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Why did the New Deal Compact in South Sudan Fail to get Signed?

27-11-2014

Wani, H. 2014. Why did the New Deal Compact in South sudan fail to get signed? GREAT insights Magazine, Volume 4, Issue 1. December 2014/January 2015.

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The endorsement of the New Deal for engagement in fragile states in November 2011 at the 4th High level Forum on Aid effectiveness in Busan was celebrated as a global reform initiative aimed at accelerating the progress of development in conflict affected and fragile states. South Sudan was one of the first countries to implement the New Deal, and was prepared to sign a New Deal Compact in December 2013. This article discusses the circumstances that enabled the failure of the Compact to be signed according to plan and draws attention to the use of macro-economic reforms as conditions for the signing of the Compact, and the inadequate attention attributed to cushioning the shocks that resulted from implementing such reforms. This particular case is exemplary for a growing concern echoed by many African governments about the practice of using mutually agreed development targets as conditions for economic agreements by international institutions and Western donors in their engagements with African governments.

Implementing the New Deal in South Sudan

Initiated by the g7+, a self-identified group of 20 fragile states, and a group of donors, the New Deal establishes new partnerships between donor states, fragile and conflict-affected states (FCAS), and civil society for the purpose of creating country-led and country-owned transitions out of fragility.This approach addresses the democratic deficit in many multilateral institutions and processes by recognising that peacebuilding and statebuilding must be led by affected countries rather than by donor states. It also recognises that state-led implementation is not sufficient and that building peaceful societies requires a whole of society approach. 

South Sudan was one of the pilot countries and launched the New Deal in August 2012. It commenced with a fragility assessment which drew participants from government, civil society and development partners with the objective of determining South Sudan’s position along the fragility spectrum for each of the five peacebuilding and statebuilding goals areas, to identify drivers of fragility, and to establish peacebuilding and statebuilding priorities in relation to the five Peacebuilding and Statebuilding Goals (see box on New Deal, pg. 17). This fragility assessment was one of the steps leading to a Compact, a framework of mutual accountability between South Sudan and its development partners, based on the principles of the New Deal. This Compact had been prepared through a series of consultations in ten different states of South Sudan from late August to late October 2013. The Compact was supposed to be signed on the 4th of December 2013, but this did not happen. I want to answer the question as to why it did not and this is found in the linking of the New Deal Compact with the International Monetary Fund (IMF) programme.

Linking the New Deal Compact with the IMF programme

A South Sudan Economic Partners’ Forum (SSEPF) was held in April 2013 in Washington DC amidst the oil shut down crisis. Pursuing the New Deal Compact was a key outcome of the Forum, alongside other key deliverables like initiating the IMF staff monitoring programme, the signing of a Statebuilding Contract with the European Union to support salaries in the health and education sectors, establishing a Multi-Donor Partnership Fund to support capacity building for good governance, investments in priority sectors and support for basic services, and finally organising an Investment Conference to promote job creation, improved livelihoods and economic grown. These deliverables were not supposed to be conditions attached to the New Deal Compact, but parallel post-SSEPF commitments that were to be monitored by respective joint-donor-government committees. (1)

The seven months long process leading to the development of the compact was layered with state consultations and intensive dialogue, more so between the months of August and October 2013. However the New Deal compact was not signed in November 2013 as planned. The reason was the Government of South Sudan’s (GoSS) non-compliance with the conditions of the IMF staff monitored programme. These IMF conditions demanded the passing of the South Sudan Petroleum Management Bill, the passing of the 2013-2014 National Budget and harmonisation of the dual exchange rate system. The failure of the dual currency exchange rate harmonisation plan in particular dealt the final blow to the progress of the New Deal compact. 

Compliance with the IMF programme had now become a condition for budget support from the EU and the World Bank, and the compact was therefore seen as less relevant until this issue was resolved. (2)

Why did the harmonisation of the dual currency exchange system fail?

The Central Bank of South Sudan (CBSS) must be credited for its attempt to comply with the IMF currency exchange rate harmonisation condition by issuing a directive in November 2013 to banks and other stakeholders citing the exchange rate regulatory change. It stated that the South Sudan pound was to trade against the US dollar at 4.5 from the previous rate of 3.16; thereby reducing the value of the pound by 42% against the US dollar. This directive was shortly rescinded by the CBSS following public upheaval and objection by parliament.

Garang Atem Ajiik, in his policy paper (3) published on South Sudan Nation, cites that well respected economists and analysts have argued that the effects of the devaluation of South Sudan’s currency would have been short term. However one must be mindful of the fact that currency devaluation encourages exports but increases the prices of imports. Since South Sudan’s only export is oil and multiple constraints inhibit the diversification of its export sector, South Sudan was and is not adequately able to produce import substitutes to cushion the 42% price increase to imports caused by the devaluation policy. This means that the production would not benefit from or respond to the incentives of currency devaluation.

Furthermore the supply of US dollars into the market by the CBSS is done on an ad hoc basis and is neither based on demand nor exports data, therefore maintaining demand-supply equilibrium becomes difficult. This creates a conducive environment for a black market industry to thrive. Consequentially, an increase of the exchange rate from 3.16 to 4.5 SSP without addressing the demand-supply equilibrium, would have hiked the black market exchange rate to 6-6.5 SSP.  

An extensive appraisal by the CBSS and IMF of these and other impediments underpinning the South Sudanese economy was essential at the time in order to guide and inform the approach employed towards the exchange rate harmonisation policy as well as the timeframe applied to its effect. Even more importantly, an economic appraisal would have better informed the Government of South Sudan and its development partners of the importance of maintaining a clear separation between the New Deal compact and the IMF staff monitored programme given the broadness of the New Deal Peacebuilding and Statebuilding Goals and the much more narrow nature of the fiscal goals that characterised the IMF staff monitored programme. The exchange rate harmonisation policy is a reform issue that could have been prioritised under Peacebuilding and Statebuilding Goal 5 [Revenue and Services], while allocating adequate time for an economy appraisal exercise and a sound implementation strategy that addresses macroeconomic stability as well as international competitiveness of the South Sudanese pound while softening the blow the policy would have on society.

Three lessons can be learned from these unfortunate events; 

i.         The first and most important lesson is, that it is counterproductive for donors and international institutions to rework mutually agreed development targets reached with conflict affected and fragile states into conditions for economic agreements.

ii.         The second lesson is that enforcing an economic policy like currency devaluation in a fragile state like South Sudan must not be paced against internationally instituted timelines but approached with due consideration to the unique structural socio-economic fundamentals of South Sudan in order to minimise the immediate impact.

iii.         The third lesson is that as South Sudan did not have necessary policies that would solve the structural impediments that inhibit the growth of the export sector, the economic foundation upon which the currency exchange rate harmonisation policy was to be implemented was insufficient, rendering the reform unworkable.

Summing up

In conclusion, the EU, World Bank and New Deal donors for South Sudan (UK, Netherlands and Denmark) and GoSS could have averted the failure of the New Deal Compact. They needed to recognise that the New Deal as a framework for aid effectiveness was formulated with the objective of establishing new partnerships between donor countries, fragile and conflict affected states, and civil society for the purpose of creating “country-led and country-owned transitions out of fragility. The IMF as an institution is not bound by the principles and mechanisms governing the New Deal, which merits a clear separation of dialogue on proposed development targets towards the Peacebuilding and Statebuilding Goals from reform conditions imposed by international institutions.

Using proposed targets as conditions to force governments to sign economic partnership agreements is a major concern emerging from many African governments citing precedence from UK, USA and EU.  Such practices deviate focus from addressing structural constraints such as insecurity, infrastructure, technology, capital, entrepreneurship, institutions and attitude that impede the growth of the local production/supply machinery as an option of influencing macroeconomic stability and international currency competiveness as has been demonstrated in the case of South Sudan. Furthermore it detracts attention from the root causes of conflict and fragility, and even risks exacerbating these in an already volatile situation. Unfortunately, due to the ensuing crisis precipitated by the 15th of December events, the New Deal Compact is currently still on hold. 

Hafeez Wani is the National NGO focal point for the South Sudan NGO Forum.

Footnotes

1. South Sudan NGO Forum, ‘The New Deal implementation in South Sudan; Perspective Paper, Digest no.1’, 23-09-2014.

2. RD 11: Discussion note: The New Deal in South Sudan: taking stock of progress, and supporting compact implementation going forward (for discussion) [Sixth meeting of the DAC International Network on Conflict and Fragility (INCAF) at Director Level New York].

3. ‘Devaluation in South Sudan: Theoretical and policy confusion in Finding a working exchange rate policy’, by: Garang Atem Ayiik, http://www.southsudannation.com/devaluation-in-south-sudan-theoretical-and-policy-confusion-in-finding-a-working-exchange-rate-policy/ 

 

This article was published in GREAT insights Volume 4, Issue 1 (December 2014/January 2015).

Security and ResilienceOther work to address conflict and crisisFragile statesSouth Sudan

External authors

Hafeez Wani