South Sudanese pound weakens | National exam

A South Sudanese man presents newly introduced banknotes in Juba, South Sudan, July 18, 2011. (Bénédicte Desrus / Reuters)

Im July 2011, South Sudan was separated from the former Sudan. Since then it has been engulfed in corruption and instability. Today it faces another serious currency crisis and economic collapse. Indeed, soaring prices have forced stores across South Sudan to close. Faced with soaring prices, customers went on strike.

The last official central bank inflation statement, dated April, put South Sudan’s annual inflation rate at 37.2%. But since then things have deteriorated. My measure of inflation in South Sudan uses purchasing power parity (PPP) theory and the use of high frequency exchange rate data. This allows me to measure inflation rates for countries with high inflation rates very accurately every day. Today, according to my measurement, South Sudan’s inflation rate is 54% per year.

South Sudan could easily have avoided this punitive inflation. On the first day of the official existence of South Sudan, the famous currency expert Warren Coats, my good friend and colleague in Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise, resided in Juba, the capital of South Sudan. He was working as a consultant with the Bank of South Sudan. At that time, Warren and I were both advocating for a South Sudanese currency board. This would have made the South Sudanese currency a clone of the US dollar, which would not only have ensured the stability of the currency, but would also have ensured low inflation.

A currency board is a monetary institution (or set of laws that governs a central bank) that issues a freely convertible domestic currency at an absolutely fixed exchange rate with a foreign anchor currency. Under a currency board system, there is no capital control. The national currency, which is issued by a currency board, is backed 100% by anchor currency reserves, so the local currency is simply a clone of its anchor currency.

For more than 170 years, currency boards have had a perfect balance sheet. In total, there have been over 70 – none have failed. Even the Northern Russia currency board, designed by John Maynard Keynes in 1918 during the Russian Civil War, has never wavered. It would not have been different in South Sudan. Indeed, Sudan had a currency board from 1957 to 1960, and it worked perfectly.

So why hasn’t South Sudan heeded Coats and Hanke’s advice? For six months, it appeared that the South Sudanese were heading towards what was to be the adoption of a currency board and sound currency. During this period, South Sudan gradually eliminated its currency controls that supported an overvalued currency. But, President Salva Kiir Mayardit stepped in and stopped the transition to a currency board system. At that point, Warren packed his bags and returned to the United States.

Unfortunately, we approached, but no cigar. As a result, South Sudan is experiencing a new currency crisis.

Steve H. Hanke is Professor of Applied Economics at Johns Hopkins University in Baltimore. He is a senior fellow and director of the Troubled Currencies Project at the Cato Institute in Washington, DC.

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