Safer Paths out of our Wartime Economy (Part 4)
By Mayen D.M.A Ayarbior, Juba, South Sudan
November 24, 2015 (SSB) –- In the last three articles on “Safer paths out of our wartime economy,” I argued, inter alia, that closing a budgetary deficit has rarely been used by governments as reason for currency devaluation. Instead, the balance of trade economic considerations are the main reasons why central banks devalue local currencies. It is done when a country wants its industrial goods to be cheaper and more desirable, hence exporting more and benefiting through an economy of scale.
If a country is in actual need of a local currency it just prints it, then controls its allocation through relevant monetary and fiscal policies. Hence, a deficit in local currency should have no direct relation to the U.S. dollar, unless the deficit in question is in dollars, which is possible for a country which is dependent on imports of goods like South Sudan. But then devaluation will not get you more dollars.
I also argued that if devaluation is finally accepted, it should be done within a total restructuring of South Sudan’s financial sector. In that regard, accession to the East African Community (EAC) is a big window of opportunity for the country to change its currency to a South Sudanese Shillings (SSS) and adopt a nominal devaluation approach of adding three zeros to its lowest paper denomination (1,000 Shillings). This, in my humble view, which could be proven wrong of course, should be the meaning of the president’s call for the country’s two main financial institutions (i.e. Ministry of Finance and Central Bank) to “align” the exchange rate.
It would be so simplistic for citizens to argue that the black market is the main problem affecting South Sudan’s economic health. While it surely is one of the problems that need quick fixing, it could not be the main problem. In essence, it is just symptomatic of the metaphoric “tip of an ice berg,” while the main problem is far beyond a bunch of village black-marketers scattered at a few locations in Juba. After all, the money laundering these village folks are undertaking on behalf of their suppliers (whoever they might be) could be a drop in the ocean when compared with the billions of U.S. dollars circulating within the banking system, internally and externally.
These village folks who are now going to determine (as it appears) the exchange rate of a sovereign country could just be legally rounded up overnight for undertaking an illegal economic activity. However desirable and urgent this may sound, it will not solve the problem of availability and allocations of foreign currency in the official market place.
It is easy to scape-goat a country’s problems on the conspicuous enemy, while using it as a pretext to abdicate a national responsibility. The central bank’s foremost role is to protect our currency from being useless internally, and given the fact that high inflation is the only measure of the uselessness of a currency, allowing the black market to determine the exchange rate would be tantamount to adding water onto mud, so to speak.
The greatest economies in the world, such as the United States and China, have not allowed invisible hands to control the value of their currencies. Surely, their exchange rates have not been so rigidly stuck to one value such as what we have here (2.96), but their central banks post daily official exchange rates on their websites which rates always differ up-and-down by cents. Country’s like Uganda and Kenya have their central banks issue “official exchange rates” every morning in response to market forces. In practice, as opposed to theory, there is no such thing as a floating exchange rate anywhere in the world.
While Ministries of Finance are in charge of managing the fiscal policies of sovereign states (taxations, export/import duties, financial allocations, etc.), central banks are in charge of monetary policies (managing inflationary and deflationary gaps, exchange rates, internal and foreign trade transactions, etc.) Abdicating one element of its responsibility such as controlling the exchange rate to market forces, especially during a wartime economic crisis, will surely cascade into the realm of galloping inflation which shall bite the already poor people of South Sudan. This is not something we should take in a rush, then claim later that we didn’t know what we were doing.
Market forces are essentially driven by profit maximization, while governments are concerned with people’s welfare through market stabilization. The two are diametrically opposing forces which are engaged in a constant conflict of interests. While I believe in that market equilibrium is achieved by a combination of free market forces, it is an economic myth that such forces freely operate unchecked.
Market forces could be allowed space in many other sectors of an economy, but not the exchange rate. It is an economic fact that capital (money) is a big coward. It reacts to every sound of bullets or rumor on commodity scarcity. If you make your currency like any other commodity, then its value will be subjected to the fluctuating market value. Those in Juba remember that the day President Kiir signed the agreement the price of U.S dollars fell by half (180 to 90 ssp). Considering that our country still imports matchboxes, tomatoes and brooms from Uganda and Kenya, market prices shall always double or triple overnight. How shall we realistically set controls over price levels?
To be clear, if it isn’t already clear to some, I am not against devaluation as a policy. What I see as a mistake is the failure of some of us to recognize that the crisis our economy is currently facing is a result of multiple forces at play. The market, which is seen as the problem, could be the least influential of all those forces. THE problem is a structural one which could only be solved through bold structural adjustments, but not the World Bank and IMF types. It is a peculiar combination of factors which are endemic to our setting, local and regional settings.
Mayen Ayarbior, BA Econ Poli. Science (Kampala Int’l Univ.), MA Int’l Security (JKSIS- Univ. of Denver), LLB (Univ. of London). mayen.ayarbior@gmail.com
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