Banking in Crisis

Economic Turmoil
Economic Turmoil

The Central Bank of South Sudan (CBOSS) is running out of money and this spells trouble for our country’s banking sector and the wider¬†economy.

A central bank has two key responsibilities:

  1. Keeping prices stable by carefully managing inflation; making sure prices don’t rise too quickly or fall to steeply.
  2. Keeping commercial banks running by making sure they have the cash available to meet their clients’ needs.

There have been several reports that CBOSS has stopped getting dollar deposits from the Ministry of Finance. There’s simply not enough money to go around and CBOSS has had its allowance cut. That means it is running out of cash. What does that mean for CBOSS and its two key responsibilities?

Price Stability

CBOSS has already lost its ability to keep prices stable. The government has used up our dollar reserves to finance the civil war. Once that was all spent, it turned to loans, racking up a level of debt that is near ruinous. CBOSS has already had to print money in response to government appeals, piling yet more pressure on the already farcically pegged official exchange rate.

I can’t sell you empty packaging and demand full value for the goods that should be in that packaging. Similarly, South Sudan’s authorities can’t expect SSP to trade at 3.1 to 1 USD, when it doesn’t have enough assets or dollars in reserve to justify the price. All you end up doing is putting the squeeze on your citizens. But this isn’t new. Pressures on SSP have been with us since the outbreak of the civil war.

Lender of Last Resort

What is new is that the central bank doesn’t seem to have enough hard currency left in its account to keep commercial banks running properly.

No one wants to buy SSP just now … well at least not at the advertised rate. Commercial banks are sitting on a mountain of SSP and not enough USD to cover clients’ forex needs. For an import dependent country, that means serious trouble. This is usually when the central bank rides to the rescue by lending hard currency to the commercial banks. But CBOSS just doesn’t have the money to lend.

The commercial banks are struggling and have started imposing restrictions to keep themselves limping along until the situation improves.

Not only have foreign banks slapped a daily cap on the amount of USD that we can withdraw and transfer, but they’ve also started making it difficult for South Sudanese banking with them to withdraw USD from branches in neighbouring countries.

Should we be worried?

A central bank without hard currency becomes nothing more than a spectator as the nation’s economy drifts, like a ship out at sea without anyone at the helm. And there’s little doubt that South Sudan is in turbulent waters and speeding towards rocky shores.

Runaway inflation and runs on banks (where people rush to get their money out of a bank that’s in trouble) are very real hazards. The destabilizing effect on an already fragile South Sudan doesn’t bear thinking about.

Think Zimbabwe and its runaway inflation that saw 1 USD trade for 2.6 billion ZD back in 2008. All it took was a loss of confidence in the currency coupled with a lack of confidence in the government’s ability to get a grip of the situation.

Getting a grip

SSP has improved slightly after signing of the peace agreement, but this vote of confidence can all too quickly fade away. Once the TGONU is established, decisive and substantive action is required to restore confidence in CBOSS. The TNLA along with the soon to be established Economic & Financial Management Authority (EFMA) must exercise their oversight mandate to ensure best practice is adopted and applied.

Difficult decisions will need to be taken. Spending will need to be tightened, especially for the military and security services. I hope and trust that the TGONU has the will to take those tough decisions.