JohnAkecSouthSudan

Sunday, September 06, 2015

Saving South Sudan's National Currency will fix the economy and reclaim the state

By Pursuit of Fiscal, Monetary, Property Rights, and Institutional Reforms



By John A. Akec

The Economy Caught between a Rock and Hard Place?

"South Sudan… there is no more country", runs the title of a recent headline article in New York Times. The article was read in Juba and, not surprisingly, life went on pretty much the same – business as usual. "The economy of South Sudan will collapse," pronounced Tom Lanzar, the former Assistant to the UN Secretary General for Humanitarian Affairs in South Sudan, after which he was declared non-persona grata, and politely asked to leave the country. These pronouncements were somewhat exaggerated, I must confess. However, it is for our own good not to dismiss such outlandish observations out of hand and go to bed undisturbed, without pausing for a moment to reflect. Who knows, they could be the tips of an iceberg.
The New York Times article exhibits a country gripped in damaging civil war in which the state appears to be losing its monopoly of violence with the attendant negative consequences on the effective administration of justice and the rule of law. It echoes the warnings of the great 17th century English thinker and apologist of a strong centralized state, Thomas Hobbes, in his magnum opus book, Leviathan, that: "The obligation of the subjects (citizens) to the sovereign is understood to last as long, and no longer, than the power lasts by which he is able to protect them…the end of obedience is protection." Namely, any inkling by the citizens that their state is not able to protect them enough leads to the termination of social contract with the state; that is, the citizens may decide to renege on their obligation to obey the sovereign. Instead they will decide to take charge of their own protection and that of their properties. It follows from there that most will live in continual fear and danger of violent death. With the result that, as Hobbes describes it, "the life of man [becomes] solitary, poor, nasty, brutish, and short."
On the other hand, Tom Lanzar's unfortunate pronouncements emanated from the persistent decline of the value of South Sudan pound against US dollar in recent months, with no evidence in sight as to the possibility of new fiscal and monetary reforms that would arrest the fall. Left unchecked, an uncontrolled depreciation of our national currency has the undesirable potential of ruining our economy through hyperinflation. In state of hyperinflation, prices of consumer goods increase by the day, and in extreme cases, by the hour. That is, what you bought in the morning could cost more in the afternoon. That, I believe, was the gist of Lanzar's message. Alarmist as it was, but not far-fetched.
The two verdicts (that is, the New York Times article, and Tom Lanzar's statement), hasty as they may be, are reflections of two faces of the same coin: war ruins national economy; bad economy leads to social unrest, undermines the rule of law, and the legitimacy of the state.
By taking measures that will halt further decline of our national currency, and quickly raising the revenue through taxes as we continue to search for a sustainable and lasting peace; this writer believes the sovereignty, ostensibly pronounced 'lost' by New York Times, can be reclaimed; the feared collapse of our national economy through hyperinflation, can be averted; and the many skeptics and doomsayers can thankfully be proven wrong.
Here, through the implementation of some radical economic reforms, everyone stands to gain, even those who perceive themselves 'losers' to the inevitable forces of creative destruction such reforms are bound to unleash. And let us be assured that doing nothing is no longer an option. Neither will half-hearted, knee-jerk prescriptions do the trick.

The Origins of South Sudan Economic Owes

South Sudan government income is mostly dependent on oil revenue (accounting for about 98% between 2005 and 2011; decreasing to 96% by December 2014; and dropping further to 60% by June 2015 of the total revenue).
Around June 2014, the monthly oil revenue stood at around SSP 360 million (USD 120 million) per month. By June 2015, it has halved to SSP 180 million (USD 60 million) per month, using Central Bank fixed exchange rate. The drop in oil revenue is attributed to drop in global oil prices per barrel from USD 101.2 in June 2014 to USD 50.7 in May 2015.
In the meantime, tax revenues rose from SSP 75 million per month in 2013 to SSP 120 million per month by January 2015. This brings the total government revenue by June 2015 to at SSP 300 million per month.
At the same time, the government monthly expenditure by June 2015 stood at SSP 900 million per month. This leads to a gap or deficit of SSP 600 million per month or shortfall of 66%.  
This hole in the finances is being closed through bank borrowing, which economic experts believe will undermine South Sudan economy in short, medium, and long term by making the national currency  worthless against other currencies. Bank borrowing or monetization of deficit was responsible for causing hyperinflation in Zimbabwe and in DRC.
What's more, the Ministry of Finance and Economic Planning has not been collecting much tax and tax income has been low because of the very narrow tax base (mostly customs and excises, and personal income tax of basic pay excluding allowances.) Many constitutional post holders such as government ministers, members of parliament, governors, commission chairs and members, county commissioners etc are not taxed. Hence, despite the potential for raising the government revenue through taxation are significant, and yet it remains untapped.
  

The Possible Remedial Options to Pursue

There are effective remedies that our country can pursue to address the recent financial challenges. It must come as a surprise to many that we have not been able, until now, to use them so far. It reminds us of Sirr Anei Kelujang's prophetic lines in his poem written in the late 1970s that reads:  "South Sudan do not be like little Gaak (bird) who died of thirst in rich field of ground nut by  River Jel; Nor be like the  Jalaba who died of hunger in a cage full of gold." (Kelueljang, The Myths of Freedom and Other Poems).
According to Kelueljang, Gaak ate plenty of peanuts and became thirsty; unable to locate the river close by, died tragically of thirst. The unfortunate Arab trader was locked up in a cage (goodness knows by who), and therefore was not free to benefit from his valuable possessions and died as miserable cage-prisoner.
There is a strong moral lesson for us in the tale of the poem. First of all, the options for resolving South Sudan's economic challenges are quite straightforward, and yet appear so illusive, so remote and so unattainable to our finance decision-makers. Vested interests have always made sure the attention of our government is deflected to other matters.

Unifying Exchange Rates

The first line of attack should be to unify the exchange rate. In other words, to move away from the fixed exchange rate policy that has been maintained by the Central Bank of South Sudan since 2005, and adopt flexible, market-determined exchange rate. The Ministry of Finance can ask central bank to pay for its monthly oil revenue the equivalent of today value exchange rate of SSP 14.5 to a dollar. That means for the USD 60 million per month from oil sale, the Ministry of Finance will fetch at least SSP 870 million per month. Add to that the SSP 120 million that is raised every month from customs and excises, and the Ministry will have in its account a sum of SSP 990 million. It means market determined exchange rate will bring in additional SSP 690 million of income per month and create a surplus of SSP 90 million that we can spend on other things.

The Impact of Currency Realignment on the Economy

An important implication for such a step is that there will be no need for the Ministry of Finance to borrow from the central bank to pay salaries and other expenditures. Every time the exchange rate goes up the Ministry of Finance will get more for its oil revenue. The effect will be that those hording dollars under their pillows will sell it to the Central Bank and the exchange rate will start to stabilize or even falls according to laws of demand and supply. Prices of consumer goods will also stabilize. The cost of imported goods will rise and in long term, and set in motion the pressure on entrepreneurs to meet the demand for some imported consumer goods locally. Markets will adjust and eventually stabilize. The pound will be saved, and with it, the country. We do not need foreign currency reserves in order to "defend" the pound; or is it in essence the defending the dollar? As some experts would want us believe. Waiting or doing nothing to stabilize the pound is not an option.

Increasing Tax Revenues

Raising taxes is the base on which all modern states are founded.
Hence, the Ministry of Finance and Economic Planning needs to raise more tax revenues in order to improve to meet its national obligations. Suppose we as a country did not have oil in the first place to pay our public servants and provide public services, how on earth were we going to survive? In fact, many countries such as Germany, Israel, South Korea, Switzerland, and our neighbours Ethiopia and Kenya do not have oil and yet enjoy thriving economies. How they do it? The answer is simple: they use taxation in different guises and forms in order to fund government expenses, build infrastructure, fund development projects, and maintain national security.
Following the examples of many countries that do not depend on oil and yet thrive, the government of South Sudan could make a conscious strategic decision to fund it budget through tax (and only fund a small part of  by oil revenue, preferably infrastructure project funding). Tax reforms should include, a centralized tax revenue authority, a progressive tax that does not exclude constitutional post holders, and at least 95% of taxes should be collected by the national government represented by National Revenue Authority.
For example, based on the current public sector pay of SSP 600 million per month, and assuming an average of 30% personal income tax rate on the gross pay of all the public sector employee through the Republic of South Sudan, the Ministry of Finance can take back at least SSP 200 million per month as tax which leads to total tax revenues jumping to SSP 320 million per month. Add this to the oil revenue of SSP 870 per month (using current market rate of one SS 14.5 to a dollar), the government revenue will total to SSP 1.19 billion a month or SSP 14.28 billion a year. With widening of tax base to include private sector income tax, value added tax on luxury consumer goods and telephone calls, tax revenues can be doubled or tripled. The government will have no difficulty rendering the services and protect us and our property because it will have the resources it needs. South Sudan will be once again bankable to international finance bodies such as IMF and World Bank. Lost friends will renew relations with us.
To sustain economic stability and spur growth, other measures need to be taken in order to improve economic governance and create attractive investment climate.

Property Rights Reforms

The National government must enact speedy reforms to regulate and control land property rights across out ten states and one administrative area; while making sure that communities displaced from lands for developmental purpose are adequately compensated. The notion that community own and control land is responsible for current conflict over lands, land grabbing, and insecure property rights that scare away foreign direct investment.

Setting Up New Institutions for Improved Economic Governance

To ensure better and more effective economic governance the following institutions need to be set us as soon as possible. These are:

Independent National Revenue Authority

To be set up as lead agency responsible for collecting taxes and identifying new opportunities for raising tax revenues and improving tax collection efficiency. It should be responsible for collecting 95% of tax revenues throughout the country.

Institution for Strategic Planning

Every country must have strategic goals that define where the nation wants to be in the next 3, 5, 10, 15, 20 years and beyond. What we do at present will bear fruits in the distant future. What we do not do at present can be a missed opportunity tomorrow. Hence, South Sudan can do better with a little more strategic thinking and less with groping in the dark.
For example, where South Sudan finds itself today in terms of shortage and high fuel prices is hardly an accidental misfortune, but rather the ultimate prize for not thinking and acting strategically five or seven years ago. It is a living proof of the cliché: failing to plan [strategically] is planning to fail [strategically].
Institutions for strategic planning are vital for the survival and future prosperity of any country. All forward-looking nations must have institutions that specialize in scanning the horizons for risks, threats, and opportunities; then prod the governments to plan and act well ahead of time upon the findings in order to minimize risks, reduce threats, and exploit opportunities. The government of South Sudan must set up a council for strategic planning that consults and works with academic and research institutions, think-tanks, and civil society groups to conduct policy analysis and compile reports that inform government strategic policy design and long-term development plans.
That also means the government should avail funds for think-tanks, research and academic institutions, and civil society groups to build up their capacity to play their role in socioeconomic development. And more important still, the government must act upon their analysis and findings.
The designated institution(s) for strategic planning should monitor how developmental projects are faring and frequently publishes reports (internal and public), meets with the legislators and executive branch of the government to discuss the status of progress of major projects and performance of the economy; thus enabling the executive branch to take informed actions and corrective measures in good time. The institution(s) of strategic planning need to have specialized committees or department within it dealing with specific issues and ministries. Its membership should include heads of specialized committees in the legislative assembly, among others.

 South Sudan Economic Advisory Board

A multi-disciplinary body with secretariat hosted in the Presidency or Cabinet Affairs and works closely with the Council for Strategic Planning and the Ministry of Finance and Economic Planning, Academia and Civil Society to make informed decisions that affect the economy in the short and medium term.

Financial Allocation, Monitoring and Evaluation Authority

This works closely with Council for Strategic Planning, South Sudan Economic Council, the Ministry of Finance and Economic Planning, specialized committees in the national legislative assembly, anti-corruption commission, office of auditor general, statistics commission etc. It should report and publish allocations and use of funds at least once or twice a year.

CONCLUSION

In order to move forward, three keys words are central to the success of any radical economic reforms in South Sudan: strong political will. Such a strong political will was demonstrated recently when the SPLM party leaders took brave steps to implement Arusha Agreement and reunify the party. SPLM leaders can demonstrate such courage once more time by taking measures that will bring about serious and speedy economic reforms, to rescue the South Sudan pound, and save country. We are at critical juncture: to thrive as a prosperous and free nation, or suffer the immense consequences of a contracting economy.

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