A couple of days ago I wrote about Steve Hanke’s new Troubled Currencies project. The project presently covers Argentina, Iran, North Korea, Syria andVenezuela. However, I think Steve now has to expand the list with the Sudanese pound.

This is from Reuters yesterday:

Sudan’s currency has fallen to a record low against the dollar on the black market since South Sudan started reducing cross-border oil flows in a row over alleged support for rebels, dealers said.

There is little foreign trading in the Sudanese pound but the black market rate is an important indicator of the mood of the business elite and of ordinary people left weary by years of economic crises, ethnic conflicts and wars.

The rate is also watched by foreign firms such as cellphone operators Zain and MTN and by Gulf banks who sell products in pounds and then struggle to convert profits into dollars. Gulf investors also hold pound-denominated Islamic bonds sold by the central bank.

On Wednesday, one dollar bought 7.35 pounds on the black market – which has become the business benchmark – compared to 7 last week, black market dealers said. The central bank rate is around 4.4.

The pound has more than halved in value since South Sudan became independent in July 2011, taking with it three-quarters of the united country’s oil output. Oil was the driver of the economy and source for dollars needed for imports.

Last week, South Sudan said it would close all oil wells by the end of July after Sudan notified it a month ago it would halt cross-border oil flows unless Juba gave up support for rebels. South Sudan denies the claims.

Flows had only resumed in April after an earlier 16-month oil shutdown following South Sudan’s secession.

Interesting it is not only Sudan that has a currency/inflation problem. The same has indeed been the case for South Sudan, which initially after it became independent in 2011 saw a sharp spike in inflation.

Paradoxically enough the cause of the spike in inflation in South Sudan was the same as in Sudan – an South Sudanese oil boycott of Sudan. Hence,  the cut in oil sales from South Sudan to Sudan caused a sharp drop in the South Sudanese government’s oil revenue. That led the government to effectively force the new South Sudan central bank to fund the revenue shortfall by letting the money printing press work overtime.

As far as I know it was initially considered that South Sudan should implement Steve’s favourite monetary solution for countries like Sudan and South Sudan – a currency board.

Even though I am no big fan of currency boards I would agree with Steve that it could be the right solution for countries with extremely weak institutions such as Sudan and South Sudan. Another possibility could simply be to just dollarize and completely give up having their own currencies. My favourite solution for South Sudan would be a currency board, but with a twist – the Sudan Sudanese pound should be pegged to the price of oil rather than to another currency. This of course would be a strict form of the Export Price Norm (EPN), while I think complete dollarization would be the best solution for Sudan. Needless to say both Sudan and South Sudan should get rid of all capital and currency controls.

Finally it should be noted that while inflation seems to be getting out of control in Sudan inflation in South Sudan has been coming down significantly over the past year.

PS While the monetary situation is getting worse in Sudan the situation in Egypt apparently is improving and the black market for the Egyptian pounds seem to be “vanishing” according to a blog post from Steve today.