Dollarising the South Sudanese economy: an ingredient or a remedy?

[Elisabeth Janaina]

Dollarising the South Sudanese economy: an ingredient or a remedy?

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By Golda T. Abbe

Recently there have been talk about dollarising the economy of South
Sudan. The backdrop is political instability and insecurity. The
driver seems to be economic mismanagement, hyperinflation, and
currency depreciation.

Keji, a teacher in Juba, the capital of 5-year old, Republic of South
Sudan, is paid a miserly amount in the local currency, South Sudanese
Pounds (SSP). She laments hardship, as korofo (an edible common
locally harvested green leaf) in January costs 50 SSP for a bunch. In
June, last year, the same bunch was 5 SSP. At one point, a generous
bunch was priced at only 1 SSP. Wage stagnation exacerbates the
despair.

Traditionally, countries have their own currency, a symbol of
sovereignty and national pride. Over the years, accelerating in the
1990s, some countries were forced to abandon their own currencies (or
peg to the US dollar) in search of stability and to curb
hyperinflation. Normally this took place as a last resort, when
Government and the central bank have lost control over their own
currency.

Dollarisation or currency substitution, is not a revolutionary idea,
therefore a possibility for South Sudan. Whether dollarisation in
South Sudan is possible, likely, easy, or advisable, is completely a
different question. Is it the saviour of the problems of our currency
and of all problems?

With worsening episodes of inflation, there was a natural flight to
dollars by the population at large, as it was always allowed to
co-circulate with the SSP. Things such as plane tickets, hotels,
rents, imports of certain goods and custom duties collection trade in
US dollars, even though illegal by law and BSS regulations.

The implications of unofficial dollarisation for macroeconomic
decisions is more difficult to predict. The greater the extent and
variability of dollarisation, the weaker the central bank’s knowledge
and control over an effective money supply. This also spills into
fiscal consequences, i.e. tax evasion (due to lack of trail and an
unreported economy) and facilitates greater corruption and rent
seeking.

Full dollarisation would render the national currency obsolete and
change the scope of the Bank of South Sudan’s (BSS) responsibilities,
as well as limit its role as a lender of last resort and lender to the
government. It would also limit monetary policy autonomy, and incur
costs due to adverse currency mismatches.

Going back to the question, we must consider the following:

Dollarisation on its own is never a complete solution to any of the
country’s issues. In fact, it generally has the contrary effect. It
side-lines the central bank and would immediately freeze Government
borrowing from BSS and begs the question, how would the government
meet its obligations?
Can it, however, be treated as part of a necessary remedy?
After full dollarisation, the Government would no longer be able to
borrow unlimited from the Central Bank, as payments of salaries and
all other expenditures would have to be made in US dollars and BSS
cannot ‘print’ US dollars. Is the revenue generated by the Government
sufficient to meet the budgeted expenditure, even if it is
significantly lowered? Will the Government, already burdened with
significant debt, be able to borrow from outside sources to continue
its budgeted operations?

The Government have run a budget deficit for several years and seems
unable to plug it. Admittedly, balancing the budget would be a hard
decision, and would result in major cuts in salaries, a bulk of the
budget anyway. This would equate to sizable job losses in the public
sector, including the armed forces.

Is the Government prepared to implement a balanced budget? Would the
Government be able to put aside some money to repay its debt over
time? Are our citizens ready to accept a much lower budget spending
that would reduce their salaries, possibly making them unemployed and
cancel numerous other public spending?

Our Central Bank, BSS, would have to exchange most of its domestic
liabilities (all currency issued, now held by our population, and
stored in the vaults of the commercial banks, and all the deposits
held by the commercial banks at the BSS) for a foreign currency, most
likely US dollars. BSS would use the foreign reserves it holds for
this purpose, and everybody would receive US dollar banknotes in
return for the SSP banknotes they would have handed in.

So far, this sounds relatively easy. But, we need to ask what the
foreign reserves of the BSS are at present. Can they technically
handle the conversion operation? How much SSP have already been
issued? What would the applicable exchange rate be? Is the government
prepared to implement a balanced budget? Is the Government willing to
abandon price controls and subsidies? Would dollarisation be
permanent? If not, what is the exit strategy? It needs to be
remembered that reintroducing the national currency would be very
difficult or nearly impossible.

The rate would simply be calculated by dividing all the available
(net) foreign reserves by the value of the BSS liabilities. Since data
on the country’s finances and foreign reserves are scarce (or
unavailable at all), we cannot offer any indicative rate, but it could
easily be worse than the going US dollar rate at the black market
today.

So, let us assume that such an exchange of SSP to US dollars would be
acceptable to our citizens and BSS would be able to provide the
necessary US dollar banknotes. What would happen next?
Our Government would start paying all the public-sector salaries in US
dollars, shops would only accept US dollars for purchases of the
goods, and we would have to use US dollars for all payments. SSP
banknotes would simply disappear.

So, maybe before we discuss dollarisation, we should talk about our
country’s finances. We must ask our Government to present a realistic
budget, one in which expenditure can be matched with revenues. When
this happens, we will no longer need to worry about inflation or
depreciation of our currency, as both would abate immediately. In
other words, the Government would spend only the money it has
collected from oil revenues and taxes. It would no longer borrow from
commercial banks, international institutions, or demand BSS to cover
any shortfall. Forcing BSS to print money to finance Government
deficits has been the main culprit of the hyperinflation. Stop
borrowing, repay some debt, and the currency will strengthen and
inflation will level out.

Apart from these monetary issues, there are other challenges, solving
of which could immediate help our country, such as battling
corruption, improving security, enabling our farmers to produce more
food and distribute across the country. Improvement of infrastructure
is also necessary to reduce the cost of food distribution and other
goods. We desperately need to reduce our dependency on imports, not
limited to food and other basic needs, but many others including
education and the health service. We really need to reduce the amount
of foreign currency that leaves our country daily. Finally, we also
need to encourage inward investment, especially such that creates
employment.

Dollarisation is an extreme monetary measure and only one of possible
‘ingredients’ of improving the situation in South Sudan, but it is not
a ‘remedy’ in itself. More to the point, dollarisation or any other
form of currency reform, are further down the list of policy options,
while good governance and a realistic, balanced national budget is at
the very top to safeguard the control over limited flow of foreign
currency, hyperinflation and -last but not least- manage national
pride.

The author can be reached at abb...@hotmail.com


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9 February 06:41, by Kuch

Mr. Golda T. Abbe,

We are way well ahead and aware of these evil corporate dollar
bullshits in our country than you creeps think you know us. No one is
going to use your damn US dollarS in not more than two years here in
our own Africa and many other countries around the world. Idiot, get
this pretty clear take your evil juus usual dirty intrigues out of our
country chap. We are not playing game

repondre message
9 February 06:47, by Kuch

>>> with you idiot, put this into your damn skull. Every piece
of trash in our region with their evil juus and CIA, MI6, IMF, world
Bank, their UN, their sleazy NGOs and some of their creeps in between
have been playing our country and our people around like our country
is their colony and we are their subjects. Fellows, your love affair
with our country and our people has gone too far. The most>>

repondre message
9 February 06:53, by Kuch

racists people on earth are us, the South Sudanese men,
the Dinkas/Jiengs of the Sudan to be precise. Fools, we allowed every
piece of trash from our region to come and to our country to do trade.
But these criminals have been turned into our enemies by the evil
juus, evil corporate America, the UK, their UN, their sleazy NGOs and
some of their criminals in between>>>

repondre message
9 February 07:08, by Kuch

Dolarizing South Sudan?? By who? Good luck with that
fellows. Before the current in our country in 2013 chap, the CIA and
some of their creeps in between used some Nuers, some Equatorians, our
so-called cloned arabs of North Sudan and some of their creeps in
between to flood our country markets to destroy our country poor
economy>>>

repondre message
9 February 07:45, by Kuch

The evils eventually pushed their Riek Machar
puppet/stooge and his Nuer tribe men to stage a coup on the 15/12/2013
against the an elected government of South Sudan, and coached their
psychopath and puppet/stooge to run to Adis Ababa, ethiopia for peace
negotiations with the government of South Sudan. The criminals did
this farce to save their evil faces after their second misadventure
against>>>

repondre message
9 February 08:03, by Kuch

the South Sudanese people. Now they have
resorted to spread out their outrageous propaganda against South
Sudanese and the South Sudanese people, and think, they can get a way
with. Good luck to the evils.

[Elisabeth Janaina]