Opinion | Does a change of domestic currency affect the economy?

By Dr. Marial Awou Yol

OPINION – The recent announcement by the Government’s spokesperson that the Council of Ministers of the Revitalized Government of National Unity of South Sudan has resolved to change the national currency, pound, has unleashed an avalanche of public interest as to whether changing a domestic currency can have a significant effect on our ailing economy. A change of currency means that the government removes the national currency from circulation and replaces it with a new currency. The announcement did not delve into other related issues such as the currency’s name, the amount of smaller units (e. g., piasters) that make up the currency and at what rate will the currency be pegged to base currency such as the American dollar.

In general, a change of a currency does not cause any fundamental change in an economy. Whether the currency is in the hoard or deposited in a bank, it remains the property of the owner who has an absolute right to withdraw it from his/her bank account ant time. A change of the currency only mops up and channels the strayed currency into the banking system. When commercial banks do not pay depositors timely or do not offer depositors sufficient interest rates to compensate them for parting with their money as the opportunity cost of holding money approaches zero, they lose trust in the banking system, and thus, resort to hoarding the currency. In addition to hoarding, some citizens can be tempted to engage in money laundering activities. A change of the currency does not restore the lost confidence between the banking system and their customers. Citizens will even hoard the new currency to be issued unless the commercial banks change their behaviors. Therefore, currency change will not ensure the availability of liquidity in the banking system, nor will it avail foreign exchange but can only help prevent money laundering.

A change of currency does not address the macroeconomic issues of non-availability of foreign exchange reserves, unemployment, exchange rate instability, commodity prices or inflation. It is a mere anti-crime tool used to curb corrupt practices by money dealers. Without fundamental changes in fiscal and monetary policies, procurement processes, revenue collection and the management of central bank, money printing will remain the sole source of financing fiscal deficits, hence driving up inflation.

South Sudan needs more than a mere change of currency. The fundamental problem facing the country today is the scarcity of foreign exchange. To solve this problem, we need to undertake important measures that either cut the demand for or increase the supply of foreign exchange. This include: first, massively investing in food production which can lessen the country’s dependency on imports from foreign countries, hence, reducing the demand for foreign exchange. Secondly, investing in education, which will reduce the number of children studying in foreign countries which will, in turn, reduces the demand foreign exchange for paying school fees, house rents, and food. Thirdly, investing in healthcare facilities in order to cut down the demand for foreign exchange for treatment in foreign countries like India, Egypt and Sudan. Fourthly, investing in road infrastructure and electricity which can reduce the cost doing business.

The author is a economist and the vice-chancellor of the University of Upper Nile.

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