Why South Sudanese Pound is Depreciating; Measures to Control it
By Hoi Samuel Dut, India
Introduction:
December 22, 2015 (SSB) — Depreciation in south Sudanese pound has become a very big worry for the south Sudanese Government and breaking news for the news channels these days. Pound has declined to its peak level since the outbreak of December 2013 war. and is expected to continue in coming days.
What is exchange rate or conversion rate: Each country has its own currency and when we convert currency of one country with that of another country, it is called conversion rate or exchange rate between the two countries. For example- 1USD= SSP 2.96 initially in central bank and 3.16 in forex bureaus which means if we convert 1 USD in SSP we will get SSP 2.96 and 3.16 in the forex bureau The conversion rate fluctuates on timely basis based on various factors such as demand and supply of each currency, inflation rate in country, interest rate prevailing in the country etc.
What is currency Appreciation and Depreciation?: Appreciation in any currency means when we exchange that currency with another currency, we will get more foreign currency or we need to pay less home country currency. On the other hand depreciation in a currency means when we exchange that currency with another currency, we will get less foreign currency or we need to pay more home country currency.
For example: Few months back, 1 USD= SSP 2.96 which means for each 1$, we need to pay SSP 2.96.While in current situation, USD is scarce in central bank and in private enterprises however much the official rate was 2.96 which was shifted to 18.5 couple of days ago which means for each 1$, we need to shell out SSP 18.5. Thus we need to pay more SSP compared to previous situation. Thus in this case, Pound has depreciated and USD has appreciated.
Reasons for Depreciation in south Sudanese pound:
There are various reasons for depreciation in SSP such as:
- Current Account Deficit: This situation arises when a country’s’ imports are more than its exports. Due to which it needs to buy more foreign currency to pay off the debts. Increase in the demand of foreign currency will ultimately reduce the value of that country’s currency. South Sudan is facing a high current account deficit since its founding which led to fall in SSP value.
- 2. Inflation: It is one of most crucial factors in determining the currency exchange rate. We are experiencing advance imported and hyper inflation rate in south Sudan now. This has decrease the purchasing power against other currencies and lead to depreciation of the south Sudanese currency.
- Political Paralysis: In last few months, we have seen various corruption issues. The parliament is not functioning properly due to which several important Bills are pending. The Government is not able to make any firm decisions relating to investment and finance to attract investors. Due to political paralysis in country, the investors have taken a back seat which affected the inflow of funds and thereby led to depreciation in SSP
- Recession in Euro Zone: The effect of recession in Euro Zone has been seen in world markets today. The investors are selling Euros and buying Dollars which resulted in high demand for dollars and thereby increase in value of dollar.
- Negative remarks of credit agencies: The major credit rating agencies such as Finch, S&P etc. have given negative remarks for south Sudan which made many foreign investors to stay away from investing in south Sudan for time being which resulted in reduction in inflow of foreign currency and thus depreciation in the value of SSP
Effects of depreciation in pound in south Sudan
- Value of imported items such as food items, beverages, gadgets like laptops, mobile phones and motor cars etc. will increase as imports becomes dearer.
- The current account deficits will even increase more due to the shortage in exports and an increase in imports.
- Depletion in forex reserves.
- The borrowing costs for the existing companies will increase more.
- Studying and travelling abroad will cost more home currency.
- Depreciation in pound is good for companies which are billing to its customers in dollars.
- Its good for employees who are abroad and getting salary in dollars.
Measures to control fall/depreciation in south Sudanese pound:
Allowing sovereign wealth funds, endowment funds and foreign central banks to invest in government bonds.
Raising the foreign investment cap
Boost the slowing industrial growth in order to promote exports incentives and reduce imports
Limits the foreign currency expenditure
The central bank should persuade banks and financial institutions to raise funds in dollars from abroad and lend them locally.
The government should review sectors such as defence or initiate pension and insurance reforms.
Conclusion:
Depreciation in south Sudanese pound is not a permanent phenomenon but it is due to various reasons, some of which are stated above. Since there are various internal as well as external reasons behind this situation, it is not always easy to make situation better in a blink of an eye.
It takes time to bring back the situation to the normal state. The Central bank and other Government agencies are doing their utmost best to tackle this situation.
The opinion expressed here is solely the view of the writer. The veracity of any claim made are the responsibility of the author, not PaanLuel Wël: South Sudanese Bloggers (SSB) website. If you want to submit an opinion article or news analysis, please email it to paanluel2011@gmail.com. SSB do reserve the right to edit material before publication. Please include your full name, email address and the country you are writing from.
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