South Sudan devalues currency after two years of war

South Sudan’s central bank unpegged the national currency from the dollar Tuesday, freeing it to trade at black market prices several times the official rate amid soaring inflation caused by two years of civil war.

The Bank of South Sudan said it took the decision due to “stark realities” including civil war — which marks its two year anniversary on Tuesday — and a fall in global oil prices, upon which the vast percentage of government foreign exchange earnings depend.

“All foreign exchange business shall be transacted at market determined exchange rate,” a bank statement read.

The currency, which was previously held at the official rate of 2.95 South Sudanese pounds to the dollar, has traded on the black market at sometimes more than 18 pounds to the dollar, and bank governor Kornelio Korim Mayik warned the new currency regime, “will have negative effect on low incomes which may trigger political risk.”

Mayik said the stability of the exchange rate, “may be difficult to maintain in the short term without availability of adequate foreign exchange reserves.”

Civil war, economic collapse and a dearth of foreign currency have had a major impact on the war-torn and land-locked nation, which depends on costly imports for some of the most basic goods, with food and fuel prices rocketing in recent months.

Much of the oil production has been cut due to fighting in the two key production states, Unity and Upper Nile, down from a peak of 300,000 barrels per day, to 165,000 now, while the price per barrel earned is down from $100 to $40, Minister of Finance David Deng Athorbei said.

Production had already failed to return to full capacity following a 15-month shutdown during a border conflict with neighbouring Sudan in 2012-13.

“As a country that is almost entirely dependent on oil proceeds, these shocks have resulted in the rise of huge budget deficits,” Athorbei said in a statement.

“This measure will certainly have some adverse effects on our people, particularly in the short run,” he added, calling the changes “difficult but necessary.”

Political elites were accused of exploiting the huge gap between official rates and the black market by changing government dollars illegally and pocketing the difference.

South Sudan’s civil war began in December 2013 when President Salva Kiir accused his former deputy Riek Machar of planning a coup, setting off a cycle of retaliatory killings that has split the poverty-stricken country along ethnic lines.

The conflict has triggered a humanitarian crisis with 2.3 million people forced from their homes and 4.6 million in need of emergency food.