Modelling the sources and impact of macroeconomic fluctuations in Sudan

Like many developing countries, Sudan has experienced different episodes of political and economic instability throughout its history. While it was a relatively good time during 1960s, Sudan has undergone significant fluctuations during the successive decades. This include oil price shock during 1970s, the civil war and drought in 1980s, regime change and economic policy change “liberalization” in1990s, oil boom over early 2000s and the situation has worsened over the last few years after the secession of the South Sudan in July 9, 2011. This secession has contributed to create severe macroeconomic imbalances and deteriorating considerably the economic conditions in Sudan. It resulted in losing some three-quarters of its oil production, half of its fiscal revenues, and about two-thirds of its international payment capacity. It has also driven the trade balance from substantial surplus to a large deficit. In response to these various turbulent events, authorities in Sudan adopted various policy choices to maintain macroeconomic stability, usually in the form of economic policy measures. However, the policies adopted have not been quite effective in stabilizing the economy. The economy is currently experiencing high inflation rate, unstable exchange rate, large external and internal deficits, low growth rate, high unemployment, and sever poverty. To adjust to this new economic reality, strong policy responses are required if the economy is to be put onto a sustainable growth path in the future. It is therefore seems timely for policymakers in Sudan to question what has gone wrong and what has been forgotten in an attempt to put it right in their future policy priorities. Toward that end, the current study aims to add value in supporting the country’s policy responses to mitigate the negative consequences of these turbulent events. This study focuses on modeling the sources and impact of macroeconomic fluctuations in Sudan by considering a set of major macroeconomic variables including: real output, price level, real exchange rate, and money supply as domestic forces and world oil prices and real output for Arab countries to represent the external forces. It also investigates the impact of different domestic and external shocks on the performance of the Sudanese stock market. In terms of methodology, the study applies the structural vector autoregression (SVAR hereafter) methodology to look at the dynamic interrelationships between key macroeconomic aggregates and it also uses a VAR(1)-GARCH(1,1) model to see how the Sudanese stock market responds to changes in fundamental economic forces. The estimation results of a SVAR model lead to the conclusion that the shocks in crude oil price and output for the Arab countries (external shocks) are less likely to explain the movement of domestic macroeconomic variables than shocks to domestic variables. For instance, external factors account for approximately 21% of the real output dynamics in the 12th time horizon. Additionally, the results show that fluctuations in world oil prices account for more domestic fluctuations than that related to movements in the real output of the Arab countries. As for domestic fluctuations, empirical results suggest that apart from their own shocks, much of the real output fluctuations can be explained by the shocks in price and real exchange rate. Consistent with turbulent macroeconomic environment in Sudan during the past few years, the study also shows that KSE has experienced higher levels of fluctuations especially in the post-secession period and that the KSE fluctuations are greatly attributed to oil shocks and exchange rate fluctuations. Based on these findings, the study presents many policy implications pertinent to policy makers, authorities and future researchers.