By: Mabor Maker Dhelbeny, Advocate and Legal Consultant, JUBA, MAR/28/2016, SSN;
In December last year, when the Government of Republic of South Sudan (GRSS) discovered that the country’s economy has been hit hard by the civil strife, the Central Bank of South Sudan (CBoSS) and monetary authority devalued the local currency against the US dollar, by abandoning its fixed exchange rate in which SSP 2.95 = US $ 1. And by adopting the floating rate system which puts SSP 18.5 = US $ 1 and later from SSP 30.5 to US $ 1. The CBoSS devalues the SSP by 34% and the rationale given by the leadership of the Bank, according to VOA is that the devaluation was to reduce the volatile pricing, curb the black market and to encourage foreign investment.
Less than three months, the exchange rate of US $ 100 is equal to SSP 4,000 in the black market as the result of currency devaluation by the “CBoSS”. This demonstrates that the South Sudanese Pound (SSP) continues daily to lose its value against other currencies in the market.
Should it continue like this, then South Sudan will be compared with the other countries which have devalued their local currencies. For example, the study discloses that Zimbabwe abandoned its currency in 2009, after it became worthless as a result of over devaluation which plummeted to US $ 1 = Z$ 500,000 plus. And thus adopt a multiple–currency system which has been in operation for almost six years.
This shows that the Zimbabwean government had lost control of dollarization or multiple-currency system, where Chinese Yuan, South African rand, US dollar and etc were operating. While in the DRC formerly known as Zaire, its over-valued currency also became worthless until people rejected it and as a result the Congolese soldiers went on rampage through the towns, looting markets, smashing windows of the shops and overturning the vehicles.
In the inflationary of Konyo Konyo, Customs, Jebel and Jubadit markets, consumers are always spending less and traders are feeling the pinch. Such a situation invoked by the currency devaluation or economic reforms, the SSP needs to be rescued before it becomes worthless like Zimbabwe’s and the DRC’s currencies.
Allocation of scarce dollars & the black markets:
With scarcity of dollars allocation in the country, still people ask themselves these questions: “Where did the black market get dollars, especially the poor boys under umbrellas along the streets of Juba?” “Who gives them (the poor boys) dollars, is it CBoSS or whom?”
When this Writer came into contact with one of the vendors in the black market, he admitted that some of them got dollars from “CBoSS” through coordination with Bank officials and others got theirs from different financial institutions. A reliable source however, told me that the Central Bank’s tycoons sometimes used to pump dollars into the black markets.
This indicates that there might be a network of patronage system between the black market and other financial institutions in the country. Otherwise, fighting the black market by the government will be a joke because the US dollar has become a commodity. It has become a commodity in the sense that the country lacks industries, business opportunities and therefore people tend to use dollar as an easy trade to get rich overnight.
While the country does not export goods to other markets of foreign countries so that to finance its budget, therefore it depends on oil whose productions and prices sharply declined. Unfortunately, this forces the “GRSS” to subsidize fuels from SSP 6 per litre to SSP 22 per litre in all petrol stations in Juba and thus devalues its currency as a solution to the ailing economy.
The subsidization of food commodities by the “GRSS” consequently means elimination of consumers as well as violation of the consumer protection law.
Effects of currency devaluation on economy:
Since devaluation is a monetary policy tool of any country that has a fixed exchange rate, the “CBoSS” has now two types of exchange rate systems including – the fixed and the floating rates. The former is abandoned while the latter has been adopted by the Bank so that the SSP is allowed for a free fluctuation against other currencies including the US dollar.
By letting the SSP to fluctuate freely, it means that its exchange rate is left to be determined by the market forces. This is dangerous because there are no strict regulations in the market and therefore this currency devaluation causes high inflation which affects the purchasing power of SSP.
This inflation causes the employees of KCB (Kenya Commercial Bank) and other institutions to strike by demanding more money or increment of their wages since the previous wages will no longer reflect the value.
The question one may ask is that: What prompted the government, especially the “CBoSS” and the “MoFEP” to officially lower the value of our local currency within the fixed exchange rate system?
In answering the above-mentioned question, the “CBoSS” and “MoFEP” might have run out of foreign exchange or perhaps the – “reserves” are depleted.
In economics point of view, if the “CBoSS” happens to have sold all its foreign exchange to speculators until its reserves are depleted and thus left with no money to import basic commodities from abroad, then the “GRSS” will remain with no option but to devalue its currency and to buy back the foreign exchange it has sold to speculators at a low price.
This is exactly what had happened in our country. South Sudan, however, with volatile export prices or speculative cash flows, floating rate system would be considered as the best ideal because it is good for the protection against deteriorating economy in terms of trade. Significantly, it entails that if export prices fall or import prices surge, the floating rate will act as self-adjustment that reflects new flows of currencies but with help of the “CBoSS” to move them (currencies) to an exchange rate fair to the country’s economy.
It is imperative that the “GRSS” has carried out devaluation of SSP as part of an economic package of measures in order to close gap of the balance of payments deficit. While aware of the consequences accompanied by such drastic measures of an economic package, the “GRSS” should take note of these recommendations:
–(a) The “CBoSS” and “MoFEP” should introduce monetary policy that encourages currency appreciation – i.e. an increase of SSP value against other currencies.
–(b) The “GRSS” should embark on reduction of government expenses, downsizing of workers in foreign embassies and missions including the elimination of ghost workers in payroll systems through swift auditing by the two ministries of Labor and Finance and –(c) The “GRSS” should also encourage by supporting chamber of commerce and trade unions so as to create more cooperative markets or shops where people may buy food commodities with affordable prices. This is because many people do not afford to buy more than two meals a day as prices of food commodities are continuously increasing.
This appallingly situation needs urgent remedy, either the decision of currency devaluation by the “CBoSS” is reversed or else revoked by the National Legislative Assembly (NLA). This is in accordance with section 12 (1) (d) of the Foreign Exchange Business Act 2012, which stipulates that “if the Governor has determined that South Sudan has experienced a severe deterioration in its balance of payments requiring a temporary imposition of exchange controls … the Governor may in consultation with the Minister make regulations restricting the rate at which the purchase and sale of foreign exchange may take place in South Sudan.”
Such regulations are expected to remain in force for a period not exceeding three months, which I think this period has already been exceeded and therefore the parliament should intervene without any further delay.
Finally, undertaking piece of advice from the experts of International Monetary Fund and World Bank by the Central Bank and Ministry of Finance & Economic Planning (MoFEP) to embark on economic reforms; by devaluing its currency suggests that the decision taken by the leadership of financial institutions was implemented without proper analysis.
Recently, when Ethiopian government was asked by the IMF to devalue its currency in order to cover certain percentage of export prices, it didn’t take heed to such advice since Ethiopia is a major exporter country of coffee in Africa.
The Writer is an Advocate & Legal Consultant in Juba, the Republic of South Sudan. He can be reached for comment(s) via his email address: firstname.lastname@example.org