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Archives of Business Research – Vol. 10, No. 2
Publication Date: February 25, 2022
DOI:10.14738/abr.102.11774. Atem, G. G. (2022). Currency Crisis in South Sudan: Contexts, Causes and Policy Options. Archives of Business Research, 10(02). 42-
57.
Services for Science and Education – United Kingdom
Currency Crisis in South Sudan: Contexts, Causes and Policy
Options
Gabriel Garang Atem
University of Nairobi, Kenya
ABSTRACT
This study combines contextual framework, review of South Sudan elites’
speculative policies and empirical evidence between July 2011 to December 2017
to explain the causes of the exchange rate crisis in South Sudan. The study finds
elites' speculative policies and a surging money supply caused the depreciation of
the exchange rate. The study argues that policymakers implemented unsustainable
policies, and speculative regulations in the financial sector as conduits for the elites
to benefit through rent-seeking. Disabled by ineffective monetary and exchange
rate transmission channels, the Bank of South Sudan signaled its inability to defend
the fixed exchange rate in November 2013 by devaluing the pound. Politics came in
the way, the devaluation was rescinded by parliament in December 2013. The
devaluation was later implemented in December 2015 at a higher exchange rate
when the Bank of South Sudan surrendered to defending a fixed exchange rate
regime. South Sudan's macroeconomic environment is characterized by
hyperinflation, depreciation and lack of political will to ensure good economic
governance prevails. Resolving macroeconomic challenges of such magnitude,
requires external policy and financial support for the Bank of South Sudan to
correct the exchange rate and monetary policy challenges.
Keywords: South Sudan, Bank of South Sudan, exchange rate, elites' speculative policies
INTRODUCTION
Exchange rate policy management in South Sudan has been a problematic issue. Partly due to a
lack of central bank independence, political interference and poor policy decisions. Policy
actions have not been evaluated holistically, limiting policy choices and understanding of
exchange rate management. A currency crisis is defined as a situation in which serious doubt
exists as to whether a country's central bank has sufficient foreign exchange reserves to
maintain the country's fixed exchange rate. A lack of sufficient official reserves causes the
domestic exchange rate to fluctuate in a volatile manner in a country with a fixed exchange rate
regime.
South Sudan got its independence in July 2011 from Sudan in a referendum enshrined in a peace
agreement that was signed between Sudan People’s Liberation Army/Movement (SPLM/A) and
the Government of Sudan (GoS). Yet immediately after independence, a dispute over transit fee
for use of Sudan’s pipelines, forced South Sudan to voluntarily shut down its oil production in
January 2012, a decision that came on the heel of Sudan unilateral oil payment-in-kind. Power- struggle in the ruling party-SPLM, which turned into a full-blown civil war in December 2013,
made fiscal position worst for South Sudan.
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Atem, G. G. (2022). Currency Crisis in South Sudan: Contexts, Causes and Policy Options. Archives of Business Research, 10(02). 42-57.
URL: http://dx.doi.org/10.14738/abr.102.11774
As South Sudan’s political class duked it out in the political ring, the economy too was not
spared as “it took up arms, hence becoming a rebellious economy.”1 The parallel exchange rate,
popularly known as the blacket market exchange rate started to develop as early as 2012 after
the oil shutdown and its gap with the official rate continued to widen. This gap, which only
narrowed after the liberalization of the exchange rate in December 2015, widened again in
2016 and throughout 2017. As an oil-dependent economy with weak institutional and policy
capabilities, South Sudan is vulnerable to external shocks and currency crises. A scan of
literature indicates that only a few studies have been carried out to understand exchange rate
management and its contribution to macroeconomic instability in one of the youngest nations.
This study fills the gaps in the context of South Sudan. The study relates currency crisis
literature to South Sudan by mapping out areas of policy inconsistencies. It sheds a spotlight on
plausible factors that accelerated the occurrence of a currency crisis in South Sudan. The study
goes ahead to discuss drivers of the exchange rate instability using an econometric model and
using a context information approach. Finally, the study proposes policies that can stabilize the
exchange rate in South Sudan. Due to the availability of data and to capture pertinent drivers of
the exchange rate in South Sudan, the study utilizes time series quarterly monetary data from
July 2011 to September 2017.
LITERATURE REVIEW
Researchers and academicians offer different definitions for a currency crisis. Frankel and Rose
define a currency crisis as a depreciation of the nominal exchange rate by about 25% in a
previous period or a 10% depreciation every year (Eichengreen, Rose & Wyplosz, 1996).
Ferretti & Razin (1998) adopted a similar definition of 25% nominal rate depreciation in a
previous period or a doubling of an exchange rate on a year-on-year basis. Other studies,
consider unsuccessful speculative attacks, weighted average changes in the exchange rate and
reserve loss to defend against a currency crisis (Eichengreen, Rose & Wyplosz, 1996; Reinhart,
Graciela, & Carmen, 1999).
Speculative attacks on the European Monetary Systems in 1992 to1993; Mexican Peso Crisis of
1994 to 1995; and the Asian crisis of 1997 to 1998, brought the role of exchange rate policy
into a mainstream economics debate (Glick & Hutchison, 2013). The integration of financial
systems around the world creates a medium for currency crises contagion to spread between
countries and even across continents. A risk, that suggests a currency crisis anywhere can be a
crisis everywhere. This creates major academic and policy concerns on exchange rate
management.
When a country adopts a fixed exchange policy as was the case with South Sudan after
independence in July 2011, Solheim (2002) suggests there are three reasons why a fixed
exchange rate remains vulnerable to a currency crisis: unsustainable growth of the money
supply; adjustment problems caused by sticky prices and shocks; and, finally, a credibility
problem of a central bank to defend the fixed exchange rate.
1
rebellious economy is an author’s coinage referring to an economic state characterized by hyperinflation, depreciation, ineffective monetary policy
and of political will to resolve an economic crisis
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South Sudan floated its exchange rate in 2015 when it found it difficult to defend the fixed
exchange rate against speculative attacks due to dwindling foreign exchange reserves. South
Sudan’s exchange rate depreciated both in parallel and official markets as shown in Figure 2.
The net foreign assets and official reserve of the Bank of South Sudan declined for most of the
time since South Sudan shut down its oil production in January 2012 as shown in Figure 1.
Going by the definition of Eichengreen, Rose & Wyplosz (1996) and Ferretti & Razin (1998) of
25% nominal exchange depreciation and loss of official reserve, then one concludes that South
Sudan has been in a currency crisis for most periods of its existence as a country.
Figure 1: Normalized official reserves and net foreign assets for the Bank of South Sudan.
Source: Bank of South Sudan, Research and Statistics Department
The intuition and conclusion drawn from graph 1 are straightforward. When a currency crisis
occurs, mostly under a fixed exchange rate as was the case with South Sudan, a central bank
sells its reserve to defend a fixed exchange rate. This action causes a continuous decline in the
official reserves. When the economic actors doubt the capability of a central bank to make true
its commitment to defend a fixed rate, multiple equilibria started to emerge causing the
exchange rate to diverge as the case with South Sudan’s official and parallel markets in Figure
2. Besides, an increase in base money could compound the depreciation of the nominal
exchange rate as Figures 2 and 3 show.
-3
-2
-1
0
1
2
3
III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I
2011 2012 2013 2014 2015 2016 2017 2018
Official reserve of the Bank of South Sudan
Net foriegn assets of the Bank of South Sudan
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Atem, G. G. (2022). Currency Crisis in South Sudan: Contexts, Causes and Policy Options. Archives of Business Research, 10(02). 42-57.
URL: http://dx.doi.org/10.14738/abr.102.11774
Figure 2: Normalized graph for the Bank of South Sudan’s exchange rates and money supply (M1)
Source: Bank of South Sudan, Research and Statistics Department
The economic literature is awash with various models that explain the causes of the currency
crisis. These models are loosely grouped into three different models – though, there are many
variations. Krugman (1979) pioneered the first generation models. These models suggest that
a currency crisis is caused by inconsistent domestic macroeconomic policies practiced by the
government - a commitment to a fixed exchange regime and persisting government’s deficit
financing that remains monetized. Figures 2 and 3 are revealing, for they brought out how
money supply and exchange rates grew over time but moved together. Deficit financing
practiced by the Bank of South Sudan was the driver for an increase in the money supply.
According to first-generation models, to defend a commitment to a fixed exchange rate, the
government depletes official reserves. The situation is made worst if the government faces
fiscal challenges and attempts to monetize the fiscal deficit from a central bank. An act by the
government to defend a commitment to an exchange rate regime is, therefore, unsustainable as
the government can’t borrow forever and the official reserves level limits the ability of the
central bank to defend a fixed exchange rate. All money supply aggregates are similar as Figure
3 depicts. This indicates South Sudan’s financial market has little capacity to create money.
Figure 3: Normalized graph for South Sudan’s monetary aggregates
Source: Bank of South Sudan, Research and Statistics Department
-0.8
-0.4
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2.8
III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I
2011 2012 2013 2014 2015 2016 2017 2018
Official Exchange rate
Parallel exchange rate
M1
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2011 2012 2013 2014 2015 2016 2017
M1
M2 Broad money
Base money
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Second-generation models were pioneered by Obstfield (1986). These models postulate that
policymakers analyze the costs and benefits of defending a commitment to a fixed exchange
rate regime. The model argues that, if the cost of defending a commitment to a fixed exchange
rate regime exceeds gain, the government is likely to give up defense of an exchange rate
commitment, and consequently, a fixed exchange regime collapses. The Bank of South Sudan in
December 2013 issued a directive to adopt a managed or liberalized exchange rate regime. This
directive, signaled the Bank of South Sudan’s inability to defend the fixed exchange rate due to
dwindling official reserves.
The Bank of South Sudan’s directive was, however, rescinded immediately after the South
Sudan parliament rejected its adoption in December 2013. The rejection was a clear
manifestation of political interference in monetary policy and says a lot about the Bank of South
Sudan’s independence - a critical principle requirement for prudent central banking today.
Though rejected, the message was out: that the central bank realized that costs exceed the
benefits of defending a fixed exchange rate. The rejection sent out information to speculate on
South Sudan’s currency.
Third-generation models are not very clear-cut. These models argue that currency crises start
as distortions in the financial market and banking crisis which lead to a full-blown currency
crisis. There are many causes of a currency crisis according to these models. First, proponents
argue that a credit constraint, which reduces investment, lowers the demand for local currency,
thus, triggering a currency crisis (Banerjee & Abhijit, 2000). Others, argue that an increase in
risk appetite by the banks, induced by financial liberalization, and deposits insurance, causes a
credit expansion both internally and externally (McKinnon & Pill, 1996). This credit expansion
and potential defaults eventually lead to a banking and a currency crisis. This view explains
2007 to 2009 global financial crisis.
The links of credit constraint or economic booms are not vividly evidenced in South Sudan’s
case. Though a decline in output is precisely present. A decline in South Sudan’s output was
caused by shocks that developed into a currency crisis. The fragility of a banking sector and
unrestricted capital flows played a crucial role in aiding or averting a currency crisis in a
country. “Impossible trinity or trilemma” is a concept used in economics to refer to a situation
where capital is freely mobile, assumes no country can simultaneously maintain a fixed
exchange rate and deploys an independent monetary policy (Glick & Hutchison, 2013).
SOUTH SUDAN’S CURRENCY CRISIS: CONTEXT AND A DISCUSSION OF ELITES’
SPECULATIVE POLICIES
The analysis highlights succinct evidence that links the currency crisis in South Sudan to the
first and second-generation models. South Sudan has shown signs of a currency crisis for a long
period as evidenced by a rate of its currency depreciation and depletion of the official reserves
as Figures 1 and 2 show. An inconsistent policy decision of a government such as deficit
financing that increased money supply as in Figure 3 caused the depreciation as theory
predicts.
Capital flows played a role in South Sudan’s currency crisis, as South Sudan’s economy remains
open to capital mobility. Most of the capital inflows that occurred during relative economic
stability periods, reversed when signs of currency depreciation emerged. Figure 4 summarizes
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capital and financial intermediation mechanisms, assets and bank rates channels remain
ineffective.
The Bank of South Sudan has limited monetary and financial capacity to influence the financial
sector. Seigniorage and direct intervention in the foreign currency market had been the only
ways the Bank of South Sudan influenced the financial market in the past. Treasury bills that
had been issued since 2012 were only meant to serve the fiscal objective of financing a budget
deficit. But since then, the government failed on timely payment schedules, and continued
rolling-over of treasury bills held by the commercial banks. This signaled a lack of credibility
on the Bank of South Sudan. Thus, fueling speculative actions on the South Sudan pound.
Figure 5: Bank of South Sudan monetary policy and exchange rate transmission channels
Opinions in South Sudan remain divided on the actual cause of the currency crisis. Some argued
that a currency crisis was caused by the liberalization of an exchange rate carried out by the
Bank of South Sudan in December 2015. Evidence from the above analysis gives a starker and
subtler view that the devaluation attempted in December 2013 or liberalization as effected in
December 2015, were responses by the Bank of South Sudan to its inability to defend a fixed
exchange rate as currency crisis generation models predict. Others point to deep-seated
structural impediments and weaker fiscal rules, as contributing to such a crisis.
The exchange rate models suggest governments cannot print money forever. There is a limit to
the extent of printing. When the official reserves approach zero, a central bank is helpless in
supporting a fixed exchange rate regime,” liberalization is not only a choice but an automatic
option.” In fact, by the time liberalization of the exchange rate went through in December of
2015, reserves were depleted in South Sudan.
Speculative attacks refer to a move by the majority of the market’s participants in one direction
to buy or sell a currency with an intent to protect the value of assets or gains for these
transactions (Glick & Hutchison, 2013). Speculative attacks play a central role in a currency
crisis. Whether they are firms, individuals, and the government which is the policymaker, each
of these market’s participants serves an objective. In a context with the immense disparity
Bank of South
Sudan
Exchange rate
channel Credit channel Bank rate
channel Assets channel
Expectation Seignorage
Money and
financial market
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Atem, G. G. (2022). Currency Crisis in South Sudan: Contexts, Causes and Policy Options. Archives of Business Research, 10(02). 42-57.
URL: http://dx.doi.org/10.14738/abr.102.11774
between official and parallel exchange rates, well-connected individuals and firms gain from
the market through arbitrage or convert local denominated assets into dollars or whichever
stable currency is available. Currency trading to make gains, or repatriate assets to a safe haven
is central to currency speculative attacks in South Sudan.
In fulfillment of the self interest or rent-seeking behavior, even public policies were not immune
to exploitation. It is easy to see policies designed with no appropriate public resources
protection mechanism. A policy on a letter of credit is one policy whose misused falls squarely
into this category. Letter of credit was a policy designed to provide access for dollars to the
private sector to import essential products to an import-dependent South Sudan. The policy
provides dollars to a well-connected few for arbitrage opportunities. A report by the national
legislative assembly (2015) and Alic & Issa (2017) indicate the letter of credit policy never met
its objective. Though about US$725 million to US$993 million were spent between 2012 to
2015 on a letter of credit activities.
In 2012, a program meant to provide food was turned into a scandal where undelivered food
items were paid for, a scandal known as the “Dura saga” in South Sudan. No details about the
amount lost due to the dura saga. It is reported that the World Bank auditors invited by South
Sudan to investigate found that 290 companies were paid without contracts and 151 overpaid.2
In early 2014, a committee formed by the President to manage salaries due to the
disorganization caused by the 2013 conflict that engulfed the country was alleged, turned into
a scam. The Auditor-General has audited the committee’s activities, though the report is to be
made public. A huge amount of dollars was spent though salaries were denominated in local
currency. The exchange rate premium motivates the intent to disbursed cash in dollars.
Fuel subsidy falls into a category of speculative policies that played a central role in setting up
the country for a currency crisis. The Nile Petroleum company limited, a commercial arm of
government’s investment in oil and gas sells fuel at an extremely subsided price. The fuel itself
became a trading commodity like the dollar as a parallel fuel price developed. Well-connected
firms and individuals buy from Nilepet and fuel stations at cheaper prices and sell it's at higher
prices in a parallel fuel market. The government continued to lose official reserves in the supply
of dollars to buy an oversubsidized fuel. The cost of fuel subsidy was too high and borne by the
country’s Finance Ministry. This deprived the country of rare opportunities for services
delivery in the public sector.
Towards the end of December 2013, there were 28 banks, 70 applications for bank licenses,
and 86 bureaus (Ministry of Trade, 2013). During the same period, Kenya had 46 banks and
Uganda had 45 banks. The loan-deposit ratio was 15% in South Sudan; 66% in Kenya and 72%
in Uganda (Atem, 2018). The growth in the number of banks offering limited financial services
as evidenced by the low loan-deposit ratio in South Sudan was driven by the exchange rate
premium (Atem, 2018). Since independence, the Bank of South Sudan allocates a huge amount
of foreign currency to caution the economy against exchange rate volatility as per a fixed
exchange rate regime. These allocations became a major source of profit, attracting more
commercial banks and bureaus. The commercial banks did not innovate and labor to create
products to enhance financial development, disabling the influence of monetary policy channels
2 https://www.voanews.com/a/south-sudan-probe-sorghum-dura-saga-corruption/1661994.html
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Atem, G. G. (2022). Currency Crisis in South Sudan: Contexts, Causes and Policy Options. Archives of Business Research, 10(02). 42-57.
URL: http://dx.doi.org/10.14738/abr.102.11774
Armed with the knowledge of the Mundell-Fleming model, let us assume for simplicity's sake
that immediately peace was signed between the Sudan government and the Sudan People’s
Liberation Movement/Army (SPLM/A) in 2005, which creates opportunities for businessmen
in the region and the world. In search of better returns, investors rushed capital to South Sudan
for investment. As business started to boom, transit fees for the use of Sudan’s pipelines caused
a dispute between the two Sudans – South Sudan and Sudan. This incident compelled South
Sudan to shut down its oil production in January 2012.
The impact of oil shut-down reduced consumption, crashed output growth, affected revenue
stream to the state coffers (Alic & Issa, 2017). In the eyes of capital owners, this shock was a
short-term problem as political stability assures investors of better economic fortunes in the
future in South Sudan. Theoretically, investors were willing to defer profit: the shutdown never
triggered capital flight and never stopped capital inflow. It reduced the inflow of dollars from
oil causing the central bank to use its accumulated reserves to defend a fixed exchange rate,
and for the sustenance of the government’s operation. The shortage of dollars supplied to the
market during this period, vividly brought to the attention of economic actors speculative
opportunities.
It is subtle clear that profits to be harvested in South Sudan diminished as days went by since
January 2012 when the oil was shut down and the government implemented austerity
measures. Oil production never really recovered to the pre-shutdown level. This outlook was
made worst by a subsequent deterioration of the macroeconomic environment following the
December 2013 civil war. The war sends a message to investors that South Sudan’s political
stability was not assured. This was in addition to the unstable macroeconomic environment
caused by a shutdown of oil production in 2012, oil being the main export.
During and before the December 2013 war, South Sudan was performing badly in terms of
global ranking and other welfare indicators. The Ease of Doing Business report by the World
Bank, ranked South Sudan number 187/190 (World Bank, 2017). These bad performances,
together with political instability and deterioration in the macroeconomic environment,
triggered a capital flows reversal and accelerated repatriation of profits by investors that
continue to worsen the macroeconomic environment in South Sudan.
MODEL, DATA, AND EMPIRICAL EVIDENCE
In the past, empirical studies of currency crises adopt three major approaches. First, there are
those studies that adopt an “event approach” where the behavior of individual indicators in
periods leading to a crisis are compared with non-crisis periods’ indicators. The variables are
assessed for an indication of potential risk for a currency crisis (Reinhart, Graciela & Carmen,
1999). Such studies use real GDP per capita as shown in Figure 6. For instance, in the case of
South Sudan, there is a huge reduction in 2012 due to the oil shutdown. Output per capita has
never recovered to the pre-independence GDP level since the shutdown.
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Figure 6: South Sudan’s Real GDP in Million South Sudan Pound at 2009 prices
Source: Bank of South Sudan, Research and Statistics Department.
The ratio of the money supply to official reserve is the other useful indicator. if the public fears
depreciation, it endeavors to convert domestic assets to a stable currency which is, the dollar
in the case of South Sudan (Reinhart, Graciela & Carmen, 1999). The ratio as shown in Figure 6
captures the central bank’s ability to repel speculative attacks. The likelihood of a currency
crisis increases as this ratio increases, thus, an important variable in this study’s modeling.
Others useful indicators used to capture the risk of currency crisis include the vulnerability of
term of trade’s deterioration; increase domestic credit/GDP ratio; and a decline in outputs. In
the case of South Sudan, the loan-deposit ratio has always been very minimal to cause a boom
that could trigger a currency crisis.
Figure 6: Normalized ratio of money supply-official reserve
Source: Bank of South Sudan, Research and Statistics Department
-
5,000.00
10,000.00
15,000.00
20,000.00
25,000.00
30,000.00
35,000.00
2010 2011 2012 2013 2014 2015 2016 2017
REAL GDP (2009)
South Sudan's Real GDP in Million in SSP
(2009 prices)
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I
2011 2012 2013 2014 2015 2016 2017 2018
M1/Reserves ratio
M2/Reserves ratio
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Atem, G. G. (2022). Currency Crisis in South Sudan: Contexts, Causes and Policy Options. Archives of Business Research, 10(02). 42-57.
URL: http://dx.doi.org/10.14738/abr.102.11774
The second approach used in currency crisis studies is the “signal method” where key variables
are monitored for signs of unusual periods of behavior that signal a crisis. For instance, a
threshold of 3% of the current account-to-GDP ratio could be set as a signal for a crisis. The
third approach utilizes the probit method or any other econometric models to predict the
occurrence of a currency crisis. The first two approaches serve to warn policy-makers or
investors about the possible occurrence of a currency crisis.
The third approach predicts an occurrence of a currency crisis given some variables. The first
and second-generation models seem to explain a currency crisis that occurs in countries with
weak institutional setup, poor capabilities in policy-making, and policy management. These
models befit South Sudan, a country with little experience, inconsistent economic policies, and
poor timing of policy choices.
Third-generation models tend to predict currency crises in more developed countries with a
complex financial sector. But these distinctions are not clear-cut as there are overlapping
causes. The study uses an econometric model to test for factors that potentially account for the
exchange rate or drivers of the currency crisis in South Sudan. Many variables are usually used
to model currency crises. A list includes domestic credit growth, fiscal deficit, real exchange
rate, output growth, and adequacy of international reserves to respond to shocks, market
expectation, and openness of an economy (Glick & Hutchison, 2013). The link between these
variables and the currency crisis is straightforward.
For instance, excess money growth creates pressure on the value of the home currency but if
this growth is to accommodate economic expansion, this should not be a problem. This, in an
economic sense, is an expansionary monetary policy. When such a policy is implemented, the
central bank should have enough reserves to keep any speculative attack at bay. The risk,
inability, or ability to defend a fixed exchange rate, is captured by a ratio of the M1-official
reserves. M1 is a sum of domestic currency in circulation and domestic checkable deposits of
the financial sector. The intuition in this relationship is simple. During a speculative attack,
economic actors would like to convert their cash in a bank and cash into a stable currency.
Captured by this ratio, this risk is theoretically expected to have a positive correlation to the
nominal depreciation of the currency.
As opposed to an expansionary monetary policy that is well planned by monetary authorities,
a central bank can be pressured by fiscal policy dominance to print money to finance a fiscal
deficit in the budget. This is captured by the same ratio as reflected in the increase in the money
supply. This act communicates monetary indiscipline and is likely to trigger further speculative
attacks, capital flight, and certain reversals. It sets in motion a self-fulfilling expectation of a
currency crisis as Obstfield’s model argues (1986). If a central bank prints money, it accelerates
the depreciation of a nominal local currency.
Many variables could be included in the model, but for simplicity, they are excluded. The model,
therefore, could capture the impact of the oil shut down in 2012. This study assumes that the
impact of these shocks is captured in changes in the reserves, change in money supply and a
dummy of war is included to capture the behavior of the government during the war. It is
expected war as unproductive spending accelerates a currency. The coefficient of war is
expected to be positive.
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This study departs from others in its approach to currency crisis modeling. First, many previous
studies used the probit or logit model with an occurrence of a currency crisis modeled as 1 or
its absence as 0. This study is based on a definition of a currency crisis (Eichengreen, Rose, &
Wyplosz, 1996; Ferretti & Razin, 1998). It assumes that a currency crisis occurs for most of the
periods of South Sudan's existence since independence given that the official reserves have
been reducing and the exchange rate has been depreciating. This study’s empirical contribution
is to assess drivers of the exchange rate by relating it to a ratio of money supply-official reserves
and a dummy for war as explanatory variables to complement the discussions above.
Model
Exchange rates f (war, money supply-official reserves and error term)
Where:
The exchange rate is either parallel or official rate.
War is modeled as 0 from the period of no war, July 2011 – December 2013; and war is modeled
as one for the period January 2014 – December 2017. The dummy is expected to depreciate the
exchange rate being a positive coefficient.
Money Supply/Reserve is the ratio of M1 to official reserves. It is expected to have a positive
coefficient.
The study uses monthly time-series data from the Bank of South Sudan, Research and Statistics
Department. The above model is estimated with OLS in EVIEWS for parallel and official
exchange models. Parameters are checked for theoretical consistency, the goodness of fits and
residuals’ behavior analyzed. The diagnostic test is performed by checking ACF, PACF and
Ljung-Box Piere Q statistics for stationarity. Forecasting capabilities of the models are tested
by performing forecasting for the exchange rates and evaluating models’ forecasting
capabilities using static forecasting at 95% confidence levels.
Empirical results
The study estimates two models specified above: parallel exchange rate and official rate models.
Table 1 presents the result for the parallel exchange rate model while Table 2 presents that of
an official exchange rate model. The coefficients for war and M1/official reserves are consistent
with theoretical expectations of both being positive.
The M1/official reserve ratio is very significant which means, as reserve diminishes, a fixed
exchange rate is prone to speculative attacks, thus, depreciating the exchange rate. This even
becomes more pronounced if the money supply is increased through deficit financing without
sufficient reserve to repel speculative attacks. The result shows that war has a correct
coefficient sign but is not significant. This could be explained by the fact its impact is partly
captured in M1/official reserve ratio as deficit finance is part of M1.
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Atem, G. G. (2022). Currency Crisis in South Sudan: Contexts, Causes and Policy Options. Archives of Business Research, 10(02). 42-57.
URL: http://dx.doi.org/10.14738/abr.102.11774
Table 1: An estimated model for parallel exchange rate
Variable Coefficient Std. Error t-Statistic Prob.
C 3.163770 4.482227 0.705848 0.4880
WAR 3.304747 6.538389 0.505438 0.6185
M1/reserve ratio 0.147124 0.013070 11.25619 0.0000
R-squared 0.886411 Mean dependent var 24.96735
Adjusted R-squared 0.875593 S.D. dependent var 40.17885
S.E. of regression 14.17162 Akaike info criterion 8.256828
Sum squared resid 4217.529 Schwarz criterion 8.404085
Log-likelihood -96.08194 Hannan-Quinn criter. 8.295895
F-statistic 81.93873 Durbin-Watson stat 1.958871
Prob(F-statistic) 0.000000
Table 2: An estimated model for official exchange rate
Variable Coefficient Std. Error t-Statistic Prob.
C 2.190409 3.154195 0.694443 0.4950
WAR 0.124290 4.601139 0.027013 0.9787
M1/Reserve ratio 0.123845 0.009198 13.46452 0.0000
R-squared 0.914812 Mean dependent var 18.99380
Adjusted R-squared0.906699 S.D. dependent var 32.64899
S.E. of regression 9.972730 Akaike info criterion 7.554054
Sum squared resid 2088.562 Schwarz criterion 7.701311
Log-likelihood -87.64865 Hannan-Quinn criter. 7.593122
F-statistic 112.7563 Durbin-Watson stat 1.876998
Prob(F-statistic) 0.000000
Both models nicely fit the data. The adjusted R-squared for the official exchange rate model is
91% while that of the parallel exchange rate model is 89%. The difference in their predictability
could be explained by a premium put on a parallel exchange rate. The Durbin-Watson Statistics
is 1.95 for the parallel exchange rate model and 1.87 for the official exchange rate model
suggesting autocorrelation is not a major issue in these models. ACF, PCF, and Q-statistics were
used to check the presence of stationarity. The results show both models were stationary.
The official exchange rate model has less Akaike information of 7.5 criteria compared to the
parallel exchange rate estimation model that has 8.2. This shows that the estimated official
exchange rate model is better compared to the parallel exchange rate estimated model. The F- statistics for both models show they are all significant to explain exchange rates in both markets
and currency crisis by extension.
Both models, forecasted official and parallel exchange rates with 95% confidence level with
official exchange rate estimates model doing better in forecast compared to parallel exchange
rate model. Official exchange model forecasts official exchange rate with only 9.3 Root Mean
Squared Error while parallel exchange rate model forecasts parallel exchange rate with 12.9
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Archives of Business Research (ABR) Vol. 10, Issue 2, February-2022
Services for Science and Education – United Kingdom
Root Mean Squared Error. War has no significance to change the results. This shows money
supply is a critical empirical driver of a currency crisis and the exchange rate in South Sudan.
DISCUSSIONS AND RECOMMENDATIONS
This study uses existing models and contexts to explain South Sudan’s currency crisis. While
opinions vary on what caused a currency crisis in South Sudan, this study empirically shows
that the ratio of money supply-official reserve is the most significant variable that explained an
exchange rate and currency crisis by extension in South Sudan. The rate at which a state
monetized its fiscal deficit has a role to play in accelerating a currency crisis. Increasing reserve
and reducing money supply is the first step towards stabilization of South Sudan’s pound.
It is argued that the liberalization of the exchange rate in December 2015 caused a currency
crisis. This argument is inconsistent with the theory and empirical evidence in this study.
Krugman (1979) showed that when a government fixed its exchange rate and engaged in deficit
financing, it is likely to cause the peg to collapse. Obstfield (1986) argues that policy-makers
analyze the cost and benefits of defending a fixed exchange rate. If the government finds that
the cost exceeds benefits, the government tends to give up defending a fixed exchange rate. An
attempt to liberalize a fixed exchange rate in December 2013 was a realization by the monetary
authority that the cost of defending a fixed exchange rate exceeds benefits in South Sudan.
While the authority had a policy choice in this attempt, the study strongly argues that the
liberalization of a fixed exchange rate in December 2015 by the Bank of South Sudan was a
surrender to a currency crisis rather than a cause or a policy choice.
The models exploited in this study predict the official and parallel exchange rates with a 95%
confidence interval for the said period. As a young country with weak institutional, no doubt an
old model developed by Krugman (1979) explains the cause of a currency crisis. As financial
systems become more complex, currency crises and channels of attack become more complex.
Third-generation models, in this regard, becoming better placed to explain currency crises in
modern economies’ contexts
To arrest the currency crisis in South Sudan, some policies interventions remain timely. First,
as this study found, the government should build reserves and roll-back deficit finance/money
supply. Second, the study sees merit in improving evidence-based policy to enable the Bank of
South Sudan to employ appropriate policies. Third, the Bank of South Sudan should always
make its policies and data available to the public to facilitate public policy discourse, one that
is positioned to public critique monetary policy and provide alternative policy choices. The
centrality of sharing data and filling existing gaps cannot be overstated.
Fourth, legislation must create robust, independent, accountable and transparent management
in the Bank of South Sudan to steer monetary policy away from fiscal and political dominance
(Atem, 2018). The Bank of South Sudan Act of 2012 puts a cap on deficit monetization but
authorities have duly disregarded it in the past may be due to negligence and political
interference. Fifth, the recovery and stability of South Sudan lie in increasing oil production;
stopping the war and prudent economic management including human capital competency.
In conclusion, the macroeconomic situation in South Sudan is dire and will continue to be so
until “targeted and purposeful reforms” are implemented. These policy measures include
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Atem, G. G. (2022). Currency Crisis in South Sudan: Contexts, Causes and Policy Options. Archives of Business Research, 10(02). 42-57.
URL: http://dx.doi.org/10.14738/abr.102.11774
stopping the war; prudent management of oil as it holds key to stabilization in the short to
medium term; institutional reform in the bank of South Sudan to breathe credibility into the
banking sector; governance reform to attract inflows of financial capital; structural reform of
the economy with a focus on sustainability and stability of the economy to reverse fiscal
distortion.
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