Sudan has announced the devaluation of its currency in a bid to consolidate its official and parallel market exchange rates. The announcement came on Sunday 21, February 2021 as the country’s Central Bank revealed a new regime that also aims to rebuild its economy and access debt relief from international lenders.
According to a report, several commercial banks sources have noted that the country’s apex bank set the new benchmark exchange rate at 375 Sudanese pounds per dollar, from a previous official rate of 55 Sudanese pounds. The latest move is a key reform demanded by foreign donors and the International Monetary Fund (IMF).
For several months, the government delayed in devaluating the currency due to raising inflation caused by a slump in the demand for its crude oil. Considering the fact that Sudan is an oil-dependent economy, the poor crude demand made it hard to generate foreign currency for the importation of basic goods like wheat in 2019. This provoked a wide protest that eventually ended the 3-decade rule of President Umar al-Bashir in 2019 as the people could no longer tolerate the economic hardship.
In February 2020, the transition government moved to subsidise bread during the transition period to ensure justice in distributing the subsidies as people could not afford bread when there were produced. With the latest devaluation, Sudan’s currency becomes relatively cheaper compared to other currencies, increasing its chances to exports locally made goods and generating foreign earnings.
In the long run, exponential growth of locally manufactured goods could abound as high import rates would discourage people from buying goods abroad. This could also help to increase the country’s exports of indigenous goods, decrease imports, and help to reduce the current account deficit.
According to Mohamed al-Fatih Zainelabidine, the country’s Central Bank Governor, “The decision to devalue the Sudanese pound is not a float, but a policy of flexible management.” A circular from the apex bank shows that it would set a daily indicative rate in a “flexible managed float” and banks and exchange bureaus are required to trade within 5 percent above or below that rate.
What is a Managed Float?
A managed float (also called a dirty float) is a floating exchange rate where a country’s central bank occasionally intervenes to change the direction or the pace of change of a country’s currency value. A managed float exchange rate, therefore, is a regime that allows an issuing central bank to intervene regularly in exchange markets in order to change the direction of the currency’s float and shore up its balance of payments in excessively volatile periods.
Many times, the central bank in a dirty float system acts as a buffer against an external economic shock before its effects become disruptive to the domestic economy.