Sudanese central bank weakens foreign exchange rate for banks

Sudan’s central bank has significantly weakened the rate at which the country’s banks can trade domestic for foreign currency, after carrying out a major devaluation of the currency in January.

Central bank governor Hazem Abdul Qader told locally-based reporters on February 4 that it was raising the band within which the country’s banks can exchange Sudanese pounds for US dollars. The rate rose from a band of 16 to 20 Sudanese pounds per dollar to a band of 28.8 to 31.5 pounds per dollar, effective from February 5.

The foreign exchange rate that the Central Bank of Sudan imposes on local banks is different from its exchange rate for other entities, which it also devalued by more than half last month. The latest cut brings the official exchange rate for banks closer to that used by other entities. In December, the central bank announced that from January 21, the official exchange rate would rise from approximately seven Sudanese pounds to the dollar to a rate of 17.96.

The devaluations do not appear to have brought official exchange rates in line with black market rates. A locally-based reporter for Reuters said on February 4 that the black market rate for the dollar was 38 Sudanese pounds. Abdelqader told local reporters that the central bank would not allow importers to deposit dollars bought on the black market.

IMF calls for unification of exchange rates

The latest moves by the central bank follow a call by the executive board of the International Monetary Fund to unify the country’s exchange rates. The IMF’s executive board said in December that “exchange rate unification is critical for eliminating the distortions that hamper investment and growth” in Sudan.

Some IMF directors called for “an upfront unification” of exchange rates “to eliminate multiple currency practices and bolster the credibility of the authorities’ reform agenda”. But others cautioned that a more gradual approach might “mitigate the risks of potential exchange rate overshooting given minimal international reserves”, as well as softening the social impacts of adjustment.

Sudan has been hit by a combination of factors that have raised import demand while making exporting difficult. The US lifted some economic sanctions in 2017, which local observers say have led to a significant growth in imports by Sudanese traders. The country lost the bulk of its oil reserves, which had been the source of its most important exports, in 2011 when its southern provinces seceded to become the nation of South Sudan.

“Public and external debt remain high and unsustainable”, the IMF executive board noted, with most external debt repayments in arrears. Sudan is still on the official list of State Sponsors of Terrorism, which the IMF board said is “blocking progress towards badly needed debt relief”. The country owed the IMF 966.3 million in Special Drawing rights, or approximately $1.4 billion, in September 2017.

Central bank should “reinforce limits” on monetary financing

The executive board called for “tighter monetary policy to keep inflation in check”, noting that staff reports had described loose fiscal policy as another cause of inflation. The central bank needed to reinforce its limits on the monetary financing of fiscal deficits, the IMF board argued.

“Until the building blocks to directly target inflation are in place, a reserve money-targeting framework would be helpful to anchor monetary policy under a flexible exchange rate regime”, the IMF executive board said. The board also “encouraged the central bank to continue upgrading its capacity to supervise and mitigate financial stability risks”.

The most recent official figures show inflation in Sudan falling to 24.7% year-on-year in November. This was the lowest rate for 2017, with year-on-year inflation in all other months reaching levels above 32%. The country’s policy rate was cut by 100 basis points to 13.5% in July 2017.