How an oil dividend might be possible in South Sudan

OpenOil continues its’ series of analyses on the possibility of oil dividends commissioned by the Center for Global Development

As South Sudanese is about to resume it oil production soon, we have tried to model the possibility of an oil-to-cash dividend for the newly independent state. The thinking, as ever, in a direct distribution is that it would help the South Sudanese government engage with its citizens, shed light on its finances, its resource incomes and expenditures, and make it harder for officials to siphon off revenue streams. At the same time, poverty could be directly reduced and the economy diversified based on regular incomes for every adult citizen.

But the challenges of mounting any kind of policy initiative on this scale in South Sudan are tremendous. There is nothing approaching a nationwide infrastructure, either physically or in terms of telecoms, illiteracy is high, poverty endemic and the machinery of government  absent from most of the counrtry. We address each of these challenges in turn in the coming paper but for now our working principle is that the government faces these kinds of challenges in implementing any kind of policy whatsoever and in fact the oil dividend is more suited than most initiatives to be the train blazer for establishing government presence across the world’s newest country. In other words, as they say in the world of software, we’re turning a bug into a feature.

Oil-to-cash dividends already exist in the form of the Alaska Permanent Fund and have been proposed for country specific contexts as diverse as Iraq and the Niger Delta. It is this idea of an oil-to-cash dividend that we would suggest for South Sudan, a newly born nation with some resource wealth but appalling poverty, widespread corruption and a government seeking accountability.

Under the current agreement, signed on 27 September, oil revenues will provide the new government with an estimated $3 in 2013, rising to $5 billion in 2015. To date, 98 % of government revenues have depended on oil, meaning that South Sudan could fall victim to the “resource curse” a combination of an oil dependent economy, corruption and, in general, continued underdevelopment.

 To avoid this, we have modelled the possibility of a monthly oil-to-cash dividend of around $7 in 2013, rising to $11 in 2015. Our estimates take into account IMF predictions of future government expenditure levels, possible falling oil production levels and the costs arising from transit fees and an outstanding $3,028 billion owed to the Republic of Sudan to make up for the oil revenue loss since January this year. (The financial agreement is outlined in detail in the Addis Ababa Agreement signed on 27 September 2012)

 While the government is currently stripped of cash and faces serious budget problems, the dividend is calculated at a relatively low rate (taking only approximately a maximum of 15 % of the yearly estimated budget). Still the impacts on South Sudan´s future development could be striking. Statistical projections estimate that poverty could be reduced by up to 10 percent.

 The dividend would be a ´smart dividend´ integrated into other government initiatives using a matching funds principle in areas such as health insurance, for example, or vocational programs.

 More importantly, it would be a key building block in creating the state-citizen contract as the monthly dividend would serve as a tax base and taxes and, according to social contract theory, build the basis for accountability between a state and its citizens. In short, with the dividend South Sudan´s government would have to disclose its finances, and citizens would have an incentive to scrutinize those finances and built more trust into their new government. The dividend would therefore increase credibility in a government whose own president has demanded the return of $4 billion of public money which has gone missing since 2005.

 But how shall the money be distributed to the people? First of all, eligible recipients could be registered and identified via digital finger print scanners. The money itself could simply be paid out by hand or through an innovative mobile money transfer technology, first developed in scale by M-Pesa in neighbouring Kenya in 2007. While South Sudan still faces a comparatively low rate of mobile phone penetration rate (about 15% compared to an average of 41 % in Africa) the project could start off with the distribution of mobile phones to the entire adult population.

 More widespread access to mobile phone technology in South Sudan would, however, not only enable the distribution of the dividend in a easy, reliable and transparent way, but would also create a basis for money in a cashless society and for further mobile technology-based development and transparency initiatives. For instance, the programme would enable the introduction of SMS-based information platforms as Frontline-SMS. Maybe an oil-to-cash dividend could start a small technological, transparency and development revolution in South Sudan?

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