The Controversy of Exchange R ate Devaluation in Sudan : An Economy -wide General Equilibrium Assessment

Abstract

Theinternational Monitory Fund (IMF) has been working with Sudan since 1997 toimplement macroeconomic reforms including a managed float of the exchange rate(EXR). The IMF seesthe EXR flexibility as key to safeguard and rebuild foreignexchange reserves and essential to meet the international reserve targetin Sudan.However, the authorities in Sudan are concerned that greater exchange rate flexibilitycould contribute to inflationary pressures. In addition, areview of literature focusingon the exchange rate policies in Sudan reflects huge ambiguity about its outcome.This calls for additional empirical investigations that provide economy wideassessments of the various possible scenarios that could be adopted in the Sudanesecontext. Accordingly, the current paper applies an economy-wide impact assessmenttool to investigate the possible effects of devaluating the overvalued (according to theIMF, 2009) Sudanese pound. Namely, it uses aComputable General Equilibrium (CGE)model together with its detaileddatabase of Sudan to simulate the Sudanese pound todepreciate according to three different scenarios by 5%, 10%,and 15%. Results of thepaper recommend that the additional flexibility in the Sudanese EXR regimesuggested by the IMF should be carefully considered if that would lead the value of theSudanese currency to be devalued. This imply that the authorities in Sudan shouldclosely monitor and control the EXR to avoid its depreciation in the short run, whileencouraging both public and private investments to help creating additional jobs thatincreases domestic income and reduces the negative consequences of inflation