Home | Comment & Analysis    Thursday 9 February 2017

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


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 abbe91@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

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    • 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>>

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      • 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>>>

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        • 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>>>

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          • 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>>>

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            • 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.

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              • 11 February 05:17, by Akook

                South Sudanese better be rationale beings!

                While we squandered on our own, our very rich young promising country through stupid tribal war of positions. We tend to even mention other people’s names trying to blame them. BIG SHAME ON US!!!

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              • 12 February 15:12, by Eastern

                It’s naïveté like Kuch, who are very quick at watering down dessenting ideas that have contributed to the current governance quagmire South Sudan is in!!!! South Sudan cannot reinvent the wheel; it has to humble itself and adopt what others have experienced with. A living example and a laughing stock is Robert Mogabe’s Zimbabwe.

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