By MIQOL MAYEN
Abu Dhabi, UAE – The devaluation of the South Sudanese Pound is the hottest point of discussion in many news outlets and social media today. The weakening of the South Sudanese Pound against US Dollar in the black market has raised concerns among citizens about the economic future of the world youngest nation. Some people attributed it to the Current Account Deficit and others attributed it to the strengthening US dollar (USD) as the US Federal Reserve winds down Quantitative Easing. Nonetheless, the SSP has lost up to 18 percent in value against the American Dollar in recent months based on the black market figures. Right now, the SSP is trading at around 5.0 per USD in the black market. Two months earlier, it was trading at 4.25 SSP per USD. These bring us to the desire by the Central Bank to ‘Devalue South Sudanese Pound from their current official rate of 2.96 to 4.5’ to as the governor stated unifies the two rates. So, is it good or bad?
Well, it depends on the groups involved and what they do. For example a nation has differing interests from individual, or corporation. In recent years, The United States has put China under enormous pressure to revalue its currency. But the Chinese government has been reluctant to follow US instructions and kept the Chinese Yuan comparatively undervalue. The Sudanese official rate after devaluation is 5.8 Pound per USD. Does this mean that the Sudanese economy is performing better than the South Sudanese economy?
How does it work?
It’s a basic economics law called the Demand and Supply. In truth, it is much more complicated with many variables at play. However, for this paper, let us keep it straight and simple. The exchange rate of the currency is determined by the amount of goods traded and the movement of goods between a country and her trading partners.
For example, China is an export driven market economy. It exports exceed it imports as a country. So, it brings more dollars into China than Chinese expenditure on the imports. This gives China surplus US dollars and the demand for Chinese Yuan surpasses the demand for the American dollar.
In contrast, economies like South Sudan that are import-driven bring in more goods and services from east Africa than it exports (oil the only export). This resulted into increased demand for US dollars as businesses buy imports by paying in American dollars. This increased in dollars demand increases the exchange rate and the subsequent devaluation of South Sudanese Pound in the black market which reflect the real exchange rate. This made import driven economies have relatively depreciated currencies compared to export driven economies.
Is devaluation a good thing or a bad thing?
From an individual standpoint, it will increase travelers and students costs, as their travelling costs and cost of living in other countries increase in line with the devaluation of their currency.
From a country’s viewpoint, it creates a disparity on the Balance of Payments principally for import dependent economies like ours. A nation like South Sudan which imports most important commodities like foodstuff and building materials from east Africa, will pay much more in South Sudanese Pound if the SSP is devalue than what it is paying now. The imports become more expensive thus increasing the Current Account Deficit. This will lead to further devaluation of the currency and keep recurring until the reduction of imports.
Devaluation can be a welcome change for a country with strong export sector. However, devaluation of the South Sudanese Pound at this point in time considering other economics variables at play is not a welcome strategy for South Sudan. There is no viable export sector to compensate for the likely loss of imports. The most apparent constraints for Foreign Direct investment in South Sudan are poor infrastructure and political risk. Investors’ unwillingness to invest in South Sudan is due to fear that political changes or instability in the country could affect investment’s returns. Devaluing SSP will do little to change that and will drive up the costs of living. Prices for virtually all commodities will increase. Employees will put pressure on their employers to increase their salaries. It will be an economic suicide for South Sudan to devalue its currency.
MIQOL MAYEN can be reach at email@example.com