Discussion summary (question and answer session)
Credibility in the system
The credibility in the South Sudan’s financial system has already been greatly eroded. Additionally, peace will bring a lot more fiscal demands on the government. However, the need to re-establish credibility is very important and this has been undermined. The further the loss of credibility, the bigger the steps needed to restore it. Countries where loss of credibility has been extreme tend to go for a big bang approach in terms of economic reform to help restore it.
Sales of foreign exchange to the commercial banks
Previously, the Bank of South Sudan was a net seller to the commercial banks. Recently, however, these sales have been very small and there have been no sales now for a couple of months. Additionally, some commercial banks have their own rates too (“competitive rate”) which corresponds to neither the official nor the black market rate.
Fixing the current economic situation
There is the need to present this information to key decision-makers as they need to use it to fix the economic situation within the country. The technocrats understand the gravity of the problem but it seems that the top policy makers do not. The presentation has confirmed the fears that many people have in the country at this time, i.e. that the direction South Sudan is taking is not sustainable. Although many people are excited about the new states, the establishment, operation and maintenance costs for them will be very high and put additional pressures on the fiscal situation.
The Banking Act says that there should be central bank independence, but at the moment it is not independent. There are other things in the Banking Act that are also not being adhered to. In May 2015, there was a big workshop held together with the Bank of Uganda on reforming the economy, and the points that came out of the workshop were presented to the Council of Ministers. However, little reform has been done to date. There is a need to establish a crisis management committee to build the political will for reform.
Current government plan
In this case, people are not afraid of what is unknown, but rather afraid of what is known. The Government of South Sudan wants to build reasonable currency reserves to do two things: 1) create a stock for the economy to buy essentials, and 2) to provide a buffer for the people psychologically. The Government will not be able to reduce the expenditures in the next three years because of the need to implement the peace agreement – peace is not simple and it comes with costs.
Freely floating vs managed float
No sustainable currency can be achieved without the necessary reserves to back it up. In South Sudan, neither the demand nor the supply of foreign reserves have been managed properly and there is no transparent mechanism to allocate foreign exchange to the market. To maintain stability, it seems that it would be better to establish a managed float with a ceiling and a floor. For this option, the Government will have to raise reserves. However, if the reserves cannot be raised, then policy makers will have no choice but to allow a free floating market.