The Debate – South Sudan: A Counter argument against the recent Devaluation of South Sudanese Pound

SSP

(Pennsylvania USA) – It’s of great pleasure to respond to a recent article written by a dear friend and a former schoolmate, Mr. Peter Biar Ajak, entitled, South Sudan: In Defence of the Central Bank’s Devaluation Decision. The Author rightly put it that, “Any economist of sound training who has worked in or studied South Sudan between the birth of GOSS and the oil shutdown must have felt frustrated with the region’s economic policies.” For those of us who pays close attention to development matter in South Sudan, the sentiment expressed above is commonplace and still is the order of the day, including the decision to devalue the South Sudanese Pounds. What I lament the most from policy makers and their advisors in South Sudan is their ignorant attitude about the importance of data. Most of economic policies and any other policies are instituted without a clear data that informed such decision. So, in short, we are never clear if what we are being told to be the problem is the exact issue or are there other political motivations attached to the decision. I will come back to that point later.

For now, I want to engage in the soundness of the decision to devalue the pounds. I want to go on the record that this was a bad policy, albeit the end result was well-intended. The timing of the policy was horrible; the mechanism by which it was instituted is not the most desirable one; and finally, the policy was made with no clear data and measures in place to deal with its implications. Before I delve into the issue, I just want to point out that if all economists were in agreement all the times on our economic policies, the subject matter will lose its appeal. The debatable nature of economic policies brings clarity and vigor to both the subject matter and the economists, and provides room for smart policies and well-informed decisions. For those reasons, it’s a tremendous advantage when economists’ views clash and good minds debate economic issues of national concern.

My friend Peter Biar Ajak has undertaken a great analysis of our devaluation policy. But as the saying goes, “put 100 economists in a room together and ask them to articulate their position on an economic policy and you will be surprised to find much variation in their articulation for the same subject matter.” For a subject matter that is considered a science, many people will be surprised. However, for well-seasoned and practicing economists, it’s normal. The variation is centered on the limitations in theory, practice and the fact that not all possible variables could be included in every single economic model performed. As the time is short to engage in this debate before the subject matter becomes moot because the decision was rescinded, I will save the readers the time by not going into historical chronology of arbitrage in South Sudan; I will assume that my readers know. Instead, I will get into why the decision to devalue the pounds at this time was not a smart choice; I will also highlight the implications of the decision and make a few recommendations on how such policy could have been handled. There are number of economic problems associated with currency devaluation in general, some apply more specifically to the recent decision taken by South Sudan. I will only highlight the ones that are specific to the issue of South Sudan to save time.

After the announcement, and the black market response, it was clear that the recent devaluation of South Sudanese pounds will lead to the following:

• High inflation

• Less competitive firms

• Scare away foreign investors

• Widen economic inequality

Let’s look at each of the above situations in more depth and explain how the devaluation will lead to each of the bulleted points above. First, the policy will lead to a high inflation. Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. For example, in the case of South Sudan, there is little doubt that the prices of goods and services will jump by over 40%. This is made worst by the fact that South Sudan does not currently break down its currency into the smallest unit. So, in essence, when a product’s price was supposed to increase by 30% of 1 South Sudanese pound, it will be rounded off to 100% of the 1 pound, because there is no way to get the change.

Another way the devaluation and the inflation will hurt the South Sudanese poor is that imports https://www.newsudanvision.com/files/articles–publisher/will become very expensive. we all know that south sudan does not currently produce anything of substance to export besides oil, and as a matter of fact, it does not produce much to consume locally; therefore, we are a net-importer country. While we all can agree we want to change being a net-importer economy, an overnight announcement of devaluation of our currency without good studies to our overall economy is not a good way to do it. This devaluation will shock the little economic growth we have, if at all such growth exists now. Looking at the GDP equation of [GDP = Y + C + I + G +(X-M)], one would quickly realize that if imports continue to exceed exports, meaning we have a higher negative number in the (X-M) section of the equation, our overall GDP will be lower than when that number is positive. Such situation is the one that South Sudan finds itself in terms of economic conditions.

If our goal is to grow our economy as measured by our GDP, we should first prioritize putting infrastructure together that allows to jumpstart our economy rather than shocking whatever little we have. Second, devaluation is a lazy way to fix an ailing economy. Many firms that export goods will not cut costs because the devalued currency will make up for their lack of innovation. If helping the local producers was the intention, then it hurt them at the same time in the long-run.

In theory, devaluation is a good way to help exporters. However, in the case of South Sudan, since there are no exporters in the real sense, the decision could not create producers that we do not have currently. Instead, it will hurt the poor who are clinging onto the last pound to purchase food stuffs imported from other countries. There are many reasons why South Sudan does not produce its own sufficient food, insecurity and floods being chiefs among them. So, in theory, the decision has just added fuel to fire in terms of food security. Third, the policy undertaken will scare away the very few foreign investors that believe in our young nation, assuming these investors were well-vetted and are not greedy and opportunists seeking to get rich quickly at the expense of our masses.

While we are trying to attract foreign investments as a means to accelerate our economic growth, a rapid devaluation, as the one exercised by Central Bank of South Sudan, will definitely scare investors away. It follows that with such devaluation, the foreign investors’ holdings are reduced overnight and this can send those few investors packing. Fourth and my final point, this devaluation will go to increase the ever-widening gap between the rich elites and the poor masses in our country. Since the imports https://www.newsudanvision.com/files/articles–publisher/will be very expensive, and our masses live on imports, only the rich will be able to afford the imported goods. the poor will have no alternative; even though few substitutes exist, our producers for those local substitutes are very witty and greedy, they will engage in price gouging. Very quickly, there will be an increase in the local substitutes’ prices, offsetting whatever positive change intended in the devaluation policy. Recommendations: Like I said earlier, in economic theory, devaluation is possibly good policy in an economic recession, when done with all other factors considered.

What amazes me as an economist is why this policy was not implemented when austerity measures were in place? The timing is of essence when it comes to making policies more effective: the right timing, the better the chance of the policy to do what it was intended to do. In that recession, inflation would have meant an expansionary policy. However, now, the oil production is projected to increase or stay stable, our relationship with Sudan is about to improve, and investors are gaining a little more confidence in our young nation, it is a grave economic mistake to shock all that progress through devaluation. So, what do I think should have taken place? Well, that depends on number of factors.

One, if devaluation was the only way out, as shown by a clear data. Devaluation, if implemented, should have come with specific measures to cushion the impact of the high inflation on the lowest income people, such as tax deductions on local producers who produce essential food items, lower duties on importehttps://www.newsudanvision.com/files/articles–publisher/d food stuffs and other social means to ease the pain. also, we could have devalue the currency by a little bit and not by over 35% as it was instituted. i cannot stress the point about our economy being a net-importer economy, hard enough. devaluations of over 30% can only be good for countries that are chief exporters. again, south sudan exports nothing besides oil. we all know that oil is an inelastic good and we didn’t have to devalue our currency to sell it in the global market. the world seems to not get enough of it, regardless of how much is produced and what price it is going for. second, there must be a clear data that shows what our economic predicament is, before an impetuous decision, such as devaluation is taken. with this data, it will inform our decision-making process; and analyses that are performed from the data will point to the likely outcomes and implications of the policy, hence, preparing the policy makers about ways to reduce and mitigate the risks involved.

Clearly, the Central Bank did not have good studies and research that warrants that policy decision. Third, I think there were other suitable tools in the government’s toolbox at this time to deal with black market currency trading. The government should have resorted to these tools in its toolbox and wait for a suitable time to devalue the currency. Our government could have gone with tight licensing and regulations of the forex bureaus, good taxation policy to discourage an unwanted behavior, volume and time limits on the forex activities. But, instead, it went with the nuclear option with no clear data to support it. Conclusion: In conclusion, in a country where virtually every decision made has no bearing to facts based on data; many experts are wary when spontaneous decisions are taken. I could theorize that probably Sudan pressured South Sudan to devalue its currency, so that Sudan’s own devaluation does not look out of place to her own citizens and avoid political uprising, a smart move for them, but bad one for us. Politically, this will be a catastrophic move if it were actually the case, to blindly follow an old foe. If it weren’t’ the case, show us the data that informed that decision and explains the rationale of why this was a good time to institute this devaluation policy. To make good decision for the long-run, our policy makers will need to avoid being lazy and do their research before making rash uninformed policy decisions. We tend to make good decisions if such are informed by good data and right analyses, and not by political motivations.

*I hope the fact that this policy was rescinded, does not moot our discourse. Matter of fact, I hope it will generate more passionate discussions on similar topics.

*Chol Kuch Chol-Mang’aai serves occasionally as an Adjunct Professor for Financial Management at Indiana University-Purdue University Indianapolis, Indiana U.S.A. He holds a Master’s degree in Public Financial Administration, Economic Development, and Policy Analysis from Indiana University-Bloomington, Indiana U.S.A and a Bachelor’s degree in Economics from La Salle University-Philadelphia, Pennsylvania U.S.A. He is a Project Manager at The Indianapolis Local Public Improvement Bond Bank, the debt-issuing entity and capital-financing arm of the City of Indianapolis and all other qualified entities (QEs). He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.


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