REQUEST FOR EXPRESSIONS OF INTEREST

AFRICAN DEVELOPMENT BANK

REGIONAL DEVELOPMENT AND BUSINESS DELIVERY OFFICE, EAST AFRICA (RDGE)

Khushee Tower, Longonot Road, Upper Hill     P. O. Box 4861 – 00200, Nairobi, Kenya.el: (+254-20) 2998352 Fax: (+254-20) 271 2938

Website : www.afdb.org; E-mail: g.kyokunda@afdb.org and a.mafusire@afdb.org

Brief Description of the assignment ; FINANCIAL SECTOR DIAGNOSTIC STUDY TO INFORM REFORMS TO INCREASE ACCESS TO CREDIT FOR PRIVATE SECTOR (LEAD EXPERT)

Place of assignment : Khartoum, Sudan and partly virtual

Period of assignment : November 2020 – May 2021

Expected start date of the assignment : November 2020

Last date for expressing interest : 26th October 2020

Expression     of     interest     to     be     submitted     to: g.kyokunda@afdb.org      and     copy Y.ELTAHIR@AFDB.ORG

Any  questions/  clarifications  needed  to  be  addressed  to: g.kyokunda@afdb.org  and Y.ELTAHIR@AFDB.ORG 

Further details are as below.

TERMS OF REFERENCE (TOR) –

FINANCIAL SECTOR DIAGNOSTIC STUDY TO INFORM REFORMS TO INCREASE ACCESS TO CREDIT FOR PRIVATE SECTOR

GENERAL INFORMATION

Services/Work Description : Sudan – Conduct a financial Sector assessment to inform reforms necessary to expand access to credit for the private sector, notably business enterprises affected by the COVID-19 crisis.

Type of the Contract :  Individual Consultants (one international-team leader and one national

Expected Duration : not exceeding 6 months

Expected Start Date : November 2020

1. BACKGROUND :

Updates on recent economic developments :

The Sudanese macroeconomic environment is extremely challenging. Due to the secession of South Sudan in 2011, the country lost a significant part of its export’s earnings. As a result, fiscal revenues and foreign exchange earnings dwindled. The adjustment to this shock has been incomplete, and the Government has resorted to the monetization of the fiscal deficit with a negative impact on inflation. Sudan has a high level of external debt and is in arrears to international financial institutions, with a debt to GDP ratio of 213% of GDP at the end of 2019. Despite the lifting of longstanding U.S. sanctions on trade and financial flows in October 2017, Sudan remains on the U.S. list of State Sponsors of Terrorism (SSTL), blocking progress towards badly needed debt relief.

Real GDP growth and growth drivers : COVID-19 is holding back Sudan’s economic recovery as containment measures reduce demand and consumer spending. GDP is estimated to contract further to 8.9% in 2020 under the worse-case scenario if COVID-19 persists until the end of 2020 compared to -2.5% in 2019. Weak economic performance in 2019 reflects declining agriculture production, amid continued droughts. Persistent sectoral constraints, particularly lack of production inputs like fuel and equipment, and low domestic demand are affecting growth. The COVID-19 containment measures like business closures, travel restrictions and a partial lockdown will affect demand whereas disruptions in global value and supply chains are expected to reduce national output on the supply side. Uncertainty related to the duration of COVID-19 will affect investor sentiments and lead to the postponement of major investment decisions, thereby affecting domestic investment and foreign direct investment (FDI) in infrastructure, mining and agriculture sectors.

Monetary developments : The Central Bank of Sudan has adopted a tighter monetary policy stance through the sale of government securities to contain rising inflation. Sudan’s fiscal deficit is financed by printing money which has led to inflationary pressures. Annual inflation increased from 70.3% in June 2019 to 134% in June 2020. The reduction in domestic demand due to the COVID-19 containment measures and cautious consumer and investor sentiments will be offset by disruptions in regional and global supply chains. The effects of local currency depreciation on domestic inflation and counter-cyclical fiscal policy to respond to COVID-19 and an increase in Government wages and salaries (by 600% starting May 2020) will also increase inflation. Consequently, inflation is projected to increase from an average 50.6% in 2019 to 82.5% and 92.5% in 2020 and 2021 respectively under worse-case scenario. Sudan maintains a managed exchange rate regime and the Sudanese pound is officially pegged at 45 to one US dollar, although the parallel-market rate was142 as of August 2020.

Fiscal developments: Implementation of the authorities’ fiscal consolidation strategy is expected to be suspended as the authorities scale up COVID-19 related public spending amid declining public revenues on account of depressed economic activity. Consequently, the fiscal deficit is projected to increase to 17.2% and 19% of GDP in 2020 and 2021 respectively under the worse-case scenario, up from 10.6% in 2019. About SDG 70.2 billion (equivalent to USD 1.2 billion) epresenting 30% of Government planned revenues is expected to be lost due to the COVID-19 crisis. Grant support from Sudan’s key development partners in the Gulf region is also expected to be lower than programmed as these countries have been severally affected by COVID-19 and low oil prices. However, lower oil prices are likely to expand the fiscal space for key COVID-19 related healthcare and other expenditures considering that fuel subsides accounted for 11.75% of GDP during the period 2018-2019 due to higher international oil prices.

External sector developments : Sudan’s current account deficits, which reflect structural trade imbalances will be aggravated by COVID-19. The current account deficit improved from 13.6% of GDP in 2018 to an estimated 7.8% in 2019 due to moderate growth in exports. However, exports lag imports contributing to a structural trade deficit. Gold is Sudan’s leading export, accounting for 70% of merchandize exports whereas tourism accounts for about 3% of GDP. Therefore, the country is vulnerable to fluctuations in commodity prices and travel restrictions. Sudan is expected to benefit high gold prices while depressed oil prices (oil accounts for 16% of total imports) will reduce the import bill. However, these gains will be offset by the pent-up import demand for consumer and intermediate goods, increasing the trade deficit. Reduced demand among Sudan’s major trading partners in Asia and Gulf region is expected to weaken export revenues and foreign exchange earnings. A sustained trade deficit and reduced service sector exports on account of weak tourism activity will widen the current account deficit in 2020 and 2021 to 16.3% and 17.3% respectively under the worse-case scenario.

Economic outlook : Prior to the COVID-19 pandemic, Sudan’s economic outlook reflected negative but improved real GDP growth forecasts due to enhanced investor confidence in the new Government and prospects for reintegration into the global economy. However, COVID-19 will slow Sudan’s economic recovery, with real GDP growth project to further contract to -8.9% and – 4.5% in 2020 and 2021 respectively under the worse-case scenario if COVID-19 persists until the end of 2020. The COVID-19 crisis is expected to affect Sudan primarily through three channels, namely, reduced commodity prices and thus trade, lower FDI, and reduced tourism revenues due to restrained international travel. The Government’s post-COVID-19 recovery agenda is focused on addressing macroeconomic imbalances particularly high inflation, exchange rate distortions, and supporting the private sector to revive production, which is also expected to contribute to domestic revenue mobilization. The main domestic risks stem from low public revenues amid increased spending due to sharp increase in wage bill and COVID-19 related socio-economic spending. Uncertainty over oil transit fees from South Sudan is another key domestic risk. External risks include instability in the Arab region, which comprises Sudan’s key trade and development partners, and disagreements related to the construction of the Ethiopian Grand Renaissance Dam.

Updates on the financial sector :

The Sudanese financial sector is relatively small and dominated by banks. There are 37 commercial banks, with total assets of 23.7 percent of GDP as of end 2017. Other financial institutions have a marginal share in the country’s financial system. There are 39 microfinance institutions (MFIs)¹,14 insurance companies, 2 leasing companies, 20 foreign 1Thirty-seven of the 39 MFIs are non-deposit taking. The majority of them are owned and funded by the Government and the CBOS exchange bureaus and 14 money transfer institutions, all with limited volume of assets with respect to the size of the economy.

Financial sector challenges and risks : According to the Financial sector assessment report done by the World Bank in 2018, the banking sector risks, and vulnerabilities had increased which was consistent with a weaker economy. In particular, the devaluation of the currency had weakened banks’ capital positions and – through higher inflation and low growth – worsened borrower’s repayment capacity, leading to a likely deterioration in asset quality. This has been exacerbated by COVID lockdown. A cash flow-based analysis on banks suggest that some banks were underreporting and under provisioning nonperforming exposures, exposing themselves to losses that would impair their solvency even further. A significant shortage of banknotes during 2018 forced banks to impose limits on cash withdrawals, severely undermining public confidence in the financial sector and negatively impacting livelihoods (mainly among the poor). A run on deposits is increasingly likely, for which the authorities need to be prepared. The current crisis management framework has significant deficiencies and weaknesses that renders it impossible for the Central Bank of Sudan (CBOS) to effectively manage crisis situations. The COVID lockdown has presented more challenges and there is need to address the deficiencies so that CBOS can ably relax some regulations to allow Banks to provide much needed credit to private sectors especially Small and Medium Enterprises.

Bank Supervision; The legal and regulatory framework is not conducive for effective prudential supervision. There are gaps and lack of guidance regarding the management of risk, including risks specific to Islamic finance. Prudential supervision is also constrained by limited capacity and resources (including data reporting systems), as well as by a fragmented, compliance-based and backward-looking approach that does not ensure a thorough understanding of banks’ risk profiles. Corrective actions do not seem to be effective as demonstrated by the existence of banks in problem status for many years. The AML/CFT framework has improved in recent years, but further reforms are needed, focusing on the introduction of a risk-based approach and national risk assessment. In addition, as part of its efforts to further restore correspondent bank relationships, the CBOS should encourage banks to further develop their AML/CFT compliance systems in line with international standards.

Credit infrastructure. The Sudanese credit infrastructure is underdeveloped as demonstrated by Sudan’s low rankings in World Bank Doing Business reports. However, the government is implementing reforms to improve credit reporting as well as secured transactions and insolvency frameworks. Notable actions include: (i) the drafting of amendments to Credit Information and Scoring Agency (CIASA) Law and regulations; (ii) drafting of the Securities Transactions Law, inter alia, to introduce a broad scope of movable property assets to be used as collateral for secured financing and introduce a centralized and web-based secured transactions and (iii) the amendment of the Companies Act 2015 to improve the insolvency regime. However, the passage of both the CIASA Law and the Secured Transactions Law are still pending.

Regime change has created a window of opportunity for fundamental reforms to address major macro imbalances and lay the groundwork for inclusive growth. Consequently, due to the macroeconomic and fiscal deficit challenges, the Government of Sudan has embarked on ambitious financial sector reform program which calls for immediate and expansive mitigatin measures. And given the economic situation in the country, the need to embark on deep structural reforms sooner than later became apparent. The IMF in their recent Article IV recommendations indicated that the Central Bank should continue to strengthen the financial sector soundness and mitigate risks, including through enhanced risk-based AML/CFT supervision.

OBJECTIVE OF THE ASSIGNMENT :

The objective of the assignment is to support the Government of Sudan to generate rigorous analytical work to inform required financial sector development reforms, with emphasis on enhancing the central bank’s capacity to regulate and enhance the financial sector’s contribution to post-COVID-19 economic recovery.

In this context, the African Development Bank is seeking to recruit a team of consultants to support the Government of Sudan, notably the Central Bank to undertake a financial sector diagnostic study. This study will identify gaps and develop a road map for establishing a competitive financial sector to increase access to credit for the private sector, notably business affected by the COVID-19 crisis. During the assessment, the team of experts will work with the Government officials and Central Bank team to address some of the weakness identified so as to immediately support design and implementation of reform measures to relax financial prudential regulations, develop banking regulations that meet international standards and strengthen supervisory capacity to preserve financial stability while supporting the post-COVID-19 economic recovery.

SCOPE OF WORK :

Undertake a financial sector diagnostic and financial prudential study: The key vulnerability in the financial system centers on weaknesses in the banking sector and the capacity of banking supervision to promptly, manage crisis and effectively conduct oversight. Assessing the prudential and supervisory framework for the banking system will provide insights on the most suitable options for mitigating the underlying risks. The central bank is keen on exploring options for increasing flexibility in the implementation of prudential requirements without jeopardizing financial sector sustainability. Work is underway to augment bank capitalization, review options for voluntary bank mergers, and improve financial stability. During elaboration of the diagnostic study, the consultant team will provide expert advice and technical support to the authorities to address deficiencies in the operationalization of risk-based supervision, strengthen the capacity of the Financial Intelligence Unit, and improve the efficiency of supervisory actions. The financial sector diagnostic and financial prudential will examine ;

1. The stability and developmental contribution of the banking sector ;
2. The nature of financial services (including development of nonbank financial intermediation) ;
3. The legal framework for financial sector development ;
4. Payments and settlement systems ;
5. Housing finance ;
6. Development and regulation of the insurance sector ;
7. Pensions, systemic liquidity, the money and foreign exchange markets.

Undertake assessment of the impact of COVID lockdown on MSME performance and understand challenges on their ability to continue operations and maintain financial viability. In this regard, microfinance sector has been hard hit by the Pandemic and the most affected microfinance sector is the trading operations. A recent report indicated that 45% of MFIs’ income reduced to zero, about 50% of the beneficiaries’ business halted operations completely, 41% partially, and 9% not affected, and 90% of the clients are negotiating re-scheduling arrangements for their loan’s repayments. As a result, authorities took the decision to postpone the repayments for 6 months for all MFIs financed from commercial banks & Central Bank of Sudan. Thus far, the scope should cover an assessment of the impact on MSME operatons and investigate what is needed to support them to operate sustainably and attain resilience to shocks such as COVID-19 Pandemic : 

Develop a roadmap to inform the implementation of specific actions to support financial sector development and expand access to credit to the private sector, particularly firms that have been severely affected by the COVID-19 crisis ;

Findings from the financial sector diagnostic and financial prudential will inform the following tasks, which will also be undertaken by the consultants :

• Support the Central Bank to develop a banking supervision and crisis Management framework ;
• Provide advice on options for enhancing the financial sector regulatory framework ;
• Improve the financial sector supervisory structure and approach ;
• Develop an emergency liquidity processes ;
• Provide advisory services to the government on how the proposed policies of financial prudential can be implemented.

DELIVERABLES :

Inception Report capturing: (a) review of recent financial sector developments (b) methodology to be used to address objectives (as presented in section II above); (c) the key stakeholders to be engaged in the preparation of the analytical work; and (d) and outline of the diagnostic study report;

Level of Effort :

Two individual consultants will be hired. The team leader will be an international consultant and supported by two national consultants. The successful consultants will need to commit an effort equivalent to six (6) person months for this assignment.

DESIRED QUALIFICATIONS AND EXPERIENCE :

Two individual consultants will be hired. The team leader will be international consultant and supported by a national consultant. The individual consultants should be able to demonstrate professional, operational and academic competence in the field of banking and finance, macroeconomics, and economic growth, with experience of working with governments in developing countries, particularly transitional states. Individual candidates should be able to demonstrate the following academic qualifications and professional experience, at a minimum :

Academic qualification : An advanced University (Master’s degree) in Banking, Economics, Finance, Law, or a related field. A Ph.D. is an added and knowledge of Islamic Banking advantage.

Experience :

• At least 18 years for the international consultant/ team leader and 15 years for the national consultant of relevant post-qualification working experience (e.g. in monetary policy and financial sector management, or macroeconomic management with Central Bank or Ministry of Finance etc.) ;
• Extensive experience of working in fragile situation like Sudan will be a significant advantage ;
• Knowledge and practice of Islamic Banking ;
• Experience in preparing diagnostic reports, policy analysis and roadmaps ;
• Experience in working with senior government officials, donor representatives and civil society on policy and strategic issues ;
• Ability to lead discussion including diverse teams ;
• Willingness to travel and work in Sudan.

Language :

• Fluency in English with good verbal and written skills ;
• Given that Arabic language is officially used in Sudan, the national consultant proposed will complement the international consultant role and assist in communication during the implementation of the assignment.

REMUNERATION :

The proposed remuneration will be defined based on the consultant’s financial proposal but will be aligned with the Bank’s remuneration grid and budget availability. The cost should be inclusive of honorarium and reimbursable costs. Should the highest scoring consultant’s financial proposal exceed the budgeted amount, the consultant will be contacted for negotiations. If no agreement is reached, the next highest scoring consultant shall be contacted until a suitable financial proposal is achieved.