Soon after the devaluation of the currency in December 2015, the Central Bank authorized the auction of US dollars to commercial banks to offset the cost of devaluation which had caused the South Sudanese pound to lose its value by 84% after rising from 2.95 to 18.55.

About 70 Million dollars was auctioned to the commercial banks as a result of this move.

Four auction sales have been carried out to date on the following dates: 21^st December 2015, 4^th and 19^th January 2016, and 24^th February 2016.

First, $66.63 million or 53.4% of the total fund available for this policy support has already been auctioned off so far but the effects of the millions of dollars auctioned couldn’t be realized.

Before the devaluation, two parallel exchange rates existed in the market: a black market rate and an official rate set by the central bank.

The currency devaluation was aimed at reconciling the parallel exchange rates, but in the last four months, the exchange rate continued to diverge even further.

The Pound became increasingly weaker and unpredictable, manifested in a sharply depreciating parallel exchange rate accompanied by an increasingly severe shortage of dollars, even in the parallel market.

Therefore, through the auctions, the commercial banks were expected to satisfy the market demand for foreign exchange.

But with close to 70 million dollars auctioned off to commercial banks, the gap between the official rate and that of the parallel market continues to widen, with the devaluation of the SSP and spikes in inflation contrary to expectations and policy intention.

Why the auctions couldn’t influence the market

Hon Goch Makuach, a Member of Parliament who chairs the economic committee at the National Legislative Assembly believes the auctions at the bank were not effective because the bank did not study and consult on the modalities used for auctioning; hence, the system applied wasn’t one of the standard modalities used in conducting sale of dollars.

Hon Makuach said the bank should have supervised the sale right after auctioning it to the commercial banks, which, according to him, led to dollars being sold at not only higher rates but also sold outside the country.

“Therefore, as parliament and as the chair of the economic committee, l advised the central bank  that since this process has not achieved its objective, they have to suspend it and people will have to sit again to see new modalities of conducting the auctions,” he told The Eye.

The amount auctioned came from the International Monetary Fund as reserve support for the Central Bank, so the auctions, Hon Makuach continued, should have been well studied in order to achieve the intended objectives.

No ‘market-driven principles’

For his part, Garang Atem, an independent economic commentator, says the auctions at the central bank ‘failed to address its intended aims because the central bank did not apply market driven principles e. g by asking the commercials banks to add only 2% on the sales of dollars despite existing high rate in the parallel market’.

This, Mr Atem said, created possibilities of buying money from the Central Bank or moving dollars directly from other financial sectors to the black market in an attempt to get more profits.

Atem also said the amount of dollars the central bank and other financial sectors are injecting into the market is too insufficient to meet the huge demand of hard currency in the country which indicates that the government has no capacity to influence the market.

“That’s why even after the auctions, the commercial banks did not have money to sell the same dollars to the public except for some few connected people who are probably transferring their profits or buying products from outside,” Atem said.

‘Dirty managed float exchange rate regime’

In his position paper entitled “Preliminary Findings on the Functioning of Interbank Market for Foreign Exchange in South Sudan”, James Alic Garang, a Senior Economist at the Ebony Center for Strategic Studies, describes the current situation as “a dirty managed float exchange rate regime”.

“Each auction sale produces more unsuccessful bidders than successful ones, which implies that few players would dominate the market for foreign exchange and prices could rise because dollar is not finding its way to as many hands as possible,” Mr Alic said.

According to the paper, the inter-bank market is not operational because banks currently lack the basic financial infrastructure to enable them to trade among themselves, coupled with the fact that demand for hard currency has assumed a complex structure that outweighs the limited supply of foreign exchange.

“We all know now that close to seventy million dollars has been auctioned off to commercial banks. But with no discernable impact on the inter-bank market, one is tempted to argue that those resources have vanished by way of capital flight,” it reads.

“In the same vein, researchers with different methodological sways have also come to argue in concrete terms that the inter-bank market is nonexistent in South Sudan.”

Mr Alic also attributed the failure of the auctions to the fact that some banks are not attracting dollars from the NGO community; instead, he says, they “sit and wait it out till” next auction comes along.

Following such scenarios, the Central Bank Governor, Kornelio Koriom, asked the commercial banks to account for how the dollars was utilized.

The parliament’s economic committee also suggested the suspension of the auctions until better procedures are developed to guide the dollar sales.

Way forward

Goch Makuach, the chairman of the economic committee at parliament, says the economic committee at the parliament has taken certain measures which are still being discussed in the parliament.

“As parliament, we have made our studies and we will make it public soon” Makuach said.

Ariic David Reng who writes for the SUDD Institute in his paper “Understanding the Exchange Rate Regimes in South Sudan” stated that budget discipline is the baseline from which reforms must begin in earnest which at the moment is lacking in South Sudan.

“Reforms in exchange rate regimes are normally effective when conducted simultaneously with reforms in the monetary and fiscal policies. Tighter controls in money supply and fiscal discipline reinforce the credibility and commitment of monetary and fiscal authorities to a binding exchange rate regime and to keep inflation and other macroeconomic indicators within acceptable limits,” Ariic argues.

The paper further suggests that adopting a ‘managed float regime’ would require the government of South Sudan to institute monetary and fiscal strategies where spending levels and compositions of public expenditures are evaluated and controlled.

For James Alic Garang, financial sector in South Sudan is thin and shallow; thus, needs to be developed further through creating new processes, removing unnecessary restrictions and identifying incentives to enhance innovations in the sector.

He added that there should be regular reports by banks before bidding process to allow increase in trust levels between the banks and its customers.

In addition, Alic also suggested, that the Bank of South Sudan should also learn from the Region.

“Some of the lessons to learn from Uganda include training authorized dealers, screening commercial banks before participating in the auctions, adopting psychological interventions, collecting turnover data on bank utilization, rethinking about choice on a band and understanding that not every bank can be a member of the foreign exchange market,” he explained.

For his part Garang Atem, an Economist, recommended a serious overhaul of the central bank to fix its capacity to have serious and capable oversight function over commercial banks because he thinks the auction scenario is an indicator of a bigger issue to be sorted in the commercial banks.

He added that commercial banks should be asked to comply with the Banking Act of making public their financial statements so that ordinary citizens can have an idea of the performance of the commercial banks in the country.

When the Central Bank announced a major shift in the country’s exchange rate policy, the strategy seemed to strike a heavy blow initially for some currency speculators but at the same time created intolerable conditions for ordinary citizens — notably consumers of food, fuel, and medical supplies and those with no income or low fixed incomes, including a large number of public servants and people in the military and security sectors.

This policy change; thus, sparked a lot of mixed reactions from the public, private sector and political actors with some of them calling for its revocation, citing the country’s “unpreparedness” to deal with devaluation of its currency.

Four months down the road, the effects of the devaluation of the SSP are not negligible. The pound has lost considerably against the dollar over the period, living conditions of the ordinary citizens continue to worsen, prices of essential commodities have since skyrocketed to intolerable levels and fuel shortage is evident despite its subsidy.

In January, the government announced tripling salaries of low income earners in the civil service and the ministry of Labor also issued a circular fixing a minimum wage for unskilled laborers at 2000ssp, in an attempt to support low or fixed income earners to cope with the prevailing economic hardship – but these policies are all yet to be implemented.

As the peace partners make efforts to implement the August peace agreement, to resolve the political instability, reforms in the exchange rate regime, monetary and fiscal policies must be given priority in the policy agenda of the forthcoming Government of National Unity to address the rising inflation and general unbearable living conditions.