at their disposal. Donors are understandably reluctant to use relief to a population suffering chronic food shortages as leverage for political or economic reform, given what they view as the government’s cruel indifference to its own people’s hardship. They also fear that punitive measures could make the state even wobblier.
Targeted sanctions, Western powers’ pressure tool of choice in recent years, have failed to generate substantial reforms, although some Western officials believe that their escalation affected the thinking of South Sudanese elites during the peace process. In particular, they believe that threats of more sanctions helped convince Kiir and Machar to form the unity government in February 2020. Government representatives repeatedly mentioned the sanctions in diplomatic meetings, and hired at least two firms to lobby for their removal in the U.S.
Donors have also struggled to get regional powers – especially Kenya, Uganda, and Sudan, which mediated the 2018 peace talks – to increase pressure on South Sudan’s leaders to clean up the government’s finances. Kenya’s business-minded elite rarely cracks down on illicit money flows from abroad (even if its diplomats are aghast at the state of South Sudanese politics). Nevertheless, Nairobi recently froze the bank account of Martin Lomuro Elia, South Sudan’s cabinet affairs minister and a key Kiir ally, for suspected money-laundering, although it then quietly unfroze it.
Uganda’s political and military elites, too, share commercial ties with South Sudanese elites and are happy to welcome their channeling millions of dollars into bank accounts in Uganda with few questions asked.
Sudan would have the most to gain if South Sudan cleaned up its image enough to attract investment in its oil industry, yet its relations with Juba are primarily handled by its military elite, who are unlikely to push for reforms. Khartoum is also swamped by an array of other pressing negotiations with Juba, including over border disputes, trade relations, and peace talks with Sudanese rebels.
Most East African officials say they do not believe additional sanctions would be helpful. Regional envoys may also have promised Kiir that they would try to get the current economic sanctions lifted if he moved forward with the peace deal. Many analysts also believe that regional elites suffer little from the status quo, as donors pick up the tab.
Since it is clear that punitive measures alone will not prise South Sudan’s oil riches out of the ruling elite’s hands, some donor officials are hoping that IMF engagement could at least create momentum for reforms. A nine-month Staff Monitored Program, which creates a basis for the fund to monitor the reform program, was attached to the second round of IMF funds and may facilitate greater international oversight. South Sudan has already moved the powerful Technical Loans Committee, which oversees government borrowing, from the president’s office back to the finance ministry. Kiir’s party controls that ministry, but it is subject to greater oversight. Officials say government officials seem keenly aware that their progress could determine the availability of additional IMF funds.
Yet other donor officials fear that the IMF relief could weaken the pressure for substantial reforms. The large influx of money without major up-front reforms surprised many, even though some of their own governments sit on the fund’s board. This makes clear that the IMF engagement was never integrated into a broader coordinated donor strategy in South Sudan. Some Western capitals may also turn their focus to other priorities, given the IMF lead on the financial-reform agenda. The IMF also dispensed the second, larger round of funds before the government’s internal watchdog had completed its audit on the first batch. That audit found millions of dollars in aid could not be accounted for.
Little action on a long list
President Kiir, by agreeing to form a unity government in February 2020, hoped in part to improve his relations with the country’s key Western donors. Today, he faces an economy that will struggle to stay afloat once the IMF relief runs out.
South Sudanese activists and outside partners lack a clear roadmap to achieving reforms, however. The most obvious reference point has been the detailed pledges all parties in the unity government made in the 2018 peace deal, which envisages an overhaul of the country’s oil sector and public finances. Commitments include opening the government’s books and thus bringing transparency and oversight to government revenues, debts, and expenditures. They also include the reform of major institutions such as the Central Bank; enquiries into key government bodies involved in the oil economy; the creation of a least six new agencies to strengthen management of public finances and resources; and the review of at least twelve major pieces of legislation relating to management of the economy. All in all, the peace deal’s financial-reform roadmap binds the government to take at least 65 distinct steps, and it does not appear to be making much headway on more than a few.
Sensible as it may be, the laundry-list approach lacks strategic focus, and is thus unlikely to lead to more than a few piecemeal changes. More critically, the country’s oil sector is already governed by strong legislation that needs to be enforced rather than revisited. Perhaps the most important step donors could take would be to identify a handful of key reforms to put at the top of the long list of priorities that activists and diplomats are already pressing government officials on – a list that also includes progress toward elections, reduction of insecurity, constitutional reform, and justice for victims of war crimes. Even the shorter list of IMF priorities may still be too extensive, if the goal is substantive change. The commitments Juba made in June to the Financial Action Task Force (FATF), after it added South Sudan to its “grey list” of countries with “strategic deficiencies” in countering money-laundering and terrorist-financing also muddle the reform agenda.
Crawling from the wreckage?
Amid the financial wreckage, reform-minded South Sudanese and outside powers need to figure out where to focus. Ideally, Kiir would enact all the reforms his government has committed to. In practice, though, those seeking reforms will need to be more strategic, prioritizing the steps most likely to bring immediate change.
South Sudanese and their outside partners should start by coalescing around the demand for a single, designated, transparent oil-revenue account, as required by the nation’s law, and which the government agreed to create in both the peace deal and its agreement with the IMF. They should also insist that its balance and activity be regularly disclosed publicly, in accordance with South Sudanese law.
That would be a key first step toward the regular disclosure of South Sudan’s revenues and loans — without which credible public finances are all but impossible.
Other steps will also be necessary. Most urgent is the immediate disclosure of all government revenues and debts, a prerequisite for almost all other critical reforms as well as for rebuilding trust. This should include the timely publication of accurate budget documents, expenditure sheets, oil marketing reports, and information on the allocations of oil to Nilepet and other off-budget projects – a practice that should end.
Until such transparency exists, donors and international financial institutions, including the IMF, should decline to provide further budget support.
Transparency alone will be insufficient. Corruption is endemic, manifested in tactics ranging from unbudgeted withdrawals, inflated procurement contracts, and “ghost workers” to exchange-rate manipulation and self-dealing oilfield service contracts.
The newly established Public Financial Management Oversight Committee needs to show it can deliver results by limiting the practice of unbudgeted withdrawals for private use and by ensuring that ministries produce regular budget and expenditure reports that reflect actual government spending. Given its rock-bottom reputation among donors, the government may need to accept external oversight and auditing.
There could be easy wins, too. Kiir’s entourage may retain the balance of real power, but an array of new officials, including longtime Kiir opponents, hold positions of authority in the unity government. They have already taken positive steps. In February 2020, the petroleum ministry, led by a Machar ally, published the first Oil Marketing Report – a vehicle for sharing information on oil sales with the public – since June 2015. It has also committed to releasing monthly production data.
The government should build on these developments and, in accordance with its own laws, ensure regular and timely public reporting of oil production and exports. Donors could support Internet portals that regularly update oil production and revenue figures and make key documents, including laws and marketing reports, more easily available to a wide audience.
Enforcing promises
Few expect Kiir to loosen his grip on state finances of his own accord, given that his mode of politics relies on patronage networks and off-budget financing. To increase pressure on his administration, South Sudanese – particularly civil society and religious leaders, but also disenchanted politicians – should to the degree they can do so safely build a coalition with regional allies and (where helpful) donors to coordinate their messaging, driving home the point that South Sudan cannot fix its politics without restoring credibility to its public finances.
South Sudan’s neighbors can be of particular assistance. Sudan could help shed light on South Sudanese oil exports that pass through its territory by disclosing more about its own oil industry, as it has pledged to do. Kenya and Uganda should strengthen and enforce regulations to combat money-laundering, particularly in the commercial banking and real-estate sectors, which are benefiting from the proceeds of South Sudanese corruption.
Both countries have incentives to do so. Uganda has landed on the FATF’s “grey list,” leading the EU to designate it as a “high-risk third country.” Kenya’s next assessment under the FATF framework is underway, with results expected in 2022.
Donors, meanwhile, should better articulate both what they expect South Sudan’s government to do and what it might get in return – and stick to these priorities and commitments. They and the IMF must resist the temptation to latch on to any single reform as proof of South Sudan’s commitment to change. For example, President Kiir might well offer greater transparency over non-oil revenue streams in exchange for more budget support — but oil revenues are where the rot in South Sudan’s finances originates. The IMF in particular should not take transparent management of its loans to South Sudan alone as evidence of meaningful progress.
Many donor officials expressed frustration or surprise at the IMF’s sudden disbursement of support to South Sudan in late 2020 and early 2021, without any coordination over how this might be leveraged to encourage reform.
IMF officials maintain that the fund has a technical mandate and that it relies on its board to provide political oversight of its activities. Donor governments should accordingly increase their engagement with the IMF at senior levels, including with board members, to make sure that its efforts in South Sudan are not at cross-purposes with attempts to improve governance in Juba. Meanwhile, IMF officials should also recognize the deeply political nature of any assistance, and strive to align their efforts more closely with other diplomacy.
Finally, donors should not ignore their most important allies: the South Sudanese people. Kiir and Machar are deeply unpopular, even within their own camps. Diplomats should make clear to both the political class and the citizenry the costs and missed opportunities of their leaders’ failures. Donors should emphasize that they are prepared to reset relations with South Sudan, if and when the ruling elite embarks on a more credible political transition — which would likely require both Kiir and Machar to step aside. They should also speak up in defense of journalists and civil-society activists who focus on corruption or financial reforms and are routinely arrested or harassed because of their work, including by the National Security Service, which has been among the beneficiaries of IMF funds.
Rules for oil buyers
The small number of international firms that provide a large percentage of South Sudan’s revenues requires more attention, too. For starters, donors and external partners should state clearly to commercial actors under their jurisdiction that they expect them to follow the law, including routing all payments to the single designated oil account and making sure their contracts expressly require compliance by all parties with South Sudanese laws.
South Sudan has sold a majority of its oil cargoes to companies with an established presence in Europe, while the rest went to firms with ties to China, Russia, and the United Arab Emirates. While Western governments may be the most likely to do so, all these governments should encourage those companies to disclose all payments and loans to South Sudan. They might be willing to do that if urged to do it collectively; some companies already do it in other countries where they operate.
Banks and insurers, too, should require that all contracts by clients comply with South Sudanese law, which would help protect their reputation and guard against legal risks. Transparency among foreign commercial partners could also motivate Juba to open its own books, since these disclosures would mean that South Sudan itself has less to hide.
Objections that such disclosure requirements, if imposed solely or primarily by Western governments, would only lead Juba to favor non-Western firms or force Western firms out of the South Sudanese market are misplaced. South Sudan is not in a position to turn away business, while shrinking profits have nudged most traders to look for new markets, rather than abandon them. Oil companies, moreover, have regularly disclosed payments elsewhere when legally required to do so in the U.S. and EU, and commodity traders have slowly started to report under voluntary standards established by the Extractive Industries Transparency Initiative.
Even if some Western firms did leave the South Sudanese market, nothing suggests that their present trading or disclosure behavior is currently any better for South Sudan than that of the non-Western firms that could replace them.
Corralling these commercial actors will require governments to open formal or informal channels with their management. At present, the companies complain that messages concerning commerce in South Sudan, including industry-wide alerts, are vague and inconsistent. Donors can provide more regular advice on corruption risks in South Sudan, as the U.S. and UK have begun to do, while taking care not to discourage responsible investment and acknowledging that companies are wary of being treated as foreign-policy tools. Yet companies should be aware that their involvement in South Sudan has clear reputational and regulatory risks should they not follow the law.
Unappealing alternatives
If South Sudan’s leaders fail to carry out meaningful reforms, as their track records suggest will happen, donors face a range of unappealing options.
Additional targeted sanctions are one, although while they can shift individual behavior at key junctures, they are unlikely to bring systemic change. The costs can also be high and indiscriminate; even targeted sanctions can throttle legitimate businesses and cut off civilians from banking services. Still, countries such as Kenya, Uganda, the U.S., and the UK could do more to pressure the ruling elite, notably by threatening to seize assets or end family education privileges abroad, especially if they tied that to specific demands and commensurate positive incentives. If countries applied such pressure in conjunction with conditional offers of IMF or other donor support, then donors could employ a strategic carrot-and-stick approach that has thus far been lacking.
Furthermore, the U.S., UK, Switzerland, and the EU could consider requiring special licenses for people and businesses under their jurisdiction to operate in South Sudan that are conditioned on transparency measures and compliance with South Sudanese law. Trade with South Sudan’s oil sector would thus require a permit from relevant government authorities. The EU insists on a similar license for exports to Russia and Iran, while the U.S. already requires licensing for the export of certain goods to 15 companies in South Sudan.
A licensing regime could make the purchase and advance purchase of South Sudanese oil, as well as the financing and insurance of such transactions, subject to a permit requiring public disclosure of all related payments to the government as well as demonstrable adherence to other laws. The threat of such regulation could also be used to encourage commercial actors to work with donor governments on voluntary collective disclosure of their activities in South Sudan.
Some South Sudanese believe that outside assistance is also entrenching a predatory elite.
Donors’ long-term presence in South Sudan risks becoming a clear moral hazard, should it allow the government to keep neglecting its population. But the nuclear option of threatening to limit or cut off aid if South Sudan’s leaders continue to pilfer oil funds is polarizing, and rightly so, given the potential humanitarian fallout. In any case, few donors are willing to seriously consider any strategy that risks hurting the South Sudanese people. Rather than speculating about this possibility, they should work harder to make sure that less assistance falls into the hands of the Juba elite through logistics subcontracting, rent, and exchange-rate manipulation, and by expanding outside Juba as much as possible. They could also consider shifting more assistance to direct cash transfers in rural areas, as is being tried in Somalia and Sudan.
The only durable route to fixing South Sudan’s finances and the aid conundrum is through its politics. Financial remedies alone will not fundamentally change the predatory winner-take-all system. As Crisis Group has previously argued, the South Sudanese should agree to some form of decentralization to reduce the government’s power. Donors who have grown frustrated with the country’s political quagmire should push regional leaders and the African Union harder to convince the ruling elite of the need for a more consensual form of governance. Many South Sudanese, fearing more power struggles, desperately want a political reset: The National Dialogue, which concluded in 2020, called on both Kiir and Machar to step aside instead of competing in forthcoming elections, possibly scheduled for 2023.
Paying to abandon oil?
The South Sudanese and their long-term donors also need to start thinking about South Sudan’s inevitable transition away from a fossil-fuel economy. When the oil wells dry up or stop producing, as they eventually will, South Sudan will become much more reliant on state-level administration and revenue collection, as well as local economic growth. That is yet another reason why authorities should speed up the devolution of power, a widespread demand of the South Sudanese population.
One fairly novel option that donors could consider would be to offer conditional budgetary support in exchange for leaving oil in the ground. Some observers are already arguing that oil-dependent countries, especially those prone to conflict, may need to be coaxed away from fossil fuels with financial assistance.
Paying Juba not to produce oil might be too much for some donors to swallow, particularly given that it could conceivably renege on that pledge after a year or two and pocket both the assistance money and the oil revenues (although any such assistance could be turned into hefty debt obligations if the government reneges on commitments to keep crude reserves in the ground).
Nevertheless, testing this idea in South Sudan could make sense for several reasons. Its oil revenues are small for an oil-dependent economy, and donors are already deeply invested in the country’s welfare. More critically, in few other places does the opacity of oil money’s flow so clearly hinder a move away from conflict. Donors could firmly demand that the government must be transparent in spending aid funds and accounting for them. These conditions could also include Juba exploring more non-oil sources of income and growth, such as agriculture or renewable energy. And aid could be devolved to state-level governments, in line with South Sudan’s constitution.
Conclusion
South Sudan’s finances are in ruins. The oil that was once expected to fund the development of the new state instead unleashed and then fueled a bloody power struggle. Its leaders have emptied the country’s coffers, siphoning off its oil income and mortgaging its future oil revenue. That has helped keep President Kiir and his allies in power, but it has come at great cost to the population and is preventing a broader political settlement that could stabilize the country. The South Sudanese and external partners should focus on key reforms that will bring transparency and accountability to its mismanaged public finances. Delaying that any longer will only further isolate the country as it nears a time when it will need all the help it can get.