South Sudan: Rising prices and prospect of Economic stability
By Addis Ababa Othow Akongdit (PhD)
Reachable at firstname.lastname@example.org
Prior to the outbreak of conflict on 15 December 2013, South Sudan had positive development prospects. The country was expected to achieve in 2014 at least an average growth rate of 30.7% of GDP, a growth in non-oil sectors, such as agriculture, construction and services, following two years of strong economic contraction.
However, this crisis has punctured the excitement of South Sudan becoming a beacon of hope for political stability, food security (Africa’s next food basket), the world’s newest investment destination, economic growth and prosperity. The country is currently facing a widening financing gap, high inflation and unpredictable economic dilemmas, due to its on-going political crisis, deteriorating oil production and volatile global oil prices.
It is estimated that the current conflict has cost up to more 15% of the potential GDP in 2014 and it is predicted to upsurge as the recent conflict and the falling international oil price continue to cast a shadow over economic prospects.
Military and security expenditure has drastically increased, jeopardizing the availability of resources for service delivery and capital spending on much needed infrastructure and development programs.
On May 5-6, 2015, the Government of South Sudan had organized a high level Consultative workshop under the theme: “Towards improving Economic Governance”. The workshop was meant to exchange views and come up with concrete recommendations on how to improve the falling economic situation in the country, especially rising prices of essential commodities in the market.
This two-day Economic Consultative Meetings had generated recommendations which can be summarized as follows:
- Fiscal Policy: strengthening of resources management (i.e. Restructure our economy) and adhering to the approved budget lines.
- Monetary Policy: realign the exchange rate regime and better management of FX allocations (LC’s, public services and etc.).
- Revenue collection and Management: enhance efficiency in tax, non-oil revenue
- Market prices: introducing price controls measures
These recommendations were presented to the Council of Ministers with an aim to take quick actions to get back our economy to its right footing.
This deteriorating economic situation and sharp increase in food prices in our country raised serious concerns on what to do to bring our economy back to track.
Fiscal & Monetary policies
The core fiscal policy of South Sudan is to execute sound economic, fiscal and investment policies, distribute its revenue to the other sectors by adopting international ‘best practices’ of fiscal management, including new instruments such as a Medium-Term Expenditure Framework (MTEF), Revenue Authority, and an Integrated Financial Management Information System (IFMIS). On the other hand, Bank of South Sudan (BSS) its primary objective is to maintain monetary and domestic price stability for effective functioning of a stable market based financial system and to promote a safe, sound and efficient national payments system which aims to maintain the stability of the financial system as a whole. However, with these well-articulated policies, the factors which contributed to the political and economic instability in South Sudan have been apparent since independence, yet they have not been addressed with any urgency. The Country has been facing major political and economic challenges such as internal conflicts, rebellion, food insecurity, price volatility and etc and the question is where/what are our strategic plans that tackle all these sweltering issues.
A- Prices and Free Market Approach:
Rising prices of basic commodities particularly food prices in the past few months raised a lot of questions whether our economic policies (SS Development Plan and Vision 2040) are adequately followed. As we know, South Sudan economy is based on free market policy where the prices of goods and services are determined by the interplay of supply and demand. The market is driven by “invisible hand” of self-interest in which the consumer is at its centre and the facts are that South Sudan annual Consumer Price Index (CPI) has increased by 38.4% from May 2014 to May 2015, Food and non-alcoholic beverages increased by 41.1% from May 2014 to May 2015, while the prices for health increased by 77.4% and restaurants and hotels increased by 34.3% over the same period. The high prices of food and non-alcoholic beverage were mainly driven by higher price of vegetables. On other hand, annual inflation in May 2015 was 36.4% in Juba, and 63.8% in Wau, compared with 39.5% for South Sudan. Prices of food and non-alcoholic beverages increased in Juba by 41.3%, and by 80.5% in Wau respectively over the same period.
These higher food prices have radically different effects across states and population groups. At the country level there will be a huge challenge to meet domestic food demand. Given that South Sudan is almost import dependent country, it will be hard hit by rising prices. At the household or population level, rising and falling of food prices affect those who can afford it the least, the poor and food insecure population. This group (poor and food insecure population) forms the large majority (above 54 % of population) and they will be seriously affected by the situation.
Emerging factors behind rising food prices could be December 15th, 2013 political crisis, escalation of war which led to increased military, security expenditure, enlarged deficit financing and abandoned the fiscal policy. On other hand the Bank of South Sudan has maintained its fixed exchange rate policy, despite the irregular devaluations resulted from a failure to control inflation. However, it is known that domestic price level is mostly equal to the parallel market exchange rate. In other words, the prices of goods and services are based on the black market rate. The instability arises under the fixed exchange regime led to a deteriorating budget leading to inflation.
Giving the situation we are in, what should be a sound policy actions, one may ask? Many countries which experienced the same had taken steps to minimize the effects of higher prices on their people. Argentina, Bolivia, Cambodia, China, Egypt, Ethiopia, India, Indonesia, Kazakhstan, Mexico, Morocco, Russia, Thailand, Ukraine, Venezuela, and Vietnam are among those that have taken the easy option of restricting food exports, setting limits on food prices, or both. For example, China has banned rice and maize exports; India has banned milk powder exports; Bolivia has banned the export of soy oil to Chile, Colombia, Cuba, Ecuador, Peru, and Venezuela; and Ethiopia has banned exports of major cereals. Other countries have introduced restrictions on imports: Morocco, for instance, cut tariffs on wheat imports from 130 percent to 2.5 percent; Nigeria cut its rice import tax from 100 percent to just 2.7 percent.
Generally, Price controls and changes in import and export policies may address the problems of poor people who find that they can no longer afford an adequate diet for a healthy life. However, some of these policies are likely to backfire by making the international market smaller and more volatile. Price controls reduce the price that farmers receive for their agricultural products and thus reduce farmers’ incentives to produce more food (which may not be the cast in South Sudan). In addition, for those who can afford higher food prices, price controls divert resources toward helping people who do not really need it.
Joachim von Braun, director general of IFPRI and other economists believes that the rising food prices have a dominant role in increasing inflation and it would be misguided to address these specific inflation causes with general macroeconomic instruments.
There are sound policies which are needed to deal with the causes and consequences of high food prices:
- Government should establish a comprehensive social protection, food and nutrition initiatives to meet the short- and medium-term needs of the poor (safety net programs like food or income transfers and nutrition programs focused on early childhood). Some of the poorest people, especially in rural or displace areas are not well connected to markets and thus will feel few effects from rising food prices, but the much higher international prices could mean serious hardship for millions of poor urban consumers( for example, Juba, Wau, Bor and all residents of big cities ) who are net food buyers. These people may need direct assistance. Some countries, such as India and South Africa, already have social protection programs in place that they can expand to meet new and emerging needs. Countries that do not have such programs in place will be able to create them rapidly enough to make a difference in the current food price situation.
- Government should also impose price controls on the prices of essential goods and services to maintain the affordability of essential foods, goods and services and to prevent price gouging during shortages. A country like Egypt during the Third Century has regulated grain production and distribution. In Greece price controls were established on grain at a price the Athenian government thought to be just. Developing and developed countries have their own laws and regulations pertaining to price control. In advanced countries there is greater emphasis on price regulatory and monitoring commissions. For example, the Government of New South Wales, Australia established the Independent Pricing and Regulatory Tribunal NSW (IPART) and in the United Kingdom, independent regulatory bodies were established to oversee and regulate charges by utility monopolies.
- Government should also eliminate agricultural trade barriers (if any). Although some progress has been made in reducing agricultural subsidies and other trade-distorting policies in developed countries, many remain, and poor countries cannot match them. This issue has been politically difficult for developed-country policymakers to address, but the political risks may now be lower than in the past. A level playing field for developing-country farmers will make it more profitable for them to ramp up production in response to higher prices.
- To achieve long-term agricultural growth, the government should increase their medium- and long-term investments in agricultural research and extension, rural infrastructure, and market access for small farmers. Rural investments have been deeply neglected in recent decades, and now is the time to reverse this trend. Farmers are operating in an environment of inadequate infrastructure like roads, electricity, and communications; poor soils; lack of storage and processing capacity; and little or no access to agricultural technologies that could increase their profits and improve their livelihoods.
- Government should also support private sector development programs and promote private sectors ability to create a competitive environment which will help generate quality services to the people; improving the standard of living of South Sudanese.
- Free markets in developing countries such as South Sudan indulge in market abuses which resulted in rising prices and inflation. It is appropriate that south Sudan adopts a free market approach in the short run as it works on designing a mixed economic system that will tackle some disadvantages associated with capitalism such as fund repatriations, imports of illegal products among others. It should use its oil revenue to invest in building its productive capacity.
B- Parallel Market and Foreign Exchange Reforms
existence of a ‘parallel’ or black market for foreign exchange suggests that the official exchange rate overvalues our national currency(SSP), leading to allocative inefficiencies in the economy. In most of developing countries, dealings in foreign exchange (FX) are subject to restrictions on sale or / and official price ceiling. Typically, the exchange rate is pegged by the central bank and only a small group of intermediaries mainly financial institutions (banks & forex bureaus) are permitted to engage in currency transactions. But, when the individuals or/ and briefcase companies are allocated FX , the consequence would be that some of this FX (if not all) could be diverted and sold illegally at a market price much higher than the official price creating black market premium. That’s way; the Bank of South Sudan (BSS) had attempted to eliminate the parallel market premium either by floating the exchange rate or by adjusting the official exchange rate towards the parallel market rate.
On Tuesday November 12, 2013, the Bank of South Sudan had devalued its national currency (SSP) against the dollar by 34 percent to bring it onto a par with the black market rate, a move that risks fanning inflation. The Bank had indicated the official foreign exchange rate as one dollar to 4.5 pounds from 2.96 pounds before the devaluation. South Sudan has had a currency problem ever since it gained independence from Sudan in July 2011. Its oil exports have been disrupted by disputes with Khartoum, leaving it struggling to pay for the food and other imports that it depends upon.
The devaluation was part of Foreign Exchange reforms intended to bring the parallel markets into the formal economy and create jobs. It would had lower short-term exchange rate volatility, provide more reliable access to foreign exchange by the business community and members of the public and help to build buffers for the economy to deal with unanticipated shocks.
Although the BSS has the full mandate to take decisions that will stabilize national economy, including the harmonization of the exchange rate, but it was forced by South Sudan Legislative Assembly to revoke the devaluation decision with immediate effect.
However, the Governor of BSS had then reaffirmed the Bank its longstanding commitment to market reforms and to focus on the necessary conditions for creating conducive environment for more investments, macroeconomic stability, high quality financial institutions and effective banking supervision. The rationale for exchange rate reforms can be summarized (not limited) to the followings:
- The core of the reform is the unification of all exchange rates into a single rate at which all transactions are settled.
- Multiple exchange rate systems damage the credibility of the Government. It projects an image of a country which is unable to pursue sound economic policies. This system implies a large hidden transfer of funds from the government to those that get foreign currencies at official rate. It facilitates also rent-seeking behavior and money laundering, raises risks, and deters foreign investments.
- Unification of official and ‘parallel’ market exchange rates may lead to an increase in steady-state inflation, because of the fiscal impact of real official exchange rate changes and enable the Government meet demand arise of a massive expansion of it expenditures associated with the civil war or other developmental programs.
- The typical rationale for doing away with a fixed regime or for devaluing the currency is to avoid the shortage in foreign-exchange reserves or the speculative attack that can arise from inconsistency between the fixed exchange rate and the country’s monetary policy (see Obstfeld and Rogoff 1996, section 8.4). If the exchange rate and monetary policy are inconsistent, then there will be substantial growth (positive or negative) in the stocks of official reserves; if these decline to zero, the exchange rate regime can no longer be supported. This reform (to the extent that the nominal exchange rate changes relative to nominal wages and prices) will alter the relative price of traded goods and will reduce the purchasing power of consumers in terms of traded goods;
- Devaluation is a natural process in the history of financial markets with aim to remove multiple exchange rates and eliminate the inefficiencies and corruption that follow from such rates. This will cause a shift in the relative prices of the goods sold under the multiple rates and will also change the allocations of income among producers;
- Government of South Sudan has ambitious plans to promote diversification of exports in an attempt to reduce the dependency on import and improve the foreign exchange supply situation. Therefore a more competitive exchange rate will support this goal. Devaluation will also in long run boost exports and creates a favorable investment climate;
- Results show that devaluation can bring about significant gains compared with the bleak and unwelcoming picture painted by the public. Devaluation would eliminate the parallel foreign exchange market and improve GDP growth. We will note a significant recovery in investments which will improve exports and ultimately supplement the pool of savings in the economy;
- Inflation levels will also lower once the currency is devalued. This reflects the fact that imports are no longer derived from the much higher parallel exchange rate that existed prior to the devaluation.
- Generally, devaluation is likely to contribute to inflationary pressures because of higher import prices and rising demand for exports. However, the overall impact depends on the state of the economy and other factors affecting inflation. Under the extensive trade and exchange restrictions that are common in Africa as well as South Sudan, devaluation of the official exchange rate should have little impact on domestic prices simply because is determine on parallel marker rate basis. When a country devalues its currency, its exports (if any) become cheaper for other countries to buy, and it becomes more expensive for the country to buy imports. This tends to bring more foreign currency into the country and to encourage the foreign investments. It can also help to increase aggregated demand (AD) and improve the rate of economic growth.
- The parallel market and the accompanying rent-seeking behavior will never be completely eliminated as long as the members of general public seek to extract funds through illegal channels. Apart from legal measures, the devaluation is a way to reduce capital flight is to establish credibility in government as the custodian of a stable and prosperous economy in the long run.
There are voices calling for dollarization of South Sudan economy which means adopting the US dollar (fully or partially) as the currency of choice in the country. Many countries today have already dollarized their economies as a response to economic instability, high inflation and protection of assets from the risks of devaluation of their own currencies
Generally, there is no any country that leaves its own currency as its own legal tender and adopts or deals in a foreign currency. However, even though SSP is our legal tender, but in South Sudan with that regulations, some government & financial institutions, non- governmental & civil society organizations and general public are in the habit of drafting official or private contracts, normal rent payments or salaries in foreign currency and not in local currency(SSP).
Some dollarization supporters think that this policy is capable to eliminate the risk of a sharp devaluation of the exchange rate and rising prices. It allows the country to abolish the rent seeking behavior and establish one exchange rate that may permit its process of joining East Africa projects such the EAPS system (an integrated regional payment system that will enhance efficiency and safety of payments and settlement within the EAC region). They also believe that it creates a higher level of confidence among international investors, lower interest rate spreads on their international borrowing, reduced fiscal costs, and expand the investment and growth.
Based on the BSS regulations, it is highly prohibited for any institutions, official or private in any parts of the Republic of South Sudan to fix hotels rates or any kind of rental rates, payment of prices for all goods, services or requesting payment of contracts or any monetary dealings, in foreign currency, to the exclusion or disregard of the local currency (South Sudanese Pound), as the legal tender. Most importantly many people and politicians see South Sudanese Pound (SSP) as a symbol of national sovereignty and national pride. Losing it could be difficult for many to accept, but the question is could dollarization be an answer to our economic dilemma?
South Sudan is indisputably one of the poorest countries in the world. It lacks vital institutional settings due to long period of destruction and instability. There is undesirable level of capacity building, low life expectancy rate, worse mortality rate in the world, poor basic services. The current situation is seriously shocking, although the country has abundant resources in Africa making its economic prospect potentially bright. South Sudan therefore needs a well-planned economic system to harness its resources as well as enhance its economic socio- political stability.
 Aggregate demand is the demand for the gross domestic product (GDP) of a country, and is represented by this formula: Aggregate Demand (AD) = C + I + G + (X-M) C = Consumers’ expenditures on goods and services. I = Investment spending by companies on capital goods. G = Government expenditures on publicly provided goods and services. X = Exports of goods and services. M = Imports of goods and services.