In July 2011, South Sudan was carved out of the former Sudan. Since then, it has been engulfed in corruption and instability. Now, it is facing yet another severe currency crisis and economic collapse. Indeed, surging prices have forced shops across South Sudan to close their doors. In the face of skyrocketing prices, customers have gone on strike.
The central bank’s most recent official inflation release, way back in April, put South Sudan’s annual inflation rate at 37.2 percent. But, since then, things have deteriorated. My measurement for South Sudan’s inflation employs purchasing power parity theory (PPP) and the use of high-frequency, foreign-exchange-rate data. This allows me to measure inflation rates for countries with elevated rates of inflation very accurately each and every day. Today, by my measure, South Sudan’s inflation rate is 54 percent per year.
South Sudan could have easily avoided this punishing inflation. On the first day of South Sudan’s formal existence, renowned currency expert Warren Coats, my good friend and colleague at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise, was in residence in Juba, South Sudan’s capital city. He was operating as a consultant to the Bank of South Sudan. At that time, Warren and I were both advocating for a South Sudanese currency board. This would have made the South Sudanese currency a clone of the U.S. dollar, which would have not only ensured currency stability, but would also have guaranteed low inflation.
A currency board is a monetary institution (or a set of laws that govern a central bank) that issues a domestic currency that is freely convertible at an absolutely fixed exchange rate with a foreign anchor currency. Under a currency-board arrangement, there are no capital controls. The domestic currency, which is issued by a currency board, is backed 100 percent with anchor currency reserves, so the local currency is simply a clone of its anchor currency.
For over 170 years, currency boards have had a perfect record. In total, there have been over 70 — none have failed. Even the North Russian currency board, which was designed by John Maynard Keynes in 1918 during the Russian Civil War, never faltered. It would have been no different in South Sudan. Indeed, Sudan had a currency board from 1957 to 1960, and it worked perfectly.
So, why didn’t South Sudan heed the advice of Coats and Hanke? For six months, it appeared that the South Sudanese were proceeding towards what was anticipated to be the adoption of a currency board and sound money. During this period, South Sudan was phasing out its exchange controls that had been propping up an overvalued currency. But, President Salva Kiir Mayardit stepped in and stopped the transition towards a currency board system. At that point, Warren packed his bags and returned to the United States.
Unfortunately, we came close, but no cigar. As a result, South Sudan is experiencing yet another bout of currency chaos.