Oil based economy, plummeting oil prices and global economic slowdown: Isn’t it economic/security crisis for Southern Sudan?

October 28, 2008, Vermont, USA
Disclaimer
First, let me admit that I am not an economic guru. I do not have advanced training in economics other than Economics undergraduate education, hence these views will pale compared to those of individuals with advanced training in economics. Second, I do not have access to internal economic analysis that the Southern Sudan Ministry of Finance and Economic Development might have done in preparation to deal with current global economic crisis. Neither do I have the insider look of how the Central Bank of Sudan (and Southern Sudan for that matter) made the rationale for pegging New Sudanese Pound to Dollar and/or its justification.

Facts about the state of affairs

Southern Sudanese know these as facts. First, GOSS relies on oil as the main source of revenue to run its daily governmental affairs, ranging from the provisions of services at the national (Southern Sudan) level to payouts to all 10 Southern states. Unfortunately, we cannot tell if the South is getting its 50% share of oil revenue as stipulated by the CPA since we have lost the Ministries of Energy and Finance long time ago. Second, the international community has been funding development projects in Southern Sudan via both governmental and non governmental organizations (USAID funded by US Government being one of the leading governmental organizations down there). Third, New Sudanese Pound is pegged to Dollar (US $ 1 = 2 New Sudanese Pound). I am afraid each of those facts, if I am not mistaken, is a true recipe for economic and Security troubles for Southern Sudanese in the days ahead. Let us dissect each of those facts one by one and see if they make economic or security sense for Southern Sudan now and in the years to come.

(a)Oil Revenue as the Main Source of GOSS Funding

It does not take a rocket scientist to worry about what the NCP ideologues would do in the dark when the South lost both the Ministries of Energy and Finance. It was a clear defeat and slap in the face of Kiir when those Ministries were gone. Who among Southerners can make an argument that Bashir fought so hard to win those Ministries, went in the dark and all of a sudden decides to share the oil revenue equitably? Absolutely, not. I know we, all the Southerners, especially those who engaged the Mujahidin for over two decades are smarter to know that we are being scammed here. In fact, I have to be more direct; President Kiir, you are being scammed by Bashir when it comes to the redistribution of oil wealth. Lets face it; we are not getting 50% oil share. We are not getting our share of the pie. In fact, we do not know what it is that we are getting. That has been a failure on the side of the South from day one. Southern Sudan is a victim here because the goal of NCP to retain the treasury was to bankrupt the GOSS in order to fail miserably in meeting the needs of its own people including funding and equipping the SPLA. It came from the idea that a Government that loses the confidence of its people or its military is doomed to failure.

But that is not the point of this piece. The purpose of this piece goes beyond this issue. It is about addressing a new paradigm: the pie that was not being shared equitably is shrinking as we speak. The global oil prices are plummeting; all could be traced to the subprime mortgage crunch in the US but it is a reality to be dealt with in Southern Sudan anyway. Because of the prospect of global economic slowdown, the demand for crude oil went down precipitously. Guess who are being hit? Those who rely on oil money to run their governments and GOSS is not immune to this trouble. Now that the pie has even shrunk farther, GOSS will be receiving even less as a result of this smaller pie still being shared inequitably.

The other problem that this economic model (reliance on oil revenue) raises is “Dutch’s Disease”. The idea is when you put too much effort in exporting oil, it erodes your economic base, and your country end up with highly overvalued dollar revenue making everything else you export very expensive to foreign consumers. All of a sudden, foreign produced goods become cheaper to domestic consumers while the domestic producers completely end up not exporting anything. This may end up being the case in Southern Sudan. Just a simple question to think about, is there a single trader, in lets say Juba or Bor, selling anything produced locally? I am talking about finished products; not fish caught in a nearby Nile River or Arege distilled in a local market. I would argue: none. This is a real security and economic threat to Southern Sudan as this global economic woes unfold.

(b) Pegging of New Sudanese Pound to US Dollar (US $ 1 = 2 New Sudanese Pound)

I do not understand why the New Sudanese Pound was pegged to US Dollar because it does not help in every measure. The only issue that could be raised in defense of this decision was to encourage foreign capital inflows from the West to Southern Sudan by addressing the investors’ worries about currency volatility that normally plagues the developing world economies. It is a valid argument to make but is the foreign capital flowing in? I guess, not. But even if it is, do the benefits of pegging our pound to the US dollar outweigh the harms? I believe the harms outweigh the benefits. This will exacerbate the problem I have raised earlier about the terms of trade (or Dutch’s Disease for that matter).

These days, Southern Sudanese are trading with Kenyans and Ugandans. A few days ago, US Dollar appreciates in value precipitously relative to Kenyan or Ugandan Shillings; good news for remitters like me who are happy to see our remitted money exchanged for a lot more money in either of those two countries. But what does it mean to Southern Sudan economy? It is bad news. It simply means the appreciation of dollar is New Sudanese Pound appreciation as well. It means Ugandan and Kenyan (southern Sudan leading trading partners) goods, are a lot cheaper compared to Southern Sudanese ones. It means Southern Sudan will be importing more goods as it has been doing and exporting less if it ever does. One other important thing occurring as a result of this dollar appreciation is it becomes cheaper and livable to raise a family in Uganda or Kenya including sending one’s children to good schools there as well. And since many Southern Sudanese reside in either of those countries, it means we are subsidizing Ugandans’ or Kenyans’ cost of living through multiplier effects caused by pound appreciation at the expense of Southern Sudan. What will end up happening in the long run is it becomes more expensive to either live or raise a family in Southern Sudan. The ultimate end result is more families who have means to relocate find their ways back to either Uganda or Kenya. Are you surprised? Why are we renting Kenyans’ and Ugandans’ apartments when that money should have been injected into Southern Sudan Economy? How can we explain the presence of well off Southern Sudanese in the best houses of those nations’ big cities? Of course, what that implies in a simple term is there are beneficiaries of dollar and/or New Sudanese Pound appreciation. Here are the beneficiaries, all at the expense of Southern Sudan Economy. (1) We the remitters are ultimately beneficiaries, and since dollar will translate into more money in either Uganda or Kenya, we will channel our dollars into those countries. (2) The GOSS and NGOs employees who earn huge salaries are beneficiaries as well. What they can do with such money at their disposal is to even send more of their family members to either Kenya or Uganda since it makes economic sense to support them outside Southern Sudan (3) The businessmen/women in Southern Sudan who rely on import business models (and almost all of them are) are beneficiaries as well. They will be buying cheaper goods from Ugandan or Kenyan suppliers and rush them to Southern Sudan for quick distributions and harness enough profits that way.

By the same token, the losers affected by pegged currency are the Southern Sudanese who have no means to exploit the system. They are those who would have benefited from the booming economy but are now left idling around with nothing to do. They are the prospective entrepreneurs who have no capital to start the business in the first place. Let me make it clear. I have no problem with capital inflows or with highly paid employees or with business people who are creating wealth. They are entitled to enjoy the peace dividends in the best way they can. What is not helpful, though, is a pegged currency dragging down the Southern Sudan economy because what it does is the nation will always be at the mercy of its trading partners. If Southern Sudanese (all Sudanese) love the value of their currency, lets them not do what has been the cause of hyperinflation in the developing economies: DO NOT PRINT more paper money whenever there is a shortfall in the government’s budget; simple and clear. There is nothing more important than floating currency in order to keep the nation terms of trade favorable. We do not have that with our pegged currency, and that is a cause for alarm and the average Southern Sudanese will be left suffering.

Governmental and Non Governmental Organization funding of Development Projects

Following the signing of CPA, a donor conference was convened in Oslo, Norway and so much money was pledged for Southern Sudan reconstruction. Those who pledged the money were the world most industrialized economies like the US, UK and many others. Guess what? As we all know, pledging is one thing and actually delivering on one’s promise is quite another. Only few so far had followed through with their promises. What I am getting at, though, is we have been very good in deferring most of our obligations to international community as the sole problem solver for us. Whenever there was a bad road, call the UN. Bad school, call the UN. Poor health services, call the UN. The instances are endless. All our problems were basically placed on the shoulders of the UN to have them sorted out for us. Back then, nobody would whine about it because we had no capability to deliver the services to our people. The Movement, the SPLM/A, was barely keeping pace with well funded Khartoum Regime in terms of making sure there was army equipment to enable the gallant SPLA forces have the means and capability to engage the later let alone feeding its own people. Today, it is a different story. Guys, we are the Government of Southern Sudan (GOSS). Everything that goes wrong at the moment, be it undelivered service or unmet promise, will be up to the GOSS to explain why the state of affair it is what it is. I am driving home this message in the wake of global economic slowdown because the world governments and donors are more interested in what is happening within their borders. It was about two weeks ago during their final debates that both presidential candidates were asked about what they would be willing to sacrifice in terms of their spending promises that they had made to voters on the campaign trail. Guess what? Our friend Obama was very clear. He said, and I paraphrase, that he would have to hold back on spending on foreign aid. Does it not sound like less money to UN and/or USAID? That was clearer Obama’s answer would get in order for us to understand that other nations won’t fix our problems forever. We got to roll up our sleeves and do everything we can to help our own people before we call others for help.

Words of Advice

Generally speaking, I do not expect the GOSS to have the first world capacity of economic analysis on day one. Things like council of economic advisors for the GOSS president, Ministry of Finance and Economic Development publishing GDP growth yearly, or Ministry of Labor and Human Resource Development reporting the employment/unemployment numbers on quarterly or yearly basis are not what we expect at the moment. This is too early for the GOSS to do those things until it has the capacity (both in human capital and technology). Having said that, however, what Southern Sudanese expect now is a sense of direction towards prosperity. In that regards, Southern Sudanese would expect the GOSS to: first, discount oil revenue once and for all, and start raising its own revenue and building its own economy as if we have never been endowed with oil in the first place. We have the most resilient people in the world. If we had managed to weather all the brutalities that successive regimes in Khartoum and their Arab backers did to us and still came out victorious, I am confident we can build one of the most prosperous nations in East Africa irrespective of oil endowment. Second, pegging of dollar is a bad economic policy. It does not grow any economy and in my view, it is a policy that should be reversed in favor of currency floating. GOSS should consult with the GONU to have that policy reversed. Finally, lets end reliance on international community as the sole entity to fix our own problem. It was in March 2006 when I was heading to Bor by road and when I arrived at Nadapal heading towards Kapoeta, I saw a signboard bearing the name of US Government Organization that helped paved and demined the Narus – Kapoeta Road, and it was USAID. It was (and still is) a great generosity from American tax payers but it is our responsibility to maintain that road now. In a simple term, let us not defer serving our own people to other world governments or donors whenever we have the resources and means to do so because it is us who will do it better.

Akol Aguek graduated from the University of Vermont (USA) with a BA in Economics and Political Science (2005). He is currently pursuing his MBA in Strategy and International Management at the same institution.