* Growth slowing, inflation rising
* North-south oil deal may mitigate impact of secession
* But big fiscal, industrial policy changes may be needed
* Political obstacles to such changes
By Opheera McDoom
KHARTOUM, Jan 5 (Reuters) - As Sudan prepares for a referendum that is likely to split the war-scarred nation, it is already sliding into an economic crisis caused by years of government overspending.
Regardless of the result of the referendum on independence for Sudan's south, the north of the country -- which contains the capital Khartoum, most of the country's industry and about 80 percent of its population of 40 million -- may struggle with sluggish economic growth and high inflation for years.
"I think we are in a very serious economic crisis, probably the most prolonged in years," said economist Hassan Satti, who worked in the finance ministry for more than a decade.
The Jan. 9 referendum could ultimately deprive the north of access to the bulk of the country's oil resources; almost 75 percent of Sudan's 500,000 barrels per day of crude output comes from wells in the south. [ID:nN03113566]
Eventually, analysts estimate, the amount of foreign currency at Khartoum's disposal may decline by between 10 and 30 percent.
In the initial years, the economic impact of secession may be small. Since most of Sudan's oil is refined and transported by the north, analysts expect the north and the south to strike a deal on oil cooperation that would soften the blow to Khartoum over a transitional period. [ID:nMCD437757]
But whatever the terms of the deal, policy failures and structural weaknesses in the economy make the outlook grim.
Officials in Khartoum blame economic instability since last year largely on speculative trading and hoarding in the run-up to the referendum. Private analysts say the referendum is only a minor factor, and that Sudan's economy has hit crisis point because of years of mismanagement and overspending.
"Inflation will go up and at the same time economic growth is slowing down and we are facing stagflation," said former state minister of finance Abda al-Mahdi, who runs the economic consultancy UNICONS.
BOOM
Since it took power in a 1989 coup, the government of Sudanese President Omar Hassan al-Bashir has focused on extracting oil, with exports beginning in 1999.
Despite U.S. trade sanctions, imposed since 1997, Sudan even enjoyed an economic boom after a north-south peace deal in 2005 ended Africa's longest civil war. Annual growth averaged around 8 percent as oil prices rose and foreign investors flooded in.
But in relying on oil, Sudan neglected core industry and agriculture, leaving it vulnerable when the global financial crisis of 2008-2009 hit oil prices and cut foreign investment.
Also, as the ruling party exerted its influence across a wide range of businesses to strengthen its base of political support, some qualified Sudanese were pushed out of their jobs, analysts said. This fuelled mismanagement and decay.
"There was no hands-on management of the economy at the political level and I believe some of the presssures exacted by the politicians have adversely affected the economy," said former finance minister Abdelrahim Hamdi. "It's a managerial problem."
During the boom, Sudan imported massive volumes of goods to compensate for a lack of domestic production. This helped to create a structural trade deficit.
Real gross domestic product growth in 2009 fell to 4.5 percent from over 10 percent in 2007. Gross national product per capita was just ${esc.dollar}1,220 in 2009, according to a World Bank estimate, with GDP calculated at ${esc.dollar}54 billion.
There are no official figures for unemployment but analysts estimate it at around 20 percent. Sudan's 2011 budget, made on the unlikely assumption of the country remaining unified, projects inflation at 14 percent; analysts believe the real rate will be higher.
"The government is very unfortunate that by the time they realised that they needed to mend things, they are bereft of the resources they used to have," said Hamdi.
"Now they have to start applying the brakes and immediately apply some drastic steps."
POLICY
Sudan's central bank operates a clever policy in an effort to avoid a damaging currency devaluation. It provides a financial incentive to buy and sell foreign currency which matches the black market rate, to curb activity in the black market and bring liquidity onto the official books. It hopes eventually to row back any depreciation after the referendum.
But such measures will have only a limited effect in the absence of deep economic reforms to cut government spending and increase non-oil revenues.
The government does not release complete, detailed data on its budget, and the finance ministry declined requests for interviews, but analysts believe state finances are under heavy pressure. Some 75 percent of the budget is spent on the military and the plethora of security forces which Bashir's National Congress Party has built up over the years, analysts say.
In addition, Sudan has to fund salaries for a giant central cabinet, with some 90 ministerial-level posts, a huge central parliament, and local governments and parliaments in each of the 15 northern states.
Al-Mahdi said increased transfers of money to the 15 states of the north since the 2005 peace deal were going towards salaries and the upkeep of local NCP-dominated governments.
"I found that of all these increases in transfers to the states, 80 percent of it is going on current expenditure, with very little to development. The country cannot afford that."
On Wednesday the government announced emergency measures to address its budget deficit, reducing subsidies on petroleum products and raising prices of key goods; Finance Minister Ali Mahmoud said the package would raise an extra 2 billion Sudanese pounds (${esc.dollar}669 million), and indicated that subsidies could be cut further in future. [ID:nMCD560385]
But it may be impossible to get the deficit under control without directly cutting spending on the bloated government aparatus and security forces, which keep the NCP in power. Hamdi and others said such cuts would be politically difficult.
Meanwhile, Sudan has ambitious plans to increase its sugar output with a view towards creating a small surplus for export within three years. It aims to cut imports of wheat and other produce, hoping to become food self-sufficient in five years.
But most of these plans are dependent on inflows of foreign investment, which has dried up because of uncertainty ahead of the referendum and because foreign currency restrictions imposed by the central bank make it difficult for companies to repatriate their profits.
Regardless of the result of the referendum, uncertainty may persist for years over whether armed conflict between the north and south will resume. And the government is reluctant to implement economic policy changes that could inconvenience key parts of its base of support.
Hamdi said that because of government interference and incompetence, foreign investors were unlikely to return to the north in a hurry.
"We need to rely on the private sector and give them the right mix of incentives," he said, adding that the government should raise taxes on the financial and energy sectors to increase revenues. (Editing by Andrew Torchia)
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