Determinants of Inflation in South Sudan (2011-2019)

Abstract

In the recent past, South Sudan has witnessed a swift rise in general price level which adversely distresses real output, relative prices, the standard of living and the overall macroeconomic system. Perhaps, the investigation into the multi-dimensional and dynamic factors suspected to cause inflation essentially motivate this study, as to make applicable recommendations that are essential for reducing further economic shocks. This paper, therefore, seeks to empirically examine causal relationships between exchange rate, broad money growth, interest rate, and world oil prices and inflation. The methods used are Johansen Co-integration test for the long-run relationship between the variables; vector error correction model (VECM) test for modelling the co-integrated time series, descriptive statistics summarize characteristics of variables. The findings suggest that in the long run broad money growth M2, parallel market exchange rate, interest rate, and world oil prices collectively put pressure on the commodity prices at varying degree causing inflation in South Sudan. The exogenous variables accounted for 99.51 per cent of the variation in inflation during the period with the error terms capturing 0.49 per cent of the variation. Too high R2 confirm that the inflation processes are due to the influence of the exogenous variables. Briefly, inflation in South Sudan is a multi-dimensional and dynamic which require robust stabilization policies. Henceforth, the Bank of South Sudan should adopt aggressive policies in combating inflation such as stabilizing exchange rate regime through building sustainable domestic and foreign exchange reserves to withstand trade deficits and aggregate demand shocks. The Government should entirely avoid Budget deficit financing by not borrowing high power money (seigniorage) from the Bank of South Sudan. These practices would cut quantity of money supply in circulation thereby reducing inflation. The government should as well invest the revenue from energy sector in secure, viable and sustainable replicating developmental sectors such as agriculture, infrastructural, health, and education to achieve economic progress and growth. By this, the government shall create a robust economic and stable financial system and eventually achieve low, stable inflation, a prerequisite for economic growth and development. Keywords: Inflation, Consumer price index, Exchange rate, broad money growth (M2), Johansen Co-integration, Exogenous, Endogenous, and VECM.