China’s role in South Sudan’s economic development

12 October 2017 | 10:08

China’s role in South Sudan’s economic development

Oil installation in South Sudan. Photo: Shannon Orcutt

 

South Sudan became independent on 9th July 2011, after decades of civil war against the North. The world’s youngest nation almost represents a perfect textbook example of a small isolated economy. It is small both in terms of population and economy. As a country that is geographically bigger than France, there is only one-fifth of the French population. In terms of the economy, according to the IMF April 2017 WEO database, the estimated GDP of South Sudan contributes less than 0.01% of the global GDP in 2016. It is also land locked with limited infrastructure that connects the rest of the world. As a result of its size and production capabilities, South Sudan must rely on imports to meet the demands for daily consumption. Production and exports other than oil are minimal.

 

About 80% of the South Sudanese lives in rural areas. The highly dispersed population makes it difficult to harness economies of scale and specialization. Consequently, the country’s chances to succeed in rapid industrialization, raising productivity, and ultimately ascent out of poverty are already very slim. Poverty and economic stagnation often result in conflict and the war, which further damages the economy, and in turn reproduces even more conflict (Collier 2007). To break this endogenous cycle of poverty and violence, external forces are required to play a role in supporting economic development in fragile countries like South Sudan. This article solely focuses on China’s role in economic development in South Sudan, putting political engagement aside. I recognize that, more than often, political and economic engagements are intertwined with each other, but this article will focus more on economic development. I argue that China has demonstrated itself as a trading partner, a pillar in the extractive industry (even in times of crisis), and a supporter of South Sudanese infrastructure.

 

China has been the largest trading partner of South Sudan since its independence. More than 80 percent of total exports from South Sudan have been shipped to China. Exports to China increased from US$499.5 million in 2012 to a record high level of US$4.3 billion in 2014 and reduced to US$1.4 billion in 2016 reflecting both falling production levels and international price for crude oil after 2014. In terms of imports from China, a steady increase from 11.9 percent of the total imports in 2012 to 24.6 percent in 2016 is observed.

 

The oil sector is probably the most important sector when trying to understand China’s economic presence in South Sudan. The sector now contributes over one-third of GDP, more than 80 percent of the total exports, and over 90 percent of the fiscal revenues. Since the sector is capital intensive, few jobs are created directly, though jobs are creating indirectly in other sectors in the economy.

 

The pursuit of vast oil reserves in South Sudan, which some may consider as naked imperialism, was not as easy as one might think. China National Petroleum Corp (CNPC) first opened its subsidiary in South Sudan in August 2011. Before the independence of South Sudan, CNPC enjoyed a rate of return of roughly 15 percent on investment in the oil fields in Sudan. This has since been impacted by the unrest in South Sudan. In 2012, due to the disputes between South Sudan and the North over the vested interests in the oil sector and the oil-rich region of Abyei, the operation was banned by the Government of South Sudan (GoSS). Subsequently, the conflict aggravated into fighting leading to the Heglig Crisis. CNPC’s operation in South Sudan did not resume until May 2013 and it did not last very long. In December 2013, the country fell into civil war again and oil fields were at the epicentre of the conflict. All the foreign workers from other shareholders were evacuated except the Chinese. CNPC kept a small team on ground to operate at minimal level, which has won over the supports and trust from the current regime.

 

Like many other mining activities, the complex nature of oil exploitation means CNPC is only one of the major players in the sector. There are various other foreign and local state companies such as Petronas (Malaysia), ONGC Videsh Ltd (India), and Nilepet (South Sudan) who own significant shares in various oil blocks. There are no refinery facilities in South Sudan, hence crude oil must first be transferred by pipeline to Khartoum for processing and then sent to Port Sudan for shipping.

For every barrel of crude produced in South Sudan, CNPC must pay an overall US$24 as transit fees charge to Sudan as well as costs for processing. With low international oil price, the company is making a financial loss for every barrel it sells. In 2016 alone, CNPC made a loss of US$560 million. From a profit maximisation perspective, the optimal solution would be to temporarily shut down operations, but CNPC still keeps production running, however small it is. It might be seen as part of China’s political mission that state-own companies are obligated to carry on operations in overseas investment. Regardless the underlying intentions, the continuing production does act as an essential stabilizer to South Sudanese economy

 

Finally, apart from the oil sector, Chinese state-owned and private companies work in various sectors such as construction, telecommunication, hotel and services. Up to May 2015, there were over 140 Chinese companies and institutions registered in South Sudan. However, without the military protection that exist in the oil fields, these sectors face difficulty in carrying out operations. The Juba Airport Renovation Project offers a good example. China Harbour Engineering Company operates a US$160 million contract to renovate and expand the Juba airport, but the project came to a halt due to the on-going civil war. The Chinese government is also actively involved in building hospitals/schools, providing medical aids, and bringing officials from various government entities to China for trainings. China’s ambitious One Belt One Road strategy may bring new opportunities in improving transport corridors which boosts trade and economic development.  

 

Many China-South Sudan analyses largely focus on questioning China’s fundamental interests in South Sudan. Whether is it is a modern imperialist or a genuine peacemaker, the dire needs of South Sudan at its current development stage are forgotten. An unstable political environment and unprecedented low oil prices in the international market have seriously devastated the South Sudan economy. CPI skyrocketed from 161.5 in 2014 to 1184.2 in 2016 and exchange rate at the parallel market depreciated dramatically from 5.8 SSP/USD in December 2014 to 90.9 SSP/USD. After November 2015, the official rate was also forced to adjust downward from 2.9 SSP/USD to 78.4SSP/USD. China has continued to work with South Sudan throughout this political and economic crisis.

 

No country can prosper when domestic conflicts are on-going. The key priority is to end the violent conflict and to prevent the risk of the recurrent cycle of violence (Mueller and Tobias, 2016). China could be a game changer in boosting the economy which may contribute to ending the conflicts. In fact, China is already quietly deviating away from the long-standing non-interference in other nation’s internal affairs policies due to its increasing economic presence in the region.

 

Saite Lu is currently a third year PhD candidate at the Centre of Development Studies, University of Cambridge. Prior to this, he was a Senior Economist/ODI Fellow at the Ministry of Finance and Economic Development in Sierra Leone. Upon completion of the fellowship, he continues to work as a macro-fiscal adviser for the Budget Strengthening Initiative (BSI), providing technical support to the governments of Sierra Leone and South Sudan. He has an MPhil in Economics from the University of Oxford and a BSc in Economics from the University of Ulster.

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