When South Sudan became independent from Sudan in the middle of last year, relations between the two countries were strained. The major export earner for Sudan had been oil from South Sudan, and oil from the south was still being shipped through Sudan, so Sudan decided to make a grab for the lion’s share of the oil royalties as “transit fees”. South Sudan responded by cutting off production, so neither country has been benefitting from oil revenue for the past 6 months.
As oil accounts for 98% of the income of the South Sudan government, the country has been living off reserves since December. The government has adopted an austerity budget, and expects that its reserves will last for up to another year. Those reserves have been accumulating since 2005, with earnings exceeding $50 per barrel being placed into an oil stabilisation account, a future generation fund and an emergency contingency fund. South Sudan hopes to complete a pipeline through Kenya within the next year, but will face difficulties if the construction takes longer.
Meanwhile, Sudan is attempting to restructure its economy to cope with the loss of oil revenue. The country currently produces 115,000 barrels per day (about one third of the production capacity of South Sudan), and is seeking to increase production as quickly as possible. Sudan is also trying to diversify its exports, including cement, gold and sugar, which is used for the production of ethanol.