KHARTOUM - While southern Sudanese are enjoying their first heady days of independence, people in the north, like Khartoum food vendor Mutasem Suleiman, see hard times ahead.
When South Sudan split away last Saturday, the north lost most of its oil reserves and inflation is rising fast.
"During the past two weeks there has been a strong increase in prices. You could say they have risen by 10 to 15 percent," Suleiman said, standing behind a counter lined with canned vegetables, fruit juice and sweets in his small shop in a downtown market.
"Buying and selling have visibly dropped in this market," he told Reuters.
Suleiman expects that ordinary people like him will be the ones who pay the price after the north lost two thirds of the country's total oil production of 500,000 barrels a day.
The loss of the main source of state revenues comes at a time when the north is already grappling with a U.S. trade embargo, a scarcity of foreign currency and annual inflation that hit almost 17 percent in June.
As the north controls the only port and refineries to sell the oil, the south will have to share revenues by paying for northern pipelines and other facilities.
But analysts say Khartoum's share of oil revenues, which have been split equally up till now, could soon fall to 40 percent or less, hitting the budget and cutting the foreign currency inflows needed to buy food and other imports.
Food vendor al-Sadiq Ibrahim said prices have been rising since January when the south voted for independence.
"Without doubt, the political changes in the country are causing economic consequences ... I'm not sure what kind of support the government will chose," he said.
The central bank said it was supplying banks with dollars to support the pound and facilitate imports while non-oil exports such as gold were at reassuring levels. But economic analysts say challenges are mounting.
"The secession is serious for the economy," said Harry Verhoeven, a PhD fellow at Oxford University who focuses on the Sudanese economy, estimating the north will lose some 20 percent of state revenues. In a worst-case scenario, it could be 30 percent.
Khartoum tried to boost liquidity in the financial sector and dry out the black market by effectively devaluing the pound in November. But this has more than doubled inflation and the pound has been falling on the black market for weeks.
At the same time foreign investment has been limited due to violence, mismanagement and a U.S. embargo in place since 1997, analysts say.
For the better or worse, Khartoum is one of the few capitals without a McDonald's restaurant or credit cards.
"The loss of southern oil production will result in domestic and external imbalances. Preserving macroeconomic stability in the face of this permanent shock could be challenging," the International Monetary Fund said in April.
"Capital inflows ... could decline in the short term, contributing to the emergence of a financing gap that could reach 3-4 percent of GDP in 2012," the IMF said, adding that real GDP growth for the whole of Sudan will slow to 4.7 percent this year from 5.1 percent last year.
Another obstacle will be a debt mountain of almost $40 billion, which the impoverished south does not want to help shoulder. Some government bond auctions have seen weaker demand compared to last year.
TIED TOGETHER FOR NOW
Despite north and south trading accusations over violence in the volatile border region, analysts expect both sides to untangle their economies only slowly.
The north can play hardball and demand high pipeline usage fees as 98 percent of state revenues in the south come from oil. Analysts say vague southern plans to build alternative pipelines to eastern African countries are years away.
But the south is rolling out its own currency next week, which could further devalue the northern pound if introduced without coordination.
"Both economies need that oil. They'll have to cooperate," said Roger Middleton at the Chatham House think-tank in London.
But the government of President Omar Hassan al-Bashir will face the problem of having to cut the budget while trying to contain food inflation and keep a patronage system in place.
The import of luxury items such as cars to be distributed among Bashir's supporters in the military, government or ruling party will be more expensive.
"So far, Khartoum has been able to manage the pound's depreciation," said Aly Verjee at the Rift Valley Institute.
"But unless state expenditure is reduced or new financing obtained, a growing deficit will be a likely result, putting the Sudanese pound under pressure and eroding savings."
Much will depend on whether Khartoum can establish more non-oil industries and increase food production. In order to reduce its dependency on oil, the north wants to develop minerals such as gold, which helped drive up non-oil exports in the first quarter.
Some Gulf investors from Qatar, Kuwait and Saudi Arabia have arrived, interested mainly in the banking sector or in looking for farmland and other natural resources. China is the main buyer of Sudanese oil and a major trading partner.
But the pace of economic diversification has been slow, for which the government blames mainly the U.S. trade embargo.
North Sudan wants develop farmland with the help of investors looking for food supplies, such as the oil-producing states of the Gulf.
But Verhoeven said Sudan's record was poor, since Khartoum has struggled for years to improve a state farming scheme that dates back to the British colonial era.
"The government should focus on building up more local food production and not give cars or other goods to officials," said Amer Musab, a vegetable trader.
(Editing by Giles Elgood)
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