Understanding Economic Fundamentals: Can South Sudan Export its Pound?
By Garang Atem Ayiik, Juba, South Sudan
Introduction
April 27, 2015 (SSB) —- In November 2013, Central Bank of South Sudan devalued pound from 3.16 to 4.5 SSP per a dollar. An action that was described by the governor as meant to unite the black and official rates. Immediately, prices reacted immediately by increasing prices or other hoarded goods mostly fuel.
There was outcry from the public in reaction to devaluation. The governor of Central Bank and his team was mobbed-justice and immediately asked to rescind devaluation policy. Two lessons were immediately visible; one, that an outright devaluation is likely to cause readjustment prices – goods and black market rate upward; and second, by encroaching on Central Bank independent policy decision, despite the intention, role of Central Bank as per Bank Central Bank Act 2012 was comprised by parliament.
Immediately after independent, South Sudan adopted fixed exchange rate. Around August 2011, the Bank tried to auctioned dollars to banks and bureaus, this action caused gap between black and official rate to narrow. The author believe this was a good initiative to introduce some competitive element into exchange rate risk free business.
Toward the end of 2011, Central Bank adopted an equal allocation mechanism of dollars to banks and bureaus. This mechanism has two inequity issues to financial agents; it ignore the clients base serviced by each bank or bureau, a bank with for instance 2500 customers is given the same allocation with a bank with 5000 customers; and provide incentives for growth of shallow financial institutions – banks and bureaus.
To the public, fixed rate has three short comings; increase rent seeking through allocation and licensing, distributives injustices in term of access at official rate; and finally provide an obligation to Central Bank to maintain fixed exchange rate disregarding inflows of dollars as the case now with South Sudan. Black market has increased from 3.16 to about 9.5 SSP at end of Q1, 2015
South Sudan Exchange Rate Fundamentals and Policy Option
Exchange rate policy has two main objectives; international competitive and macroeconomic stability. Devaluation of November 2013 in part was expected to increase exports in accordance with textbook economic prescriptions.
This argument to increase South Sudan export ignores structural challenges facing South Sudan like insecurity, infrastructures, technology, capital, entrepreneurship, institutions and attitude weakness.
South Sudan export sector cannot be induced with exchange rate incentives but instead with local production for consumption supported by fiscal policies is preferable – import substitution policies, this will gradually reduce demand for imports and by extension for dollars.
It is author believes only macroeconomic stability can be achieved with exchange rate policy. Currently fix exchange rate is better than float rate. But again, as it is, it is not sustainable. Can government supply demanded dollars to the market at 3.16 SSP? It is a No and hence author believe a trade-off between macroeconomic stability and sustainable is required.
Stability means government supply dollars required by the market, if this happens, inflation will be low as South Sudan is an import country which easily affected by exchange rate induced inflation. Sustainability means government supplying enough dollars to the market to keep exchange rate at 3.16 SSP without fail.
Author believe Central Bank needs correct data on dollars demand and supply. Scan of 2011 – 2015 supply to the market does not follow any trend but ad hoc behavior that seems to depend on availability of dollars within the Bank. To make economic decision without data is like to walk in a dark room.
Auctioning dollars is sure policy option. First, this will allow shallow financial institutions to wither slowly otherwise these are future financial disaster, second, will allow pound to depreciate gradually allowing economic agents to adjust; and thirdly, provide window to Central Bank to manage sustainability by supply dollars it can afford and difference will be reflected in depreciating pound, fourth, auctioning will introduce a competition between financial bureaus and banks and this will reduce gap between official and black market rate.
In this proposal, banks and bureaus will always compete for available dollars, Central Bank will always give previous trading rate average and band at which these agents will bid. This will ensure depreciating difference goes to the government instead to individuals.
Overall, an option that will introduce some competition at official rate window where dollars are access but with some band on the rate at which dollars can be sold to the public by banks and bureaus, this will ensure stability.
Finally, the fact that Central Bank can always supply dollars that it can afford and any difference can be reflected in pound value ensures sustainability. But again, with stability as key exchange rate policy objective, when possible the Bank can always provide more to ensure a strong pound.
Despite all above proposal, import substitution production must be pursued vigorously and fiscal policies can be used to support this policy path. Again, coordination between policy makers is require within the framework of national plan.
Can South Sudan Export Pound
With current fix rate, interruption of production in Unity and Tharjath and diving oil price in the World market, Central Bank has come under pressure to supply dollars demanded by the market to keep the rate at 3.16 SSP. This demonstrates that fix rate is not sustainable.
The exchange rate in the black market has deteriorated in the black market to reflect probably insufficient dollars supply by the Bank and maybe risk-mitigation behaviors by economic agents by stocking dollars in anticipation of working pound. If things continue the way they are, government might surrender to protect the pound, this the sustainability we are talking about.
Desperate times calls for desperate actions. Recently, the government has increase policing the markets. Some suggestion includes calling Uganda, Kenya, Ethiopia and other neighboring countries to start using pound to reduce demand for dollars.
Whether it is ignorant or public relation exercise, this latest approach is not going to work. Today in South Sudan, if you go to a bank and you want to send money to Uganda or Kenya, you can’t use pounds, you got to get dollars. This means even within South Sudan borders, pound is not a legal entity.
Economic agents acting rationally know that pound has been over-valued and for illustration purposes, assume, Machok has $100 to send to Uganda, if Kenya Commercial Bank allows Machok to send 316 SSP being the value of pound, KCB will not use the same amount to get the same amount but less and that is why it can’t accept to sell its asset below it market value.
Economically speaking, calls to ask Kenya, Uganda, Ethiopia and other countries are misplace and laughable as this is not supported by any economic reasoning. Countries’ currencies become convertible on two counts: one, both currencies must be fairly valued. If anyis not correctly value, market correct this through arbitrage; and second, both must be trading with each other, this means exports and imports exist between both countries.
In case of South Sudan, pound is artificially keep over-valued through a fix rate; and South Sudan does not export anything to its neighbors whether Kenya, Uganda, Ethiopia or any of its neighbors and hence these countries don’t need South Sudan pound.
So how will the proposed push for pound utilization in neighboring countries work? Assuming the policy makers of these countries act rationally in the interest of their countries which authors believe they will.
If South Sudan Central Bank give them pounds in exchange for their currencies, they know South Sudan pound is over-valued, why will they accept? I mean they cannot convert those pounds to other assets like dollars without losing value of their money and they have nothing to buy from South Sudan to use those pounds.
Worst the citizens in these countries will not go to their Central Bank to buy South Sudan because they too know about the valuation problem. For instance, a Kenya citizen will instead convert his Kenya Shillings into dollars and come to South Sudan with dollars. He/she then sell dollars at higher rate in the black market than buying over-valued pound in Kenya with his Kenya shillings.
The proposal does not consider arbitrage, rationality behavior, and simple demand and supply. It is basically unworkable and waste of time to pursue unless South Sudan believes policy makers are going to behave irrationally disregarding economic fundamentals which the author doubt.
Conclusion
South Sudan cannot export pound. The more South Sudan wants to pursue this option, the more it looks vague and empty without rigor. South Sudan exchange problem require long term surgical operation, no economic pain-killers will want.
In short run, peace to restore oil production in Tharjath and Unity which will increase inflows of dollars to easy pressure on pound is key otherwise, without peace exchange rate induced inflation will continue to surge beyond imagination.
In the long run, structural economic correction required. Basically increasing local production and improve social services with an aim to reduce demand for dollars for imports. South Sudan needs to concentrate on imports substitutions supported by fiscal policies and this has to do be done within national economic plan framework.
Garang Atem Ayiik is an independent economic commentator. He can be reached at garangatemayiik@gmail.com
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