The International Monetary Fund has reported possible improvements in fiscal and monetary policies in South Sudan since July last year, after a wartime spending spree during which the South Sudanese pound lost more than 95 percent of its value against the US Dollar.
Monetary policy is made by the central bank and involves changing the interest rate and setting the money supply (including by printing or destroying money, or by creating bank reserves). Fiscal policy involves the parliament and executive agencies, which can changing spending levels and taxation levels that affect the economy.
According to the IMF, falling government revenue and rising security-related spending caused the fiscal deficit to rise rapidly in recent years. The government reacted by creating more money: “Monetization of the fiscal deficit led to strong money growth, high inflation and precipitous exchange rate depreciation.”
However, the IMF sees changes underway that could help stabilize the economy. “The authorities shifted economic policy course in late 2016 with the passing of a new budget for 2016/17, which incorporates bold fiscal measures that could go a long way to restore macroeconomic stability and strengthen public financial management. Preliminary information indicates a substantial reduction in the fiscal deficit for the first half of the fiscal year [since July 2016] and significant moderation in money growth.”
This finding is found in a report released Thursday by the IMF at the conclusion of its annual consultations with South Sudan. Such consultations are a normal activity under IMF’s Articles of Agreement. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which is then discussed by the IMF Executive Board.
IMF’s executives recommended that “restoring fiscal discipline is necessary to reduce money expansion, help reduce inflation and restore external stability.” They highlighted the need to “stop monetizing the deficit” – a reference to the central bank policy of creating more money and lending it to the government, which reduces the value of all other money held by the public.
Nonetheless, the IMF directors called South Sudan’s economic challenges “enormous” and urged authorities to allow humanitarian access. “Without significant progress toward peace and economic stabilization, the economic trajectory for South Sudan is highly unstable, and the country risks falling into a spiraling trap of deteriorating economic performance and worsening security conditions with continued high humanitarian costs,” the directors concluded.
The most recent quarterly report made available by South Sudan’s Finance Ministry – dating to December 2016 – details some of the policy changes that the ministry is seeking to make under Minister Stephen Dhieu Dau. But it also reveals that not all has gone according to plan.
For example, the government succeeded in repaying more than it borrowed during the first quarter of the 2016/2017 fiscal year. And overall spending was very close to the quarterly budget. But some agencies overspent their budgets significantly whilst others were underfunded.
“Expenditure on both operating and capital was overbudgeted with 52% and 45% of the annual budgets spent respectively… four agencies consumed 90% of all operating spending – the Ministry of Finance and Planning, the Office of the President, the Ministry of Defence and National Security.”
The ministry further disclosed that Salva Kiir’s office continues its spending spree whilst other ministries and state governments are forced to tighten their belts: “Over 90% of capital expenditure in the first quarter was spent on vehicles by the Office of the President, who exceeded their annual capital budget,” the ministry revealed.