Exchange Rate Policy Issues in South Sudan Dr Keith Jefferis 8 th October 2015
Current Exchange Rate regime • Fixed official rate at SSP2.96=USD1 Parallel market rate, currently at SSP16.40=USD1 • Increasing divergence between official and parallel market rates • Extreme shortage of foreign currency • – No USD in the banks – LiTle USD in BSS – Now affecVng operaVons of firms in the private sector who cannot buy inputs Very low foreign exchange reserves • – All used up defending the official rate Rising inflaVon – now approaching 80% • Overvalued exchange rate • No development of alternaVve export acVviVes – not viable due to • exchange rate overvaluaVon, amongst other reasons Most profitable acVvity is “round tripping”, based on privileged access to • forex at official rates – rent seeking, unproducVve behaviour !
Government Budget • Actual revenues 1000 falling far below 900 budget SSP millions per month 800 • Due to low oil 700 prices and Cash 600 producVon deficit 500 constraints 400 • Large budget 300 deficit 200 • Revenues financing only 100 25%-30% of 0 spending 2014 M M J S N 2015 M M J • Deficit financed by borrowing from Actual Budget BSS Source: Bank of South Sudan !
Leading to dramaVc expansion of the money supply • Monetary 12,000 financing of 10,000 budget deficit 8,000 causing money 6,000 supply growth • Now increasing 4,000 at an 2,000 annualised rate 0 of almost 100% • Growth of SSP Monetary Base liquidity Source: Bank of South Sudan !
In turn driving exchange rate depreciaVon • Increasing SSP 18 liquidity 16 chasing 14 diminished 12 SSP per USD supply of USD 10 • Parallel market 8 rate has fallen 6 from 5.92 on 4 Jan 2 nd 2015 to 2 16.35 on Oct 0 7 th , 2014 M M J S N 2015 M M J S depreciaVon of 64% Parallel market rate Source: Bank of South Sudan !
Leading inevitably to higher inflaVon • Annual 70% 60% inflaVon has 50% jumped from 40% an average of 30% well below 20% 10% 10% in 2014 to 0% 60% in -10% mid-2015 -20% InflaVon Source: Bank of South Sudan !
And exhausVon of fx reserves • Reserves have 2,000 1,800 fallen from 1,600 USD2 billion at 1,400 end 2011 to USD million 1,200 only USD61 1,000 million 800 600 • Less than one 400 week of 200 import cover 0 2012 M S 2013 M S M S 2015 M 2014 Source: Bank of South Sudan !
All the above are connected in a vicious circle Government budget deficits DepreciaVon Financed by pushes up prinVng money inflaVon by BSS Monetary Demand expansion pushes parallel fuels demand market rate up for USD !
Where does the current road take us? • To Zimbabwe: – Excessive government spending – ContracVng fiscal revenue – MoneVsaVon of deficit by RBZ – Spiralling inflaVon – reaching a monthly rate of 79.6 billion percent in late 2008 – Abandonment of Zimbabwe dollar – Bankruptcy of RBZ – Full dollarisaVon, with adopVon of USD as official naVonal currency • An extreme case, but a lesson for what happens if nothing is done !
What needs to be achieved in reforms? • Three requirements: – Devalue or depreciate the exchange rate to match the parallel rate – Ensure that post-devaluaVon, the same situaVon does not arise again – i.e. the exchange rate must adjust in future to changing economic circumstances, not be held at an arVficial level – Re-establish economic credibility and confidence !
Barriers to Reform • Current exchange rate regime is unsustainable • Everybody agrees that something has to be done • Reform programme drawn up • But nothing (?) has been done • What are the barriers to reform? – Vested interests? – Lack of agreement on exact nature of reform? – Inability to saVsfy pre-requisites for reform? !
PotenVal alternaVves • Devalue, and keep a fixed rate regime • Introduce a free float • Introduce a managed float • Intermediate regime, such as a devaluaVon followed by a crawling peg None of these are easy solu5ons and all have advantages and disadvantages, but some are be<er than others !
Assessment of AlternaVves Devalua4on + Free float Managed float Devalua4on + fixed peg crawling peg Pre- Reserves AucVon AucVon system Reserves • • • • requisite Data system Reserves Data • • • s Monetary Monetary policy • • policy Data • Advanta Eliminates XR Adjusts to ParVal Eliminates XR • • • • ges differenVal – if shocks adjustment to differenVal – if large enough Eliminates shocks large enough • parallel Crawl inhibits re- • market emergence Credibility • Disadva • Size of • Exchange rate • Target rate • How large should ntages opVmum could be unknown devaluaVon and devaluaVon volaVle • DisVnguishing crawl be? unknown permanent and • Does not adjust to • Does not stop temporary shocks differenVal re- shocks • No reserves emerging • Support • Does not adjust overvalued XR to shocks All opVons require fiscal restraint to have any chance of • No reserves success
Free Float • Could be done In a “big bang” approach, involving: – Ending preferenVal supplies of FX at official rate – Divide FX oil inflows between GoSS and BSS – All non-government FX to be sourced in the market – Establish 2-way aucVon • Sale of FX by BSS to banks via regular aucVon • If banks have surplus, can offer back to BSS – Allow banks to buy and sell FX in the market at any rate – Interbank FX market !
Managed Float? • A lot of aTenVon focused on move to managed float, once reserves have been built up; USD300-600m target quoted – based on what? • Where from? • – Current BSS reserves (USD61m) – IMF SDRs (150m) – BoP surpluses • Restrict imports • Higher exports – Borrowing (from where?) – Development partners (other prioriVes) Seems unlikely that significant reserves can be accumulated to reach this • target What would USD300-600m achieve? (1-2 months import cover) • Would stabilise a floaVng rate for a short period of Vme only • Focus on building reserves would delay reforms unnecessarily • !
Monetary Policy • With a floaVng rate, need a new monetary policy regime, e.g. base money (=fiscal restraint) !
Timing? • Near future could be favourable: • Peace agreement – poliVcal credibility • Exchange rate reform would complement – economic credibility • AddiVonal FX inflows – DPs, increased oil producVon • Would help to support a floaVng rate • PoliVcal buy-in essenVal ! ! ! !
Risks • Unstable, depreciaVng floaVng rate: – Underlying problem is budget deficits; if this is not fixed, the new floaVng rate could be unstable, and depreciate further – People rush to use their SSPs to buy USD • InflaVon: – Prices are already set in the parallel market, so floaVng the official rate would not make much difference, as inflaVon is already high • Delay – Postponing reforms in order to build up reserves will make problems worse, and in any case it is unlikely that funds will be forthcoming to build up reserves !
Big Bang or Incremental Reform? • Big bang would be traumaVc – even if a posiVve shock eventually • A more gradual approach might work beTer: – Allow banks to trade FX freely, at any rate – Move parallel market into the banks, help to build an interbank market – Reduce non-govt FX allocaVons at the official rate – BSS to sell FX to banks at aucVon – would help government income – Official rate becomes less important for non-govt transacVons !
Risks • Risks of doing nothing are greater than the risks of doing something • Risks of delay are greater than the risks of reform !
THANK YOU Keith Jefferis keith@econsult.co.bw ! ! ! !
Recommend
More recommend
