Sudan’s recent history has been marked by economic decisions that have not taken into account the long-term growth of the country. Unsurprisingly, since 2011, when South Sudan seceded and took with it roughly three quarters of the country’s oil revenues, Sudan’s macroeconomic situation has deteriorated. Businesses are grappling with an acute shortage of foreign currency, rising inflation, and a dearth of safe assets. The central bank has refused to release statistics on foreign reserve levels, which likely means they are largely depleted. And on February 4, for the second time in a little more than a month, Sudan devalued its currency in an attempt to reconcile the official exchange rate with that of the black market.
None of this is particularly remarkable by itself. However, what makes Sudan’s recent drama particularly tragic is that many of the troubles it is now facing mirror those Egypt faced several years ago. Yet, Sudan’s solutions seem to demonstrate no understanding of the lessons wrought by Egypt’s ill-fated attempts to manage its currency.
Like Egypt, Sudan now finds itself facing a series of economic challenges that are highly interconnected. Aiming squarely at only one source of distress often exacerbates and complicates others. For example, seeking to prevent high levels of inflation by supporting the value of the domestic currency can bring foreign currency reserves down to a dangerously low level if a country’s balance of payments is negative. Making domestic savings more desirable than overseas investment by raising interest rates also makes domestic borrowing more expensive. However, if investors and businesses begin to see depreciation as inevitable and they begin to move their money out of the country, this often reduces foreign currency reserves which are needed for international trade. In this case, a central bank’s only option may be to set import restrictions or capital controls, essentially restrictions on the movement of money out of the country. Unfortunately, this often makes foreign investors skeptical of their ability to repatriate profits in the future and further prevents the needed hard currency from entering the country. Ironically enough, the very inflation the government had sought to avoid in the first place may be triggered by shortages brought on by domestic importers’ increasingly limited access to foreign currency.
Of course, none of this was inevitable in the case of Sudan. Egypt’s experience prior to liberalizing its exchange rate and receiving the first tranche of its loan from the International Monetary Fund (IMF), shows that overvalued currency pegs coupled with current account deficits are, barring exceptional circumstances, quite difficult to support in the long run. Egypt resisted liberalizing its exchange rate for years. When it did, the value of the pound dropped suddenly—while a more flexible exchange rate regime such as Tunisia’s, which employs something akin to a managed currency float, allows currency to depreciate gradually as the external pressures caused by a widening current account deficit ebb and flow.
Historically, a fixed exchange rate, such as that formerly used in Egypt and currently employed in the Gulf Cooperation Council (GCC) countries, helped keep domestic prices for imports steady. This is a justifiable policy for the GCC members, whose economies are heavily reliant on commodity exports and need to import most consumer goods from outside, and who also have large foreign currency reserves. The downside is that imported goods can become more expensive if the currency peg moves and the currency depreciates. Although exported goods thereby become less expensive, the changes in import prices usually take effect immediately, while it can take exporters months or years to ramp up production of their goods to take advantage of their newly lowered costs in the international marketplace.
While Sudan would likely have benefited in the long-run from a flexible exchange rate like Tunisia’s, Sudan’s monetary policy has followed a more stubborn and confusing path, especially following the breakup with South Sudan in 2011. The loss of the oil revenues from South Sudan pummeled Sudan’s economy, blowing a hole in its current account balance (according to IMF estimates) and forcing several devaluations to the Sudanese pound. Whether Sudan realized that mimicking Egypt’s mistakes was a bad idea is irrelevant, as it remains clear that the exchange rate of the Sudanese pound was unsustainable. However, while Egypt did eventually liberalize its currency and allow market forces to take control, Sudan has no plans to do so. Beginning in late 2016 and continuing through 2017, the Sudanese economy utilized four different U.S. dollar exchange rates: the official central bank rate of 6.7 pounds, primarily for government transactions; the wheat import rate of 7.5 pounds; a commercial bank rate of 16 pounds, intended to incentivize Sudanese expatriates to send remittances home through the banking system; and the highly variable black market rate.
At the IMF’s urging, effective January 2018, the government devalued the pound and unified the official exchange rates at 18 pounds to the dollar (a 62.8 percent fall from the official rate) also implementing a band, in which the currency could move between 16 and 20 pounds to the dollar based on market forces. While this was clearly a compromise by the Sudanese central bank, the black market price of the dollar rose to 38 pounds by the end of January, which prompted Sudan to devalue the pound again on February 4, moving the band to between 28.8 and 31.5 pounds to the dollar. This effectively means the official exchange rate is 31.5 pounds to the dollar, the weakest acceptable rate closest to the black market rate. In doing this, Sudan appears to be copying Egypt’s short-sighted and ultimately doomed effort to implement deposit restrictions on foreign currency acquired from the black market.
In early 2015, with foreign currency reserves diminished from their pre-revolution highs and the black market rate for the Egyptian pound beginning to creep upward, Egypt placed a cap of $10,000 per day and $50,000 per month on deposits of U.S. dollars and other foreign currencies. Importers would in theory be forced to go through the conventional banking system in order to acquire foreign currency and open letters of credit for imports. By placing a limit on the amount of foreign currency that could be acquired on the black market and deposited in banks, the Egyptian government hoped to lower the usefulness, and thus the exchange rate, of black market dollars. While this briefly stabilized the black market dollar rate, it did little to quell the demand for dollars, which further weakened the pound.
Sudan, apparently believing the laws of supply and demand do not apply to its domestic market, has also implemented restrictions. Instead of simply placing a cap on the maximum deposit for a given period of time, Central Bank Governor Hazem Abdelqader announced that importers would be prohibited from depositing any black market dollars. Abdelqader followed this with the suggestion that the central bank would intervene if additional foreign currency liquidity was needed—laughable given the Central Bank appears to have almost no foreign currency in reserve.
Unfortunately, at least in the short term, Sudan’s predicament is likely to grow even worse. Since the United States lifted sanctions on the country in January 2017, foreign currency is more useful, thereby increasing demand and raising the black market price for dollars. This may be counteracted to some extent by freer access to the international marketplace for Sudanese exports. However, Sudanese exports have been stunted by the overvalued exchange rate of the Sudanese pound and the U.S. sanctions, and it may take years to develop and fully take advantage of the newly lowered rate.
The normal course of action would be to work with regional and global multilateral organizations to come up with an economic reform plan. However, there are a number of outstanding domestic and international political issues standing in the way of such cooperation. While sanctions were lifted, Sudan is still listed on the U.S. Government’s State Sponsors of Terror list, which requires the United States to oppose (and effectively veto) any loans from the World Bank, IMF, and other multilateral development organizations. Such loans are no panacea for economic mismanagement—and frequently come with a list of required reforms—but can provide much-needed liquidity and a tacit vote of confidence that may encourage foreign investment. At the same time, Sudan remains on tenuous terms with its neighbors, as negotiations with Egypt and Ethiopia over the Grand Ethiopian Renaissance Dam remain contentious.
For Sudan, Egypt should not serve as a model economy, but instead a case study in what not to do when attempting economic reforms and exchange rate management. However, so far Sudan has made no indication that it plans on attempting to learn from Egypt’s missteps. In order to improve its current lot, Sudan has to balance the need to address diplomatic concerns, such as improving its relations with the United States and its North African neighbors, with its efforts to stave off a complete economic collapse. Given how tenuous the current economic situation is, and the political ripple effects such economic tensions and shocks have, it is doubtful that the chaos will decline any time soon.
This is the second in a two-part series on lessons learned from Egypt’s economic policies. Read the first here.
Brendan Meighan is a macroeconomic analyst focusing on the Middle East. Follow him on Twitter @BrendanJMeighan.