South Sudan hikes rate to calm markets as pound falls

     South Sudan's central bank raised its key interest rate sharply, reversing two rate cuts earlier this year, saying a tightening of monetary policy was aimed at calming financial markets amid a sharp fall in the pound's exchange rate and high inflation.

      Only three days after once again taking over the leadership of the Bank of South Sudan (BSS), Governor Dier Tong Ngor on Nov. 6 chaired an extraordinary meeting of the bank's monetary policy committee (MPC) and tightened the monetary policy stance "to mop the excess liquidity from direct borrowing from the Central Bank."

     BSS raised the Central Bank Rate (CBR) by 500 basis points to 15.0 percent, completely erasing the two rate cuts in April and July that aimed to limit the adverse impact of COVID-19 on the country's nascent financial system, and especially its banking sector.

     The bank's MPC also doubled the reserve requirement ratio (RRR) and cash reserve ratio to 20 percent undoing a 200 basis point cut in April and another 800 point cut in July.

     In addition, the central bank said it would urgently introduce its own bills to help manage liquidity and step up its role as a supervisor by continuously monitoring the cash in-vault of commercial banks.

     "The MPC noted that the economy is severely battered by shocks brought about by COVID-19 pandemic, low oil prices which led to considerable fiscal imbalances and constrained financial system performance, particularly the banking sector," BSS said.

      The Republic of South Sudan gained independence from Sudan in 2011 but continued to endure civil war until February this year when a coalition government was formed.

      The South Sudanese Pound (SSP) became the official currency of South Sudan in July 2011, replacing the Sudanese pound, but the country's economy continues to suffer and the fall in the prices of oil - its main revenue source - has hit government revenue and foreign exchange earnings.

      Local press reported that in July the central bank said it had run out of foreign exchange and could not stop the depreciation of the pound, and in October the government agreed to introduce a new currency.

      SSP is not widely traded and while the official exchange rate against the U.S. dollar is listed as 175.53 on Nov. 6, the black market rate is estimated at 400 to 500 pounds.

      South Sudan's inflation rate rose to 11.6 percent in August from 7.5 percent in July, sharply down from a recent high of 170.5 percent in October 2019.

    The Bank of South Sudan issued the following press statement:

1. The Bank of South Sudan’s Monetary Policy Committee (MPC) convened
   an extraordinary meeting chaired by the Governor Hon. Dier Tong Ngor on Thursday November 6th 2020.The meeting was held on the backdrop of the rapid depreciation of the SSP and high inflation. The meeting suggested ways to calm the market, using available monetary policy tools.
2. 2. The MPC noted that the economy is severely battered by shocks brought about by COVID-19 pandemic, low oil prices, which led to considerable fiscal imbalances and constrained financial system performance, particularly the banking sector.
3.  In light of the above, the MPC resolved to tighten monetary policy stance to mop the excess liquidity from direct borrowing from the Central Bank.
4. 4. In this regard, the MPC resolved the following:
5. a. Raised the Central Bank Rate (CBR) to 15%
   b. Increase the Reserve Requirement Ratio (RRR) to 20%
   c. Increase the cash reserve ratio to 20%
   d. The Central Bank will urgently introduce its own bills as a toll of liquidity management mechanism.
   e. Bank will step up its supervisory role by continuously monitoring the cash in-vault of commercial banks."

       www.CentralBankNews.info