By Matiop A. Any`ang,
Juba, South Sudan.
April 23, 2021(Nyamilepedia) — Just like any other Central Banking Institutions globally, the Bank of South Sudan is an independent National Authority that has an objective of ensuring financial stability.
The goals of Central Bank Are to control and regulate macroeconomic variables aimed at economic growth, stabilizing the nation`s currency, control inflation and keep unemployment level as low as possible. It does this through introduction and application of either ‘Expansionary or Contractionary Monetary policy’. These include the rightful conducts of monetary policy tools, (Open Market Operations, Reserve requirements and Discount rates). The application of these tools by the Central Bank affects the level of liquidity in the Financial System in the Country, depending on which policy does the Authority aim at pursuing in regards to the economic status of a Nation.
Unlike South Sudan, inflations occur when prices rise due to high costs of productions. Such as raw materials, labor (salaries and wages). A surge in demands for goods and services as consumers do have high purchasing powers and are willing and able to pay any price for goods and services. The economy here is characterized by expanding money income relative to economic outputs, capital accumulations, high employment / labor inputs such as workers and hours worked as well as technological advancements. As a result of these, the demands for goods and services will outstrip supply as more money in circulation begins to be in excess of economic activities / outputs. The costs for factors of production automatically rise and these make companies raise prices while trying to bridge the gap.
Central Bank in collaboration with the Ministry of Finance and Economic Planning, will therefore intervene by introducing either ‘Expansionary or Contractionary’ Monetary Policy, through the application of the following tools;
- Open Market Operations (OMO)
- Reserve Requirements
- Discount Rates
Open Market Operations (OMO);
This is the sale and purchase of government securities and treasury bills. The aim is to regulate the amount of money supply in an economy.
The Central Bank sells out government Securities and Treasury Bills to collect money from the public in case of inflation caused by surge in money supply leading to high demands for goods and services. The sale of government securities and Treasury Bills limits the amount of money circulating in an economy and therefore, reduces demands for goods and services therefore, curving inflation.
On the other note, the Central Bank buys or purchases government securities / bonds and Treasury Bill in case of economic recession, depression or downturn. The aim is to inject more money into an economy. This action will in the long run, lead into more investments, employment opportunities as well as capital formulation.
Reserve Requirements;
This is a policy by Central Banks that coerces Commercial Banks and other Financial Institutions to keep a certain amount of money as reserves in their accounts with Central Banks.
In an economy characterized by high inflation, due to high / excess money supply, the Central Bank will set a level of reserves (usually high), as a regulatory reserves limit in accounts of Commercial Banks held in the Central Bank that must be met. This however, leaves Commercial Banks with no capacity to lend more money to the businesses and individuals hence reducing the money supply in an economy and therefore reducing inflation.
On the same note, the Central Bank will relax regulatory limits on Commercial Banks when there is an economic recession, depression or downturn. This measure helps Commercial Banks have more money in their reserves and therefore, be able to lend more money to the businesses and individual consumers. Businesses will however, increase the level of investments, create more employment opportunities, leading to more economic activities hence an economic growth.
Discount Rates
The Central Bank regulates the economy through discount rates by expanding or contracting the money base, which consists of currency in circulation and Commercial banks` reserves on deposits at the Central bank.
Discount rate, also known as policy rate, base rate, or repo rate is an interest rate charged by the Central Bank on the loans taken by Commercial and other Financial Institutions. Discount rate is one of the tools used by the Central Bank to regulate and control macroeconomic variables in an economy.
The Central Bank raises discount rates as a result of high inflation in an economy. It is economically viewed that high rates of inflation commonly known as hyperinflation, are caused by an excessive supply of money into an economy in excess of economic activities. As a result, the Central Bank raises discount rates. Commercial Banks will be forced to raise prime rates. Prime rates are interest rates charged by Commercial banks on businesses and individuals seeking to borrow loans. This will discourage borrowings and spending by businesses and individuals respectively and henceforth, prompting a reduced inflation.
Analysis;
In July, 2020, Bank of South Sudan reduced interest rates from 13% to 10%, Cash Reserve Ratio from 15% to 10%. A move that is economically aimed at encouraging economic growth through ‘Expansionary Monetary Policy’.
In October, 2020, the council of Ministers through the Minister of Information, Communication and Postal Services, announced a change of local currency. A move viewed as the last resort by the government to the ever-worsening economic crisis.
In November, 2020 the same year, Bank of South Sudan threatened to raise interests from 13% to 15%, a move viewed economically as ‘Contractionary Monetary Policy’aimed at curbing inflation. According to the governor, it was aimed at rescuing the local currency from collapse as well as saving an economy from hyperinflation. But in reality, this could only contract an already contracted economy. This move when implemented, would have drastically reduced the amount of money in circulation and increased the money base at the Central Bank.
In February, 2021, Bank of South Sudan printed and introduced 1,000 notes of South Sudanese pounds into an economy, a move economically viewed as ‘Expansionary Monetary Policy’. This economically entails that the economy is cashless and therefore, a need for more and additional notes in circulation. But in reality, the move adds nothing rather than solving the portability problem, furthering depreciation of local currency as well as increasing inflation. This is because more notes are added into existing notes that are chasing fewer goods, prompting an increased demand for and services.
Currently, the Bank of South is engaged in foreign currency sale by auctioning through bidding processing, a process that gives opportunity to the highest bidder (s). A move aimed at returning local currency into the Central Banking System.
Although the current Bank of South Sudan`s governor Hon. Dier Tong is seen with some economic efforts, there remains a huge gap on how, when and what type of Monetary Policy to implement, given a well-studied and analyzed prevailing economic status at a time.
Points of concern!
- Why is Bank of South Sudan pursuing contractionary Monetary policies (Expansionary and Contractionary) the same period of time?
- Why did the Bank of South Sudan print and introduce 1,000 notes in February 2021, knowing that it has more money in circulation chasing fewer goods that will be collected through the bidding process in a month time later?
NB; Part 2 of the Impacts and Analyses will soon be published.
The Author is a Graduate Student at the University of Juba, pursuing a Master Degree of Arts, Economic Development and Policy Analysis. He can be reached at Matiop.aguek@gmail.com,
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