Implementing Monetary Policy on Exchange Rate: Devaluing the Overvalued SSP has been an overdue issue!

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.

Conclusions:
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; bettyangasi@gmail.com or betty.angasi.bss. Please note that this article reflects the views of the author as an individual

16 Comments

  1. Eastern says:

    Dear Betty,

    This is an excellent piece shedding light on the recent development on the SSP. Actually prices in the market, save for petroleum products, were already sold based on the parallel (black market) rates for the better parts of the last two years.

    It was a few people benefitting from dollar allocations from the Central Bank, thus abusing the whole scheme and depleting the reserve if any.

    I hope my brother Tong Kot from Nairobi can benefit from this explanation by Betty.

    The Eastern Rock

  2. Francis says:

    The Author articulated the issue well. People with expertise like the writer have to help our people understand what is going on. The situation can only be reversed if the government embarked on establishing good schools and health facilities to reduce the need for dollars. I would also put in my view, the BOSS and MOF have to inject Dollars into the market on a regular bases to wipe out the black-marketeers and to also put pressure on business people who are over charging the consumers without any reasonable reasons.

    • Betty Imoya Angasi says:

      Francis-

      You are right, actually the international financial Institutions will now be ready to lend to South Sudan money (hard currency; USD, Euro or SDR, GBP, etc) to maintain our balance of payments/internationla trade following SSP devaluation as much as we keep our promise to adhere to coventional monetary policy on exchange rate that is market driven, floating, or non fixed exchange rate regime.

      The black market will die naturally or may survive in a very slight difference of 0.5, 1 or at least 2SSP vacume, indeed the hard currency black marketeers will find business less attractive.

      Betty Angasi

      • Bol says:

        Dear Betty,
        The black market will die when supply of dollar match its demand. RSS needs to increase its ability to attract more hard currency via diversification of economic output.

  3. johnjerry says:

    There are people out there who know,but the attitude of our government that they know, that is dragging the country into the abyss.Right people in the right place will cure the country from the economic ill that is destroying the country couple with the incurable disease corruption,tribalism,nepotism to mention ,but a few. Now that there is a sign that peace may return to the country let us learn from our mistakes and turn to the right road and later on to the highway as the country takes the best road to development.Give a chance to those who know,education is a big challenge for example why import meat from Uganda when we have a lot of cattle that could be used for milk,meat and other dairy product.South Sudan could be the leading dairy product producer in the region,but unfortunately the” Milk is still kept in the Cow”.

  4. Deng Monymor says:

    Francis,

    You said it well. The problem with our country’s economy is our outside consumption. However, the things we consume from outside the country are the things that can be produced right at home without any difficulty, such as building “good schools and health facilities.” In addition, the government should negotiate with Uganda and Kenya a trade deal where they can trade on their local currencies. If they do these three things–building good schools, health facilities, and negotiate a trade deal– South Sudan will be a bread basket in East Africa which will make the United States of America and its Troika partners unhappy.

    Therefore, the solution to our economic problem lies, not in the physical measures such as Fixed Prices on foreign currencies, but in the brains of our leaders. They should learn how to think and be proactive rather than being reactive.

    Deng

    • Eastern says:

      Deng Monymor,

      I like your second name! Your thinking and I quote “Therefore, the solution to our economic problem lies, not in the physical [fiscal] measures such as Fixed Prices on foreign currencies, but in the brains of our leaders…..” End of quote. Why should we not individually take responsibilities by managing ourselves: the cattle keeper should ensure that there is security so that his cattle is safe and there is market for it and the farmer should have his crop protected from damage by cattle for his crop to reach harvest and be available in the local market.

      I have written this before; most South Sudanese are lazy but very good consumers of everything and anything imported. You find simple things like slashing compounds in Juba or doing the laundry in the numerous ‘dobbies’ in Juba are done by the ‘wewes’, the foreigners – all these cause capital flight from our country. All these microeconomic leakages cause the country a lot of capital flight.

      We should not look at Aggrey Tissa, Cornelious Koryom or Athorbei to provide the magic bullet to our economic tragedy. Individuals in this country have thousands of heads of cattle out of which they pay no taxes to the government; a lot of imports for economic gains are done with those involved seeking tax exemption from government leading to loss of revenues. Deng, we need to change individually before we look up to our leaders for the ‘ultimate economic panacea’.

      Thank you,

      The Eastern Rock

  5. Gatdarwich says:

    The problem facing South Sudan financial Institutions is obviously clear and well known, it is thievery period.

    It is being corruptly run and managed by naturally born thieves from tops to bottoms.

    So, replacing all the thieves with patriots and nationalists Bankers-economists should be the first priority.

  6. False Millionaire says:

    In fact I am not so much in disagreement with the thinking of Eastern and johnjerry.
    But I come back to the author whom I believe to have taken the position of an irresonsible rural adviser who speaks of milk but not about the cow and the circumstances that permit it to provide the milk.
    Take her assertion as,”Uganda is a typical life example where citizens cultivate and export”.That’s correct and bears no single grain for diagreement.But I would have hoped she had gone further to provide the backround as why so far as Uganda was a victime of misrule which has come a very long way to be at the point where it is today.

    The IMF among the actors which the author claims to support the,”reforms”,at hand was the same IMF which supported Uganda to carry out it’s economic reforms during it’s difficult hours.
    But the grave mistake is limiting the reforms to only mean currency devaluation.
    The case of milk is a prove to us that the health of the cow that provides it is more important than the milk.
    I am never jealous but very proud of the ugandans for being visionary and constructive in their reforms.
    They have established good road network and good conditions of security that guarantee their farmers to farm without any fear of unexpected reasons to disturb their sense of stability as is the routine in RSS.
    Ugandan banking and money circulation is also well assured as salaries are paid out regularly and every where in Uganda.Such conditions permit the farmers to take their products to the markets in towns and sell them as the money is already available in the hands of consumers.
    Ugandan farmers satisfy their market needs and are now on the offensives to export their surplus not only to RSS but worldwide.
    I chalange the editor to go to fruit and vegitable markets in England if he wouldn’t find ugandan sweet patatos,garden eggs and avocados brilliantly on display.
    That’s what brings back hard currency and dollars to Uganda and ugandans.

    The point that should never be overlooked by any pretending economist is,the reforms begin from the begining as the ugandans have demonstrated.
    As the cow exists first before providing milk,conducive conditions for farmers to work in RSS must be met before they should be expected to produce beyond subsistency.
    Our author is out of the game if she doesn’t recognize that it’s the IMF that may spoon feed the RSS’s government with dollars as assistance on reforms.
    But devaluation of the pound will never stop the RSS’ economy from going down the drain if the ugandan likewise reforms aren’t carried out to put RSS productive forces on production!!!

  7. False Millionaire says:

    Francis,
    I am sorry to say that your comments are misleading.
    just observe how Madam Angasi approves them with the snap of a finger!
    That conduct from here part is terribly worrying as she seems to hold an influential economic and financial position in the RSS’ centeral bank.
    Francis with all due respect,u and me,each one of us have rural life experiences in one way or another.
    I give u one example.
    Suppose we come from the same area and that in a given rain season,we both cultivate.
    But for some reasons my harvest is poor than yours.That at the begining of the following rain season,I fall short of food provisions with u having surplus in your stockage still.
    There are ways of dealing with such a situation sir.
    If I ask u to give me some food in the context of credit,the best way to proceed is taking me infront of witnesses who are the equivalent of a committee in the urbanne banking sectors.
    The witnesses would establish my credentials and means that would gurantee that I will pay u back.
    But if I fail to meet the creteria,the witnesses would declare my demand dishonest,insincere and that u can only loan me the provisions at your own risk.
    Coming to your view,if it’s out of any sincere economic conviction to assert that,”the BOSS and MOF have to inject dollars into the market”,what economic projects that may bring cash to the RSS’ coffers and therefore pay back with it the BOSS’ and MOF’s money do u see the RSS’ government undertaking?

    It isn’t unimportant at all to watch out.
    The grecs fooled around borrowing for nothing and they are paying very dearly today.
    Does RSS and it’s masses really deserve suffering under undue economic debts?!!

  8. abai okwahu says:

    the author of this article has written it as if she is an independent economist, she is clearly an employee of the central bank (bank of south sudan). she has not articulated how the fixed exchange rate mechanism was devised, in other words how the value of the pound was measured in relation to the dollar or other hard currencies. the central bank is merely playing catchup with the black market rate by floating the pound. this trick is not working because the black market rate will keep escalating as long as there is a shortage of dollars since the central bank has exhausted its reserves. the drop in the price of oil is not the culprit but rather the execution of the war that is eroding the reserves at the central bank, and of course graft. inflation has obviously reached 70 per cent, a simple litre of gas has jumped from ssp 7 a month ago to almost ssp 25 maybe more, other basic commodities have also trippled over this very short period. soon the central bank would start printing more paper money not backed by any value (gold, foreign currency reserves, etc) to pay salaries. the author might need to look at the case of zimbabwe now where citizens are avoiding the national currency because it is worthless, a result of punitive sanctions and poor economic policies and fiscal dsicpline. please tell your incompetent bosses at the central bank to look for other work.

    • Eastern says:

      Abai okwahu,

      The recent announcement to change colour of some of the local currency bills and introduce coins may be just the gimmick to print more paper money which will drive the SSP to all time lows of 1$ = 50SSP. I had made the prediction of the current situation sometime back last year.

      The government thinks it’s ahead of the curve but inflation is something that can’t be handled by the type of people in leadership in South Sudan. Zimbabwe, Greece, Puerto Rico, etc have all borne the brunt of bad economic management. South Sudan’s case worse because of zero productivity ( I have decided to ignore the oil revenue: Sudan $27 per barrel, oil companies $10 and South Sudan $0 out of $37 per barrel) and the state of insecurity which is gradually engulfing the otherwise Equatorian states.

      Salva Kiir’s government needs to be put to task to explain the rationale behind the new currency denominations that will circulate concurrently with old currency bills in addition to the coins. I know the hapless ‘parliamentarians’ will just okey the move because they need money to see another day not knowing their actions continue to create more hungry and angry masses.

      The Eastern Rock!

  9. Itikwili says:

    Dear Ms Betty,
    This is an excellent reflection on South Sudan’s economic situations but disingenuous from an insider if indeed you are as the pierce suggests. Monetary reforms are undertaken by any responsible government to improve the situations of its citizens based on sound analysis and due forecast of the implications such a reform may entail. How can this comes from a financial economist at the Central Bank as an after thought:

    “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”

    Shouldn’t this exercise be undertaken prior to the so-called monetary reform to inform the direction of this half-cooked and disastrous policy? Some people are paid less than 600 SSP a month, you float SSP overnight encouraging wild speculations in the commodity sector and expect the vulnerable people to wait for a salary scale survey yet to be conducted God Knows when?

    I am not sure even sure whether the author is conversant with the disastrous structural adjustment policies of the 1980s through 90s, a key element being the monetary reform engineered by the World Bank and IMF to proudly come around and say “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”.

    Besides, we should not just be talking about this so-called free market economy, market forces of demand and supply as if this is the only economic direction to take – developmental states, the state led macro-economic planning have provided great transition to many countries if we want to persist being a firm believer in free market economy.

    As of your assertion that “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.”,

    Please be reminded that it is this very government that is draining the resources of this country. most if not all those holding key positions have cushioned their families abroad living lavishly on the dollars regularly sent from South Sudan.
    So where is the moral argument to support a monetary reform policy, it is indeed, a thought out one?

  10. Nelson Mandela Albert says:

    The devaluation of local currency is a contraversal issue in the republic of south sudan. This economist has no clear measures to implement the devaluation of SSP currency at this current situation, because the govt right now is facing deficit budget. The expense of the govt exceeds more than what the government earns due to present insecurity. Moreover the government of south Sudan economic growth is negative (-), the government imports capital goods including food commodities from neighbouring countries such Uganda and Kenya among others. And even our country doesn’t export for the beneficiary. More worse the country is experiencing inflation in last four years. Therefore, for south economist for ur thoughts to success, the govt has to ensure that is political stability in the country.because it is not possible for country’s economic growth and development to prosper. For u who claimed to be an economist ensure that is peace in the country.

  11. Nelson Mandela Albert says:

    Hello sis Esther u ve a very important though based on monetary and IMP but the big questions here is, do we have Export industry apart from the oil? Again analyst who devalued the local currency didn’t they know that there is inflation in the country? Why do they devalue the currency while knowing that devaluation causes inflation in the country. On top the country is under deficit budget because of this current untold crisis. Moreover, we rely on import honestly. What this economist to established agriculture through the help of development bank, but this will happen if we establish peace and unity in entire country.

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