Dollar squeeze adds to economic hardship in Sudan

Scanning his company's 2012 financial statement, El Rashid El Amin Hamid, head of Sudan's biggest pharmaceutical maker, should be celebrating - sales shot up 70 percent while marketing costs plummeted as strong demand reduced the need to advertise.

But the entrepreneur still has a problem. How does his company get dollars to import raw materials for the antibiotics, malaria pills, diabetic tablets and other drugs it makes, and, if it can access hard currency, at what exchange rate?

"We need to import materials for our drugs which are paid for in dollars, but it's very difficult to get dollars through the banking system," said Hamid, director of Amipharma Laboratories, sitting in his spacious office in Khartoum's Bahri industrial district.

Sudan is battling its biggest economic crisis for decades as it struggles with a severe shortage of hard currency following the loss of three quarters of its oil production due to South Sudan's independence in 2011. Oil revenues were the main source of revenue for Sudan's budget and for foreign currency needed to pay for vital imports including food and medicine.

The situation has deteriorated sharply in the past few weeks as new tensions with South Sudan dashed hopes that oil exports from the South would resume soon and pass through Sudan for a hefty fee. South Sudan shut down its oil production a year ago after failing to agree a pipeline fee with Sudan.

Economists say Sudan's central bank and commercial lenders have been finding it increasingly difficult to supply the market with enough dollars. That forced people travelling out of the country, as well as exporters, to go to black market traders.

But when the Sudanese pound hit a record low in late December with black market dealers demanding a rate of 7.1 pounds to the dollar - compared to an official rate of 4.4 - the central bank, which does not disclose its foreign reserves, launched a crackdown on the black market.

Within days, security agents had arrested dozens of dealers, seizing their cash, market sources say. Most street vendors went into hiding or left Khartoum.

The crackdown has brought down the dollar rate to 6.5 pounds on the black market. But now there is an even bigger problem: with the black market frozen it is almost impossible to obtain or even change dollars.

Instead of going to a bank and using the poor official exchange rate as the government had hoped, many Sudanese with dollar reserves are sitting tight, depriving the economy of a much-needed injection of hard currency.

The pharmaceutical industry, one of the country's main industries along with food, mining and textiles, is being hit especially hard by the freeze in the black market and by sharp currency swings, which saw the pound lose as much as 15 percent in a month on a few occasions last year.

Depreciation of the pound has pushed inflation above 44 percent and is making it harder and more costly for Sudanese to access drugs. That raises the risk of dissent and is adding to the hardship of the 32 million Sudanese who have endured decades of ethnic strife, poverty and economic crises.

While the country has avoided an "Arab spring", Khartoum and other large cities have seen small student protests against both high food prices and austerity measures imposed to plug a 6.5 billion pound ($1.5 billion) deficit caused by lost oil revenues. Many ordinary people struggled to pay for drugs or hospital treatment even before the currency crisis.

"We don't have some heart drugs and diabetic pills at the moment," said a pharmacist in downtown Khartoum, who did not wish to be named. "Some foreign products have disappeared or are very difficult to get," she said.

The government has insisted it will ensure supplies but pharmaceutical traders stopped ordering some foreign brand drugs when the pound went down. That has triggered a surge in demand for cheaper local versions offered by companies like Amipharma.

"We cannot meet demand at the moment," said Hamid.

But the jump in sales is offset by a rise in costs as raw material imports paid for in dollars account for a third of the company's equipment operating expenses.

"It's a challenge doing a good job," said Hamid.


With Sudan largely cut off from international financial markets due to U.S. trade sanctions, local banks have never played a dominant role in the economy. Most Sudanese do not have bank accounts, while many large firms such as Amipharma are family-owned and use money traders in and outside Sudan to obtain dollars.

Since South Sudan's secession the black market has become a problem because the loss of oil revenues has left the central bank with insufficient dollars to keep the gap between the official and black market rates tight.

Last July it nearly halved the official dollar rate to 4.4 pounds, from 2.7, and allowed licensed dealers to offer a rate above 5.5 in an attempt to encourage millions of Sudanese living abroad to send money home via official exchange bureaus.

Most remittances however seem to have been exchanged on the black market.

The government hopes a $1.5 billion loan from a Chinese bank, announced by Sudan last week and guaranteed by Chinese state oil producer China National Petroleum Corp - the biggest investor in the oil industry in Sudan and South Sudan - will stabilize the currency. China has yet to confirm the loan.

But Harry Verhoeven, a Sudan expert at Oxford University, said Khartoum would not be able to keep the black market frozen for long as that would risk paralyzing the economy because people are unwilling to sell dollars at the official rate.

"This is clearly unsustainable," he said. "They'll have to backtrack ... The main money traders in Sudan, these are guys who get picked up here and then the next day government officials themselves go to these guys to change money."

But even if the dealers come back soon, the highly volatile exchange rate and the loss of oil production are making Sudan a difficult place to do business, despite its potential as a cheap manufacturing base from which to export to emerging markets in Africa and the Middle East.

"We came here in 2006 when Sudan was a very good market with a stable economy," said Abdulrahman al-Shamiri, a Yemeni national who heads Azal Pharmaceutical Industries, a Sudan joint venture owned by investors from Yemen and Saudi Arabia.

"Now the economy is in shock."

While the currency crisis continues, Azal Pharmaceuticals is holding off on plans to open a second plant to serve neighboring African countries such as Chad or Uganda.

"We will see how it goes," Shamiri said. Pulling out of Sudan is not an option though, despite the problems.

"We would make big losses and lose our investment. So we'll stay."

($1 = 4.4150 Sudanese pounds)

(Editing by Susan Fenton)