Sudan Conflict: What are the Global Economic Impacts?

In Sudan, a protracted and intensifying conflict between the Sudanese army and the paramilitary Rapid Support Forces (RSF) has unleashed a devastating humanitarian crisis and wreaked havoc on the nation's economy. In addition to local and regional impacts, the repercussions of this conflict extend far beyond the African sphere. As the conflict escalates and prolongs, concerns are raised  about its potential impact on trade, investment, regional stability, and broader economic dynamics. 

One of the consequences of the clashes in Sudan is the ripple effect that threatens to disrupt international trade flows and supply chains. Sudan plays a significant role in the global market as a major producer and exporter of key commodities, such as gum arabic. This ingredient, used widely in industries such as food and beverage, cosmetics, and printing, faces severe disruptions as Sudan represents approximately 70 per cent of its global supply. Due to the turmoil and road blockages in Sudan, it is now impossible to source gum arabic and the product does not have many substitutes. With that in mind, the scarcity of gum arabic supply could have profound implications for global consumer goods sectors and businesses reliant on Sudan’s exports. 

On top of that, Sudan is a significant global exporter of other commodities, including crude oil, gold, and agricultural products. The conflict's disruption to production and export capabilities can thus lead to price volatility in these markets. In 2021, Sudan (and South Sudan) exported approximately 132,000 barrels per day of crude oil, with the United Arab Emirates receiving 45 per cent of these exports. Any reduction in oil output due to the conflict can lead to upward pressure on global oil prices, affecting energy markets and potentially impacting industries and consumers worldwide.

Furthermore, the conflict's disruption to agricultural production in Sudan poses risks to global food security and inflation rates. Sudan's other top exports include groundnuts and sheep and goats, primarily sold to the  UAE, China, Saudi Arabia, India, and Italy. The interruption in agricultural activities due to the conflict can result in reduced supply, leading to higher food prices. This not only affects local populations but also has implications for global food markets and inflation rates. While in Sudan, the prices of basic commodities have gone up by over 60 per cent, due to the conflict-induced supply challenges, its neighbours are also expected to feel their repercussions.

The ongoing conflict in Sudan casts a shadow of political and economic uncertainty, profoundly impacting business confidence and deterring foreign direct investment (FDI). The heightened risk of asset expropriation, contract disputes, and the ongoing instability discourages investors from engaging in Sudan, hindering economic recovery and development prospects. This cautionary approach to investment not only hampers Sudan's economic growth but also restricts opportunities for international businesses looking to enter the Sudanese market. On top of that, since the conflict began, financial donors suspended Sudan’s debt removal program, which resulted in the cancellation of an agreement to eliminate $14 billion in debt and waive an additional $9 billion in the future.

Moody's Investors Service warned of the credit-negative risk posed to neighbouring countries and multilateral development banks (MDBs) if the conflict persists. The conflict's prolonged duration and potential escalation into a civil war could lead to the destruction of social and physical infrastructure, resulting in lasting economic consequences. This, in turn, would impact the asset quality of MDBs in Sudan, as well as overall nonperforming loans and liquidity.

Moody's also emphasised the potential for a prolonged civil war to inflict lasting damage on social and physical infrastructure, thereby affecting the asset quality of MDBs in Sudan, as well as overall nonperforming loans (NPLs) and liquidity. The major infrastructure in Khartoum, such as the international airport, hospitals, and schools, has suffered significant damage, forcing most economic activities and government business to come to a halt as civilians seek refuge in their homes.

Moody's highlighted specific exposure of the Trade and Development Bank, with loans amounting to $931 million in Sudan, predominantly in the form of trade finance facilities used for food and fuel imports. The Islamic Corp. for the Development of the Private Sector also had exposure to Sudan, albeit with significant provisioning and marked-down credit and equity exposures. MDBs, such as the Islamic Development Bank, African Development Bank, and International Development Association, hold exposures to Sudan below 1 per cent of development-rated assets, thanks to their preferred creditor status.

The conflict has also affected the key port city of Port Sudan, which serves as an export hub for oil from Sudan and neighbouring South Sudan. The fighting in Port Sudan has caused some disruption to port operations, temporarily suspending activities. However, as of recent reports, the port is now fully operational, which is positive news for the economies of both Sudan and South Sudan. The restoration of port operations allows for the resumption of oil exports and facilitates trade, supporting economic recovery and regional stability. The functioning of Port Sudan is essential for maintaining trade relations and ensuring a steady flow of exports from the region.

The humanitarian crisis resulting from the conflict poses immense challenges, both locally and internationally. The funding for the UN’s Sudan Humanitarian Response Plan, which seeks to address the country’s humanitarian needs, is only at 14 per cent of its target. Given these circumstances, the economic crisis is expected to worsen in 2023. Sudan's resources, infrastructure, and public services are strained as the country grapples with the influx of displaced populations and the urgent need for humanitarian aid, essential even before the conflict erupted.

This diversion of resources away from economic development initiatives prolongs the path to recovery and exacerbates the already dire economic situation. The potential long-term ramifications of the ongoing conflict in Sudan, including economic consequences and spillover effects on neighbouring countries, highlight the urgency of finding a peaceful resolution to mitigate the damage to Sudan's economy and stabilise the region as a whole.