South Sudan Pound Appreciation, Risks and Policy Options
By Garang Atem Ayiik, Juba
- Introduction
I had kept an eye on the performance of South Sudan pound and exchange rate for the last two years. In being alert, I had published three articles related to exchange rate policy options and participated on ‘Wake Juba’ to discuss devaluation late last year.
Recently while on Easter leave in Nairobi in April 2014, a colleague asked me why these days banks denied their customers their demanded dollars even if these customers have dollars accounts.
Another new observation is the appreciation of South Sudan pound to 3.85 SSP in May 2014 from 4.5SSP in December 2013 in parallel market while the official rate sits comfortably at 3.16SSP. This is despite the fact that Central Bank of South Sudan is not giving regularly monthly allocations of dollars to the bureaus and banks after December 2013 crisis.
So how could pound appreciate against the dollar even after disruption of dollars flow resulting from shutdown of oil-fields of Adar, Unity and Tharjath. This article aims to put into perspective the latest behaviour of pound; second, sketch possible economic risks on latest behaviour of pound; and thirdly propose policy options.
It is important to note that the author has not explored the merits/demerits of appreciation but rather analysed the sources of appreciation and highlight key associated risks on these paths.
- South Sudan Pound Appreciation
The concept of demand and supply determines price for goods. Equally, if dollar is treated as good bought with money, pound, it is therefore, lawful that if dollar supply reduces, the price of dollar goes up. The expectation base on demand and supply is that dollars supply have been reduced resulting from oil production disruptions in Adar, Unity and Tharjath oil fields.
The expected conventionally behaviour of pound base on the law of demand and supply was that it should continue to depreciate as it did in December 2013. But recently, pound has gained in the parallel market to 3.85SSP in May 2014 from 4.5SSP in December 2013. This happens as production in three key oil-fields remained close reducing oil production to below 50% before December 2013 crisis.
Despite reduction of oil flows reducing dollars income to Central Bank, author suspects that pound has gained due to the following reasons; first, reacting to December 2013 crisis, the public-firms and individuals have cautioned themselves by buying dollars and transferring them to neighbouring countries and abroad.
This led to stocking-back of pounds with the banks; and banks finally deposit them with Central Bank. This means the public has few pounds in circulation and hence the shortage has led to gain by pound in parallel market. In the meantime, pound is building up in banks and Central Bank.
Second, the government has not paid its employees mostly the civil servants and army for the last three months. This section of society spends all its income nearly in totality increasing the velocity of pound. As the government has not paid its employees, pounds that accumulated in banks and Central Bank has not moved out causing a shortage in the market and this is exhibits in appreciation of pound in the parallel market. This becomes critical considering the multiplier effects in the economy.
Author believes the appreciation of pound in the parallel market is not in any way determined by supply fundamentals but by intrigues of demand. It is tempting to argue to insulate their staffs from possible depreciation of pound, development agencies, private sector and humanitarian agencies brought-in a lot of dollars resulting in a strong pound. There is little evidence that local staffs in these agencies are paid in dollars and even if some cases exist, lack of dollars in commercial banks invalidates this argument.
Critical is the fact that pound gains in the parallel market while in the official market-banks are rationing the withdrawal of dollars for their customers with dollars’ accounts. To reconcile this contradiction, the author’s hypothesis is that some dollars are going to the parallel market without going through official market. If this was not the case, why would pound in parallel market appreciate while banks lack dollars to pay their customers with dollars accounts?
If the above hypothesis holds, where would dollars move to parallel market without passing through the official market-through banks? The first case would have been Crisis Management Committee in case they were given any money in dollars. Ideally, they didn’t need dollars; and second, if there is a cartel within Central Bank with capacity to bypass official channels to obtain dollars and sell them to parallel market.
There are indications that black market is becoming a key profitable business in South Sudan with foreigners actively engaging in large scale. With this participation, it is author’s believes that Sudan, Kenya, and Uganda are key intermediary hubs.
Every trade in dollars, accumulate pounds in banks and Central Bank. After short-while, it is author’s view that pound shortage is eminent and likely to cause serious economic hardships and disruptions.
Acting rationally, many foreign traders might have noted that margin obtain in importing is more less equal to premium on getting dollars at official rate and sell them in the parallel market. Armed with this view, it is possible that for long time, these traders have been buying dollars and selling it in parallel. This view reinforce an argument that appreciation was due to accumulation of pounds in the Central Bank as traders buys dollars with pounds- filing pounds in the Bank.
- Risks, Policy Options and Conclusions
The current appreciation of pound in author’s view resulted from pound shortage, supported by reduce economic activities as economic actors become cautious and stock their wealth abroad in dollars.
It is critical that peace is restored immediately otherwise, economic activities will continue to diminish as firms and individuals continue to withdrawal their wealth in South Sudan in form of dollars, stocking pounds in the banks and Central Bank;
As economic activities reduce, economy will contract causing hyperinflation and unemployment which is likely to cause misery to the citizens. Already fresh graduates cannot be absorbed by the economy; this is an indication of a deteriorating economic performance. The government should engage the rebels with view to restore stability, this improves confident of businessmen and citizens hence reviving economic activities;
There is need to monitor asset position of Central Bank of South Sudan with view to locate pounds-dollars moments. This will help in locating possible path-way of dollars to the black market in unofficial manner;
The government should pay its civil servants immediately and explore other ways of injecting pounds to the market to rejuvenate the economy;
There is need to enhance technical capacity to supervise banks and bureaus, do surprise audits and enforce money laundering to reduce the roles of financial services in promoting parallel market, money laundering and economic inequality;
All decisions affecting monetary performance must be reviewed and approved by competent, independent and cautious policy team.
Garang Atem Ayiik is an independent economic policy commentator base in South Sudan and he can be reached at garangatemayiik@gmail.com
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