Understanding the High Inflation Rate in South Sudan and Its Economic Impact
The official annual average inflation rate for South Sudan in 2017 was reported as 187.85, with an even more precise figure of 187.867 by the IMF. Such precision in macroeconomic figures is often seen as both humorous and, at times, rather absurd. As Russ Roberts, host of the podcast EconTalk, pointed out, it is not uncommon for macroeconomists to use decimal points in their forecasts, suggesting a level of precision that might be questionable given the limited statistical capacity of the South Sudanese government.
For the purposes of this analysis, it is reasonable to round this number to 190, indicating an extremely high rate of inflation. The World Bank and IMF, along with other international organizations, must acknowledge and use these figures despite their apparent imprecision. In 2019, the IMF reported that inflation had declined to an average of 24.467, and they forecast it would drop even further to 10.799 by the end of 2020. Such precision in these figures is indeed commendable, if a bit exaggerated.
Causes of High Inflation in South Sudan, 2017
The primary reason for the high inflation rate in South Sudan during 2017 was intimately tied to the ongoing civil war. The conflict severely impacted government revenue while concurrently increasing public spending both on-budget and off-budget. On-budget expenditures included efforts to suppress ethnic rivals, while off-budget schemes allowed top government officials to siphon resources from various sources, including the state oil company, fake payrolls, and fuel subsidies.
Under these dire circumstances, the central bank was placed under immense pressure to extend credit to the treasury department. This practice, known as “printing money,” was a ploy to address the fiscal challenges. Meanwhile, the economic chaos led to a rapid depreciation of the exchange rate, causing domestic prices of imported goods to skyrocket alongside the rising price of foreign exchange.
The interplay between these factors resulted in rapid inflation, a rapidly shrinking real economy, and further economic turmoil for households that could not afford to convert their cash holdings into foreign currency and place them in secret bank accounts abroad. This situation inherently destabilized the economy, exacerbating the struggles faced by individuals and families.
Economic Consequences of High Inflation in South Sudan
The severe economic consequences of high inflation in South Sudan were profound and far-reaching. Firstly, the rapid depreciation of the exchange rate undermined the purchasing power of the local currency, leading to increased costs for imported goods. This, in turn, pushed up domestic prices, creating a downward economic spiral.
Secondly, the high inflation rate significantly eroded the real wages of the populace, exacerbating poverty and social unrest. As households struggled to keep up with rising prices, the demand for basic necessities decreased, further weakening the economy. The desperation arising from this economic strain often fueled societal tension and civil unrest.
Thirdly, the high inflation rate eroded the value of savings, making it nearly impossible for individuals to maintain their financial stability. As a result, many people turned to informal economies or alternative monetary systems to preserve their wealth, further straining the formal financial sector.
Current Status and Outlook
Fortunately, the civil war in South Sudan has ceased for now, offering some hope for the country's economic recovery. The IMF's inflation projections cautiously assume that South Sudan will gradually pull itself together and begin to address its economic challenges. However, this optimistic outlook depends on a range of factors, including political stability, effective governance, and the ability to harness external support and investment.
As the situation in South Sudan begins to stabilize, it is crucial for international organizations and local leaders to work together to implement policies that can mitigate the effects of high inflation and promote sustainable economic growth. This includes strengthening the financial sector, improving public finance management, and enhancing statistical capacity to ensure more accurate and reliable economic data.
The high inflation rate in South Sudan in 2017 is a stark reminder of the complex interplay between socio-political instability and economic strain. It highlights the importance of effective governance, economic stability, and robust statistical practices in addressing and managing such challenges. Only through concerted efforts can South Sudan hope to achieve lasting economic recovery and social progress.