Is Floating Exchange Rate Good or Bad For Young Nation?

By Ter Nguth,

Money South Sudan

Dec 22, 2015(Nyamilepedia) —- South Sudan is a country that gained it’s independent in 2011, after a long civil war that cost millions life. After that hard won independent, the country slid to another civil war that again uprooted citizens from their home, kill thousands of people and some under UN protection size. A war that cost too much destruction interm of economic.

After independent, the people were hoping for bright future if their economy was framed in a good way that could boost up per capita income but that was not the case . The country central bank which is the custody of other bank and the last resort in decision making of the country’s monetary policy, the bank opt for fixed rate of its currency in term of others currencies.

Fixed against either the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold. For the government of South Sudan to follow that exchange rate regime, it should first know the pros and cons in following that exchange rate. If the benefits are good for the young nation, it could be good to go for that exchange rate but if not, the next best alternative which is floating exchange rate could be choose in the very beginning of the nation formation. If central bank is strong enough to influence both demand and supply of the economy, the nation wouldn’t be in that situation we are in as of today. Fixed exchange rate is good when the country is using monetary expansion.

A fixed exchange rate is usually used in order to stabilize the value of a currency by directly fixing its value in a predetermined ratio to a different, more stable or more internationally prevalent currency to which the value is pegged. fixed our currency against unstable currency (USD) which changing day and night based on the force of demand and supply created a gap between the two currency and due to that it become difficult for the nation bank to maintenance the fixed value. If the central bank insists in following that they must make sure that, the exchange rate between the currency and its peg does not change based on market conditions this makes trade and investments between the two currency areas easier and more predictable, and is especially useful for small economies in which external trade forms a large part of their GDP.

Ter Nguth is an assistance lecturer at  Mikese University Yambio WES, South Sudan(Photo: profile)

Ter Nguth is an assistance lecturer at Mikese University Yambio WES, South Sudan(Photo: profile)

Let me come to my point of arguments. As a concern economist who can alway predict future economic events and who can also anticipated what will be good during long term economic movement or some time called business cycle, the decisions taken by the Central Bank to float the currency is good and feasible in the long run because when a currency floats, targets other than the exchange rate itself are used to administer monetary policy by using open market operation. Open market operation is when the central can influence the domestic money supply by buying and selling of government security from and to the business firm and in fixed rate it is a bit difficult to use policy mix. Central bank cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. It must choose any two for control and leave the other to market forces

The other things about the floating exchange rate is that it allows monetary policies to be useful for other purposes. Under fixed rates, monetary policy is committed to the single goal of maintaining exchange rate at its announced level. Yet the exchange rate is only one of the many macroeconomic variables that monetary policy can influence.

A system of floating exchange rates leaves monetary policy makers free to pursue other goals such as stabilizing employment or prices.In cases of extreme appreciation or depreciation, a central bank will normally intervene to stabilize the currency. Thus, the exchange rate regimes of floating currencies may more technically be known as a managed float. A central bank might, for instance, allow a currency price to float freely between an upper and lower bound, a price “ceiling” and “floor”. Management by the central bank may take the form of buying or selling large lots in order to provide price support or resistance or, in the case of some national currencies, there may be legal penalties for trading outside these bounds.

The other thing good about floating exchange rate is economic rationality. Floating exchange rates automatically adjust, they enable a country to dampen the impact of shocks and foreign business cycles, and to preempt the possibility of having a balance of payments crisis. However, they also engender unpredictability as the result of their dynamism.

With the new policy of floating exchange rate, the government should also increase the the civil servant salary to much with new increase in exchange rate. And also government need to inject enough money in to the supply side of the economy so that trader will be able to satisfy the demand. The auction of 2 millions dollars by central bank to commercial bank is also a good move because commercial will sell and buy base on the market force of demand and supply. To conclude my article, I will end by saying I am much optimist that South Sudan will be able to solve conflict goal of economy which couldn’t be solved when followed fixed exchange rate. Now we will see the real economic growth.

The author is an economist and lecturer in MIKESE University of Western equatoria state department of economic. He can be reached ternguth@yahoo.com

 

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