South Sudan devalued its currency by 84 percent as the government allowed the pound to trade freely, surrendering to prices charged in the black market.
The central bank adopted the parallel market rate of 18.5 per dollar on Tuesday from a previous fixed rate of 2.96, Governor Kornelio Koriom Mayik told reporters in Juba, the capital. The regulator will supply the market with occasional dollar sales, he said.
Oil output in the world’s newest nation has been curbed by a civil war that erupted two years ago, reducing production by about a third in a country that has sub-Saharan Africa’s third- biggest reserves. The decline in crude revenue and oil prices that have plunged to below $40 a barrel have resulted in dollar shortages that weighed on the local currency and caused the value of the greenback to soar in the black market.
“We are being driven by the supply and demand of commodities on the market,” Mayik said. “The money was already devalued. People were no longer receiving money at the official rate and nobody could control it.”
The government plans to fire state workers to free up cash for investment in non-oil industries, while improving revenue collection, President Salva Kiir said last month. Conflict in the country has left tens of thousands of people dead and forced about 2 million to flee their homes. An August peace agreement signed by Kiir and rebel leader Riek Machar seeks to establish a transitional administration that will govern the country.
The peg wasn’t sustainable and dropping it “was just a matter of time,” Bloomberg Intelligence analyst Mark Bohlund said by phone from London. “This adjustment means that hopefully more dollars will come to the market and economic activity should fare better, there should be fewer hold ups in economic activity as you often have if there is too much of a discrepancy between the official exchange rate and what’s required from a supply and demand perspective.”
The central bank appealed to the international community to help the country make the switch as it doesn’t have the reserves to back a move to the free-floating currency, the governor said. It also made the shift because rich people would buy the currency at the official rate and then sell it to the poor at inflated levels, Mayik said.
Officials with access to oil revenue during the conflict have profited by manipulating the dual system, selling foreign exchange at the black market rate, the advocacy group Enough Project said in an e-mailed statement on Tuesday. The finding is part of a wider study by Enough Project on how financial interests fueled the conflict.
The finance ministry will work on a package of measures to improve fiscal prudence to better cope with economic and external shocks, David Deng Athorbei, the department’s minister, said in a statement.
The devaluation follows similar steps by other oil- producing nations with Brent crude hovering around $36 a barrel, down almost 70 percent since a June 2014 high. Angola, Africa’s second-biggest producer, has devalued its currency at least twice this year, and Kazakhstan let the tenge float freely, while exporters from Russia to Colombia have let their currencies slide.
“South Sudan is highly dependent on oil and their decision to let the pound float is the latest example of the pressures that falling oil prices are bringing to bear on oil-producing countries,” Per Hammarlund, chief emerging-markets strategist at SEB AB in Stockholm, said. The latest fall in oil was probably the “last nail in the coffin.”