Can gold save Sudan’s economy (and regime)?

Can gold save Sudan’s economy (and regime)?

The Sudan has many problems, among them several civil wars and a host of unstable neighbours. But the biggest issue, especially from the perspective of the authoritarian government under president Omar al Bashir, may be the tanking economy.

The trouble began in earnest when South Sudan reached its independence, taking a large share of Sudan’s oil reserves with it. Later, the countries almost went into a full-blown war over the transport fees that Sudan levies on the sole pipeline leading out of the South Sudanese oil fields and Khartoum had to reduce these rates as a result.

The consequences were bitter for Sudan: the country lost more than half of its government income and two-thirds of its foreign exchange earning exports. This contributed to a massive inflation of over 30 percent since 2012. The dire fiscal situation led to deep cuts in government spending, especially concerning fuel subsidies. As a result, the country experienced the biggest anti-regime protests since the last coup d’État more than twenty years ago.

Trying to turn the situation around, the Sudanese government started to look at its considerable and gravely underdeveloped gold reserves. Encouraged by rising gold prices on the world market after the financial crisis in 2008, Khartoum decided to make gold the new oil.

This hope that gold can save the Sudanese economy and by extension the regime in Khartoum still persists:

The government is now consulting with international companies and contractors in an attempt to fill the hole left by lost oil revenues with gold exports.

Sudan’s Ministry of Minerals, which oversees all mining activity and licensing, has contracted BGS International, a company spun-off from the British Geological Survey, to help restructure its own state surveying organisation, the Geological Research Authority of Sudan (GRAS). […]

Gold is already rising in prominence in Sudan’s economic profile. In 2008 the sector represented just 1 percent of exports with a value of $112m, but this year gold will total more than $2bn in earnings, or over 40 percent of all exports. By contrast the value of oil exports has fallen to just more than 20 percent of its 2008 peak. [Gold: a glimmer of hope for Sudan’s economy – This is Africa]

But, especially compared to oil, gold has several disadvantages.

Artisanal mining and smuggling

As This is Africa rightly points out in the article linked above, a large part of the gold mining going on in Sudan happens in the informal, artisanal sector. Small-scale mining activities are hard to regulate and control, especially because many of them are located in areas which are contested between by armed groups.

As a result, the government has only limited direct income from the production and trade of the precious metal. A drive to bring more foreign investors and large-scale, formal mining operators into the country could change that, but this will take years. Meanwhile, hundreds of millions of dollars worth of gold are produced without any government interaction and much of this is probably exported informally as well.

What is gold worth, anyway?

Even if the government is able to channel a substantial part of the gold revenues into official channels, there remains the question how big the resulting pie will be that the regime hopes to distribute to quell dissent and strengthen its support base.

At the time of South Sudan’s independence, the price of gold was near it’s all-time high of 1,900 Dollars per troy ounce. It reached these record heights as a result of the financial crisis of 2008, when private and institutional investors started looking at gold as an alternative to the volatile stocks market. Gold continued to trade at record levels throughout 2012, but went into free fall in 2013, losing more than 35 percent of its value. Today, a troy ounce trades at slightly above 1,200 Dollars.

This poses two problems for Sudan: Firstly, international mining companies are already looking at cost-cutting measures. Mines that were opened or expanded in recent years are getting closed or are experiencing lay-offs in Ghana and Burkina Faso. A continued fall of world market prices for gold will greatly reduce the likelihood that mining companies will invest in Sudan. Secondly, with gold now representing 40 percent of Sudan’s export value, the direct economic impact of falling gold prices for the country is immense.

Out of the frying pan into the fire

With betting on gold after its oil revenues plummeted, the regime in Khartoum may have made a big mistake. Almost certainly, it will not be able to realise the hopes it had for expanding the business with the precious metal in the near term. With oil production in South Sudan (and the corresponding transport fees) threatened by burgeoning civil war there, president Omar al Bashir will likely be pressured to enact further austerity measures. If the pattern of the last year holds, this will lead to further protests, seriously testing his hold on power.