Monetary and Fiscal Policy of South Sudan: Analysis of a Newly Independent Oil-exporting Country
Ichisaka, Kohei
2012
- Submitted in partial fulfillment of the degree of Master of Arts in Law and Diplomacy at the Fletcher School of Law and Diplomacy. In May 2012, the Republic of Southern Sudan (South Sudan) is the newest country in the world. The economy of South Sudan was devastated by more than fifty years of the civil war with Sudan, but its economic level is as rich as neighboring East African countries, thanks ... read moreto its abundant oil resources. Still, its actual economy is impoverished, with more than fifty percent of citizens living below the poverty line. The country suffers from high inflation, led by price increases in basic goods. Oil production in South Sudan is expected to start declining after production peaks around 2015. To achieve economic development, the Government of South Sudan (GoSS) allocates portions of its annual budget, ninety-eight percent of which comes from oil products, to the sectors necessary for economic growth. In monetary policy, the Bank of South Sudan (BoSS) currently applies the floating exchange rate regime with a band of SSP 2.9 to 3.3 to a U.S. Dollar. BoSS is also obliged to control the high inflation rate in order to stabilize the economy. With respect to fiscal policy, GoSS has effectively managed its fiscal balance since the CPA in 2005. Thanks to its abundant oil revenues, GoSS is able to allocate its financial resources to critical sectors. However, continuing conflict with Sudan forces GoSS to spend its budget for security as the first priority, while other areas such as infrastructure, health, and education are left behind. As non-oil private sector industries are still too primitive to contribute to the governmental revenues, GoSS is facing a serious budgeting problem due to its focus on expected oil revenues. To suggest possible solutions for the situation, this paper makes recommendations for the monetary and fiscal policy of South Sudan. In monetary policy, BoSS should shift its exchange rate regime to a currency basket that includes the major currencies of its oil export partners. The currencies included should be the Singapore Dollar and Chinese Renminbi as well as the U.S. Dollar, and the exchange rate for SSP should continue to be held within a band vis-�_-vis the U.S. Dollar. As Kuwait has already discovered, the currency basket regime will enable South Sudan to effectively reflect the economic conditions of its export partners. In order not to lose the effect of inflation control, South Sudan should manage the currency basket portfolio by flexibly adjusting the portions of the U.S. Dollar and other currencies. In fiscal policy, South Sudan should enhance relations with international financial institutions (IFIs) and international community members that give aid as a form of development assistance. IFIs, including the World Bank, IMF, and African Development Bank, have been providing loans to South Sudan for the development of new oil wells and basic infrastructure. The international community, consisting of countries in advanced economies, will effectively complement the scarce investments made by GoSS in the fundamental sectors.read less
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