By Ter Lual Nguth
SS, Yambio- After two years monetary policy of fixing rate, the central bank witness a major challenge in term of policy control. This can be witness by the Central losing it defensive policy of allocating one million dollar weekly to the commercial bank which resulted in to shortage of foreign currency in the central bank.
This weaken the central bank by reducing its reserve in foreign currencies which resulted into disequilibrium between official and black market rate and as the result, the central bank opt for floating rate to balance the market. As the nation’s central bank opt for floating its currency, the country seem worsening it economy.
Price of basic commodities increased to an unexpected point and exchange rate reached 30 SSP/$1 or $1/SSP 30 which is difficult to be afford by ordinary citizens. Before everything went from bad to worse, the government has depleted the central bank reserves by borrowing from the central which resulted into reduction in the savings of the commercial.
Here’s the details of government debt.
The government has borrowed a billion of money from central bank to finance war which resulted into huge debt for the government. This can be witness by central loaned a billions of pounds to the government to finance its war time deficits. This resulted into increase in money supply and finally deflated the value of the pound and increased the price. Before the war, the government debt to the bank of South Sudan was 3.9 million according to central bank statistics and increased to 8.1 billion by the end of 2014.
These liabilities took the form of Treasury bill, bonds and overdraft. Over the same period, government deposits at the bank dropped by 1 billion SSP, this resulted into increase in government’s net liability to the bank by 5 billion SSP. To finance this huge gaps, the central bank increase the supply of money.
Reduction in savings and income of the citizens
Borrowing by the government from central bank lead to the reduction in savings of the Commercial bank and higher price of the commodities in the market also reduced saving of the citizens and finally dropping down their income.
Economist believed that, when there’s war, the beneficiary is the government, because it would allow the government to increase its spending while the citizens are the one to shoulder the burden of the war. Citizens would face the consequences of war by reducing their saving, income, provisions of basic services, high cost of living and many more.
Impact on poverty
It is well known that adopting floating exchange rate in an under developing economy without proper policy mix lead to hyperinflation and dramatically worsen poverty in the country. This is due to the fact that the results of floating exchange rate has long term impact. It equalize the market at a later date. It also come with inflation if the economy is not well developed.
This is what happened in the world’s youngest nation from the beginning of 2014/2015 up to date. The price of commodities is sky rocket every day. With price of basic commodities keep on increasing this show that the purchasing power of SSP is diminishing which requires the willingness buyers to hold more pound to get what he or she want in the market.
If citizens spend more money to get what they want it mean that their saving is also reduced. Therefore, the overall impact of increasing money supply is widening of poverty in the society with low income earners seriously affected by the increase.
As an economist, the policy adopted by the country’s central bank by increasing money supply which further create demand without increasing the supply side of the economy will further worsen the situation in the country. If the government want to mitigate the problem here are few solution.
- Government should stop war immediately and encourage production society rather consumers society.
- Government should work hard to bring back those who went to East Africa for study and opened quality education with in the country so that no one would spend money for education outside the country.
- Construction of standards hospital in the country so that no one should go and spend money outside the country for treatment.
- Government should stop currency outflow by restricted money send out of the country and allows it only for importer of commodities into the country.
- Encouraging domestic banking system which can help in local transaction across the country. Encouraging domestic banking system can also help in making interstate transaction across the country. If we can look at this foreign
Banks in the country they don’t accept sending of money across the country unless you have an account with them. Foreign bank also contributed a lot into this current situation we are in because they don’t support the local people by loaning them money which they can start their business with. They charge too much interest rates on loan they give to few peoples they trust.
- Construction of roads across the country to encourage interstate trade with in the country and others developmental activities in the country.
To conclude my article, stopping of war is the only solution to the current situation in which the country is undergoing. Without stability, don’t expect economy to stabilise because instability has negative impact on developments.