By: Ms Betty Imoya Angasi, 22/Dec/2015, Juba, SSN;
I would like to applaud the monetary and fiscal authorities in finally devaluing the overvalued SSP. This is a very positive move and an overdue process that would have taken place right in Aug 2012 after the RSS exhausted its oil reserve following the closure of oil pipeline, but it is a better move than not doing it at all.
This in fact is the first biggest achievement ever in the history of monetary policy instrument in this country.
It is understandable that the monetary authority has been very patient in trying to comfort the peoples’ will by upholding the irrelevant Fixed Exchange Rate (FER) regime throughout the economic difficulties that hit this country from Aug 2012-Dec 2015.
However, the purpose of this article is to answer a key question of: what is the right rate at which the exchange rate should have been devalued or unified that would be sufficiently credible to last?
In order to answer this question, this note revealed the causes of changes in exchange rates behaviour; it analyses the history of Exchange Rate Regime in South Sudan; Disadvantage of Fixed Exchange Rate (FER) Regime; Advantages of Managed Float/Flexible Exchange Rate (FLER); the need for Harmonization of Fiscal & Monetary Policy in particular Areas; and draw conclusions.
To start with, fluctuations in exchange rate are a normal part of development stages. In South Sudan, the Exchange rate reacts to speculations, insecurity and global oil price.
Aware that the BSS (Bank of South Sudan) or MOF (Ministry of Finance) does not print USD or hard currency locally, there is not enough reserve (USD, Euro, GBP, nor Yen, or Yuan) in this country that can defend the FER regime anymore (1USD@2.96-3.17) as much as there is no export revenue to cover the FER gap.
If these institutions are again pushed to print more SSP for full scale salary adjustments, then be ready for 1,000% plus rise in inflation.
There is no country in the world that brings dollar or hard currencies for spoon feeding its citizen but rather citizens can contribute in bringing various hard currencies to their economy through their individual exports or from overseas remittances to top up the efforts of their Govt.
Uganda is a typical life example where citizens cultivate and export to SS and the dollars goes to the Republic of Uganda period, and there is nothing we sell to Uganda, Kenya, Ethiopia, or Sudan to bring back our USD indirectly, therefore making a kind of holocaust imbalance in regional and International trade because SS became the main sources of hard currency to some immediate neighboring countries, unfortunately.
The International oil price which is the only export commodity in this country has dropped from $100-$107 to $35 per barrel when the USA which was the world’s major oil consumer started drilling its own soil (sand) oil.
Besides not all oil field stations are operational in South Sudan since the beginning of the internal War from Dec 2013. The oil revenue the RSS was enjoying until 2011 has dropped by 76%, leaving the country in a complete paralysis stage.
As the saying goes, when the USA sneezes, 80% of the world can catch flu, this alone is a food-for-thought for some South Sudanese who had consciously and openly propagated against the USA in newspapers eluding that the USA is after the RSS oil.
If that is the case, why are some of you then dying after the USA dollar, a currency that belongs to your presumed foreign enemy??
History of Exchange Rate Regimes in South Sudan:
The fixed exchange regime (FER) as a nominal anchor for monetary policy was adopted by the BSS on July 2011 as South Sudan got its independence with a good intention to stimulate economic growth and ensure macroeconomic stability in the country.
From Aug 2012- Mar 2014, the exchange rate in the black market (parallel exchange rate) soared to 1USD@5.34 SSP and from Jan-Dec 2015 the maximum rate was 1USD@25 SSP, telling there was no enough reserve to supply the rising demand for dollars in SS.
Abusively, 84 forex bureaus & 28 banks emerged in SS much more than in Uganda, Kenya, Ethiopia, Rwanda and other African Countries just for the sole reason of foreign exchange business using the FER, making the situation counterproductive to the economy.
Disadvantage of Fixed Exchange Rate (FER) Regime:
As a result between the periods of Aug 2012-13 Dec 2015, the FER regime under-served nothing but instead encouraged recycling of money, created rent-seeking behaviour (black marketeers), diverted Govt reserves meant for development for invisible purposes.
Some people who have access to USD became millionaires overnight by abusing the FER. The FER turns to auction or re-sale our oil in much lower price through subsidies (being it KSH, USH or USD allocations) because at the end of the day we tend to give out our hard currency on less value below the market demand value-subsidies.
The FER had a hypocritical banking system which turned to divert from basic banking business of lending to people for economic development to other unrealistic deals through LC’s Shilling transfers and exchange of USD.
The FER prohibits people who deserve and are direly in need of hard currency from accessing the hard currency; for instances how can you differentiate between a sick person or those with kids studying abroad from the ones who are not sick nor needed hard currency for external purpose if all had the same documents (Medical reports from the Medical Commission and Tuition fee papers)?
How can you as much prohibit LCs rent seekers who have access to hard currency using invisible companies from productive business people?
Where can the RSS get free USD or Euro to allocate to certain group of people every three to four months when there is no enough hard currency entering the economy/country in the first place?.
The hard workers are categories of people who earn their money through sweat; these are segmented group of people during the fixed exchange rate regime the black marketeers robbed their money from Aug 2012-Dec 2015 as they have no access to approvals for USD from the MOF, MOP, BSS, MOC to get the hard currency, and at the same time they want to keep their businesses running or children studying abroad as well cover their medical on their own.
This was a stage of economy of deprivation, imbalance and inequality that cannot bring macro-economic stability or equitable growth but rather nourish false millionaires in the face of rent seekers who have wide access to the little dollar that comes in and it encourages laziness.
Besides, the economic law of one price does not allow any market to clear at more than one price, hence the foreign (US dollar) exchange market obeys the same law and the exchange rate, which is the price in that market, should be unified. This is one of the key reforms of the economic program that the BSS should be highly applauded for finally coming to central bank consensus.
There shouldn’t be much reaction from the market because already prices of goods were throughout priced according to market exchange rate prices, and it is very clear in Uganda and Kenya, the SSP is rightly quoted in forexes according to its right value.
Advantages of Managed Float/Flexible Exchange Rate (FLER):
The Manage Float or rather Flexible Exchange Rate encourages competitions in banking sector and many banks will be willing to lend out money to the public to get profit other than relying on forex exchange profit.
The Banks can merge and reduce unnecessary opening of big forex bureaus under the umbrella name of commercial bank with quasi-business plans that do not contribute to the growth of the economy, it shall differentiate the work of banking and forex clearly.
The FLER is realistic and reflects the truth about an economy, it encourages people to work hard and gives chance for local production of goods and services in realistic price much lower than import goods. It gives opportunity for economies to diagnose and fix up things simply using right approaches, it reduces or clears out the parallel markets or black markets for dollars or fuel because these black markets businesses will not be profitable to the rent seekers any more as same prices will be applicable anywhere with slightly narrow differences of 1 or 2 SSP only.
Harmonization of Fiscal & Monetary Policy Areas:
There could be areas of harmonization needed in some areas especially for low income civil servants, the author suggest that a salary survey scale be carried out by the MOF and Public Services in countries SS trade with; Kenya, Uganda and Sudan to map the salary scales of civil servants of all levels in these countries such that an average salary plus slight addition be drawn for salaries of public civil servants in this country.
It is quite outrageous to note that from the onset of CPA and beyond, the finances that were used for paying civil servants in this country was 80% and development 20% making this country a complete paradox or drama in the world and upside down sort of country because in other countries it is the development finances that take 80% of the budget and 20% is for salaries.
While doing so, the said institutions should be careful in doing the financial adjustments while taking into consideration inflation pressures.
Maybe it is time we cultivate small garden farms in our backyards like before and advise the cattle herders to take care of their cattle from eating people’s farms.
We should be improving production of these cattle too for commercial purposes because we cannot claim to be among the countries with big number of livestock cattle while on the other hand importing meat from abroad- Uganda. We should be the ones exporting meat to others and get dollars from the meat exports not just faking to have the biggest number of cattle over the region with no proofs.
The unification of the exchange rate has to be presented as a part of package of reforms designed to ensure macroeconomic stability, improve good governance of public resources, and create the conditions for inclusive growth and poverty reduction.
These reforms are supported by the international community, particularly the IMF. It is an economic law that the real market exchange rate is determined by the market forces of demand and supply of dollar for the case of South Sudan.
It is important to underscore that the proposed unified exchange rate is around the prevailing parallel exchange rate at the time of unification. There should therefore not be any negative impact on inflation, particularly of basic food items.
Given the perception among the public that are dealing in the parallel exchange rate as a legitimate business, the authorities should be careful to explain the benefits for the national economy of having one single exchange rate.
Therefore, based on the preceding exchange rate analysis, the newly implementation of a unified exchange rate or managed float, or flexible market rate, call it as in place that is market driven.
The Author is a financial economist in the Central Bank, she can be reached via: 0955322322; firstname.lastname@example.org or betty.angasi.bss. Please note that this article reflects the views of the author as an individual