CEIC Data Blog

Sudan’s Currency, Economy Faces Uncertainty as Oil-Rich South Pulls Out

 

News @lert: In early January 2011, peripheral, historically poorer but oil-rich South Sudan voted for its secession from the Arab-linked, Islamic and overriding North in a move that will reverse the efforts for cohabitation set in motion six years earlier in a country traditionally divided by ethnicity, religion, fight for dominance and more recently, by the oil reserves. The move leaves the North’s economy and currency vulnerable to risks and instability.

Back in 2005, with the Comprehensive Peace Agreement (CPA), the country gave away its Dinar as too linked to Arab world and embraced the more secular Pound. During the second civil war that ended in 2005, currencies of neighboring countries and the US dollar and even more exotic payment means have also circulated in Southern, rebel-controlled areas. With such a volatile monetary history, no surprise that the confidence in country’s single currency, reflected in its equivalence in goods (purchasing power, inflation) and foreign currency (exchange rates), is rather weak.

Sudan Inflation
Sudan Inflation
Chart provided by: CEIC Data

Sudan already began to pay the price of the secession. Headline inflation accelerated to 16.8% y/y in May while the Pound weakened by 16.6% y/y to the US dollar in the month. Sudanese pound has weakened steadily against the US dollar since the referendum on worries it will be without value after the independence. In order to preserve investors’ confidence in the currency and fully benefit of the independence, the South has to conduct smooth transition to own monetary institutions and currency, including by allowing a transition period of at least one year.

Sudanese Pound vs. US Dollar (Avg.)
Sudan Currency

Chart provided by: CEIC Data

On the monetary side, North Sudan previously had no plans to supplant the current pound with a new currency after the south’s secession is official in 9th of July of this year. However, lately there are some talks that they might revert to the country’s previous currency the Dinar. On the other side, South Sudan has issued contradictory statements on whether they want to retain the pound after independence or create their own new currency. But analysts warn if a new currency is issued in the South without the coordination of the North on the timing and exchange rate, the pound will weaken with inflationary pressures rising.

With the emerging split of Sudan into north and south, there is much to inquire about the future use of resources. At the same time, it is well observed that the oil-rich South is eager to break all forms of dependency on the North. However, economic realities may keep them uncomfortably dependent on their former foes. So in Sudan’s case, probably there would be a forced economic cooperation if not a desired one.

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