(Cambridge, United Kingdom) - I write this note in continuation of our ongoing debate on the devaluation of SSP and in response to my former classmate and a dear friend, Mr. Isaiah Chol Kuch, who recently wrote a rebuttal to my latest article in which I went on record, supporting the Central Bank’s move. I have fond memories of Isaiah Kuch; we spent four arduous years – many nights of which passed away over economic problem sets, solving lagrangians and running regressions – but four years of exponential growth in our knowledge and in character, complemented by a deep bond of friendship. I congratulate my friend for a well-articulated piece, and commend him for exercising his obligations as an educated citizen, for an educated citizen has obligations, as JFK articulated “to encourage the pursuit of knowledge, to serve the public, and to uphold law.” An educated citizen promotes freedom by engaging in an informed debate, for “only… informed people will be a free people;” and by spreading information, “tyranny and the oppressions of mind and body will vanish, like evil spirits at the dawn of day.” It is through the same weight of obligations that I respond to his arguments.
It may appear as if Mr. Kuch and I disagree on a lot, but a closer look reveals much agreement than it appears. Mr. Kuch has not disputed my assertion that devaluation provides positive incentives towards production; he has not disputed my claim that it would lead to increase in GDP due to expected fall in imports and expected increase in government spending; and he has not questioned the wisdom of devaluation as an industrial policy aimed at long term fundamentals. His thesis contests, “The timing of the policy was horrible; the mechanism by which it was instituted is not the most desirable one; and finally, the policy was made with no clear data and measures in place to deal with its implications.”
I will address each of these claims one after another, including other assertions in his paper, while incorporating other points that other colleagues have raised in regards to my paper and on the devaluation.
Was the timing horrible? Mr. Kuch finds it disturbing that “this policy was not implemented when austerity measures were in place.” Indeed, I can see his line of logic in two accounts: a). The oil shutdown reduced the supply of hard currency to nearly zero, and therefore justifies the need to cut the injection of foreign exchanges into the market; and b). The shutdown also reduced the revenue by over 98 percent and plunged the country into recession. Devaluation in this case would have done two things: 1). By reducing foreign exchanges’ injection, Central Bank could have made its holding of reserves to endure as much as possible; and 2). By increasing money supply, the Central Bank could have stimulated the economy, easing the pain of recession. Indeed, this option was considered by the austerity committee, however, it was not dropped for the following reason among others: Since devaluation engenders volatility and shocks in the short run, Central Bank would have run short of mechanisms to steer the market to stability. The reserve position was already quite poor before the shutdown, and if marked volatility had occurred – as seen in the few days the decision held – the Central Bank would have run out of reserves much quicker, not to mention the added externality of speculation, which generally follows these measures. It is worth mentioning that the Central Bank was still able to make a loan to GOSS of nearly a billion SSP.
It was agreed then that the devaluation would be shelved until oil resumes so that the reserve position of the Central Bank improves – to give it enough leverage and capacity to withstand short-term volatility – and for the revenue position of the Ministry of Finance to improve so that the fiscal policy also becomes as a viable instrument in the adjustment process.
I also believe that doing it in November is absolutely fine since the growing season for farmers in many parts of the country starts in April/May. If the decision had not been reversed, the next month(s) would have seen marked volatility before stability returns. You want to make sure that things stabilize so that incentives and expectations are formed before the production season begins in order to maximize the integration of structurally unemployed labor to productive sectors. He summarizes it all, “The timing is of essence when it comes to making policies more effective: the right timing, the better the chance of the policy to do what it was intended to do.”
Well then, was the mechanism by which it was implemented not desirable? Here, Mr. Kuch is referring to the percentage of devaluation, which in his opinion is too large; he is also objecting to the use of devaluation to merge the two rates, suggesting that “tight licensing and regulations of the forex bureaus” among others would have been preferable.
Indeed, there is a point to be made in regards to the percentage of devaluation and whether a more cautious approach could have been better. Certainly, it might have reduced the ongoing outcry among the public as well as the short-term agony of the adjustment costs. However, it is important to recall that the black market rate was already 4.3. In order to maximize the incentives towards production, it was important for the new rate to be even weaker than the market rate, hence making the 4.55 reasonable.
But could “tight licensing and regulations” have worked? The reader would recall a time when the police was used to arrest / disrupt black marketeering in Juba; there was actually a time when such a policy was almost successful, but then the dollar traders on the street reemerged. What happened? It is the same problem that virtually all governments face with administrative controls when incentives encourage participation – whether it is dollars, drugs, or other illicit trade in which there is a clear demand. People respond to incentives and will take the risks to engage in those activities if the rewards are substantial.
If the regulations are in reference to the oversight of the financial market, then there is a contradiction that I have witnessed with many of our colleagues. They argue that the officials at the Central Bank should first design and implement administrative / regulatory reforms in the banking sector before devaluation, while implying at the same time that the same officials are not to be trusted with the devaluation because they have inherent opportunistic motivation in black marketeering. If such is the case, how does one know if the same officials who are not to be trusted in managing devaluation will have the interest or motivation to implement regulatory reforms? If anything, as we have seen in the rest of the world, government officials have greater discretion in the implementation of administrative reforms, leave alone in an environment where opportunism eclipses any notion of a social contract. So, if we use such logic that is being advanced against devaluation, then administrative reforms are equally doomed. How then are we to move forward?
But suppose there were actually such regulatory policies, does the reader think they will be implemented? Does the BOSS have implementation capacity of such a complex issues? Even advanced economies like the US & UK find it difficult to get the compliance of the banking sector when it comes to regulations! Should we then wait until we have bureaucratically competent Central Bank before we adjust the exchange rate to reflect the market?
But to push this issue a bit further, in the extreme end of free market that Chicago school promotes, government is actually supposed to be bad for an economy. Government is bad because it regulates the market and regulation causes inefficiency, the logic goes. This is the line of argument that led to large deregulation of the financial sector that is partly to blame for the banking crisis of 2008. The Chicago School promotes pure free market where competition settles all. And if indeed, there is true competition, the bad firms will not survive. In our case, regardless of the regulation, if the market was to function at market equilibrium, the bad banks and forex bureaus – our national bourgeoisie – will naturally die! In other words, you don't necessarily need regulations to end their existence. Competition will do that for you!
Obviously, the positive effects of government’s intervention in an economy are well recorded in history; the Great Depression wouldn’t have ended without government’s intervention. However, regulations complement an already functioning market – they themselves do not engender efficiency.
Was the decision then made without any data? Mr. Kuch infers, “Clearly, the Central Bank did not have good studies and research that warrants that policy decision.” One can ask, how clearly and how would he know that? Indeed, the scarcity of economic data in South Sudan is a real problem, but one that is often overstretched. In my original commentary, I made reference to the black market data and the CPI data, all of which are collected by the National Bureau of Statistics (NBS) and available on the NBS website. It is worth mentioning that the Norway Statistics and now Delloitte Consultancy have assisted the Central Bank and the NBS in improving data collection. We now have GDP estimates (including growth rates, imports and exports, consumption, investment, etc.), demographic data (including viral rates), and general estimates of money circulation in the economy, among others; however problematic these data may be, they are there and often offer useful insights. How is Mr. Kuch able to assume then that such data were not used by the Central Bank? Even more problematic, how is he able to assert that the Central Bank lacked good studies grounded in research to make this decision?
Let me offer whatever little information I know in the evolution of this decision. In March 2011, while I was still an economist at the World Bank, I worked in partnership with the SPLM National Secretariat and the Norwegian Embassy to help put together a three-day intensive workshop on reformulating the SPLM economic policy. This workshop was attended by the Ministers of Finance of the 10 states of South Sudan, Finance Secretaries of the SPLM State Offices, more than half of the Governors of the 10 states, nearly all national ministers, the current and former Governor of the Central Bank, all members of the SPLM Political Bureau with exception of the Chairman and the Vice-Chairmen, who happened to be engaged elsewhere. External experts such as Prof. Tony Venable from the University of Oxford, Prof. Lant Pritchett from Harvard University, Dr. Shanta Deverajan who was the World Bank Chief Economist for Africa Region, Thorvald Moe who was previously the Director General of Norwegian Finance Ministry and one of the architects of the Norwegian Fund, and a host of other foreign experts graced the workshop. While the forum deliberated on virtually every economic issue facing the country, the problem of black market and regulation of the financial sector were delved into with great passion and ferocity. It was around this time that the would-be independent South Sudan decided to adopt managed-float exchange rate regime instead of a currency board, the other option that was being considered.
Moving forward to January 2012 to the launch of Center for Strategic Analyses and Research (C-SAR), again, Dr. Shanta Deverajan was able to come along with Prof. Paul Collier from Oxford and a number of other former colleagues at the World Bank. While the discourses around that time were planned to focus overwhelmingly on macroeconomic issues, the decision of the Council of Ministers of South Sudan to shut down country’s entire oil production forced us to focus on the matters at hand; however, numerous policy deliberations with the Central Bank and the Ministry of Finance were still possible and numerous policy papers were produced. The plan was to implement the devaluation in April of 2012.
The oil shutdown, as mentioned above, made it practically unthinkable to devalue. The focus moved towards austerity measures and financing the budget, including means to mitigate virtual dependency on Khartoum. However, a number of macroeconomic workshops were still held. In my capacity as the Resident Director of the International Growth Centre (IGC), I hosted Dr. Allen Gelb, a former World Bank Chief Economist for Africa Region, Dr. Adnan Khan, an economist at the London School of Economics, and Dr. Keith Jefferis, former Deputy Governor of the Bank of Botswana. The IGC South Sudan office also worked with our current Minister of Finance, Hon. Aggrey Tisa, who was then the Presidential Advisor on Economic Affairs, to bring Dr. Ato Newai, current advisor to the Prime Minister of Ethiopia and the Chairman of the Board of Directors of Ethiopia’s Central Bank. In virtually all of these visits, macroeconomic policy positions were drafted in conjunction with officials at the Central Bank and the Ministry of Finance. I am also aware of the visits of the Governors of the Central Banks of Uganda, Kenya, and others to South Sudan to discuss monetary policy coordination. The list is long. These are only processes for which I am absolutely sure, not to mention many for which I was not aware or not in the country.
Was the decision executed as a shock? Absolutely not! At the recent launch of the South Sudan Economic Association (SSEA) in which Dr. Isaac Bior Deng and I presented the two keynote papers on the evaluation and analysis of 2012/2013 Budget (austerity budget), the Governor of the Central Bank plainly announced it that the SSP was going to be devalued. This gathering was attended by a number of officials in South Sudan, including a large cohort of our Honorable MPs and business leaders. How else then do you signal to the market?
The point is not to say that our government has always relied on data or prepared studies to inform significant economic decisions. Our government has been known to make decisions from its guts, chief among them being the decision to shut down the oil flow. I am also aware that our government feels quite uncomfortable sharing information, even when it is harmless. However, not being aware of something is not a proof of its nonexistence.
Mr. Kuch repeats this mistake by asserting, “Devaluation, if implemented, should have come with specific measures to cushion the impact of the high inflation on the lowest income people.” Leaving for the moment whether the devaluation actually disproportionately affects “lowest income people,” one wonder what makes him assume that complementary policies were not to follow. A recent presentation by the Minister of Finance on the “New Compact” articulates areas of high priority investment, which by and large, would benefit the poor. I am told that a few days ago a meeting by the government and the development partners also revealed a lot of the so-called “cushion.” What he calls “high inflation” is what I call short-term price volatility, which is unavoidable in most cases of monetary expansion.
Does devaluation scare away investors? It depends. If a Central Bank devalues and is unable to defend the new rate or steer the market towards stability, the speculators seize on this weakness and bet against the currency. Extremely rich people such as George Soros made their money through speculation. However, when a Central Bank has enough instruments at its disposable, its chances of realizing faster stabilization are often high. There is no ground to assume that our recent devaluation was going to scare away foreign investors; if any thing, devaluation would have attracted them since incentives towards production were going to improve.
Let’s examine then if the devaluation would have indeed disproportionately affected the poor or an average person. We should first ask, what does it mean to be poor in South Sudan? What is the average income? If we take the 2012 estimates, South Sudan’s real GDP was 15 billion SSP. The NBS population estimates for 2012 (these are all online at NBS website) put South Sudan’s population at nearly 12 million people. The GDP per capita would have been 1, 250 SSP per year; dividing this number by 12 months gives us just a little over 100 SSP; dividing it again by days gives us about three (3) SSP per day. This is the average income.
What about the poor? According to our 2009 Household survey, a poor person was defined as someone consuming less than 2.4 SSP per day. Nearly 51 percent of South Sudanese population was found to live in poverty. Now, let’s honestly ask, does someone consuming about 3 SSP or less a day consumes that many imports? I don’t doubt that many people do consume imports and that products such as salt and cooking oil are consumed across the board. However, would import price hike really disproportionately affect the poor? This I doubt!
There are many parts of our country where basic commodities do not exist; the currency (SSP) itself doesn’t exist and a great deal of trade is done by barter. I also remind the reader that over 80 percent of our population lives in the rural areas – that is, outside of the 10 state capitals and Yei. These people do, by and large, produce their own food, and so far, the government has not been able to do much to improve their lives. These people would have seen their income increase since their produce would have seen great demand from urban elites whose real incomes would have been significantly reduced by devaluation and not able to afford imports. So, the devaluation should have instead narrowed income inequality, not widen it.
Could devaluation cause political problems? Absolutely! And this is where communication strategy becomes absolutely important. In many of the military coups we have seen in African countries in the ‘90s, one of the first things that the usurping junta states as a reason to justify the coup was devaluation. If there is no adequate communications, it can easily backfire. We have a population that could easily be mobilized, even against its own good.
In any case, I very much thank my good friend Mr. Kuch for an enjoyable debate! We must recognize that “nothing worth gaining has ever been gained without effort.” Our recent war experience proves it beyond doubt that the building up of our collective destiny requires “assumption of responsibility on a historical scale.”
As for our politicians, I wish they thought of their responsibilities as much as they think of their privileges. Their sheer hypocrisy reminds me of this saying by Leo Tolstoy: “I sit on a man’s back, choking him and making him carry me, and yet assure myself and others that I am very sorry for him and wish to ease his lot by all possible means - except by getting off his back.” Well...