Capital Markets and Portfolio Investment
South Sudan’s financial system offers few financial products. It is difficult for foreign investors to get credit on the local market due to the shortage of hard currency, the lack of accurate means of obtaining reliable figures or audited accounts, the absence of a credit reference bureau, and South Sudan’s failure to document land ownership properly. According to the World Bank, 50 percent of all South Sudanese firms cite access to finance as a constraint.
Banks are unwilling to lend due to the lack of adequate laws to protect lenders and difficulties related to personal identification. After the Bank of South Sudan confiscated commercial banks’ reserves on deposit at the central bank in autumn 2015, diverting them to the use of the government, companies and individuals had difficulty accessing their funds. This has made depositors reluctant to trust their funds to the banking system.
The Bank of South Sudan launched treasury bills on August 18, 2016 up for purchase by members of the public, companies and commercial banks. This lasted until April 2017, when people stopped investing in the bills due to high inflation and a lack of a secondary market for them. The bank had previously issued treasury bills in 2012 without success.
Money and Banking System
Activity in the financial system grew after independence for a period until it deteriorated in 2014 due to civil conflict and the reduction of oil exports. The economy of South Sudan is cash-based, with limited use of demand deposits. The IMF has categorized South Sudan’s financial sector as small and undeveloped. There is limited information to assess the health of this sector.
The Bank of South Sudan is the country’s central bank. Most of the foreign owned banks that have branches in South Sudan, such as Kenya Commercial Bank (KCB) and Equity Bank, closed their branches due to the conflict, devaluation of the SSP, and high inflation that has greatly affected bank profits.
There are a total of nine foreign-owned banks and 21 local banks. The combination of conflict and economic crisis and the high risk of doing business in South Sudan forced foreign banks to close at least 22 out of 50 branches. Lending is now rare, and most banks are barely more than conduits for transferring money or receiving spoils. Economic activities that bear big shares of commercial bank lending are Domestic Trade Restaurants & Hotels (49%), Foreign Trade (17%) and Real Estate (17%), representing 83% of total lending by commercial banks.
Kenyan multinationals with subsidiaries in South Sudan have lost billions of shillings to devaluation of the South Sudanese Pound by 84%, as part the transition by the Bank of South Sudan (BSS) from a fixed exchange rate regime to a managed floating regime in December 2015. Inflation has risen sharply since then, diluting the value of assets denominated in local currency, including cash and loans held by Kenyan banks. Foreign banks are allowed to operate in South Sudan and are subject to Bank of South Sudan regulations. The banking sector has been in crisis since the devaluation of December 2015. According to a December 2017 commercial banks survey (other depositary corporation survey), net foreign assets were about USD 458 million.
Foreign Exchange and Remittances
Foreign Exchange Policies
South Sudan maintained a fixed exchange rate for the South Sudanese Pound until December 2015 when it moved to a managed floating exchange rate regime. Since then, the local currency has depreciated significantly due to deficit spending by the government, printing of money, and a lack of hard currency. The current official exchange rate can only be found directly from the Bank of South Sudan, or from commercial banks in Juba that get the daily report from BSS.
South Sudan relies on oil exports for inflow of hard currency. Those exports and the accompanying revenues were reduced after the outbreak of an internal conflict in 2013; however, after the increase in oil prices in 2017 the government of South Sudan still faces challenges in paying civil servants on time. Revenues have increased slightly due to the increase in the price of oil.
With no access to external financing, the government has used domestic borrowing from the central bank, printing money to cover a growing financial shortfall and pay monthly operating expenses. Foreign currency reserves are extremely low, and the government routinely fails to pay salaries of civil servants and diplomatic staff.
Since January 2017, the Bank of South Sudan has only allocated U.S. dollars to two forex bureaus, called “Adjum Forex Bureau” and “Green South Forex Bureau,” which sell dollars to the public at a rate close to the black market rate. In 2016, the central bank stopped allocating dollars through periodic auctions conducted after the December 2015 devaluation of the SSP. Foreign investors found it difficult to repatriate their locally-generated income. Multiple international companies suspended operations in South Sudan since 2015, claiming that, despite promises at the highest levels to rectify the situation, they were unable to convert their profits in the local currency into USD. Black market exchange is prevalent. The value of SSP/1USD in the black market depreciated by 47.9% from January 1 to December 31, 2017.
In March 2017, the Bank of South Sudan issued a new regulation requiring banks, companies and individuals seeking to transfer amounts over USD 10,000 to undergo checks and approval procedures from the country’s central bank. Under the new guidelines, all financial institutions and individuals will be required to report any transaction such as withdrawals, deposits and bank transfers above USD 10,000 to the central bank.
The Bank of South Sudan has implemented licensing and regulatory framework for mobile money but has not specifically expressed an interest in blockchain technology.
Foreign investors cannot remit through the parallel market. They are required by law to remit through banks or foreign exchange bureaus.
In theory, funds associated with any form of investment can be freely converted into any world currency. The exchange rate in South Sudan is determined according to data gathered from commercial banks every day, and the central bank indicative rate is the average rate of all the operating commercial banks in South Sudan. This system started after the devaluation of the local currency when the bank announced a shift from Fixed Exchange Rate Regime to a managed floating Exchange Rate Regime in December 2015.
The 2009 Investment Promotion Act guarantees unconditional transferability in and out of South Sudan “in freely convertible currency of capital for investment; payments in respect of loan servicing where foreign loans have been obtained; and the remittance of proceeds, net of all taxes and other statutory obligations, in the event of sale or liquidation of the enterprise.” In reality, the ability to exchange local currency for foreign currency is severely restricted.
South Sudan is not a member of the Financial Action Task Force (FATF).
Sovereign Wealth Funds
The Petroleum Revenue Management Law 2013 created a sovereign wealth fund (SWF) to set aside surplus profits from oil sales. The law established the Oil Revenue Stabilization Account to act as a buffer against volatility in oil prices and the Future Generations Fund to set aside some funds for future generations. The law is in line with the Transitional Constitution of South Sudan, which states that the ownership of petroleum and gas shall be vested in the people of South Sudan and shall be developed and managed by the national government on behalf of, and for the benefit of, the people. The SWF is supposed to distribute 10 percent of oil profits into the Oil Revenue Stabilization Account and 15 percent to the Future Generations Fund. To date, however, neither has received any financing. The Comprehensive Peace Agreement (CPA) that ended the civil war with Sudan sets a 2% share of oil revenue that is supposed to be given to the oil producing states along with 3% revenue allocation to the local communities. However, in August 2017, the government announced that it would stop giving the 3% and 2% share to states.