The Sudanese economy has often been read as a conflict economy whose growth has been impeded by economic sanctions. This has been exacerbated since 2011 and South Sudan’s secession and subsequent oil production shutdown (before which growth was at least positive), which drastically altered Sudan’s economic growth prospects. The latest International Monetary Fund (IMF) estimates indicate that Sudan’s economy contracted by 4.4% during 2012, which followed a contraction of 3.3% in 2011. Currently, Sudan’s economic policy is guided by the Three Year Program (2012-14), a course of action meant to deal with the negative consequences of South Sudan’s secession. The program focuses on softening the adverse effects on Sudan’s negative economic growth rate, and dealing with the resulting problems that arise in public finances. Severe austerity measures are currently in place to aid the government in implementing the program.
The economic situation in Sudan, already dire, has continued to deteriorate since South Sudan’s secession. The shutdown in South Sudanese oil production severely affected Sudan’s economic indicators. Further exacerbating matters, economic sanctions remain in place on Sudan, while aid and external economic activity is limited. The structural economic shift caused by South Sudan’s secession has adversely affected virtually all of the country’s economic growth prospects.
As a consequence of secession and the subsequent disappearance of oil revenues, Sudan’s attention shifted towards agriculture and gold mining as two potentially lucrative – and in case of agriculture almost untapped – sectors of the economy. Gold in particular has been touted as oil’s possible replacement. Sudan’s services sector is currently driven by the telecommunications industry, while the banking sector is also relatively well developed in regional terms. Both these industries, however, are expected to feel the impact of the country’s fiscal deficit, which has resulted in severe austerity measures including higher tax rates and the removal of fuel subsidies. Soaring food prices, along with the cessation of oil exportation, led to crippling inflation in 2012 and 2013. Although the devaluation of Sudan’s national currency was necessary to realign the Sudanese pound to a level resembling its internationally perceived value, this also meant that the cost of imports increased in local currency terms.
Since losing more than half its oil reserves to South Sudan in 2011, Sudan has been struggling to keep down consumer price index (CPI) inflation levels. The 2013 IMF data gives a figure for CPI inflation of 28%, down from the 35% recorded in 2012. While this forecast seems likely at the moment, there is a risk that CPI inflation could be much higher, despite the likelihood of base effects occurring later in the year.
Looking fist at the relevant literature, the following sections will present a macro model of the country’s conflict economy and an empirical analysis of the model and its data. A final section presents the research findings, explaining the possible consequences of a predicted inflation rate that is about 22% over the official estimate.
In the past two decades a number of studies have investigated the causal relationship between inflation and financial variables, including monetary aggregates and foreign exchange rates, in developed economies (Estrella and Mishikin, 1997; Anderson and Sj, 2000; Chandra and Tallman, 1996; Gray and Thoma, 1998). The search for a causal relationship between monetary aggregates and foreign exchange rates on inflation has also been examined in African economies. London (1989), for example, analyzed the experience of 23 African countries and concluded that exchange rates and money growth had a significant effect on inflation. Chhiber et al (1989) looking specifically at Zimbabwe claimed that exchange rate adjustment and domestic money growth had a significant effect on inflation. Tegene (1989) employed Granger and Pierce causality tests to discover that monetary expansion had caused domestic inflation in six African countries. Agenor (1989) identified a significant role for parallel market rates on inflation in four African countries, where Durevall and Ndung (2001) have more recently employed an error correction model of inflation for Kenya, and found that money supply only affected inflation in the short-run, and had a significant impact on the three month treasury bill rate. Similar results from Nachenga (2001) confirmed the significance of T-bills by on inflation levels in Uganda. Sacerdoti and Xiao (2001) indicated that money growth had an insignificant effect on inflation in Madagascar, but that the effect of the exchange rate was significant. Durevall and Kadenge (2001) showed a significant role for exchange rate and foreign price changes after the economic reforms in Zimbabwe, while Barnichon and Peiris (2007) used a panel co-integration model to verify the effect of money and output gap on inflation in Sub-Saharan African countries. Balvy (2004) and Nassar (2005) both found a long-term association between consumer prices and money supply in Guinea and Madagascar respectively. Despite the apparent consensus in empirical research on the impact of money supply and exchange rates on inflation in low-income economies, however, studies on inflation dynamics in post-conflict countries have been scarce. To fill the void, this paper aims first to structure a macro-economic model depicting a conflict economy, and second, to assess the time-varying effects of explanatory variables on inflation in Sudan using a dynamic estimation approach.
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