Managing uncertainty: With Sudan’s official separation in July, a new currency is to replace the Sudanese pound (SDG) in the South. The Bank of South Sudan (BOSS) will take over monetary management from the Central Bank of Sudan (CBOS) for the South: issuing the currency, monitoring the money supply and regulating financial institutions.
In this inaugural issue we provide an analysis of currency fluctuations prior to, during and post the transition to the new currency. Throughout the end of 2010 and the beginning of 2011, the Sudanese pound depreciated considerably further, culminating in an official rate of 2.6 SDG to the USD and a black market rate of 3.2 SDG to the USD (February 2011). Inflation and exchange rate drivers With oil consisting of 93 percent of Sudanese exports and 50 percent of Sudan’s domestic revenue in 2009, oil revenue is one of the principle exchange rate drivers. Whilst oil production remained stable between 400 and 500 barrels per day from 2007 to date, the price of oil peaked in March 2008 at more than $100 per barrel, and then fell till March 2009 (“a” in diagram), closing at lows of just below $30 per barrel. Operating under a managed float, CBOS first sold its foreign reserves to maintain the exchange rate, but eventually left with only 2 weeks import value of foreign reserves, CBOS let the exchange depreciate in response to the plummeting oil price. >From Mar 2009 the price of oil increased to $58 per barrel in 2010, then $81 per barrel in early 2011. The exchange rate normalized in response mid 2009 (“b” in diagram), but instead of appreciating in line with the rising oil price the exchange rate depreciated further (“c” in diagram). This persistent fall in the value of the SDG probably stems from rising uncertainty over Southern Sudan’s transition to a separate country, leading to USD and foreign assets being held in preference to SDG. In view of this uncertainty, The SDG depreciation is expected to deepen in the upcoming months and could easily result in official rates of 3 SDG/USD and black market rates of 5 SDG/USD. Pitfalls with switch to new currency The new currency is to be issued by BOSS on the 9th of July 2011. In the ensuing period, BOSS will replace all the SDG notes it is responsible for, with the notes of the new currency (1 SDG = 1 unit of the new currency). The present complication for BOSS lies in negotiating with CBOS for the attribution of its liabilities (the amount of SDG currency it is responsible for) along with equivalent assets (backing the currency). This result, along with BOSS’s ability to deal with a less than perfect outcome will determine the rate of exchange from the SDG to the USD, and from the new currency to the USD. In the best-case scenario, both the official and the black market rates of the new currency to the USD would be close to those of the SDG, and would not draw supplementary SDG for exchange from the northern currency pool. Alternative scenarios include, the inability to replace all Southerners’ SDG, or an undervalued new currency (USD holders will win, while SDG holders will lose) A key issue in this transition is that the pool of SDG can flow from North to South quite easily. Thus, if the north suffers economic shocks or does not cooperate well with the south – this would have a negative impact on the transition. Given these uncertainties, most businesses are increasingly switching their SDG to the USD and fixed assets (both locally and abroad), as a safe strategy over the next few months. The exchange rate is expected to stabilize from October 2011 onwards, when business and consumer confidence will have been restored. What the future holds With few alternative sources of revenue to oil (Oil revenue amounted to 93% of 2010 GOSS budget forecast), Southern Sudan is expected to be even more vulnerable to oil price volatility than Sudan. Heavily dependent on imports too due to minimal local production, a fixed exchange system (managed by BOSS) accompanied by a sovereign oil fund/buffer (managed by the Ministry of Finance) would be best adapted to maintaining economic stability despite external oil and import price fluctuations. BOSS has been considering the implementation of an adjustable peg to manage its exchange rate. In order for such a ‘soft peg’ system to be credible of maintaining a fixed and stable exchange, BOSS would have to: · Retain a significantly large foreign currency reserve, that would enable BOSS to uphold the exchange rate despite depreciative pressures · Ensure Central bank independence shielding the currency from government pressure to finance its fiscal deficits (by printing money or borrowing from the central bank). As such the ministry of finance would have to finance its deficits through taxes and use a buffer (counter cyclical savings via a sovereign fund) to cushion fluctuations in oil revenue. Steer clear from capital controls. If this peg proved to be closer to a managed float, the positive news of Southern Sudan’s separation should lead to a medium term appreciation of the exchange rate driven by the increase in foreign investment and donor aid (assuming no immediate fall in the price of oil). A clearer picture of the chosen exchange rate regime will emerge from the BOSS, GOSS, and CBOS discussions over the course of the coming month, as well as following the approval of the Central Bank law at the end of March. References & further info Christopher Adam and Bendikt Goderis “Monetary Management of Oil Price Surges” in Paul Collier, Catherine Pattillo and Chuckwuma Soludo (eds) Economic Policies for a Prosperous Nigeria (Palgrave Macmillan, 2007) IMF “Sudan: Article IV Consultation - Staff Report; Debt Sustainability Analysis; Staff Statement; Public Information Notice on the Executive Board Discussion; Statement by the Executive Director”, Country Report No. 10/256 on Sudan (2 Aug 2010) Government of Southern Sudan Centre for Census, Statistics & Evaluations http://ssccse.org Central Bank of Sudan website http://www.bankofsudan.org Bank of Southern Sudan website http://www.bankofsouthernsudan.org Kind thanks to: Christoffer Koch, Udara Peiris, P’Tiluc & Prof. Laura Nyantung Beny *Melody Atil is founder and managing director of Peace Dividend, which harnesses global diaspora networks to expand access to finance in countries recovering from civil war. The project is getting its start in Southern Sudan, where Peace Dividend channels global capital to small businesses with limited or no access to finance. From 2007-2009 Atil was with the World Bank's private sector development project for Southern Sudan in Juba. She has a background in microfinance business development in Mexico and previously worked in finance at GE CapitalLondon. [email protected] e-mail address is being protected from spambots. You need JavaScript enabled to view it __________ For subscriptions: [email protected] e-mail address is being protected from spambots. You need JavaScript enabled to view it -- You received this message because you are subscribed to the Google Groups "JFD info" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. For more options, visit this group at http://groups.google.com/group/jfdinfo?hl=en.
