South Sudan’s Economy and Her Currency: A Case for Making SSP Convertible

Brief Background

March 23, 2015 (SSB)  –   The South Sudanese Pound (SSP) came into being in July 2011 when the country attained her independence from Sudan. When the SSP was introduced by the first governor of the Central Bank of South Sudan, Elijah Malok Aleng (May he rest in peace), he made it clear that the country was adopting a “managed Float” as opposed to pure float or fixed exchange rate regimes.

Managed Float regime is when exchange rates fluctuate, but a central bank can influence the exchange rates by buying and selling currencies. The official bank rate against U.S dollar at the time was set at SSPs 2.96/$. More than 3 years later, the official rate has remained the same although the parallel rates in black markets have fluctuated between 3.5 to 7.2 SSP per dollar.

In a nutshell, 2.96 has been our official bank rate even when the country almost went into a full scale war with Sudan over Panthou in April 2012. It has been the same when the country accused Sudan of thefts of her oil, forcing South Sudan to shut down pipe lines for more than a year. And 2.96 has been the same when the country found herself in a civil war more than a year ago.

With the three major economic shocks highlighted with no policy changes to support our currency, does that really look like a managed float? How come we didn’t use the “buying and selling of SSPs or other currencies” which was the basis of the country adopting a managed float?

An exchange rate regime that ignored those major shocks to the economy doesn’t fit the bill and it looked more like a fixed exchange rate regime more than anything else.

What is wrong with our currency?

With that said, this piece is not about filing a blame on who and what should have been done when and how, but rather on what needs to be done going forward. There is a saying that goes “use what you have to get what you want,” which to a certain degree has been hijacked by pimps and prostitutes because it fits their actions. We have the petrodollars albeit in a limited amount at this point which we can use to our advantage.

The main reason why our neighbors are reluctant to use our currency is mainly due to the fact that we have nothing to sell. Why would Kenya or Uganda traders need SSPs when there is nothing to buy in South Sudan? Most of South Sudan’s production; be it crops or animal production is pretty much subsistence in scope and scale.

In a figurative sense, the South Sudanese Pound has been like a girl whose father thinks is beautiful enough to compete with other girls in the dancing arena but keeps coming home with no man running after her dance after dance. There are some few things a father can do to this ugly girl called South Sudanese Pound to make her desirable.

Buying and selling two East African currency reserves in Shillings

Of all the countries in the world that need foreign currencies, South Sudan should be better off due to her massive oil reserves underneath. Even with the limited supply in the oil producing states and the dwindling global prices because of decreased demand, we should still be better off.

For the sake of this argument, I will only focus on buying Kenyan and Ugandan shillings because the two countries have large South Sudanese populations.

Our central bank (BOSS) and the Ministry of Finance can do a few things to backup, preserve and validate the value of SSP with the goal of making it convertible in the region. This one bold step if rightly executed can go a long way. The two institutions have a very attractive case to make to their counterparts in Nairobi and Kampala about what they want to do that will greatly help South Sudan and the parties involved.

The Kenyan shilling is currently trading at about 92 shillings per dollar, while Uganda’s shilling is value at 2,880 per dollar. Knowing the dire need in which her economy is in, South Sudan needs to create foreign currency reserves in both UGX and KES by buying, stocking and selling shillings here in Juba. How do you go about that? Out of the oil money this country gets monthly, you can put aside $10 million monthly solely for this purpose.

I don’t really know the trade volume in terms of exact figures between South Sudan and the two countries, but I am going to assume that Uganda exports more goods to South Sudan than Kenya. Kenya need dollars and so is Uganda and South Sudan comes in trading dollars for their local currencies. Out of that $10 million, Uganda gets $7 million and Kenya gets the remaining amount.

The bank of South Sudan (BOSS) does her due diligence and wire $3 million to the Central Bank of Kenya (CBK) at a discounted rate of 90 Kenyan shillings per dollar.

(a) South Sudan and Kenya

1) South Sudan gets $3,000,000*90) = 270,000,000 Kenyan Shillings. This amount is wired back to the Bank of South Sudan (BOSS) in Juba. The discount is $3,000,000*92 – $3,000,000*90 = 6,000,000 Kenyan shillings.

2) Kenya gets her $3,000,000 from BOSS, making a profit of 6,000,000 shillings. You have to make a little tradeoff here and this transaction took care of that.

(b) South Sudan and Uganda

1) South Sudan gets ($7,000,000*2,878) = 20,146,000,000 Uganda shillings.

2) Uganda gets her $7,000,000 from South Sudan making a profit of ($7,000,000*2,880 – $7,000,000*2,878) = 14,000,000) 14,000,000 shillings. The same appeal of give and take made to Kenya also holds here for Uganda.

In total, the bank of South Sudan gets to stock 270 million Kenyan shillings and 20.146 billion Ugandan shillings. Fair enough game right? As for how this policy can be executed, the governor and his team can design ways of making these currency reserves efficiently available to the public.

My suggestion would involve creation of public vendors around Juba primarily for dispensing shillings to the public. In the end, the goal is to create a market and competition for the SSP; and in the process relief our exchange wary traders and parents whose children are going to schools in Kenya and Uganda.

Using what we already know as an example. The commercials banks (KCB and Equity in particular) trade South Sudanese Pound for Kenyan shillings at KES 26/SSP and UGX at around 540/SSP. By creating this open window, a parent with 3,000 SSP go to the nearest vendor and gets 78,000 Kenyan shillings or 1.6 million Ugandan shillings.

A businessman who imports food items from Uganda comes to the bank with his 200,000 SSP and gets 108 million UGX. A car dealer who imports cars from Nairobi comes to the bank (Buffalo, Ivory, Eden, South Sudan Commercial Bank, FOREX’es etc) with 300,000 SSP and gets KES 7.8 million.

In the end, we all win. The government of South Sudan gets her $10 million investment back in form of SSPs turned into Ugandan and Kenyan shillings and back into SSPs from her citizens who need the East African currencies. The government of South Sudan pays her workforce in SSPs and there and then she gets it. The business people get shillings and buys goods from East Africa.

The parents and South Sudan renters get shillings and pay their rents/school fees on time. By doing so, you will somehow eliminate this crazy demand for dollar. This process has to be open to the public and competition has to be encouraged to eliminate the many inefficiencies of distribution. Who really needs dollars?

Before you know it, you will have a Kenyan currency trader somewhere in Nairobi taking his chances by exchanging shillings for SSPs at KES 24. You will most likely see the same trends of that mindset here in Juba and in Kampala. The government will have to register, monitor and tax all the vendors involved in this business to avoid production of counterfeit monies.

How does Uganda and Kenya Benefit from this venture?

They benefit in many ways as follows: First, they need dollars and South Sudan provide dollars by buying their currencies at discounted rates to their advantages. Secondly, imports to South Sudan will increase because the inconvertibility of SSPs has kept the volume of trade unreasonably low. That means more traders who can’t import from Kenya and Uganda at this point will easily do and both Kenya and Uganda benefit from huge trade surpluses as a result.

Thirdly, both Kenya and Uganda have high levels of inflation. South Sudan will reduce this problem by creating demands for their currencies which in turn decreases inflation (quantity of shillings demanded increase while supply of shillings remains constant), putting downward pressure on the so called “imported inflation”- increase in the price of imports or depreciation of a country’s exchange rate. Finally, by trading dollars for shillings, South Sudan improves the dollars supply for both countries.

How does South Sudan benefit?

The country benefits in five major ways. First, trading SSPs for shillings helps reduces long lines for dollars at the FOREX’es. Secondly, it will solve the issue of black market which has been a nightmare to stop for the last few years; this cut the demand for dollars because of majority of South Sudanese who need dollars want to exchange it for Kenya and Uganda shillings.

Thirdly, the country’s currency becomes acceptable without waiting for export to pick up. Fourth, commodity prices at Konyo-Konyo are dictated by the price of dollar in black market. The prices of goods and services will decrease because this policy execution cuts the long chain of having to look for scarce dollars in order to import from Kenya or Uganda.

Instead, the trader just exchanges her/his SSPs for UGX or KES right here in Juba. And finally, a parent with SSPs 3,000 won’t have to buy dollars in the black market at 7.2 SSPs/$ resulting in a mere $416. Instead, her 3,000 SSPs give her KES 78,000 (about $847) or UGX 1,620,000 (about $562).

Conclusion

Exchange rates are determined by demand and supply. The quantity of dollars demanded has always been high here in South Sudan but the quantity supplied has always gone the other way. What do you do when you have 50 customers scrambling for your only three bags of charcoal? You have two options: (1) selling the charcoals to your friends and relatives at that cheap price or, (2) increase the price to get the most out of them or risk selling them off cheaply only to see them resold next door at a price five times greater than what you charged.

The agents of our powerful black markets have perfectly capitalized on this logic and you can’t blame them. That is why I have always argued that the South Sudanese pound is unreasonably overvalued at the detrimental cost to the country. If your dollars supply can’t meet the market dollar demand at $5 per one SSP, what is the point of keeping 2.96 (bank rate) and 3.17 (commercial rate) exchange rates?

There is no policy proposal that can help sustain our bank rate being that low unless we miraculously get to the level of pumping 700,000 barrels of oil a day with each barrel going back to say $100. But this is wishful thinking at best and we can’t build an economy on wishes. What I have proposed has better chances of prevailing because it cuts into further decline of the SSPs by giving options to the people whose only gateway out of South Sudanese Pound is to buy dollars.

By creating alternatives for the dollar, the black market will lose most of her customers who buy at SSP 7/$ to Kenya and Uganda shillings and they will be forced to continually lower their prices until a certain equilibrium is reached or risk not selling dollars at all. Whether adopted or not, this macro policy opinion makes it clear that this country is better off having the dollar and at least two more tradable currencies as her reserves.

Disclaimer: The views expressed in this piece are solely those of the author whose name appears above. He holds a BA in economics and MA in International Economics and Finance. He can be reached at; chiengky@gmail.com