South Sudan became the world’s newest nation on 9 July 2011, making it Africa’s 54th country. Independence brings enormous opportunities to South Sudan to increase its integration into the regional economy but also substantial challenges to put in place a policy and security regime that facilitates cross-border trade. The 2005 peace accord that ended Africa's longest-running civil war has led to a significant growth in demand in South Sudan, ushering in a new era of increased regional trade, in particular, with Uganda. A new Africa Trade Policy Note highlights the recent patterns of trade between South Sudan and Uganda, and draws attention to significant constraints that are limiting the prospects for enhanced cross-border trade.
Bilateral exports from Uganda to Sudan have skyrocketed from $60 million in 2005 to $635 million in 2008. Trade between Uganda and South Sudan is highly asymmetric with the volume of exports from Uganda being disproportionately larger than the volume of exports from Sudan to Uganda. While South Sudan lacks local production capacity, its oil revenue transfer from Khartoum, based on the wealth sharing agreement in 2005, has financed those imports from Uganda as well as from elsewhere in the region and the world.
Also, imports from Uganda largely go through informal channels. However, this rapid growth in cross-border trade stalled after 2008. Formal trade declined in 2009 as a result of import controls imposed by the Central Bank of Sudan due to concerns over foreign exchange reserves. A substantial drop (55 percent) in informal trade occurred in 2010 following violence and harassment against Ugandan traders in South Sudan and fears of insecurity during the general election (April 2010) and in the run-up to the referendum (February 2011).
While there have been signs of a return of Ugandan traders to South Sudan since the peaceful conclusion of the referendum, and the drop in 2010 may be a temporary phenomenon, the magnitude of decline is nonetheless significant, showing how informal trade is sensitive to changes in local security conditions and economic policies.
The policy note identifies the most significant costs and constraints, both at and behind the border, to trade between South Sudan and Uganda, and how to address these problems in order to enhance bilateral trade. Lack of consistent implementation of trade policies at Sudanese customs raises the cost of trading; there is significant confusion and lack of clarity and consistency in implementing trade policies including tariff rates to be applied.
Also, limited opening hours causes significant fluctuations in the daily volume of traffic passing through Sudanese customs. Security is still weak at the border area for traders particularly those from Uganda, inhibiting the incentives to do business in South Sudan. Behind-the-border costs include high transport cost due to poor road conditions, multiple check points and roadblocks and numerous miscellaneous payments including informal payments collected at those locations, multiple taxes (state tax, VAT, county fees), as well as non-tariff barriers such as those arising from product standards and import licenses.
The note makes some policy recommendations for eliminating these constraints; improving the availability and quality of services provided at the customs through building staff capacity and extending hours of operation is crucial to increasing efficiency at the border. These are relatively simple steps and should be a higher priority than investments in hardware infrastructure and upgraded computer systems.
Regional training opportunities - cross-country learning from other Eastern African countries - may be an effective way to build staff capacity in South Sudan. Ensuring security for traders at, as well as behind the border is a critical step to sustain growth in cross-border trade. Improved clarity and coordination in various taxes and charges, both at the central as well as state levels, is needed to reduce trade-related transaction costs. Removal of roadblocks is essential and should precede investments to improve road quality.
* Blog entry by Gozde Isik on the Growth and Crisis Blog.
* The Trade Policy note was written by Yutaka Yoshino, a senior economist in the Africa Poverty Reduction and Economic Management unit with Ephrem Asebe and Grace Ngungi, both consultants. This work is funded by the Multi-Donor Trust Fund for Trade and Development supported by the governments of the United Kingdom, Finland, Sweden and Norway. The views expressed in this paper reflect solely those of the authors and not necessarily the views of the funders, the World Bank Group or its Executive Directors. The note can be accessed here.