By Ulf Laessing
KHARTOUM (Reuters) - In his office in Khartoum's gold market, central bank sales agent Mohamed Adam sips tea and watches while his staff load bundles of cash worth tens of thousands of dollars from the safe into four boxes.
The government will use these piles of Sudanese pounds to purchase gold, which it plans to sell for the dollars needed to pay for imports of food and other essentials.
"We buy all gold from local traders and people who search for gold," Adam said. Outside his office, gold traders make deals in the busy market in a rundown downtown building, where paint is peeling from the walls.
Sudan is looking to expand gold mines and boost production of the metal to help keep the economy afloat.
Oil had been the main source of state revenues as well as the dollars needed to pay for imports, but Sudan lost three-quarters of its oil production when South Sudan split off last year.
A scarcity of dollars has driven the annual inflation rate to 37.2 percent in June, double the level of June 2011, and officials warn prices will rise further.
The country sits on what could be Africa's largest gold reserves, and the government has handed out exploration contracts to more than 600 mining firms to search for gold and other minerals.
Khartoum hopes to make up to $3 billion from gold exports this year, double the amount from last year. It made $603 million by the start of April, according to the latest official data.
Much of that output currently comes from small, individual miners, lured by high gold prices to seek gold in remote corners of the country. The central bank is now buying up their gold, which in the past was often smuggled abroad.
The government estimates that about 250,000 Sudanese search for gold, mostly in the north of the vast Arab African country, where the Nubian desert has been a source of gold since the Egyptian pharaohs.
"I always go and buy up gold from local people and sell it to the central bank," said gold trader Jumaa Mohamed Said, who travels every month to a desert area 300 kilometer (190 miles) north of Khartoum.
"Sometimes I buy a few grams, sometimes 500 grams, a kilo. I'm always busy," the 25-year old Said said. He brings the gold to Khartoum, where he does business with the central bank. Experts verify its grade before it ends up on Adam's desk.
The central bank has appointed three sales agents at the gold market, who buy gold for a little less than the global price, Adam said.
But a senior official at an international organization said the agents sometimes pay above the global price to stop other traders from snapping it up for smuggling to Dubai, a large gold market.
"The central bank sometimes pays well above market prices," he said, declining to be identified. "It fuels inflation, but they need the dollars from gold exports."
BIG POTENTIAL, BIG CHALLENGES
The targeted $3 billion in gold revenue for this year is still well below Sudan's 2010 oil revenue of at least $5 billion. But the government hopes it will keep the economy afloat while it seeks a negotiated solution over oil export fees from South Sudan.
Khartoum faces a budget deficit of 6.5 billion pounds ($1.4 billion) following South Sudan's independence a year ago under a 2005 peace deal.
The finance ministry had counted on export fees paid in dollars by the landlocked new nation, which needs to ship its crude through northern pipelines and the Red Sea port of Port Sudan to get to international markets.
But Juba shut off all oil wells in January after talks over export fees failed, and Khartoum started taking some oil to cover what it said were unpaid pipeline dues.
Meanwhile, the government is trying to attract more investment as it hopes to boost gold production, which amounted to 33.7 tonnes last year.
The mining industry is one of the few areas growing in the economy, in crisis due to the shortage of foreign exchange.
Out of the 600 licenses granted for mineral exploration, 88 have gone to large companies. New fields will be opened for investment, the state-linked Sudanese Media Center said last week.
"Sudan is right up near the top in Africa in terms of mineral potential," Tucker Barrie, a Canada-based mining consultant knowledgeable about Sudan, said.
"Northeast Sudan is very high on the list in Africa to look for gold," he said. "There are going to be discoveries."
Companies had long neglected the country amid its civil war and ethnical conflicts, but they are now turning to it as one of the last large unexplored areas in Africa.
Last week, Canadian mining firm La Mancha Resources, the biggest player in Sudan, said it had agreed to be bought by a firm owned by Egyptian tycoon Naguib Sawiris.
La Mancha said the deal would help it develop the Hassai mine, Sudan's biggest gold mine which is run by the Ariab Mining Co, majority-owned by the Sudanese government and 40 percent by the Canadian firm.
"With the influx of cash from a wealthy Egyptian, the company should fair well and keep exploring and developing," Barrie said.
Foreign firms face a number of obstacles, however, in dealing with a government desperate for cash.
The royalties they have to pay are higher than those of other African countries such as Ghana or Eritrea, which have issued more investor-friendly laws, industry insiders say.
"Under pressure they are now reviewing the laws," said Abulrahim Hamdi, a former finance minister.
Mining projects in Sudan tend to be expensive because equipment must be trucked in over long distances. Few qualified miners graduate from local universities, and firms tend to rely on large expatriate workforces.
A U.S. trade embargo, in place since 1997 over Khartoum's role in hosting prominent Islamists in the past including Osama bin Laden, deters most Western firms and makes life difficult for those that come. Western banks routinely reject project funding in Sudan.
While the government hopes for quick cash, Hamdi said many projects would take three to five years to start producing.
La Mancha, for example, expects its attributable gold output to fall by some 16 percent this year because the top layer at the main Hassai mine is being depleted after being mined for 20 years. It needs to invest in new technology to drill deeper.
Jumaa Mohamed Said, the gold trader doing business with the central bank, said amateur diggers at the field he visits every month face the same problem.
"First they just were walking around with metal detectors and discovering gold on the surface. Now people need to drill deeper. It gets more expensive," he said.
(Editing by Jane Baird)