A conceptual framework for analyzing inflation and economic crisis in South Sudan
By Ayuen Ajok, Washington, DC, USA
EXECUTIVE SUMMARY
September 7, 2016 (SSB) — The countries chosen for this analysis were based on country that had economic challenges similar to issues in South Sudan, such as Ghana, Zambia, Zimbabwe, Uganda and Mozambique. The macroeconomic policies that are used in this analysis are drawn from the success of economic policies in Zambia, Mozambique, Ghana, Uganda and Zimbabwe. Additionally, a conceptual framework was established for these four countries in order to provide evidence of successful policy intervention implemented by them
It is determined that South Sudan is to address its economic challenges, it would be advisable for it to reform its economy by using interventions similar to the ones followed by the countries mentioned above. This analysis also looks at the role of the government in these countries, with regard to the promotion of economic growth and country development, and in other sectors of the economy. Finally, the paper considers contemporary challenges that derail economic activity in those countries, particularly challenges related to inflation and currencies reforms
- INTRODUCTION TO THE PROBLEM—CHALLENGES OF ECONOMIC CRISIS
This research draws relevant information from different data sources. The analysis discussed in this economic paper presents a conceptual framework that helps us to understand economic challenges that some of the economies in Sub-Saharan Africa have experienced, and how the Republic of South Sudan can learn from those countries discussed in the literature. Based on this framework, a detailed review of the literature is analyzed in the research. This analysis helped us to understand how government and individuals in those countries perceived inflation, and how they were able to come up with policy interventions for addressing the economic crisis they were facing. Also it scrutinizes the conflict and economic crisis that South Sudan has experienced since the recent conflict erupted on December 15, 2013.
Knowing the economies crisis these developing economies faced and how these developing economies were able to manage their economic crisis, will help us determine what are the areas of policy intervention South Sudan should learn from these countries, and how the Republic of South Sudan should manage the contemporary economic challenges the country is facing.
In the relevant literature studied, it is discussed that in 2008 Zambia experience high inflation when there were lack of macroeconomic policies in place. This translated to the nose-diving of the country’s economy. When this happened, the prices of commodities such as oil and copper fell drastically. The country’s balance of payments was aggravated by large outflows of capital. When the conditions presented themselves as economic indicators, investors that were interested in investing in the country Zambia didn’t want to invest anymore because of anticipated economic volatility within the country. After the falling of prices affected the country’s currency and this intensified instability and uncertainty for exporters and investors.[1]
Despite the occurrence of inflation in Zambia, similar conditions took place in Zimbabwe when the country’s economy deteriorated vastly that Zimbabwean dollar lost the value of its currency, resulting in value depletion of the country’s currency. As the economy was deteriorating the government planned on reforming the country’s economy. In this case, the Zimbabwean government came up with robust and sounds economic policies in place.[2
2. ANALYSIS
According to the article entitled Dollarization: The Case of Zimbabwe, it is stated by Noko Joseph (2011) that the country of Zimbabwe did experienced massive economic challenges for a very long time. The author further affirmed that the Zimbabwean currency lost its value terribly. The Zimbabwean dollar was specifically to a flexible basket of currencies in which Zimbabwe dollars had a crawling band of +/-2 percent of the dollar. Joseph (2011) mentioned that there were other factors contributing to the reasons the Zimbabwe economy was plummeting. One of the factors that were mentioned by the author that had contributed to the deteriorating economy of Zimbabwe included, land expropriation program of 2000. The policy of land expropriation program in Zimbabwe affected the country’s economy in a very problematic manner, especially when the Zimbabwean government decided to appropriate white’s lands to black Zimbabwean. Also, when the Zimbabwe government began to involve in the Congo’s conflict, it affected the economy in Zimbabwe. Another condition that affected the economy was the decision in printing the country’s currency. When the country of Zimbabwe began to print more money, their economy collapsed and the economic crisis that was surging brought the country’s economy to almost nonexistence.[3]
When Zimbabwe failed to adopt sound economic policies in the year 2003, the country’s economy suffered severe inflation. This economic devastation can be attributed to the lack of monetary policy within the country. The Zimbabwean government was reluctant to reform the economy. As the government and policy makers remained reluctant in installing sound economic policies, the Zimbabwean Central Bank was experiencing a loss of money. Due to these harsh economic challenges, 40 percent of the banking system in the country ran out of money. Those economic conditions drove the local owned bank out of business for good.[4]
Herbst, J.I. (1993) argued in the article entitled The politics of reform in Ghana for the government and policy reformers to understand inflation that was weakening the country’s economy. Herbst (1993) discusses that when inflation is happening, it’s difficult for people and policy reformers to understand the driving forces of inflation when they are not well informed of what factors influence inflationary forces. The thought of people not being aware when inflation happens occurred among the farmers. As the country was experiencing inflation crisis, farmers did not know what to do with their agricultural productivities. The driving forces of inflation immensely affected the farmers. Some of the farmers even decided to stop growing or producing produces. Those who decided to produce began to smuggle their produces to the neighboring country of Ivory Coast for better prices when they realized that the country of Ghana wasn’t offering higher returns on their goods.[5] As inflation was rapidly increasing and prices of goods were declining, Ghana’s government officials and civil servants became aware of the overvaluation of the country’s currency. The government became aware that this overvaluation was hurting Ghana immensely, and on the other hand, the urban population in urban centers in Ghana had a high perception that the development of exchange rate would hurt the market and people as well.[6]
The economic crisis in Zimbabwe was a big issue to the country because it affected all sectors of the economy. In the words of the Zimbabwe’s ministry of finance Tendai Biti it was stated by the minister “high inflation was primarily driven by high money supply growth on account of expansionary quasi-fiscal activities by the Central Bank. This pro-inflationary macroeconomic policy was compounded by speculative activities in financial markets and the underlying severe supply constraints in the economy” (Biti 2009b). When the country’s economy was viewed to be worsening in all sectors of the economy, government of Zimbabwe with the country’s reserve bank came out with a policy intervention. The Bank of Zimbabwe began to increase currency circulation at the escalating rates in the economy. The Reserve Bank know that by adopting such sounds ad robust policy would help the economy from inflation forces. Most importantly, the government of Zimbabwe and the Reserve Bank came to understanding that improving the economic system would be immensely significant for the country and to Zimbabwean currency (dollar). However, in the year 2006, Zimbabwean dollar was then valued at 1 revalued dollar to 1,000 old Zimbabwe dollars, and sub- divided into 100 cents, though the cents were never used.[7]
Despite economic challenges Zimbabwe was experiencing, the government decided that it would be significant to embrace currency regimes policy intervention in order to address the economic challenges the country was confronting. However, the Zimbabwe’s government devalued its new Zimbabwean dollar from depreciating. The new Zimbabwean’s currency (dollar) was devalued by 60 percent against the U.S. dollar. When the currency was devalued, the country’s economy improved, and soon as the economy began to pick up from inflation and it was seen improving, the government decided to devalued their currency several times in order to enable the currency to compete against the U.S dollar in good rate in the economy. For example, on September 6, 2007, Zimbabwe’s government devalued their currency again by 92 percent. And importantly, the Zimbabwe’s government decided that it was an extraordinary for Zimbabwe to adopt a Short-Term Economic Recovery Program (STERP) on February 11, 2009. This economic recovery program was viewed as crucial program to economic growth in Zimbabwe. However, it was viewed as an important policy intervention by the government. Zimbabwe’s government perceived that in order for their country to overcome the economic crisis that was threatening the economy, it would be better for government to adopt a strategic approach that would to help the Zimbabwe to strengthen its currency.[8]
Importantly, for the country of Zimbabwe to address its currency problems, the government decided that the best mechanism was to trades in foreign currency and to implement the process of full dollarization of Zimbabwe currencies under the new currencies regime. Moreover, when the country of Zimbabwe experienced high inflation, the government and the Reserve Bank suspended Zimbabwe dollar in the market as the legal tender and adopted the U.S dollar as a currency in Zimbabwe and agreed that U.S dollar would be use as a currency of conducting businesses in the country. The suspending of Zimbabwe dollar in the market however helped the country to stabilized the banking system in Zimbabwe.[9]
In 2000, Zimbabwe experienced hyperinflation, which caused much economic devastation to the country. The hyperinflation presented a lot challenges to the economic performance of the country. However, in the year between 2000 and 2008, the monthly inflation in Zimbabwe was at 79.6 billion per cent. Zimbabwe’s Gross Domestic Product (GDP) was massively affected, which meant there was 40% dropped in the country’s GDP. On the other hand, the county’s unemployment rate was standing at 80% during the economic crisis in Zimbabwe. In addition, the nation experienced depreciation in its currency, and shortage of foreign currencies. However, the banking system in Zimbabwe failed to taken initiative in order to stabilize the economy.[10]
In Mozambique case, the country experienced economic catastrophe in different ways. The authors argued that the economic crisis in Mozambique that contributed to occurrences of inflation range from natural disaster and climate shocks, high international fuel and food prices.[11]When Mozambique was confronting worse economic conditions in mid-1980s, the government began to developed inclusive policies that were geared toward lowering the inflation rate and enhanced macroeconomic policies that would strengthened the country’s economy from worse economic conditions. The strategically inclusive policies were viewed as a crucial mechanism that would save the country from the economic crisis occurring in Mozambique at that time. Although Mozambique was experiencing other economic shocks to due inflation, the country managed to reach 8 percent average growth in its economy when the government to a role in implementing robust economic policy. The initiative took by the Mozambique’s government allowed the country of Mozambique to be realized and acknowledged as one of the top ten fastest-growing economics in the world.[12]
The strategic economic policy that the country of Mozambique took was viewed as a significant policy intervention. This strategic economic policy led to economic transformation when the country’s policy makers put in place the mechanisms of addressing the inflation. This policy was made possible when the Bank of Mozambique (BM) introduced its first structural adjustment program in 1987. The Bank of Mozambique introduced a structural adjustment program and established it in order to marked-controlled price system in the country. However, when this process was established, it took a very long time for it to take effects in address inflation conditions that the country was experiencing, but as time progressed it started to suppress the inflation rates.[13]
Also, the government of Mozambique introduced a market-determined exchange rates in order to help eliminate a premium of 40 times of a US dollar on the parallel market in 1986. Specifically, when the government implemented these policy processes, the Bank of Mozambique showed improvement overtime due to the introduction of the government treasury bills. In addition, the author stated explicitly that the goal of BM’s intervention during economic crisis was to address the issues of financial reforms processes and to bring down inflation rates by 6 percent and to maintain financial stability in the country.[14]
Zambia on the other hand, was stated to have experienced economic distress, especially from a mix of domestic and international unfavorable factors. In 2008 the Zambia experienced the fall in prices due to economic factors that presented themselves. The country’s commodities prices fell drastically, especially the price of oil and metal. The fall in oil prices and metal prices affected the market at large. When the prices of oil, metal and other commodities fall, this made it difficult for exporters to export commodities to other market.[15]
When this happened, the Central Bank of Zambia found it important for it to come out with the best strategy in order to address the economic challenges that the country was experiencing. The government and the Central Bank of Zambia strategically developed a monetary policy. It was in the best interest of the Central Bank of Zambia to make sure that stabilizing the real exchange rates would stabilized country’s economy, promote growth and tackled the issues made it difficult for the investors to invest in the country.[16] The best approach the Central Bank of Zambia to tackle the economic conditions that were affecting the country was through tightening of the monetary policy and by increasing the statutory cash reserve in the market. The policy mechanism was viewed importantly by the government and Bank because it was geared toward open –market operation. This was also deemed as a mean to increase the interest rates. Interestingly, when both the government and the Central Bank of Zambia implemented the market-oriented policy, positive outcomes were experienced in the economy. There was a sharp increase in interest rates “(on 91-day treasury bills) from 34 per cent at the end of 2000 to about 45-50 per cent during the latter part of 2001, in a real appreciation of the kwacha against the US dollar, and in a reduction of the year-end inflation to 18.7 per cent.”[17]
However, in 1991, the country of Zambia came out with another strategy of reforming their economy. The strategy proposed was the donor-advised structural adjustment policies. The government figured that this policy would help in improving the economic conditions in the country. The government reckoned that would be significant for the economy if policy makers embraced donor-advised structural adjustment policies and transitioned the economy from centrally planned to a market based economy. In order for the economy to transition to the market-based economy, the government crafted in July 1992, the Zambia Privatization Agency (ZPA). The goal of the agency was to market out the privatization policy to small, medium enterprises, and large companies.[18]
Ghana has experienced tremendous economic conditions with a real exchange rate problem during their financial crisis in early 1970s. Also, the country’s exchange rates were distorted in the same year. Hence, this made it problematic to reform the real exchange rates. The distortion of the real exchange rates put Ghana in a worse economic condition. Consequently, the Ghanaian cedi devaluated by 78 percent, therefore reducing the value of cedi from 1.02 to the dollar to 1.82 to the dollar. Accordingly, the overvaluation of the cedi produced tremendous problems in the black market. This made it difficult for people to find commodities at the market price. This created another issue. For individuals’ importers to find commodities in the black market, the importers were encouraged to a bid on a value of funds that they would like to trade for on the black market.[19]
When the exchange rates were distorted in the economy, the Ghanaian government came out with a policy of reforming the exchange rates. The government viewed it considerably important to address the economic problems the country was going through. Therefore, the government began to overvalued exchange rates in Ghana. The overvalued of the exchange rates affected exporters in different ways. The price of the country’s commodities such cocoa was very low in the market price, and this indeed affected farmers that export because they don’t get good returns on their commodities. This became a critical problem for the exporters, especially farmers. In this case, farmers were forced to make decisions. The farmers stopped producing or smuggled their produces across the border into the neighboring country of Côte d’Ivoire, where prices of goods were much higher in the market. [20]
Herbst, J. I. (1993) argued in his article that there were numerous reasons why the government of Ghana was incompetent in reforming the exchange rate. The author mentioned in the literature that the reason Ghana was not able to reform its exchange rates was due to many disagreements among government officials and senior civil servants. The author stated that government official and civil servants were aware that the overvaluation of the country’s currency was hurting Ghana deeply and they were not bothered to address the issue. Although the government viewed the allocation of foreign exchange as important in rewarding clients in the environment where there is scarcity of resources, there were no policies put in place immediately. Herbst, (1993) deliberated that the allocation of an import license by the government of Ghana was considered as a powerful means of developing and retaining publics’ needs. On the other hand, the urban population in the country of Ghana had high perception that the development of exchange rate would hurt the economy, and will not benefit the economy. It was stated in the country’s debate concerning devaluation in 1982 (tellingly titled “The Revolution or the IMF”) argued, “It is also important to point out that whenever there is a devaluation of the currency the ordinary people are those who suffer most from the resultant price increases, unemployment, and cuts in social services.”[21]
When the government of Ghana valued the importance of currency devaluation, the government began to encourage exporters and importers. The way the government began to encourage exporters and importers was through bonuses. The system of bonuses was set up by the government to encourage both the exporters and importers. The way it worked for importers was that they were surcharges if they were able and willing to lower the effective value of the cedi from 2.75 to the dollar to 25 to the dollar. Also, if they were involved in oil market, the price of petrol in the country was offered at lower surcharge. There fuel imports was charged at different exchange rates. Given the crumbled economy, the government of Ghana had hoped that the process of devaluation of the exchange rates would return the country’s economy to the right track where the economy would be competitive again.[22]
The rise in oil prices, growth in the money supply, unsustainable macroeconomic policies, and exchange rate depreciation, were the contemporary factors that the authored perceived to have been the reasons inflation took place in Ghana at first place. The author mentioned that market policies helped Ghana got rid of inflation and liberalized the economy. The country of Ghana stabilized it economy through financial liberalization approach. This approached was viewed important by the government and it has helped the farmers in the country tremendously. However, this enable the farmers to access credits, and allowed them to increase agriculture sector supply, fiscal deficit management, and exchange rate control management. When this policy framework was put in place as a mean of tackling inflation in the country, it contributes positively in price declines in the country.[23]
Adom, Zumah, F., Mubarik, A. W., Ntodi, A. B., & Darko, C. N. (2015) argued that the inflation in Ghana had external or international influence. The inflation in Ghana and Ivory Coast affected both countries one way and another. Importantly, the fiscal deficit in Ghana was viewed positive. This indicates that when the government deficit in Ghana went up, it generates inflationary pressures via demand pressures.[24] The authors stipulated that the oil prices in Ghana did have positive impact on the country’s inflation. As it was discussed in the literature that a unit increases in crude oil price was expected to generate inflationary pressures of 0.422 units in the country. It was also identified that a rising crude oil prices resulted in higher energy bills and higher transportation costs, and this translates into higher costs of production.[25]
Ravi Kanbur (1994) stated that in 1983, the country of Ghana suffered greatly in trade losses, and precisely the aid flows that was pouring into the country did not help compensate the losses that the country were incurring. The revenues that the government of Ghana was generating (omitting aid) fall to 5% of the country’s GDP. Due to the loss of country’s revenue, Ghana was unable to afford basic infrastructure that is fundamental in an economy. The government of Ghana unable to maintained roads, electricity, water, and telephones on which investors depended on. When the economy in the external sectors was liberalized, Kanbur (1994) affirmed that government revenue shot up, as activity came back into taxable channels.[26]
According to Kanbur it is contended that in 1991 government revenue (omitting aid) was going up by 15% of the country’s GDP. However, this was considered a remarkable transformation. The country’s expenditure on social sectors increased, and importantly, the country’s inflation fell from three digits to 10% per annum. In the decade of the Economic Recovery Program (ERP), Ghana’s GDP grew at 5% per annum. The country’s national income went up at 5 % per Annum, and the country’s consumption didn’t change because the public investment was anticipated to have been going up at a faster rate.[27]
For the economic success in Ghana, there were two types of reforms that took place according to Kanbur (1994). The two types of reforms were Type I or Phase-I reforms and Type II reforms. In Type I or Phase-I reforms, the country of Ghana took the initiatives in restoration of macroeconomic balance of realistic exchange rates, removal of quantitative controls, especially in trade reduction of taxes on agricultural rehabilitation of basic infrastructure. However, in Type II reforms, the government work on private sector development, export promotion divestiture of state owned enterprise, public sector restructuring and downsizing in some area and financial sector rehabilitation and liberalization reallocation of public investment and expenditure towards basic health, education and infrastructure.[28]
The Kanbur (1994) affirmed that Type I reforms help in aspect of changing the official exchange rate by lowering of taxes on agriculture, specifically through giving higher producer prices. Also, Type I reforms, is significant in equalization of official and black market exchange rates leads to an overnight jump in government revenues. The author stated that a Type II reform is more institutional nature. It helps in reorienting public expenditure and in practices it involves suitable expenditure monitoring and control mechanism be put in place-otherwise budgets and actuals bear no relation to each other. At the same time, the costs of many of the Type II reforms come through almost immediately while the benefits remain in some quantified future[29].
Based on the economic reforms that took place on Phase I reforms, suggested that there had been a success in Ghana’s economic reforms program. As it is stated in the literature, in 19983, the Ghana’s economy was plummeted, but in 1993, the economy improved based on economic reforms that were introduced. This happened due to a regime change. Ghana moved from a military government to a more constitutional government.[30]
The Republic of Uganda has gone through sequence of economic process since Ugandan independence. Although Uganda has gone through such series of economic process, its economy was affirmed to be one of the most vibrant economies between 1960 and 1970 in sub-Saharan African region. The rate of economic growth and its transformation was relatively magnificent in Uganda. Based on Ugandan’s economic growth alignment, Uganda’s GPD grew at an average rate of 4.8% and GDP per capita grew at 3% per annum. In addition, Uganda’s national savings rate grew at averaged 13.4% GDP. In this case, Ugandan national saving rate was considered sufficient to finance moderate level of capital accumulation amounting to 13% of GDP.[31]
Florence Kuteesa, James Wokadala, Ishmael Magona ,Maris Wanyera (2007) argued that in 1971, the economic situation in the country of Uganda changed considerably through domestic and external shocks to the economy. These economic shocks began to exacerbate the economy in Uganda due to lack of macroeconomic policies place in Uganda. Lack of economic policies urged the most skilled workers leave the country in order to avoid economic crisis and civil unrest, in which they were often caught as soft targets.[32]
In 1970s and 1980s, the country of Uganda suffered worse macroeconomic unbalances. The country experienced high rate of inflation and balance of payments deficits. Uganda’s growth of nominal aggregate demand began to outperform the growth of real supply Ugandan economy. As Uganda’s economy was dwindling, changes began to happen in Uganda’s economy. The national output was reported to recover from a –2.7% growth rate between 1971 and 1980 to 1.7% between 1980 and 1983. However, when these changes occurred in Uganda, the country’s industrial production began to improve positively, and then began to decline due to the problems of foreign exchange allocations and the poor state of infrastructure. In addition, the country’s industrial production fell by 3.9% per annum between 1983/84 and 1985/86.[33]
When the government of Uganda witnessed the economic crisis that the country was going through, in May 1987 the government of the Republic of Uganda began to embark on an Economic Recovery Programme with support from the IMF, the World Bank and other multilateral and bilateral donors. The goal of the Economic Recovery program was to rehabilitate Ugandan economy and enhance economic growth, and possibly to reduce the inflation and to minimize a balance of payments crisis.[34] As the government of Uganda implemented the Economic Recovery Program properly, some positive economy changes were experienced. The real GDP growth grew averaging 6.4% per annum from 1986/87 to 2003/04, and inflation was contained at an average of 4.8% per annum from 1993/94 to 2003/04.[35]
According to the Organisation for Economic Co-operation and Development (OECD) report on Uganda in 2007, it is detailed that the economy of Uganda grew rapidly in recent years. In the year 2005 and 2006, it was identified that the Uganda’s real GDP grew close to the 5.5 per cent average over the past six years. The driving forces that lead to the growth of the country’s GDP was influenced by the growth in other services sector of the economy in Uganda. In the analysis, it argued that the other services sectors of the economy grew at from 8.7 in 2005 percent up to 9.2 percent. The growth in these sectors of the economy was led by road transport, telecommunications, financial services, tourism and air travel.[36]
What enable the country of Uganda to succeed in addressing the key economic challenges in the country, was through strong macroeconomic polices that the government of Uganda put in place. The key macroeconomic policies that the government of Uganda proposed were aimed to, lower inflation and stable interest and exchange rates, increase credit to the private sector, and enhanced the international competitiveness of exports. [37]
Despite economic challenges that the country experienced, the government has been very successful in maintaining prudent fiscal policies. Also, there are other constraints that made it difficult for the government of Uganda to manage the country’s budget. This constraint is considered to be recurring pressures from supplementary expenditure and high domestic interest costs. Most importantly, according the OECD report on Uganda (2007), it is mentioned that the fiscal balance, without grants, improved marginally in Uganda in the year 2005/6, with the budget deficit declining to 9.2 percent of GDP, down from 9.9 percent of GDP in the preceding year.[38]
According to the OECD report (2007) on Uganda, it is cited that the Ugandan government goal in addressing the country’s inflation was to contain the inflation below 5 percent. However, the government of Uganda had been very successful in achieving his objective over the past years. Interestingly, with the objectives of reducing inflation and keeping it below 5 percent, the Bank of Uganda (BoU) had it own of objective in conducting monetary operations with a view to minimizing instability in the money and foreign exchange markets. The BoU immensely considered this policy intervention to be important because it was deemed to tackle this issue a combination of sales of treasury bonds, treasury bills and foreign exchange.[39]
Although the BoU had macroeconomic policies in place, the average inflation rate was at 5.3 percent in 2005/06. This rate came even higher than the target inflation rate of 5 percent, largely because of the effects of the continued rise in the world price of oil on petrol pump prices and transport fares. Importantly, the Bank of Uganda became very successful in managing the inflationary pressures when it started to tighten Uganda’s monetary policy until the government succeed in lowering the underlying inflation in 2005/06 to 4.4 percent, from 6.4 per cent recorded in 2004/05.[40]
The Ugandan government was very mindful of inflation, so the government of Uganda decided to operate at a flexible exchange rate policy. This means the Ugandan shilling permitted to fluctuate freely although the economic challenges were rather severe. The BoU made it a priority. The BoU calculated and figured that if these problems might arise from inflation, they would intervene in order to smooth short-run volatility. It was deemed necessary by the BoU to apply policies in place so that the economic crisis that was affecting the country was addressed.[41] From June 2005 to March 2006, the Ugandan currency (shilling) was depreciated 4.8 percent. The factor that caused the depreciation of the shilling was strong corporate demand for the dollars. This, however, prompted the BoU to intervene in the foreign exchange market in Uganda in order to restore stability.[42]
Kabundi, A. (2012) in the article entitled Dynamics of inflation in Uganda, stated that when East Africa countries of Kenya, Tanzania, and Ethiopia were witnessing a surge in inflation on October 2011, Uganda’s inflation was recorded the second highest level of inflation in the region hitting 30.5 percent. The rise in Ugandan inflation was seen as a contemporary problem that is going to affect the country, the IMF stressed in its report in 2011 that an increase in inflation will have negative impacts for East African countries, mainly for the poor.[43]
Kabundi (2012) stated that both domestic and foreign factors were the determinant of inflation in Uganda. Kabundi (2012) also determined that there was a stable money demand function and linkage between domestic and foreign interest rates in Uganda. Based on the Kabundi (2012) analysis, it was found that inflation in most African countries was caused by increase in world food prices and energy prices.[44]
However, it was also found that the reason why inflation became a major crisis to many African countries is that their economies are small and largely agriculture sector. This means that food prices represent a huge portion in the basket of an average household. The rise in world food prices and energy prices has direct effects on domestic prices.[45] The shortage of rainfalls and drought contributed to become determinants of inflation. Kabundi (2012) argued that the IMF (2011) pointed out higher food prices, fuel prices, and supported by accommodative monetary policy are factors of high inflation. Moreover, the rise in food prices in the country of Uganda resulted from supply and demand constraints coupled with an increase in world food prices.[46]
Also, the Ugandan economy plunged in 2009 due to financial crisis and this resulted to a sharp decreased in food inflation. In Uganda, the increase in food prices puts upward pressure on overall inflation, reaching a highest of 27% in September 2011. In addition, the country of Uganda experienced a period of food shortage due to unfavorable weather conditions. Most important, the IMF (2011) identified energy prices, especially fuel price as the second determinant of inflation dynamic in Uganda. According the IMF report the rise in petrol prices has put pressure in fuel prices in most of African countries, which is subsequently passed on to the consumer, resulting in a general rise in prices.[47]
Based on the analysis in the literature review, the methodology for this research project was aimed at analyzing how the country of South Sudan should help reform its economic conditions by following the experiences of Zambia, Mozambique, Ghana, Uganda and Zimbabwe. How these countries reformed their economies would help South Sudan on how to tackle it economic challenges.
The Republic of South Sudan (ROSS) gained its independence on July 9, 2011 after prolonged conflict that lasted two decades between the Arab North and the Southern Sudan. The country of South Sudan achieved it independence through the act of self-determination, in which nearly 99 percent of South Sudanese overwhelming voted for autonomy of their country.[48] This independence marked the Republic of South Sudan as fifty-fourth state in Africa and 193rd member of the United Nations (UN). Concretely, after South Sudan referendum, one might have drawn to argue that the facts that South Sudan was finally free as a nation, South Sudan will forge a high level of stability in which South Sudanese will be free from conflict that have devastated their country after 22 years of conflict that came to an end on July 9th 2011.[49] However, it is easy for the political leaders in the country to disregard potential source of conflicts in South Sudan, but it’s very important to understand why when the conflict occurred in South Sudan, the economy collapse.
The conflict that tore the country apart for nearly 27 months resulted from the disputed erupted between the Sudan People’s Liberation Army (SPLA) and the former vice president Riek Machar. Because of the power struggle between the two top leaders, political crisis spiraled and a fierce fighting began, a fighting that later on spread across the country within days. Within days thousands of civilians were killed and displacement of civilians occurred on a massive scale. An estimated over one million South Sudanese have fled their homes since 15 December 2013.[50]
In order for the Republic of South Sudan to address the economic challenges that the country is experiencing in terms of oil production and oil prices declining, South Sudan should replicate macroeconomic policies that Ghana took in managing their inflation. For instance, when the country of Ghana experience economic crisis in their nation, the government of Ghana started to liberalize the economy. The liberalization approach works in Ghana created a system that was very transparent to enable farmers to access credits and increase agriculture sector supply, fiscal deficit management, and exchange rates control management. When the government of Ghana implemented such reforms, the country’s inflation began to decline in a positive way.[51]
Importantly, the devaluation of South Sudanese pound could save the country of South Sudan from economic breakdown. For instance, when Ghana’s economy plummeting, the government of Ghana began to devalue their currency. The government of Ghana introduced a system of bonuses that encourage the exporters and importers to trade their goods without any difficulties in the market. The importers were surcharges if they lowered the value of the cedi from 2.75 to the dollar to 25 to the dollar. For instance, petrol prices were set at a lower surcharge, so that the exchange rates for fuel imports was at differential rates. The devaluation of the exchange rates was seen as a mean of returning the country to the right economic track from economic collapse.[52]
When Ghana took an initiative toward implementing Economic Recovery Program (ERP) in 1983, the government revenue (omitting aid) grew by 15% of the country’s GDP. The expenditure on social sectors increased, and inflation decreased by three digits to 10% per annum. The GDP grew at 5% per annum. The country’s national income grew by 5 % per Annum, and the country’s consumption didn’t change because the public investment was anticipated to have been going up at a faster rate.[53] Government revenue increased and economic activity came back into taxable channels.[54]
If South Sudan embraces the road to economic transformation that Ghana took, the country of South Sudan would overcome the contemporary economic challenges that it’s confronting currently.
Also, the country of Zimbabwe devalued its currency as well. The Reserve Bank of Zimbabwe adopted strategic approach in managing their exchange rates. The Reserve Bank of Zimbabwe began to increase currency circulation at the escalating rates. In order to improve economic system in the country, the government values its dollar. The Zimbabwean dollar was valued at 1 revalued dollar to 1,000 old Zimbabwe dollars.[55]
The Zimbabwean government devalued new Zimbabwe dollar by 60 percent against the U.S. dollar. The country’s economy was strengthened when the currency was devalued several times to enable their currency to compete against the U.S dollar in good rate. Moreover, for instance, on September 6, 2007, the government devalued their currency again by 92 percent. However, as a country’s economy was not doing well, the government adopted a Short-Term Economic Recovery Program (STERP). This economic recovery plan was to enable the country trades in foreign currency and to the full dollarization of Zimbabwe currencies. As the country was still experiencing the high inflation, the policy makers suspended Zimbabwe dollar in the market as the legal tender and adopted the U.S dollar as a currency as a mean of conducting businesses in the country. The suspension of Zimbabwe dollar in the economy helped the country to stabilized the banking system in Zimbabwe.[56]
Another policy framework that Zambia took that South Sudan should learn from how the country of Zambia tightened its monetary policy. The only way the Central Bank of Zambia addressed the inflation problem was through their tightening of the monetary policy by increasing the statutory cash reserve. The policy mechanism that was put in place was geared toward open–market operation. This was viewed as a mean to increase the interest rates. Interestingly, when the market-oriented policy was implemented, the positive outcomes were experienced by the economy.[57]
Due to major economic crisis in the country, the government of Zambia tightened its monetary policy. The government of Zambia understood that embracing market –based policy would be able to save the country from economic deterioration. The way Zambia addressed its economy problems was by privatization of small, medium and larger enterprises. This was made possible by the implementation of Zambia Privatisation Agency (ZPA) in 1992. The privatization mechanism promoted transition from a centrally planned economy to a market based economy.[58]
When Zambia put these policy frameworks into use, the country was able to recover from economic crisis. The interest rates increase positively. However, a sharp increase in interest rates was experience in the market. The country’s currency the kwacha appreciated against the US dollar, and this resulted to a reduction of the year-end inflation to 18.7 per cent.[59] In this case, it is tremendously important for South Sudan to appreciate South Sudan’s currency (South Sudanese Pounds) against foreign currencies floating the market. This policy might have managed the rising inflation in the country. The Central Bank of South Sudan might want to examined critically the challenges the country are currently facing and began to embark toward the road to economic transformation.
In Mozambique, for example, when the country’s economy was suppressed by inflation, the government of Mozambique took some important measures in resolving the inflation problem. The policy makers in the country were able to introduced a market-determined exchange rates policy to eliminate a premium of 40 times of a US dollar on the parallel market in 1986. When these mechanisms were put into place by the government, improvement was in the economy. The inflation was brought down by 6 percent and the economy began to stabilized.[60]
It’s important for the government of South Sudan should to come up with macroeconomic policies that will help the country from inflation and many other factors that are disrupting economic activities in the country. The government of South Sudan should examine the Ugandan Economic Recovery Program of 1987[61] and see if it would help them strength South Sudan’s economy and lower inflation that is surging.
It’s also imperative for the Central Bank of South Sudan to adopt a strong monetary policy measures in order for the bank to minimize stability in the money and foreign exchange markets. For example, the Bank of Uganda (BoU) implemented such strong monetary operations measures and addresses the challenges the Ugandan economy was experiencing.[62] This policy would help the nation of South Sudan to stabilize its economy from economic crisis it’s confronting.
In addition, it would significantly be essential if the Republic of South Sudan “operate a flexible exchange rate policy as it happened in Uganda in 2004/05.”[63] This would allow the government of South Sudan to fluctuate their currency (pound) freely in economy although there are economic challenges. Although this policy didn’t work out well in Uganda, it might work out in South Sudan.
3. CONCLUSION
Based on research conducted, this research concluded that in order for a country to address manage economic crisis, high inflation, and deal with the floating exchange rates from fixed exchange rate, a country must adopt sounds economic policies. However, strong economic policies will be required to implement these approaches. The government and the central bank must embrace market-oriented policies. For reasons we have just discussed, the institutions and regulations mandated by a central government set the stage for economic transactions to occur efficiently through implementation. While this has been conducted in various forms, it always emphasizes the relative free movement of the market.
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The author, Ayuen Ajok, is a South Sudanese Economist who graduated from Cornell University in the USA. You can reach him via his email: aga46@cornell.edu
===
References:
Andersson, P. Å., & Sjö, B. (2012). Successful inflation targeting in Mozambique despite vulnerability to internal and external shocks.
.https://gupea.ub.gu.se/bitstream/2077/30502/1/gupea_2077_30502_1.pdf
Adom, P. K., Zumah, F., Mubarik, A. W., Ntodi, A. B., & Darko, C. N. (2015). Analysing inflation dynamics in Ghana. African Development Review, 27(1), 1-13. doi:10.1111/1467-8268.12118
Amusan Lere. Germinating Seeds of Future Conflict in South Sudan. African Conflicts & Peacebuilding Review, Volume 4, Number 1, Spring 2014 , pp. 120-133
Bova, Elva. “Copper boom and bust in Zambia: The commodity-currency link.” Journal of Development Studies 48.6 (2012): 768-782.
Herbst, J. I. (1993). The politics of reform in Ghana, 1982-1991. Berkeley: University of California Press.
Kabundi, A. (2012). Dynamics of inflation in Uganda. African Development Bank Group, Working Paper, (152).
Kanbur, S. M. R., & World Bank. Ghana Resident Mission. (1994). Welfare economics, political economy and policy reform in Ghana. Washington, DC: World Bank, Western Africa Dept., Ghana Resident Mission.
Kuteesa, Florence, James Wokadala, Ishmael Magona, and Maris Wanyera. “Uganda: A Decade of Budget Reform and Poverty Reduction.” OECD Journal on Budgeting 6.2 (2007): 1-25. Web.
Government of the Republic of South Sudan. http://www.goss.org/
Noko, Joseph. “Dollarization: the case of Zimbabwe.” Cato Journal 31.2 (2011).
Sikwila, M. N. (2013). Dollarization and the Zimbabwe’s Economy. Journal of Economics and Behavioral Studies, 5(6), 398-405.
AfDB/OECD 2003, African Economic Outlookhttps://www.oecd.org/countries/zambia/2497663.pdf
United Nations Mission in the Republic of South Sudan (UNMISS). Conflict in South Sudan: A Human Rights Report.2014.
http://www.oecd.org/countries/uganda/38563109.pdf
[1] Bova, E. (2012). Copper Boom and Bust in Zambia: The Commodity-Currency Link. Journal Of Development Studies, 48(6), 768-782. doi:10.1080/00220388.2011.649258
[2] Dollarization: The Case of Zimbabwe [article]
Cato Journal, Vol. 31, Issue 2 (Spring/Summer 2011), pp. 339-366
Noko, Joseph. 31 Cato J. 339 (2011
[3] Dollarization: The Case of Zimbabwe [article]
Cato Journal, Vol. 31, Issue 2 (Spring/Summer 2011), pp. 339-366
Noko, Joseph. 31 Cato J. 339 (2011)
[4] Dollarization: The Case of Zimbabwe [article]
Cato Journal, Vol. 31, Issue 2 (Spring/Summer 2011), pp. 339-366
Noko, Joseph. 31 Cato J. 339 (2011)
[5] Herbst, J. I. (1993). The politics of reform in Ghana, 1982-1991. Berkeley: University of California Press
[6] Herbst, J. I. (1993). The politics of reform in Ghana, 1982-1991. Berkeley: University of California Press.
[7] Dollarization: The Case of Zimbabwe [article]
Cato Journal, Vol. 31, Issue 2 (Spring/Summer 2011), pp. 339-366
Noko, Joseph. 31 Cato J. 339 (2011)
[8] Dollarization: The Case of Zimbabwe [article]
Cato Journal, Vol. 31, Issue 2 (Spring/Summer 2011), pp. 339-366
Noko, Joseph. 31 Cato J. 339 (2011)
[9] Dollarization: The Case of Zimbabwe [article]
Cato Journal, Vol. 31, Issue 2 (Spring/Summer 2011), pp. 339-366
Noko, Joseph. 31 Cato J. 339 (2011)
[10] Dollarization and the Zimbabwe’s Economy. Mike Nyamazana Sikwila
Chinhoyi University of Technology, Chinhoyi, Zimbabwe mikesikwila@yahoo.com Journal of Economics and Behavioral Studies Vol. 5, No. 6, pp. 398-405, June 2013 (ISSN: 2220-6140)
[11] Andersson, P. Å., & Sjö, B. (2012). Successful inflation targeting in Mozambique despite vulnerability to internal and external shocks.https://gupea.ub.gu.se/bitstream/2077/30502/1/gupea_2077_30502_1.pdf
[12] Andersson, P. Å., & Sjö, B. (2012). Successful inflation targeting in Mozambique despite vulnerability to internal and external shocks.https://gupea.ub.gu.se/bitstream/2077/30502/1/gupea_2077_30502_1.pdf
[13] Andersson, P. Å., & Sjö, B. (2012). Successful inflation targeting in Mozambique despite vulnerability to internal and external
[14] Andersson, P. Å., & Sjö, B. (2012). Successful inflation targeting in Mozambique despite vulnerability to internal and external shocks.https://gupea.ub.gu.se/bitstream/2077/30502/1/gupea_2077_30502_1.pdf
[15] https://www.oecd.org/countries/zambia/2497663.pdf
[16] Bova, E. (2012). Copper Boom and Bust in Zambia: The Commodity-Currency Link. Journal Of Development Studies, 48(6), 768-782. doi:10.1080/00220388.2011.649258
[17] https://www.oecd.org/countries/zambia/2497663.pdf
[18] https://www.oecd.org/countries/zambia/2497663.pdf
[19] Herbst, J. I. (1993). The politics of reform in Ghana, 1982-1991. Berkeley: University of California Press.
[20] Herbst, J. I. (1993). The politics of reform in Ghana, 1982-1991. Berkeley: University of California Press
[21] Herbst, J. I. (1993). The politics of reform in Ghana, 1982-1991. Berkeley: University of California Press.
[22] Herbst, J. I. (1993). The politics of reform in Ghana, 1982-1991. Berkeley: University of California Press.
[23] Adom, P. K., Zumah, F., Mubarik, A. W., Ntodi, A. B., & Darko, C. N. (2015). Analysing inflation dynamics in Ghana. African Development Review, 27(1), 1-13. doi:10.1111/1467-8268.12118
[24] Adom, P. K., Zumah, F., Mubarik, A. W., Ntodi, A. B., & Darko, C. N. (2015). Analysing inflation dynamics in Ghana. African Development Review, 27(1), 1-13. doi:10.1111/1467-8268.12118
[25] Adom, P. K., Zumah, F., Mubarik, A. W., Ntodi, A. B., & Darko, C. N. (2015). Analysing inflation dynamics in Ghana. African Development Review, 27(1), 1-13. doi:10.1111/1467-8268.12118
[26] Kanbur, S. M. R., & World Bank. Ghana Resident Mission. (1994). Welfare economics, political economy and policy reform in Ghana. Washington, DC: World Bank, Western Africa Dept., Ghana Resident Mission.
[27] Kanbur, S. M. R., & World Bank. Ghana Resident Mission. (1994). Welfare economics, political economy and policy reform in ghana. Washington, DC: World Bank, Western Africa Dept., Ghana Resident Mission.
[28] Kanbur, S. M. R., & World Bank. Ghana Resident Mission. (1994). Welfare economics, political economy and policy reform in Ghana. Washington, DC: World Bank, Western Africa Dept., Ghana Resident Mission.
[29] Kanbur, S. M. R., & World Bank. Ghana Resident Mission. (1994). Welfare economics, political economy and policy reform in ghana. Washington, DC: World Bank, Western Africa Dept., Ghana Resident Mission.
[30] Kanbur, S. M. R., & World Bank. Ghana Resident Mission. (1994). Welfare economics, political economy and policy reform in Ghana. Washington, DC: World Bank, Western Africa Dept., Ghana Resident Mission.
[31] Kuteesa, Florence, James Wokadala, Ishmael Magona, and Maris Wanyera. “Uganda: A Decade of Budget Reform and Poverty Reduction.” OECD Journal on Budgeting 6.2 (2007): 1-25. Web.
[32] Kuteesa, Florence, James Wokadala, Ishmael Magona, and Maris Wanyera. “Uganda: A Decade of Budget Reform and Poverty Reduction.” OECD Journal on Budgeting 6.2 (2007): 1-25. Web.
[33] Kuteesa, Florence, James Wokadala, Ishmael Magona, and Maris Wanyera. “Uganda: A Decade of Budget Reform and Poverty Reduction.” OECD Journal on Budgeting 6.2 (2007): 1-25. Web.
[34] Kuteesa, Florence, James Wokadala, Ishmael Magona, and Maris Wanyera. “Uganda: A Decade of Budget Reform and Poverty Reduction.” OECD Journal on Budgeting 6.2 (2007): 1-25. Web.
[35] Kuteesa, Florence, James Wokadala, Ishmael Magona, and Maris Wanyera. “Uganda: A Decade of Budget Reform and Poverty Reduction.” OECD Journal on Budgeting 6.2 (2007): 1-25. Web.
[36] http://www.oecd.org/countries/uganda/38563109.pdf
[37] http://www.oecd.org/countries/uganda/38563109.pdf
[38] http://www.oecd.org/countries/uganda/38563109.pdf
[39] http://www.oecd.org/countries/uganda/38563109.pdf
[40] http://www.oecd.org/countries/uganda/38563109.pdf
[41] http://www.oecd.org/countries/uganda/38563109.pdf
[42] http://www.oecd.org/countries/uganda/38563109.pdf
[43] Kabundi, A. (2012). Dynamics of inflation in Uganda. African Development Bank Group, Working Paper, (152).
[44] Kabundi, A. (2012). Dynamics of inflation in Uganda. African Development Bank Group, Working Paper, (152).
[45] Kabundi, A. (2012). Dynamics of inflation in Uganda. African Development Bank Group, Working Paper, (152).
[46] Kabundi, A. (2012). Dynamics of inflation in Uganda. African Development Bank Group, Working Paper, (152).
[47] Kabundi, A. (2012). Dynamics of inflation in Uganda. African Development Bank Group, Working Paper, (152).
[48] Government of the Republic of South Sudan. http://www.goss.org/
[49] Amusan Lere. Germinating Seeds of Future Conflict in South Sudan. African Conflicts & Peacebuilding Review, Volume 4, Number 1, Spring 2014 , pp. 120-133
[50]United Nations Mission in the Republic of South Sudan (UNMISS). Conflict in South Sudan: A Human Rights Report.2014.http://www.unmiss.unmissions.org/Portals/unmiss/Human%20Rights%20Reports/UNMISS%20Conflict%20in%20South%20Sudan%20-%20A%20Human%20Rights%20Report.pdf
[51] Adom, P. K., Zumah, F., Mubarik, A. W., Ntodi, A. B., & Darko, C. N. (2015). Analysing inflation dynamics in ghana. African Development Review, 27(1), 1-13. doi:10.1111/1467-8268.12118
[52] Herbst, J. I. (1993). The politics of reform in ghana, 1982-1991. Berkeley: University of California Press.
[53] Kanbur, S. M. R., & World Bank. Ghana Resident Mission. (1994). Welfare economics, political economy and policy reform in ghana. Washington, DC: World Bank, Western Africa Dept., Ghana Resident Mission.
[54] Kanbur, S. M. R., & World Bank. Ghana Resident Mission. (1994). Welfare economics, political economy and policy reform in ghana. Washington, DC: World Bank, Western Africa Dept., Ghana Resident Mission.
[55] Dollarization: The Case of Zimbabwe [article]
Cato Journal, Vol. 31, Issue 2 (Spring/Summer 2011), pp. 339-366
Noko, Joseph. 31 Cato J. 339 (2011)
[56] Dollarization: The Case of Zimbabwe [article]
Cato Journal, Vol. 31, Issue 2 (Spring/Summer 2011), pp. 339-366
Noko, Joseph. 31 Cato J. 339 (2011)
[57] https://www.oecd.org/countries/zambia/2497663.pdf
[58] https://www.oecd.org/countries/zambia/2497663.pdf
[59] https://www.oecd.org/countries/zambia/2497663.pdf
[60] Andersson, P. Å., & Sjö, B. (2012). Successful inflation targeting in Mozambique despite vulnerability to internal and external shocks.https://gupea.ub.gu.se/bitstream/2077/30502/1/gupea_2077_30502_1.pdf
[61] Kuteesa, Florence, James Wokadala, Ishmael Magona, and Maris Wanyera. “Uganda: A Decade of Budget Reform and Poverty Reduction.” OECD Journal on Budgeting 6.2 (2007): 1-25. Web.
[62] http://www.oecd.org/countries/uganda/38563109.pdf
[63] http://www.oecd.org/countries/uganda/38563109.pdf
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