AUSTRALIA - An interesting debate has been raging in the social media concerning the recent abortive decision by the Bank of South Sudan (BoSS) to devalue the Pound. Central to this debate are two schools of thoughts where two economists, Peter Biar Ajak and Isaiah Chol Kuch Chol-mangaai, are key participants, who have espoused pro and anti-devaluation opinions, respectively. Biar, (the author prefers using individual’s first name – the “African way”) has been quite eloquent and with much insight and passion grounded in economic theories and insider’s information, defended the decision of the Central Bank aka BoSS. Chol as well, with a similar zeal, great respect and civility (something which is sadly an extreme rarity nowadays in South Sudanese discourse) has countered Biar’s arguments.
Biar’s (and pro-devaluationists on social media) central pitch has been that devaluation is good for long term perceived economic benefits that might result. These might include (1) the death of the Black Market (BM), (2) increases in the total revenue, and (3) less imports due to the relatively lower value of the pound and hence as a result increases in local production. Interestingly, Biar’s arguments are justifications of the three officially implied aims in the BoSS’s “Exchange Rate Reforms” Circular of November 11.
In his response to Biar, while acknowledging the soundness of devaluation as an economic policy, Chol more importantly pointed out that the timing and the principal aim of the policy in the case of BoSS was not economic growth (as Biar had suggested) but rather aimed at eliminating BM currency trading. He logically argued that the policy would have led to high inflation, less competitive business, and (bizarrely to me) foreign investors disfranchisement due to devaluation of their assets as a result of the policy. Chol also indicated that the economic inequality gap would have widened as a result of the policy too.
Writing in another forum, South Sudan News Agency, Sudd Institute economist James Alic Garang , independently from Chol’s arguments ,wrote along similar lines against devaluation. Although Alic was not writing in response to Biar he made an important observation, which contradicted Biar’s assertion, that devaluation was a move towards a “crawling peg regime.” He observed that this was a severe devaluation at “150%” (this means 50% decrease of the Pound) while interestingly his colleague, Adel Sandrai at the Sudd Institute in a Weekly Review (November 17) put devaluation at “34%” – very confusing to say the least. However, regardless of the statistical discrepancies, the policy appeared to have been more of a “shock therapy” rather than a “gradual” adjustment of the rate, something which would have been a principle step if this was the beginning of crawling peg regime. Later on, Biar would give some ground in his response to Chol by acknowledging, “there is a point to be made in regards to the percentage of devaluation and whether a more cautious approach could have been better.”
While firmly disagreeing with the stated reasons of the BoSS for devaluation for the moment, it is important that a non-economist who has no knowledge of economic theories but just the concerns of a lowly citizen and a layman should give an alternative perspective. Biar covered quite an extensive ground, which Chol and Alic attempted to address albeit inadequately at times. One could safely also draw from Chol’s second response to Biar, that his primary concern with the whole issue was not the policy itself but the timing of it without mechanism to “cushion” the impact, which would have led to myriads of problems. In fact, his views differ a little from those of Biar and that makes Chol to be pro-devaluation.
Therefore, an attempt is made here to address some important issues that all authors completely overlooked, did not or failed to adequately address. This is NOT a challenge of their expertise or knowledge but a layman’s addition to an engaging debate and questions pertaining to some narrow issues. It is important to emphasize, that the focus will be on some narrow issues because the debate is wide and has almost been rendered redundant by the reversal of the policy. Trying to refrain from being monotonously repetitive in regards to SOME issues already satisfactorily addressedby Chol and Alic, the focus will be on “convertibility” and the economic hardships of the masses (the silent losers).
However, it is prudent to address some issues beforehand. Firstly, there was a notion that was exhaustively refuted by Chol and Alic from Biar that devaluation would have led to the death of the BM - this was not true indeed on Biar’s part as was clearly shown when the BM traders quickly raised their exchange rates to more than 5:1 following the announcement of devaluation decision. There was no mechanism at least publicly announced and put in place prior to devaluation that would have (1) curtailed the flourish and growth of BM, and (2) stop the BM traders from raising their rates. Secondly, reading Biar’s first article and his subsequent response to Chol, one gets an impression that before Oil Shutdown, agricultural production was a major part of our economic output. Agriculture is a negligible part of South Sudan’s economy, it did not change during and after oil shutdown, and if it did, Biar did not present any evidence for it; making the statement sound purely speculative.
In addition, Chol’s assertion that devaluation would have “definitely scare(d) [foreign] investors away” was not well explained. It appears the claim was based on an assumption that foreign investor holdings are in Pounds, something that is not entirely accurate. While some foreign investors do operate in Pounds most of the major investors like the oil companies, the mining companies, airlines, banks and Forex bureaus deal primarily in USD or a mixture of the two currencies in rare cases. Most foreign investors have USD accounts with major banks. Therefore, the effects of devaluation would most likely have been negligible and in fact good for some of the foreign investors who pay local employees in Pounds. However, if Chol was referring to smaller foreign investors like the vegetable sellers, secondhand clothes sellers, and Bodaboda operators, then he might be right because these traders receive their cash in Pounds. Then again scaring off those dealing in petty business, which is supposed to be the domain of the locals, may not be a negative effect of devaluation after all.
Those issues aside, the fundamental problem facing the Pound in South Sudan is the BM and local consumer confidence in it as a currency. The BM is driven and flourishing because of the high demand for the dollar. This demand is because of (1) the fact that the Pound is a mere paper outside South Sudan especially in the neighbouring countries where it is not legally convertible and (2) the Banking policies in South Sudan where international transfers are severely restricted by BoSS’s policies.
The extreme limitations and prohibitions placed on the “convertibility” of the Pound with the currencies of neighbouring countries especially Kenya and Uganda can easily be solved. The demand for the dollar is driven mostly by the needs of those people with loved ones and businesses in Kenya and Uganda to provide for their loved ones and to do business. Now, if the Pound was freely convertible in Kenya and Uganda just as Kenyan and Uganda Shillings are freely convertible with each other, it would go a long way to relieve some pressure on USD demand in South Sudan. This is because those traveling to Kenya and Uganda would just take their Pounds with them and exchange them directly to respective Shillings while Kenya’s and Uganda’s Central Banks would have full confidence that they would be able to sell/exchange the Pounds back to BoSS. Please note that, “convertibility” is used here in a sense of money exchanges and not like that of unorthodoxy, Argentinian Monetary System before its economic crisis- but it is not too wide off the mark.
The other issue overlooked (albeit Biar discussed it at length in a slightly skewed lens to fit his theory) was the issue of the economic impacts of devaluation. The central argument that it will help production is negated by the fact that production is an extremely negligible part of the overall economy (but a different case ideologically). Biar also suggested devaluation would affect, “the national bourgeoisie” negatively and the masses positively in the long term with the “Republic” being the biggest winner. He argued that, “if the Ministry [of Finance] had 100 million USD in the past, it [translated] to SSP 296, but [following] devaluation, it [would] cash in SSP 455 million.”
It is true that some of the national bourgeoisie (the bureaucrats and other elites) would lose out in the short-term. However, the sheer size of their benefits and allowances will make them weather devaluation; and besides they would still have had the same avenues to access foreign currency at the lower official rate as they did before devaluation. Additionally, the view that the Republic would be a long-term winner is quite cartoonish. This is because the devaluation and resulting depreciation of the Pound would most likely force the government to (1) adjust subsidies accordingly to cater for the rise in the cost of living, (2) raise minimum wage for low income earners otherwise it would risk social upheaval, (3) government’s foreign and local debt would be significantly more expensive to repay. Therefore, any short-term gains in the value of Ministry’s cash holdings from hypothetical 296 million to 455 million pounds would be negated by these factors.
Therefore, as an African Socialist, one would be opposed to any policy that would negatively affect the lives of the silent masses as this policy would have done. BoSS should first institute reforms that would adequately address the drivers for dollar demand, which is the primary lifeline of the BM before devaluing the Pound. Simultaneously, it also needs to be more gradualist rather than deliver a “shock therapy” to the market in its approach. The government upon devaluation must immediately address the problems faced by those on minimum wage, the bulk being lowly paid foot soldiers of the SPLA and the Nation’s Police Service.