Examining the Exchange Rate Policy in RSS: Who was Right between Parliament and the Bank of South Sudan
Examining the exchange rate policy in South Sudan – who was right between Parliament and the Bank of South Sudan
By Garang Atem
In a circular dated 11 November 2013, the governor of Central Bank of South Sudan directed banks and other stakeholders about a regulatory change it made to exchange rate policy that the dollar was to sell at 4.5 SSP from 3.16 SSP. This directive was to move the exchange rate to dirty float were banks and bureaus will bid for dollars instead of allocation at predetermined rate.
On 13th November 2013, the Bank rescinded the directive after parliament summoned the governor and asked him to reverse his decision. Key issues in the devaluation debate were sustainability of a fixed regime and impact of devaluation on domestic prices and economic activities.
The implication of rescinding the devaluation policy was to bring back the flaws that have dogged South Sudan exchange rate market. First, it enhances growth of shallow financial institutions that are building long-term financial instability in the future.
As at end of November 2012, there were about 18 banks and 68 bureaus whose incomes were mainly from currency trading. In 1990s, Kenya went through turbulent financial stress as most of its shallow were going through financial instability.
Secondly, allocating dollars to banks and bureaus has accelerated inequality and distributive injustices in the country, as there is a shortage of hard currency, bureaus and banks only allocated dollars to well-connected and at time with kick-backs.
Thirdly, allocation of dollars has institutionalized rent-seeking behavior through licensing and allocation and finally a fixed rate passes the obligation to Central Bank to maintain the exchange rate at 3.16 SSP even at times when reserves wither; a case was during oil shutdown or as it maybe now as conflict has interrupted production in key oil fields.
With the above flaws, and mandated by Central Bank Act 2011, the Bank had incentive to evaluate its exchange rate policy and change the policy if appropriate including opting devaluation as it did.
The type of exchange rate chosen by a country is determined by its integration into global financial system, country specifics economic disturbances exposure, economic structure, and exchange rate risks. For the case of South Sudan, as an import country, the impact of devaluation on prices was going to be critical and sustainability of fixed regime.
During devaluation debate, the parliament took a short term comfort by forcing the Bank to rescind its proposed devaluation policy to keep imports prices low. The Bank proposed to devalue the pound in my view so as to reduce the sustainability obligation. With insecure and unreliable partner in the Khartoum, sustain must have been a parameter from the side of the Bank.
Now the worst is here, South Sudan has a fixed exchange regime with a troubled oil export. Sustaining a fixed regime must a great headache to the Bank while parliament has since fast forgotten the harm it has caused.
I am sure the Bank had challenges during the oil shutdown and these lessons form the basis of the Bank policy position on exchange that was overruled by parliament.
During the exchange rate debate last year, most comments were that devaluation will increase export as theorized by economic. However, the unique constraints of insecurity, lack of infrastructure, capital, attitudinal problems, lack of capital, and lack of entrepreneurship skills. However in my view, these impediments break down the devaluation as tool improve exports.
Second, weak financial system that is not integrated into global economy renders helpless Fleming–Mundell of feedback and self-regulating view through the capital market. Supported by specific country risks, freely floated exchange rate will skyrocket the imports’ prices.
As I argued now and before, the exchange rate policy will never and can never with current economic fundamentals can be used to improve export and to improve international competitiveness.
In the light of all the foregoing illustrations, an appropriate exchange rate policy was one that was going keep to inflation reasonable, prioritizes sustainability and ignores international competitiveness till such a time structural problems of the economy are sorted.
In this regard, I agreed with the proposal by the Bank to allow banks and bureaus to bids for hard currencies, this would have minimized problems that are currently being witness under a fixed regime.
Second, I disagreed with the part of the policy that advocated for increasing the dollar price from 3.16SSP to 4.5SSP immediately. This should have been done gradually to ensure rate at which pound is depreciated is monitored and hence control inflation within reasonable rate.
Had the devaluation been done gradually, parliament intervened in a professional way by allowing only a specialize economic committee to debate with the Bank, South Sudan would have got a better deal – an outright devaluation or fixed regime are not a better deals for South Sudan based on her current economic fundamentals.
Neither sure nor aware how the Bank intends to manage fixed regime under such circumstances, the clear lesson is that by encroaching on the role of the Bank, the parliament has ignored independence of the Bank as defined in the Act.
As South Sudan navigates the tough economic waters, the policies and decisions should be based on a holistic view of the current and the future, in part this article was meant to call for use of professional in decision making – with due diligence on impacts of the decisions. As for now, sustaining a fixed regime remains a true challenge to the Bank of South Sudan not the parliament.
Gabriel Garang Atem Ayiik is an independent economic commentator based in South Sudan.
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