DO NOT get me wrong I am a firm believer in a floating rate regime. It’s the only way to let the foreign currency exchange demand and supply momentum dictate any given currency daily quotes. Then, the central bank’s job would be to regulate the tightening/easing of the national currency through its monetary policy, should that be necessary.
Early last week, South Sudan financiers decided to float the South Sudan’s Pound (SSP). This has raised questions whether or not the timing of the policy was right.
This youngest nation in the world has been pegging its currency against the US Dollars at the fixed rate of 2.96 SSP/$. What this means is Juba was exchanging the Pound at a fixed rate of 2.96/USD on the foreign international exchange markets to buy the Dollars for the importation of goods and services. Being a heavily importing nation of almost all kinds of goods, this fixed rate was very important, at least for the time being, given the drop in oil prices on which this government’s economy heavily depends.
With this decision, the SSP was heavily devalued, plummeting at the time of an announcement by 84%. As we speak, somewhere in the country’s boutique FOREXs, it moved from 2.96/USD to almost 20/USD. Question is, how is Juba going to handle this internal ridiculous inflation? Be advised that on Wednesday last week, the local price of one litter of gas tripled. Who is going to suffer the most at least in short/medium term? You got it right: low-income earners will suffer the most, given that big players—i.e. the filthy rich who had held onto the USD at such a cheaper fixed rate—are now benefiting from this hefty move.
Imagine buying at an all-time low, 2.96:1 and selling at 20:1! Now this is a real trade.
Looking at it from both ends of the spectrum, low-income earners are going to suffer from huge price inflation.
Juba’s government is on one hand benefiting from this devaluation because now the US dollar is worth almost 7 times as much. Well, maybe they are now going to pay 7 times as many public servants’ salaries. (Just saying!)
The other prime benefit, which I think was the reason why Juba’s policy makers chose to float the currency, comes in a very long run. This is going to let the exchange rate move organically, help the central Bank of South Sudan maintain the required exchange reserves and also boost local activities valuation, such as agricultural goods to name a few.
But given last weekend’s record in low prices of oil, which Juba happens to heavily depend on, the timing was very wrong, in my opinion.
As of Friday last week, the prices of BRENT oil closed at a record low of $36/barrel in the US. Be advised that for some reasons, South Sudan oil is traded at even lower prices, $20-$25/barrel. Juba needed the USD the most right now. And guess what? Now they are going to be paying 7 times as much SSP to buy the dollar for importation of goods.
I’d like to just say: like here on the Street, anyone can trade. But the real art comes at the pricing and the timing of it. Buying and selling at the right prices, not the wrong time.
Good luck, Juba!