*South Sudan's fiscal policies risk hyperinflation/ Oxford Analytica
20.09.16*



An expanded budget coupled with falling oil revenues has left South Sudan
in a precarious economic position

The government of South Sudan on Friday rejected the findings of a US-based
advocacy group alleging that government and rebel leaders have controlled
and exploited large swaths of country's economy, especially during the
recent conflict. The report has dominated the economic news in South Sudan
as macroeconomic conditions in the country have deteriorated rapidly.
Soaring inflation, low oil prices and a persistent, growing deficit portend
more fiscal difficulties ahead in Juba.

What next

Juba will search for ways to fund the 2016-17 budget, including loans, but
Western donors will resist providing support unless the government improves
its fiscal conduct and demonstrates a commitment to the peace agreement.
Although South Sudan has been renegotiating the terms of its oil export
agreement with Sudan, the effect will be muted if oil prices stay low. With
no other way to fund the budget, South Sudan will be forced to finance
spending by printing money, leading to worsening macroeconomic imbalances
and possibly hyperinflation.

Subsidiary Impacts

·        Rapid inflation could encourage more dollarisation of the informal
economy.

·        Delays in public-sector payments are likely, including to the army.

·        Financial strains and limited patronage opportunities could
exacerbate violence.

·        Donors and aid organisations will feel pressure to increase
funding for humanitarian programmes.

·        With nearly 5 million people facing acute food insecurity, rising
prices could exacerbate a severe food crisis.

Analysis

Just as the post-civil war peace in South Sudan appears shaky, so are the
macroeconomic fundamentals.

In late August, Juba presented a 2016-17 budget of over 29.6 billion South
Sudanese pounds (SSP), equalling approximately 846 million dollars (based
on the exchange rate of 35 SSP to the dollar when the budget was
formulated).

While the proposed budget is nominally three times larger than last year's,
the SSP has depreciated by at least 90% in 2016, rendering the new budget a
reduction in real dollar terms.

Given persistent low oil prices and disruptions in production, as well as
very limited budget support, it is unclear how Juba will fund the spending
plan

Depreciating pound

Since adopting a floating exchange rate in December 2015, the SSP has
rapidly depreciated.

The official and black market exchange rates have moved toward convergence
in recent months; both stand at around 50 SSP to the dollar. The
depreciation will continue so long as the Bank of South Sudan (BoSS) prints
money to finance the budget.

<https://dailybrief.oxan.com/g/oxweb/DB213739/2016-09-19-SOUTH-SUDAN-economy_1000.png>



As a result of monetary expansion and subsequent currency depreciation,
measured annualised inflation (highly volatile in recent years) grew to
661.3% in July and 729.7% in August 2016, driving up the prices of goods in
the market. According to the government, food and non-alcoholic drink
prices are driving inflation. For example, maize reached a record high of
30,000 SSP per sack during September in Abyei.

*730%*

Measured inflation during August in South Sudan

Fiscal demands

Several factors are pushing Juba to spend. Outside of the security sector
(traditionally an area of high expenditure), other demands will add to the
fiscal strain.

The recent peace agreement ending the civil war envisaged expanding and
creating various institutions, both to fill existing gaps in government and
create positions for personnel from the warring factions. A larger army and
increases in pay to civil servants also add pressure to the budget.

Should the government follow through with a plan to increase the number of
states in the country to 28, those will come with further administrative
costs.

Funding the budget

The IMF has urged South Sudan to restore macroeconomic stability in part by
reining in spending, especially as oil revenue has dropped.

To secure budget support from Western donors and international financial
institutions, Juba would also need to present a credible plan for fiscal
reform, as well as demonstrate commitment to the peace agreement. To date,
neither of these courses of action seems likely due to the persistent
failure to improve security in the oil producing regions of Upper Nile and
Unity State, and an unresolved political crisis that has left the political
future of the country uncertain.

International financial institutions and Western donors will look for
fiscal reform and resolution of political tensions

Regional integration and support

On September 5, Juba deposited the instruments of ratification for
accession to the East African Community As the bloc's newest member, South
Sudan is hoping to win support from neighbours. Concurrent to the
presentation of the budget, the new first vice president, Taban Deng Gai,
travelled to regional capitals looking for funding to relieve the economic
situation

The visits included meetings in Uganda to request support to pay an
outstanding amount of approximately 35 million dollars owed by South
Sudanese to Ugandan traders. Due to arrears, traders have stopped supplying
essential items to their northern neighbour, crippling the local economy.
Officially, Uganda has agreed to send a delegation for technical assistance
to Juba to advise on aspects including improved revenue collection, banking
and improving the agricultural sector.

The first vice president also lobbied the government of Kenya for money to
pay for essential items, noting that Juba could no longer afford basic
goods and service delivery. Local media report that Nairobi is weighing a
possible 60-million-dollar loan for humanitarian and economic aid.

Neither Kenya or Uganda will be anxious to acquiesce to the request given
South Sudan's current fiscal position; chances of repayment are low.
Furthermore, domestic constituents may oppose a bailout of this kind.
However, both neighbours have some vested interests in the peace of South
Sudan due to trade relations, as well as from the perspective of regional
stability.

Loans

Initially, South Sudan kept inflation in check through a large credit line
provided by the government of Qatar on the basis of future oil sales, but
this credit line has dried up.

Juba has also taken loans from the Chinese government. In August, Juba
requested a 1.9-billion-dollar-loan from China to support infrastructure
finance. China may continue to lend money and keep the South Sudanese
economy afloat in the short term; however, notwithstanding unfavourable
terms for Juba, repayment will rely on increases in oil prices and
sustained productivity, as non-oil revenues are low

Hyperinflation

The release of the 2016-17 budget does not address the concerns of the
growing fiscal deficit and, in light of the low oil price, South Sudan will
struggle to find the funds needed to enact the budget. The most likely
scenario, therefore, is that BoSS will print money, which will continue to
fuel rapid depreciation of the SSP and this in turn will exacerbate the
inflationary pressures. If not addressed, South Sudan could enter a period
of hyperinflation leading to the collapse and abandonment of the SSP.

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