Opinion by Ter Lual Nguth (SS24News)
Saturday September 19, 2020
As the nation struggles to find sustainable policies to stabilize and control the ongoing hyperinflation and the exchange rates in the country, there is an urgent need to adopt drastic measures such as imposing what economists call ‘shock therapy by;
- Reduce government expenditures:
- Raise Tax for higher income earner and broaden tax base
- Increase reserve Requirements.
- Increase Discount rate. (the rate at which financial institutions loan money from BoSS)
- Conducting OMO ( Open Market Operation) buying and selling government securities
- Reduce the Government expenditure Cutting government expending will increase saving for the government. If saving increases current account will improve leading to the improvement of balance of payment. If balance of payment improve, government can be able to import essential materials for the development of domestic manufacturer leading to the improvement of gross domestic production and subsequently increase export.
- Raise Taxes for higher income earner.
Increase taxes for higher income earner and properly define tax base increase domestic revenue and enable government to finance short terms government developmental projects. As it is said by the well known economist, Adam Smith that the wealth of the nation is taxes. Every government should embark on improving taxes by properly enacting law and severely punished whoever violated taxes laws. Cutting total government spending and raising taxes bring money to the government and subsequently lead to the total national income improvement.
- Ban this idea of “dollarization” of the market economy, regulate foreign investors, ban all foreigner’s companies/ bank operating in our country, empowering domestic investors to boost domestic production and improve GDP. All transactions whether in or out of the country should be in local currency.
To do so national minister of Finance and Economic planing should pursue the policy of protecting domestic business. In other word economists terms it as protectionism. If government want to have a competitive market, they should first develop domestic industry by first discourage foreign investors to invest in our country. This can be done by raising taxes and hardening how to acquire documents permitted foreign company to operates in our country.
- On Monetary side of the Economy, the government should do the following in older to fixed our economy.
- Increase total reserve requirements.
If the BoSS increased total reserve held by commercial bank against their deposits, this will prevent commercial bank in loaning money to public and firm’s leading to decline in money supply. If money supply decrease the transaction motive will also decrease or quantity demanded will decrease leading to reduction in sustained increase in price of good and services ( inflation)
Launch a rapid initiative to boost domestic production to reduce the burden of importing basic goods and services. If that doesn’t works this might be the case that commercial banks are holding more excess reserve compared to required reserve held by central bank or central bank borrowed more money from commercial bank and unable to payback.
If such a situation happened, the central bank have limited role in correcting the economy. Economic reforms should be left to fiscal side of the economy. (Ministry of Finance and Economic planning)
Increasing discount rate. Discount rate is the rate at which commercial banks borrow money from central bank. This doesn’t have much impact as it depends on the performance of each commercial banks. If a commercial bank have a problem in its balance sheet e.g. liabilities are greater than it’s assets, the bank should apply for loan from central bank.
If the discount rate is high enough it would prevent that particular bank in creating multiple loans because in any loan it make to the investors, central bank will keep much of it as required reserve which doesn’t earn interest on commercial bank. This with lead commercial bank in expanding money multiplier and subsequently reduced monetary base.
Central Bank conducting OMO. (Open Market Operation).
In our case the government should only do one thing, selling government securities to public and financial institution. Purchasing government securities will worsened economy as it will increase Money supply leading to higher inflation.
What the government should do is selling government securities to public and business firm to reduces their holding of currency in circulation.
Bank of South Sudan should raise reserve requirements and discount rate to prevent commercial bank in lending more to private firms or individuals.
If we adapt and ACT now, we could rescue our Economy in short time.
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