Political Stability, Economic Development, Oil shutdown and Deficit Financing in South Sudan

Political Stability, Economic Development, Oil shutdown and Deficit Financing in South Sudan

Oil S. Sudan

GRP International Journal of Business and Economics ISSN 2048-8556[ONLINE]

Vol. 1 No.2, 2012, PP.96-105 http://www.gloresearch.org

Page | 96

Political Stability, Economic Development, Oil shutdown and Deficit Financing in South Sudan

Addis Ababa Othow Akongdit1 & Issam AW Mohamed2


This paper, a part of my PhD Dissertation Research under the title “Political Stability and Economic Development; the Case of South Sudan,” focuses on the impact of oil shutdown on the Republic of South Sudan’s financial budget and the possibility of deficit financing.

Due to the shutdown of oil production, the Council of Ministers of the Republic of South Sudan approved austerity measures in an attempt to eliminate its impact on economic development. This paper looks at the impact of oil shutdown on the Republic of South Sudan’s financial budget and the possibility of deficit financing. It also focuses on the austerity measures, which the Government of the Republic of South Sudan (RSS) enacted in order to align its expenditures with revenues and to find other means of raising financial resources in order to finance economic development.

Keywords: Oil shutdown, deficit financing, money issuing, debt financing, inflation


The Government of the Republic of South Sudan stunned the international community when she made an unprecedented decision to shut down oil production in January 2012. This decision, however, resulted from an impasse in negotiations between Juba and Khartoum over the financial terms and conditions meant to regulate how the newly independent Republic of South Sudan would export her oil through the Republic of Sudan.

Negotiations on oil export through Sudan and many other outstanding issues between the two countries failed, but the Government of Sudan’s unilateral decision diverting The Republic of South Sudan’s oil passing through her territory exacerbated the situation, and the two neighbors were on the brink of war. Oil was the Republic of South Sudan’s main source of income, which drove the economic growth. Oil production and its revenues accounted for over 98% of the Government of the Republic of South Sudan’s expenditures, 99% of foreign exchange earnings, and over 70% of the country’s GDP. The 10 states of South Sudan depended on transfers from the RSS Central Government for the bulk of their local operations and expenditures. Almost a month after the shutdown of oil production, the Government of the RSS approved austerity measures aimed at cutting all non-salary spending by 50 percent and reduced monthly grants to states. This was due to a report, which the Deputy Minister of Finance of the Republic of South Sudan divulged that the country has foreign exchange reserves enough to sustain its economy only for seven to twelve months. Nonetheless, it is unclear how long the budget cuts and the country’s reserves can sustain the RSS’s economy. South Sudanese officials reported, however, that plans to borrow funds from international markets were under consideration, and they would use oil reserves as collateral. The RSS officially became a member of the World Bank and IMF on April 18, 2012, but it is uncertain when the she can secure a loan from either of these entities. RSS is also submitting an application to join the five-nation East African Community (EAC), the regional bloc. This regional integration would foster economic growth particularly in the form of investment from neighboring countries. EAC Membership would also bring the RSS greater political alliances with its neighbors and enable economic integration through the EAC’s customs union.

Furthermore, oil shutdown affected the implementation of the development projects in RSS because it capped the necessary sources of capitals used for financing economic development. Given the facts that savings and demotic resources are limited and foreign resources could not be easily secured, there was no way out then to relies on deficit finance as a last resort In the 19th century, many countries resorted to deficit finance through printing of currencies and among them was the giant of the modern world economy, the United States of America. At the time of economic hardship, USA printed currency and borrowed without settling her debt due to lack of financial resources. Mr. Arthur Schlesinger, President Kennedy’s advisor on Latin American Affairs mentions in his book “One Thousand Days” that the United States would have not reached this economic growth if she had not resorted to printing currency and borrowing without paying her debts. Hence, if conditions in developed countries can allow deficit finance to address unemployment issues that such countries suffered (e.g.The Great Depression 1929 – 1933) then developing countries may feel justified to follow that route. Keynes perceives that deficit finance makes up for deficit in the private spending to preserve the necessary level of full employment. Therefore, the reasons for deficit finance (new currency issuing) in the developing countries, like the former united Sudan that are characterized by deficiency in productive working capital due to low saving and a rise in consumption, are lack of banking and financial institutions that are capable to pool all the available resources. All this shows how weak and inflexible is the productive capacity in these countries.

This type of financing may lead to increase inflation rates. However, if a government takes an action deliberately directing these resources (printed currency) strictly to real production, that would greatly reduce inflation rates in the future. This is what this paper intends to point out in reference to the impact of deficit finance in relations to economic development and its impact on currency inflation.

Furthermore, this paper looks at the following issues in details.

Oil shutdown

Although Oil is the primary driver of South Sudan’s economy, the government of the Republic of South Sudan has made in late January 2012 the unprecedented decision to shut down oil production. This decision resulted from an impasse in negotiations between Juba and Khartoum over the financial terms and conditions by which the South would export its oil through Sudan. The situation was exacerbated by unilateral actions taken on the part of the government of Sudan to divert Southern oil passing through its territory. Policy makers in Juba thought that Khartoum’s actions amounted to the illegal confiscation of $815 million worth of oil. Therefore, the government of South Sudan determined that, from its perspective, it would rather see the nation’s wealth sit in the ground, until a sustainable agreement with Sudan is reached or an alternative mechanism for export is secured. Neither of these outcomes is likely to be realized in the near term, and as a result, South Sudanese oil production could remain on hold for a period of months, if not years. Regardless of one’s opinions concerning the South’s motivations and decision to shutdown oil production, one stark economic fact remains clear: the government of South Sudan, prior to January 2012, derived 98% of its budget from the sale of oil. Therefore, one might ask, what could the oil shutdown mean for South Sudan?

We will address the question by identifying austerity measures that the government has already imposed and consider potential effects that the oil shutdown could have on South Sudan, both economically and politically, if it continues for an extended period of time.

Due to the government’s shutdown of oil production, the South Sudan Council of Ministers , in its press Release in response to loss of Oil Revenues, approved the following austerity measures on February 17, 2012:

  1. An overall non-salary spending cut of approximately 50%: In approving this sizeable cut, the Council simultaneously mandated that the salaries of all public employees be protected and that no layoffs within the civil service or security services would occur;
  2. A reduction in block transfers, or unconditional monthly grants, to South Sudan’s states. Block transfers are generally used to pay state-level salaries not paid for by conditional grants from Juba, service delivery and capital projects. Reductions in block transfers may therefore affect state governments’ abilities to pay certain salaries, deliver certain services and execute development projects.

In its Press Release on 8 February 2012 “South Sudan Expedites Transition to Non-Oil Revenue”, The Ministry of Finance and Economic Planning further resolved to increase the collection of non-oil revenue through taxation. The government of South Sudan passed in 2009 a Taxation Act. However, it has done little to collect taxes provided for under the Act. In an effort to increase non-oil revenue, the Ministry of Finance and Economic Planning intends to initiate the collection of personal income, excise and business profits taxes per the Taxation Act of 2009. As the collection of taxes is a relatively novel undertaking for Juba, it remains to be seen how successful the exercise will be and how much revenue it will ultimately raise. The potential future effects of the Oil Shutdown on South Sudan may include greater potential for food insecurity. The United Nations Office for the Coordination of Humanitarian Affairs (OCHA) in its Weekly Humanitarian Bulletin, 23 February 2012 warned that the oil shutdown and subsequent government-imposed austerity measures could exacerbate food insecurity in South Sudan and make “worst-case scenarios appear more likely.” The World Food Program (WFP) has already declared a level 3 food insecurity emergency in South Sudan, owing largely to erratic rainfalls and tensions with the north. That may result in a cereal deficit of approximately 470,000 metric tons of cereals in 2012, up 60% from the deficit in 2011. The result will mean as many as 4.7 million South Sudanese may be food insecure this year and 1 million severely. Further reductions in or all out cessations of service delivery and/or government funded development projects: A lack of available hard currency could mean that the central and state level governments may be unable to deliver the few basic services they previously provided citizens and/or continue with or complete government-funded development projects. Indeed, South Sudan Vice President Riek Machar admitted in January that his government would have to freeze development activities for 30 months. Further reductions in block transfers may mean that state-level governments are particularly impacted; Future layoffs of civil servants and members of the security forces and/or salary cuts: While the Council of Ministers mandated that public employee salaries be protected, it, as well, decided to review regularly South Sudan’s “priorities in order to meet proposed targets.” This decision may leave open the possibility of future layoffs and/or salary cuts. Given the bloated ranks of South Sudan’s civil service and security forces, such actions have the potential to impact thousands of Southerners, while, simultaneously, saving the government thousands of pounds. The specter of layoffs and/or salary cuts, or even the potential of salary non-payment, is a particularly unsettling proposition in the context of South Sudan’s armed forces. Layoffs could create insecurity and increase the number of former combatants and rebel forces currently awaiting disarmament and reintegration. Salary cuts and/or nonpayment could, as well, destabilize the security situation, as SPLA soldiers and other members of the police and security services could refuse to work or violently oppose the cuts; Foreign Exchange shortages: The Bank of South Sudan (BSS) relies on the holding of foreign exchange reserves to maintain the stability/value of the South Sudanese Pound (SSP). The sale of the crude oil used to provide BSS with over 99 percent of its monthly foreign exchange earnings. The oil shutdown means that BSS’s foreign exchange supply has diminished by 99 percent, and therefore very little additional foreign exchange will trickle into BSS’s account. As such, it is left with whatever reserves accumulated to maintain the stability of the currency. However, South Sudan’s economy largely relies on imports from its neighbors which cost roughly 300 million a month. With this knowledge and faced with the imminent depletion of its reserves, the BSS may undertake the following action:

  1. BSS may maintain the current level of foreign exchange injection into the market with aim to sustain the current level of imports and price stability. However, the depletion of current reserves would continue until BSS run out of the foreign exchange reserves. This scenario may make some people convert their money into foreign exchange or assets whose values are considerably stable.
  2. It could also steadily reduce the injection of the foreign exchange into the market. Such a policy will allow the viable reserves to last for a much longer period, depending on the size of the reduction. However, the reduction of foreign exchange supply will result in weaker SSP, which essentially equates to the reduction of imports.

Therefore, inflation is expected to rise, increasing deficits in the balance of payments and other macroeconomic issues. The loss of hard currency derived from the export of oil could have major macroeconomic reverberations. As the government struggles to meet its domestic financial obligations, in particular, the payment of salaries, the Central Bank could begin to print more money, which, in turn, could lead to the flooding of South Sudan’s economy with excess pounds and trigger inflation. As well, a balance of payments crisis may occur, if the South begins to lack the hard currency necessary to import goods from abroad. In a country with little, if any, export capacity outside of oil and few available domestic sources of food and other necessary commodities, these macroeconomic issues have the potential to develop quickly. However, such effects could be mitigated, to a certain extent, by the government’s ability to secure loans and lines of credit from outside sources, namely foreign sovereigns and private creditors. Such loans, if interest bearing, could serve to further undermine the South’s fiscal health in the future.

III. A departure of foreign laborers/entrepreneurs, particularly those from Sudan, Uganda, and Kenya: South Sudan has in recent years seen an influx of laborers and entrepreneurs from abroad, particularly from neighboring Sudan, Uganda, and Kenya. Nowhere has this influx been more apparent in the capital of Juba, where foreigners own many of the city’s shops, hotels, businesses and restaurants. If government wages decrease or dry up, this segment of South Sudan’s consumers will likely be unable to continue to purchase “luxury” items from city and town markets and restaurants. This, in turn, may leave foreigners with no choice other than to leave South Sudan for home. Juba, the capital city sustained flow of foreign capital from international NGO workers that may stem the economic losses of foreigners, keeping their businesses afloat while the majority of South Sudanese go without. Additionally, there is an escalation of tensions between Sudan and South Sudan, increasingly on the rise. North Sudan’s economy has felt and will continue to suffer Juba’s decision to shut down production almost as acutely as its southern neighbor. As the two countries, and their respective populations, become increasingly cash strapped and with the economic incentive to maintain relatively stable relations between Khartoum and Juba now shutoff, the two countries may easily slip back into conflict. In words of Neal (2008: 310-315), the current situation is similar to a Choke Game that result in both sides demise.

  1. A loss of foreign investor confidence: Juba’s unilateral decision to shutoff oil production, at great potential economic loss to foreign investors, may negatively affect South Sudan’s ability to attract foreign direct investment going forward. This may have long lasting effects on a country that acutely requires foreign investment in infrastructure and development projects.

Financing Economic Development

It is possible that any economic plan can be just a mere paperwork unless it clearly and practically delineates how to secure necessary sources that can be used to finance economic development. In other words, there should be an explanation on how to secure necessary savings to finance investments that it entails, in the sense that any investment must be matched with savings. It is obvious that financing economic development does not only depend on domestic savings, but also on foreign savings. However, taking necessary measures to finance economic development leads to diversification of the sources of savings and consequently providing large amounts of savings being domestic or foreign. This means providing capacity to all investors to access savings, and to secure enough investment to be allocated into national economy. In addition to that, it provides and allocates savings that lessens dependency on financial operations and foreign aid, and hence to revitalize economic activity and accelerate economic development. That would necessitate discussion of the role of domestic savings with reference to deficit finance, and the role of foreign savings in achieving economic development. Therefore, this section is divided as follows:

  1. Sources of financing development: domestic and foreign resources and deficit finance.
  2. justifications and effectiveness of deficit finance: justifications of deficit finance and effectiveness of deficit finance policy.

No doubt, that proper economic planning is the best way to achieve economic development. Therefore, study of the role of finance in achieving economic development requires full knowledge of the resources of domestic saving in addition to resources of foreign saving. In this section, we will discuss domestic resources including deficit finance and foreign finance resources and the role of each one of them in achieving economic development.

The topic of financing economic development from domestic resources has two major aspects. The first concerns the way in which savings can be encouraged in developing countries, because only if society is willing to save can resources be devoted to the production of capital goods. Saving is necessary to fund investment. In a primitive subsistence economy, without money or monetary assets, saving and investment will tend to be simultaneous acts, in the sense that saving and investment be done by the same people, and saving will be invested in the sector in which the saving takes places. Those who sacrifice time and resources that would otherwise be used for consumption purposes do so to develop the means of production. The second important aspect of financing development form domestic resources has to do with the role of the banking and financial system in encouraging savings, promoting financing investment and allocating savings in the most productive manner. However, the greater burden of the national economic revitalization falls on domestic savings. Obviously, as far as the nature of saving is concerned, saving can be voluntary or compulsory. Voluntary savings are savings that arise through voluntary reductions in consumption out of disposable income. Both the household (individuals) and the business (corporate) sector may be a source of voluntary savings. Compulsory savings are savings brought about through involuntary reductions in consumptions. This saving is enforced on both individuals and corporate either through taxes or inflation, in the understanding that in as much as tax collections are used to finance current government expenditure, and therefore, what can be achieved from compulsory saving through taxation results from the difference between tax collections and current government expenditure and this difference is called government saving(Al Shafei M. Zaki, 1970: 40). Anyway, there are three broad groups in society that save. The household sector, business sector and government. The household saving represents savings of the household sector out of the disposable income (personal savings). It represents the difference between total savings of the individuals that can be made use of from one part and the private expenditure on consumption on the other. Savings take a number of aspects such as direct investment. It can be in kind such as acquiring agricultural machineries and building houses. Such type of savings is characterized by absence of an intermediary between the owner of the saving and the investor. It also cannot be transferred from one sector to the other sector of the national economy. Another aspect of the household sector saving is contractual saving like life insurance, social security systems and pensions. These savings have a compulsory nature. Another aspect of the household sector savings are deposits and financial assets like shares, investment certificates and treasury bills. Generally, it is known that household sector saving depends on many factors of which is income, structure of distribution and scope of stability.

In an economy where the financial markets have developed, savings of household sector are reflected in their investments in various financial instruments issued by intermediaries like banks and financial institutions and government, net of their liabilities. Business saving is that part of income of the business sector, which is retained by the business for further growth, rather than being distributed as dividends to shareholders. Such retained earnings by the business strengthen the net worth and equity base of the business sector enabling them to further leverage their business for expansion. It is important to differentiate between the private sector and the public sector. Private sector savings are expressed in undistributed profits that are retained for investment for the purpose of reviving, expanding or establishing related projects. Household and business saving is are also referred to as private saving. Government’s saving comes out of its total revenue net of its purchases. In simple form, government’s saving is equivalent to its budgetary surplus. It is the difference between government revenues from taxes and others and current government expenditure.

Deficit finance

Deficit finance is a method used by any government to finance its budget deficit, that is, to cover the difference between its tax receipts and its expenditures. It is the practice of spending more money than is received as revenue, the difference being made up by borrowing or minting new funds. In other word, government deficit or surplus is the difference between government receipts and government spending in a single year. A deficit occurs when the expenditures of a government exceed the revenues collected by the government; a surplus is when revenues exceed spending. It is usually presented as a percent of gross domestic product (GDP). Government deficits or surpluses are measured using the net borrowing (or net lending) figures of the general government sector in the national accounts. Put another way, it is the difference between total revenue and total expenditure, including capital expenditure (in particular, gross fixed capital formation). Revenues are mainly in the form of taxes, social contributions, dividends and other property income. The main expenditures are compensation of government employees, social benefits, interest on the public debt, subsidies and gross fixed capital formation. A government that has a deficit year after year increases its government debt. Government debt is financed by printing additional currency to pay debts, by selling off assets or by borrowing. Printing money can run a risk of a galloping inflation. Selling assets can be a short-term, partial fix and in some cases necessary, but as in a household, it is not a substitute for learning to live within one’s means. Borrowing is the most common way to finance debt, but it comes with interest payments, which can also hamper long-term growth and, in some cases, add to the deficit. Borrowing can be from residents of the country (internal debt) or from foreigners (external debt). Economists generally believe that internal debt is more manageable than external debt. However, there are different schools of thought about deficits. Many economists, mainly those in the Keynesian school, believe that governments should run deficits during recessions and periods of high unemployment to compensate for lack of private demand; it is only during times of full employment and strong economic growth that governments should work to balance the budget. Increasing government debt during a recession can stimulate the economy (whereas during times of high GDP, deficits can be a contributing factor to inflation). These economists assert that the stimulus packages enacted around the world following the 2007 economic crises have downgraded a potential new “Great Depression” into a “Great Recession.” Thus, economists as Eichengreen and Masson (1998) and Frankel (2004) on the other side argue that the more important issue is to reduce the deficit by cutting government spending. While at the start of the crisis world leaders seemed to be adhering to Keynesian economic theories with huge stimulus packages in several countries. In early 2010 political participants were starting to focus on the growing debt levels and calling for cuts in public expenditures as market turmoil was sparked by government deficits of countries in the euro area, Greece in particular, and ater in Italy and Portugal. From the early 1990’s to 2006 most OECD countries had deficits, but by 2007, half of the OECD countries were in surplus3. That is mainly, but not exclusively as a result of the Great Recession of 2007-2008. However, all of the OECD countries except Norway and Switzerland had a budget deficit by 2009. A situation that has slightly improved through 2011 (with Estonia, Hungary, Korea and Sweden joining Norway and Switzerland among the nations with surplus). However, that is projected to worsen again 2013. In fact, even though a general reduction of the deficit is expected in most OECD countries, only Korea, Norway, Sweden and Switzerland will be in positive territory. The 2007-2009 financial crises led to a dramatic increase in the public deficits of many advanced economies, with many of them experiencing their highest levels of debt since World War II. This was in large part due to the huge stimulus programs in countries around the world, in addition to government bailouts, recapitalizations and takeovers of banks and other financial institutions. Another contributing factor to the higher deficits was the decrease in tax revenues. Most recently, the IMF has pointed at some signs of a turnaround, with reducing government debt and deficits spurred by economic activity and growing government revenues in many advanced economies. The key fiscal priority, as stated, will be bolstering medium-term debt sustainability in 3 The OECD (Organisation for Economic Co-operation and Development) is an international organization of countries with highly developed economies and democratic governments. Twenty countries originally signed the Convention on the Organisation for Economic Cooperation and Development on 14 December 1960 developed countries, whereas in emerging and low-income economies where recovery has been faster, it will is required to tighten fiscal policies.

The concept of deficit finance was born from Keynesian school. This school believes that government expenditure is one of the necessary tools that can be used to address economic depression. Simply because in the developed countries, depression is related to a decrease in a real consumption and investment demand, while actual investment demand falls due to an increase in the interest rate and a decrease in the investment at the same time. The increase in the government expenditure leads to an increase in income, which leads to an increase in consumption and investment demand. Therefore, when the government resorts to deficit finance it tries to make up for the shortage in demand, which is capable to raise actual demand up to the level fit to balance off full employment (Khalil, 1982: 615-616). In terminologies of many economists, deficit finance refers to a situation in which the government intends to increase its expenditure while leaving its budget unbalanced (Al Rubi,1998: 273). There are different opinions on the source of financing the deficit. The UN Economic Committee when it conducted an economic development finance study in Asia and the Far East, pointed out that budget deficit should be financed from the following sources:

  1. Foreign resources such as loans;
  2. Domestic resources that include:

III. Borrowing from individuals and private projects,

  1. Borrowing from the Central Bank through issuing new notes,
  2. Using government cash balances,

Others as Kravis and Lipsey (1988: 74-78), see that deficit finance comprises the following:

  1. Borrowing from the public and non banking institutions;
  2. Borrowing from the commercial banks;

III. Withdrawing from the government surplus;

  1. Borrowing from the Central Bank through issuing new currency(Beshai 1981: 10).

Another opinion, deficit finance is nothing but borrowing from the general public because this type of borrowing comes from real saving (Dahl and Moller 2006) and Al Rub (1998). Others like Khalil (1971: 270) explains the concept of deficit finance as it related to new bank notes issuing and borrowing from the public. However, ven if we disregard different opinions of the researches on the source of deficit finance and concentrate on its concept that says the government intends to increase its expenditure over its revenues, then the government will find itself facing the following two choices to finance its deficit:

  1. Issuing new banknote (Printing money);
  2. Borrowing and this comprise both domestic and foreign loans.

Here there is not feasible to withdraw from government surplus accounts, because it is not achieved in many developing countries with the exception of some oil producing countries. The basic idea is that all the countries should utilize all their balances in developing their national economies. Economist like Abdel Muniem Afar (1980: 229-230) believes that this does not occur for non-oil producing developing countries because they usually do not enjoy surpluses as they suffer acute shortage in capital. As mentioned above, the type of financing that is based on the concept that the government should increase its expenditure over its revenues (deficit in its budget) is considered as a very important factor in promoting economic development if properly geared towards real production that means increase in the production of goods and services and a reduction in inflation rates. This will consequently lead to positive changes in the economic variables. Foreign Resources Historically speaking countries that cannot secure sufficient domestic resources to achieve their economic development aspirations resorted to foreign finance. This source is important because developing countries consider foreign savings important in development efforts as the need for foreign funds based on two considerations said Al Shafei (1970: 53).

  1. Improving domestic savings will allow to achieve a higher level of capital accumulation. This confirms our knowledge of the low level of our domestic saving in the initial stages of Economic development, and the increasing importance of required volume of investment to achieve a reasonable economic growth.
  2. Raising the level of investment while the level of manufacturing drops. This will also encourage importing machinery, inputs and other investment commodities from abroad in order to fulfill the national investment projects. Therefore, necessary foreign exchange must be secured in order to raise the level of the domestic saving to the required level to achieve the required level of investment.

In view of the ongoing debate about foreign savings and investments, we shall discuss the role of foreign saving in achieving development and economic revitalization that involve both official and private savings. Most part of official saving is in the form of (descending) soft loans. This means that these loans are in the form of low rate and grant long term repayment schedules which are not available in the international private capital markets. These loans can be granted on commercial terms like export credit and investments, hard loans from the World Bank and regional development banks. These loans are technically called (descending) or soft loans granted for official development, but are commonly known as foreign aids/assistance. These aids are divided into bilateral that are granted by one country to the other and multilateral that flow into international institutions like the United Nations, the World Bank and other institutions which, on their part offer these loans to the countries in need. The foreign aids can be granted in technical form by sending experts to assist in capacity building of the local employees in the developing countries.

However, the foreign private saving comprises four elements. These elements are:

  1. Direct foreign investment which foreign nationals carry out and which is under their entire or partial control;
  2. Investment in national capital market such as bonds and stocks markets;

III. Multinational companies investment in installations of a developing country;

  1. Export credit provides credit guarantees to encourage export in developing countries, which are import dependent.

The Harrod- Domar model explains that the role of the different types of foreign savings is confined to assist domestic savings to increase investment and speed up growth, while, the two gap model explains that foreign savings contribute in increasing investment or imports by providing foreign currencies (Gillis and others 1995: 602-603). However, developing countries that aspire for foreign investment anticipate material and moral benefits, which are; job creation through foreign investment companies, to learn new technology/innovation and skills, to acquire foreign exchange with the aim to encourage investment and thus achieve the aims of economic development and consequently to revitalize the economy.

The justifications and effectiveness of deficit financing can be outlined as:

  1. Deficit finance supporters believe that it has justified benefits represented in compulsory saving, full utilization of economic resources, fighting unemployment and other benefits.
  2. It is effective in economic resources allocation and prices stabilization and other issues, which we shall discuss in this section.

Therefore, this part is divided into justifications and reasons that warrant deficit financing, and how is deficit financing effective to realize economic revitalization.

The Justifications for deficit financing or or inflationary finance supporters are realized as:

  1. Deficit finance helps to achieve compulsory saving through price increase and thereafter decreasing consumption that consequently leads to increase in investment resources (Al Rubi, 1998: 256). The compulsory savings are divided into two forms namely; saving in kind or in cash;
  2. Saving in kind occurs due to increase in prices that caused by increase in means of payment and when the low-income groups fail to consume part of the production due to high prices. This means that there is part

of the national product that has not yet been consumed which the government can gear toward investment. To achieve this it is conditional that deficit finance should not be accompanied with increase in wages (Al Mahjoub, 1982: 546-547);

III. Savings in cash are achieved by the business community and high-income groups, because it depends on high prices and a depreciation in money value that lead to redistribution of incomes in their favor. As known, the high-income group has a high tendency to save. They can easily increase their cash savings as a result of the high prices, and divert these savings towards investment. In other words, inflationary or deficit finance leads to increase in the rate of capital formation (Muhi- El din, 1983: 468);

  1. Deficit finance enables the government to acquire purchasing power (Money) to be able to finance development projects, and to access necessary economic resources such as expert labor, machinery and high technology. With that power, the government can control the movement of the economic resources and channel them according to development priorities( Karam,1988: 466);
  2. Deficit finance leads to increase in demand for goods and maximize the profits. This leads to investment revitalization and consequently the volume of economic development rises in the economy whose production technology is responsive (Heijer, 1997: 189);
  3. Deficit finance (issuing new banknote) becomes an important tool in countries, which have exhausted their taxation and borrowing possibilities. Therefore, by printing more money the government can bridge the financing gap in their economic development plan and eliminate production bottlenecks (Khalil, 1982: 616);

VII. The importance of deficit finance is evident in the developing countries to make up for the resulting shortage in the volume of money, because of the prevalence of the habit of hording in many countries, by issuing new currency and by expanding credit.

VIII. Lack of efficient financial and monetary systems in the developing countries makes it imperative that deficit finance becomes one of the tools of creating capital (Al Rubi,1998: 261);

  1. Deficit finance encourages monetary illusion that results from inflation represented by the increase in money income. This encourages workers to exert more efforts thinking that their real incomes have increased. Likewise, landlords and capital owners are encouraged to offer what they have of production factors in exchange of the expected cash incomes from these elements. Based on this illusion, the government can build economic development projects before the reason for the increase in incomes could be found out, whether it is true or a mere illusion.

Effectiveness of deficit finance

Some economists think that deficit finance is effective in the following ways:

  1. Allocation of economic resources through deficit finance, economic resources are transferred from the private sector (individuals and companies) to the public sector. Through its control over new currency issuing and its borrowing capacity from the banking sector, the government can purchase the production factors owned by the private sector. Therefore, deficit finance avails purchasing power to the government that allows it to control economic resources, which can be channel to investment or consumption( Muhi- El din, 1983: 466);
  2. Utilization of the economic resources, Keynes thinks that deficit finance leads to utilization of the economic resources through increase in real demand. Because increasing government expenditure and increasing individual incomes lead to increase in consumption demand and consequently lead to increase in prices which is a result of an increase in the volume of money in circulation. This guides to optimism among the business community that encourages them for more investment, which leads to more utilization of economic resources (Abdel Mawla,1986: 462);

III. Prices stability as basically, deficit finance aims to raise prices in order to achieve compulsory savings. It also aims to encourage investors to increase their investments through increase in prices and profits margin. Some deficit finance supporters think that it is capable to halt rising prices. Moreover, it leads to an increase in the purchasing power that contributes into capital formation, which consequently leads to an increase in the production rate. This, by inference leads to an increase in the supply of goods and services that leads to a fall in prices, which in turn leads to a balance between supply and demand and finally price stability.

The following conditions are necessary in order to achieve price stability:

  1. The government should prevent inflationary pressures and should not spend the printed currency on consumption;
  2. Prevalence of market competition should be maintained so that increased supply results into an automatic fall in prices;

III. Printed money should be utilized to increase the volume of supplied goods and services.

Achievement of Economic Development

Deficit finance supporters think that it leads to economic development through:

  1. Increasing capital formation rate through compulsory saving;
  2. Utilizing untapped economic resources;

III. Encouraging investors (business community) to increase their investments;

  1. Attracting foreign capital/investment.
  2. Redistribution of the national income:

No doubt that deficit finance leads to the redistribution of the national income in favor of those with high saving tendency through increased prices coupled with the increase in the profits of the businessmen and a decrease in the consumption rate of the low income groups due to the fall in the purchasing power. Therefore, deficit finance diverts a large part of the national income in favor of the rich at the expense of the poor on the argument that the rich are more capable to save and invest, assumed Al Mahjoub (1982 ; 547-547).


It is generally agreed that the oil shutdown has minimized the government income and affects the economic development, but the development should be achieved with a minimum inflation. Even if voluntary savings are not sufficient, funds should be obtained through compulsory saving in the form of ‘Taxation’. If this is not sufficient, the government should seek external financing to fill the gap. Otherwise, deficit financing, borrowing or printing of money should be considered as a last resort. The development should not necessarily be suspended in order to avoid inflationary Methods.” No doubt that taking necessary measures to finance economic development leads to diversification of the resources of saving, whether local or foreign and this means there will be a large amount of resources in government disposal. But as usual, shortage of resources of finance is a big impediment to any economic activity that aims for economic revitalization and prosperity. This is due to poor national savings resulting from low national income and the fragility of the resources of finance if any, in addition to the high consumption tendency.

It is also worth mentioning that Sudan and South Sudan reached a deal on oil transit fees, a first step towards ending a dispute which had brought the hostile neighbors close to war, but Sudan said it wanted to reach an agreement on a security arrangement before oil flows resumed.

It is difficult to project when the oil deal would be implemented and how quickly oil companies will be able to restart production. According to various estimates, it could take a month or longer, depending on the oil facility and the duration of the shutdown. However, we may discover that deficit finance may be the only way out for economic revitalization if its efficiency is properly understood. Moreover, to attract foreign resources requires availability of specific factors economically and politically and this tends to complicate matters. Hence, integration of the sources of finance becomes imperative to stimulate meaningful economic activity.


Abdel Mawla, A. (1986), “Public Finance (in Arabic)”, Dar Al Fikr Al Arabi, P 462.

Abdel Muniem Afar, M.(1980), “Al-Sharia and Economic Policies (in Arabic)”, International Association for

Islamic Banks , 1st edition, P 229-230.

Al Mahjoub, R.(1982), “Public Finance ( in Arabic)”, Arab Al Nahda Library, Cairo, P 546-547.

Al Rubi, N. (1998), “Inflation in An Underdeveloped Economies (In Arabic)”, University Cultural Institution;

Alexandria; P 273.

Al Shafei M. Zaki, (1970), “Economic Development ( in Arabic)”, Dar Al Nahda Al Arabia, Beirut, P 40-53

Beshai Kamil, F. (1981), “Role of the Banking System in Financial Balancing (In Arabic)”, Egyptian Public Corporation for the Books, Cairo, P 10

Dahl, M. and Møller, T. (2006), “Valuation and hedging of life insurance liabilities with systematic mortality risk”, Insurance: Mathematics and Economics, Vol. 39, P 193–217.

Eichengreen, B., and Masson, P., 1998, “Exit Strategies: Policy Options for Countries Seeking Greater Exchange Rate Flexibility”, Occasional Paper No. 168, International Monetary Fund, Washington DC.

Frankel, J. (2004), “Experience of and Lessons from Exchange Rate Regimes in Emerging Economies” , NBER WP No. 10032. In Monetary and Financial Integration in East Asia: The Way Ahead, edited by Asian

Development Bank (Palgrave Macmillan Press, New York ) 2004, vol. 2, P 91-138.

Gillis, M., and others (1995), “Economics of development (in Arabic)”, Al Mariekh Publishing House, P 602- 603.

Heijer, M. (1997), “Financial and Monetary Policies for the Economic Development Plans( in Arabic)”, National Printing and Publishing House, P 189.

Karam, A. (1988), “the Economies of Developing Countries (in Arabic)”, National Development Center;

Kuwait, P 466.

Khalil, S. (1982), “Financial and Monetary Policies and Theories (in Arabic)”, Kathami publishing Co.,

Kuwait, P 615-616

Kravis, Irving, B., and Lipsey, E.(1988), “National Price Levels and the Prices of Tradables and Nontradables”, American Economic Review, Papers and Proceedings, Vol.78, No. 2, P 474-78.

Muhi- El din, O.(1983), “Backwardness and Development (in Arabic)”, Dar Al Natha Al Arabia; Cairo, P 468

Neal, R. M. (2008), “The Path to Addiction: And Other Troubles We Are Born to Know”, AuthorHouse, P 310– 315.

Sherris, M. and Zhang, B. (2009), “Economic Scenario Generation with Regime Switching Models”. Working Paper, Australian School of Business Research Paper No. 2009 ACTL05 , University of New South Wales.

South Sudan Ministry of Finance & Economic Planning, “Press Release: South Sudan Approves Austerity Measures in Response to Loss of Oil Revenues,” 19 February 2012.

http://www.southsudannewsagency.com/news/press-releases/south-sudan-approves-austerity-measuresin- response-to-loss-of-oil-revenue South Sudan Ministry of Finance & Economic Planning, “Press Release: South Sudan Expedites Transition to

Non-Oil Revenue, Aims for 300% Increase in Six Months,” 8 February 2012.


The United Nations Office for the Coordination of Humanitarian Affairs (OCHA), “Weekly Humanitarian Bulletin” 23 February 2012, http://reliefweb.int/sites/reliefweb.int/files/resources/OCHA, South Sudan, Weekly Humanitarian Bulletin 17-23, February 20, 2012.pdf.


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