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Distortions to Agricultural Incentives

in Sudan

H. Hamid M. Faki and Abdelmoneim T. Ahmed

Agricultural Economics and policy ResearchCenter

Agricultural Research Corporation, Khartoum

Agricultural Distortions Research Project Working Paper xx, October 2006

This is a product of a research project on Distortions to Agricultural Incentives, under the leadership of Kym Anderson of the World Bank’s Development Research Group. The authors are grateful for helpful comments from workshop participants and for funding from World Bank Trust Funds provided by the governments of Ireland, Japan, the Netherlands (BNPP) and the United Kingdom DfID).

This Working Paper series is designed to promptly disseminate the findings of work in progress for comment before they are finalized. The views expressed are the authors’ alone and not necessarily those of the World Bank and its Executive Directors, nor the countries they represent, nor of the countries providing the trust funds for this research project.

1

Distortions to Agricultural Incentives in Sudan

H. Hamid M. Faki and Abdelmoneim T. Ahmed

Introduction and summary

Many studies available from literature sources have considered, in one way or another, macroeconomic policy issue in Sudanese agriculture and their effects on its performance and incentives, e.g., Hag Elamin and El Mak (1997), Ali and Elbadawi (2002), Amal Mubarak (2006).Others have addressed related issues such as the comparative advantage of some products and related policy issues, e.g., Hassan and Faki (1993),Hassan, Faki and Byerlee (2000), Faki, Gumaa and Ismail (1995).The current study is more comprehensive in the sense of commodity coverage and temporal dimension.It addresses the state of policy measures and estimates of distortions to agricultural incentives, with focused computations for most of the major Sudan's agricultural products, comprising 12 of such commodities that contribute some 70 percent of the GDP and rough estimates of the remaining 30 percent.The time coverage from 1955 till 2004 provides a decent overview of the path of policy effects for a long time period.The study gains its importance form that of agriculture as the most important sector in Sudan's economy; contributing some 38.4 percent to the GDP, providing livelihood for over 80 percent of the population and employing about 70 percent of the active labor force.

A salient feature of development of Sudan's agricultural growth since independence are government hegemony over production, marketing and trade of agricultural products through a series of public-sector-led development plans, and close control of foreign exchange transactions that, until recent years, had featured as local currency overvaluation.Trade flows were for a long time subjected to quantitative controls and licensing.Many attempts were made, particularly during the 1980s to contain overvaluation with interventions from the World Bank and the International Monetary Fund.Success has however been achieved as from the second half of the 1990s.The tariff structure remained to continue taxing exports, but such taxation has been removed in later years.The current average agriculture import tariff of about 34 percent is supportive to potential Sudan's products, and for further ensured support opportunities, Sudan's offer for WTO accession has been set at about 53 percent.

On the other hand, most of the investments had been directed to the irrigated sector, with notable neglect of the traditional sector in spite of its higher importance in the economy.Economic growth that is predominantly influenced by agriculture had been subject to alternating periodical negative and positive levels. While export orientation with expansion of cash crops has been an intrinsic characteristic of Sudan's agriculture, shifts to food crops via import substitution policy or for meeting food demands in Arab countries were evident in intermittent periods, especially during the 1970s and the early 1990s.

Policies since independence in 1956 are generally a continuation of those adopted in colonial time of high government-led development, land acquisition, production controls and emphasis on irrigated agriculture.Land and crop taxes, especially indirect ones, formed the bulk of government budget revenue at that time.

Distortion analysis has revealed long-time negative rate of assistance for producers, especially for exportables, with considerable fluctuations. The rate of assistance to importables depicts a declining trend for wheat during 1978-1993 and an increasing and positive one for both wheat and sugar as from about the mid 1990s.

Some pattern is also noticeable for the rate of assistance to exportables.Considering the group of exportables with no processing component, it is evident that sorghum's rate of assistance was mostly on the negative side, with an improving trend since 1989 that turned positive in later years.Millet depicts positive NRA in most years but assumes a declining trend.Cotton enjoyed mostly positive but declining assistance till the early 1990s when its rates started to rise steadily to reach positive levels in later years.Gum Arabic producers are the most hit by policy stance with a negatively increasing rate of assistance throughout the whole period.Of export commodities with a component of processing, sesame NRA was decreasingon the negative up to 1990; risingthereafter to turn positive in the last two years.Sesame oil processors had a more disadvantaged NRA but a higher DRA and, during the reform period since the early 1990s, their incentives were decreasing compared to the rising incentives for primary product producers.Groundnuts rate of assistance has been consistently negative for the whole period, with some improvement in the latter period starting 1996.The NRA for processors followed a similar pattern and like sesame, the period of reform seems to have a negative impact on processors’ incentives.Assistance to livestock was negative for sheep, cattle and goats throughout the whole period except for a few recent years.Yet a gentle improving trend is depicted for both sheep and cattle up to 1981, which reversed up to about 1991 and rose again thereafter taking both products into the positive zone.Goats' rate of assistance followed a closely similar pattern as from the early 1980s, yet goats' are not as an important export commodity.Camels enjoyed positive assistance during most of the 1970s and the early 1980s and the trend clearly increased on the positive mode as from the mid 1990s.

An overview of the rate of assistance of exportable primary commodities, averaged over periods corresponding to major exchange rate policy changes, depicts that for all products, except groundnuts, the period of high distortion (1980-1990) witnessed a worsening of the rate of assistance compared to the first period of low distortions (1955-1979), while in the third period of reform (1991-2004) more favorable rates of assistance to producers are evident for all crops except cotton, and was substantial in some cases such as sorghum, sesame, millet and live camels.

Justifications for the evolution of policy changes can be traced back to certain policy measures as well as to prevailing market failure.Wheat's variable and odd rates of assistance in some years were mostly due to government price determination with no adequate response to international prices.The declining and rising wheat NRA/DRA trends were attributable to exchange rate policy and price controls in different periods.Sugar is largely a government monopoly providing notable government revenue from its production and trade, and in such a case assistance to producers might not be a relevant concern.

For exportable commodities, fluctuations in the rate of assistance are most likely influenced by the controls on exports (and imports), but the relaxation in foreign exchange controls since 1993 has had mitigated taxation on producers.The situation of millet – not a very important export commodity - is probably associated with the level of its integration in the international market, being higher in more recent periods.Movements in cotton rate of assistance are geared by producer price determination by the government and the world market situation.Gum Arabic trade, largely under state monopoly, is influenced by the high discrepancy between low set floor producer prices and high export prices.Although trade costs and local taxes might also be high, its highly negative and worsening rate of assistance is due to a combination of market failure and, probably to a lesser extent, to exchange rate distortions.Of the exportable commodities with a processing component, sesame’s rate of assistance can be argued to be mostly due exchange rate policy and minimum export price determination, although monopolistic competition could have also played a role.On the other hand, the DRA for the processed product might be due to the level of equilibrium exchange rate that would prevail in an undistorted market.

The negative assistance to groundnuts producers, although related to the policy dimension, might be largely due to internal market failure.The status for producer assistance to livestock reflects government control on exports and most probably market failure.But it is also responsive to exchange rate regulations, where with exchange rate reforms, producers started to enjoy a notable improvement in the rate of farm assistance.For all commodities, except for groundnuts, the rate of assistance was lower during the period of highly distorted exchange rates (1980s) as compared to the preceding long-time low distortion period, while the exchange-rate reform period has witnessed notable improvement.Throughout the whole period, however, situations of low incentive distortions (NRA close to zero) have been quite limited.

Prospects for national reforms would include continuation of the on-going foreign exchange rate policy reform to attain an efficient real exchange rate, relaxation of state and state-induced marketing monopolies along with a favorable environment for private sector involvement, removal of monopoly-like practices, continuation of policies advocating the removal of export taxes, setting the import tariff structure to such a level that strikes a balance between the need to raise efficiency and avoidance of harm to domestic producers, adoption of policies that encourage agricultural processing, and boosting the supply side in terms of both stability, quantity and quality via raising incentives and promoting technology generation and dissemination.

Growth and structural change since 1955

A brief account of Sudan's agriculture

The Sudan, with a total land area of about 2.4 million km2, is the largest country in Africa, with a population of around 37 million, growing at about 2.6 percent per year.By the most conservative estimates, more than 50 percent of the population is living below the poverty line of less than $1 per day.Poverty in The Sudan is mainly a rural phenomenon, and the level of poverty is closely linked to the strength of agricultural productivity.The economy is predominantly agricultural.Agriculture accommodates three major farming systems: (i) irrigated, (ii) rain-fed semi-mechanized; and (iii) rain-fed traditional agriculture, accounting respectively for 28.7 percent, 9.1 percent and 60.8 percent of agricultural production.Within the sector, crop production accounts for 53 percent of agricultural output, livestock for 38 percent and forestry and fisheries for 9 percent.About 60 percent of all crop production is irrigated, 7 percent comes from mechanized farming, and 33 percent from the traditional rain-fed sector.Ever since the food shortages in the1980s, the government has given attention to the production of food crops, resulting in large expansions in sorghum and wheat areas and output, often at the expense of the main cash crop, cotton, the production of which has declined by more than 40 percent since the mid-eighties. Livestock production is most prevalent in the traditional rain-fed farming systems, but is increasing in irrigated areas.

Although endowed with rich natural resources, the Sudan remains underdeveloped, primarily as a result of protracted civil strife and poor economic management.During the three decades of 1960 to 1990, the Sudanese economy witnessed continued deterioration reflected in low rate of growth, which sometimes registered negative levels.On the other hand, the same period registered higher levels of population growth leading to continued deterioration in the real per capita income.The poor economic performance reflected on other economic indicators such as deficits in government accounts, accelerated rate of inflation, deterioration in national savings, deterioration of the value of the national currency, and frequent food shortages.

Performance of the agricultural sector and the economy

Economic development in the Sudan has largely been influenced by the country's colonial history, where export orientation of its agriculture has been maintained both during the colonial rule and immediately after independence in 1956 (D'Silva and El Badawi 1988).Agriculture has always remained the main sector shaping development patterns and growth.It is also evident that since the inception of the first agricultural development efforts, the tendency has been maintained by the government to practice paternal attitudes over the whole economy, especially the production sectors through excessive regulations (FAO 1997).A major feature of Sudan's agricultural development has been the focus of expansion in irrigated agriculture and mechanized rain-fed farming; a situation that started early during the colonial era (as will come later) and continued after independence.The vast traditional rain-fed sector, which accommodates the majority of the population and contributes significantly to foreign-exchange earnings, has been neglected (D'Silva and El Badawi 1988).For example, besides the low share of the agricultural sector in total public expenditure of about of only 0.9 percent of GDP in 2004, the traditional crop and livestock sectors received mere 25 percent of this meager allocation (Abdalla et al. draft undated).

The contribution of agriculture to the country's GDP has remained paramount (Figure 1).Its contribution ranged from 29 percent to 46 percent during the stated period, but mostly remained above 30 percent, with an overall average of 38.4 percent, and surpassing in many years that of the services sector, which itself is highly dependent on agricultural activities.The share of industry was relatively low, but increased during the last six years.

Yet agriculture growth has been variable and negative in many years.Especially in the period 1979-1985 growth of the agricultural sector in real terms was negative in all years with growth rates ranging from -2.5 percent to 23.6 percent, except in 1981/82 when an exceptional record of 32 percent was realized (Hag Elamin and El Mak 1997).Since agriculture is the main source of economic growth in the country, GDP growth had been variable and low, with an annual growth rate of -0.3 percent during that period, implying a decline in real per capita GDP with population growth.

Ali and Elbadawi (2002) analyzed Sudan’s economic growth considering five episodes of different lengths based on visual inspection of data series in the period 1960-1998.The resulting indicators shown by Table 1reveal that negative and positive growth had existed in alternating sub-periods, with a positive, but insignificant, growth trend for the whole period and a very low coefficient of determination.

Agriculture has also been the major source of foreign exchange till the discovery and export of oil in 1999.It typically contributed close to 100 percent of total value of merchandize exports trade till 1999, when its relative share decreased giving way to oil exports (Figure2).As can be seen from the Figure and Table (2), both nominal export value of total agricultural commodities and agriculture share in the total value of merchandized exports have been maintained at high average levels with small variation till 1998.Thereafter, both variables have dropped to notably low levels, while the value of total merchandize trade acquired a steady and substantial rise. The coefficient of variation of the share of agriculture was very low in the first period, denoting share maintenance while it increased in the second period as a result of the negative change.

On the other hand, agricultural exports have been steadily increasing in value, worsening the agricultural trade balance.This is reflected in Figure 3, which displays the ratio of the value of imports to the value of exports in the period 1961-2004.In spite of the variation that reflects Sudan's high agricultural production variability, a clear increasing trend is evident for the value of imports relative to those of exports.The straight-line trend shown in the figure depicts that the gap has been widening at a trend value of 2.1 percentage points.

The export structure of Sudan's agricultural sector has been since earlier times characterized by the dominance of five main commodities, namely cotton lint, sesame, groundnuts, live animals and gum Arabic.In the period 1961-2004, the total share of those commodities accounted for levels ranging from 49 percent to 90 percent (Figure 4), with a whole-period average of 77 percent.

Cotton dominated the export group of agricultural products – though with substantial annual fluctuations – till 1989 when its export value started to slump.From 1996 and up to recent seasons, it had been overtaken by other commodities.Seemingly steady, yet slow, improvements have been realized for the export value of live animals and sesame; overtaking that of cotton during the last ten years.Such developments have been mostly geared by world-market prices and conditions of domestic production.Gum Arabic, which was a strong competitor to both sesame and groundnuts prior to 1994, has experienced notable deterioration in its export value, being influenced by poor attention to its production and low domestic supply rather than world-market prices.Groundnuts exports started to deteriorate since the early 1980s, most probably on account of low production and increasing processing and internal consumption of its oil.