1 April 2018

Sudan: Liquidity Restrictions - Harms Heap Up, Recovery May Take Long

opinion

KHARTOUM (Sudanow) - After a harsh bickering between an agent and a bank cashier who refused to cash her over a 1000 pounds, an elderly man sitting by whispered into the young lady's ear: "My daughter! Go back to your work and from now onwards make sure to dig a matmoora (hole) in your home and put your money in it!"

"I have been shuttling around ATMs for days before coming to the bank which is far away from where I work," she said to the crowd at the bank, by way of apologizing for her hot exchanges with the cashier.

The young lady told me she was first surprised at what the old man had said but after giving it a thought she found it reasonable "for how can't I get my money at the time when I need it?".

The restrictions on cash outflows from the banks was prompted by the escalating foreign exchange rates that saw the U.S dollar jump by over 50% in just a fortnight or so last January.

Keeping the money in a hole at home, or a matmora as the old man had actually called it, is something from the past when there were no banks. To keep their savings and jewelry, people used to dig these matmoras and keep their money inside. In the Sudanese culture the matmora also has another meaning: A big hole dug in the ground where sorghum and other cereals are buried for time of need.

Sudan's banking system is made up of 38 commercial banks. Some 22 of these are joint ventures between the government and the private sector. There is only one government-owned commercial bank. In addition, the Government runs three specialized banks. The commercial banks have 773 branches nationwide, 330 of them in the Capital Khartoum.

Bank deposits (in current or investment accounts) had totaled 73.3 million pounds in the first half of 2017, 8.3 million above the sums deposited by the end of 2016 (an increase of 12.7%), according to the Sudanese Banks' Federation. Bank deposits in foreign exchange have totaled 1.118 million euros for the same period.

Merghani Ibn Awf, a professor of socio-economics and member of the council of trustees of the Consumers' Protection Society, is of the view that the provision and control of liquidity is the "primary duty of the Central Bank of Sudan."

"The Central Bank has an undertaking written on every banknote to pay the bearer the sum written on it anytime," Prof. Ibn Awf argued in a statement to Sudanow.

"I have searched in all the financial literature, the world-over, but could not find anything that supports these cash controls, even in cases of civil wars, emergencies and for the prevention of money laundering," he said.

"The expected and inevitable outcome of these casual and unexamined resolutions was sure damage to the citizens, businessmen and the government. For, while the government was after controlling liquidity outflows from the banking system, businessmen, whenever they found a chance, hastened to withdraw sums more than they actually needed" he said.

"The situation thus created has encouraged the cash middlemen to exchange bank cheques for less cash sums," he said.

"Accordingly, confidence in the banks has collapsed and businessmen and financial investors have started to buy the dollar and open accounts outside the country (one cause of the rising foreign exchange rate). They had to do that to meet their commitments towards the others," Prof. Ibn Awf said.

In a bid to control the circulating cash mass, the Government had earlier encouraged the banks to set branches all over the Sudan. It also encouraged banks to introduce the ATM systems for the same objective. This had encouraged people to open bank accounts. Some 60% of the cash mass was deposited in the banks. Now, by these measures, the government is undoing its work without any legal or economic justification. The expected result now is that money deposited in the banks would drop substantially.

Imports have come to a halt, even for allowable commodities. The banks have also refrained from giving credits for fear of repayment defaults.

Banker al-Bashir Abu Nakhal said the Central Bank of Sudan did not mean this deflationary policy, but the crisis had occurred because of many mistakes, including the absence of firm supervision of the banks, in particular on big deposits whose owners (particularly foreign investors) withdrew huge sums from the banks to buy the dollar or because of uncertainty in the country's deteriorating economic conditions.

Abu Nakhal, who works in the Salam Bank, charges that those big withdrawals, whether with intended subversive objectives or not, had created a scarcity in cash that stopped the continued upward rise in the foreign exchange rates, the dollar in particular. That was the only positive outcome of these measures, he said.

Abu Nakhal has confirmed that the public will lose confidence completely in the banking system when many citizens had withdrawn their money and stored it outside the banks to meet their urgent financial obligations knowing that most transactions are made in cash.

He said these harms and losses will continue to heap up and reflect on all the components of the Sudanese economy unless quick measures are taken. The banks will be incapacitated to give loans to businesses and this will stagnate the rates of development. Also, the presence of money outside the banking system means the existence of a big mass of stagnant cash which could have been of help to many citizens. To attract money back, the banks would have to offer high interests and this would consequently raise inflation rates and aggravate poverty.

The cash mass was 126.7 million pounds during the first half of 2017 up by 95.6 million pounds from that of the same period in 2016. Some 42.1 million pounds were thought to be in public hands in that period.

In the light of the country's economic situation and the country's external relations, this crisis could be protracted and the economy may not be able to recover from it before the elapse of five years, Abu Nakhal said. But a good recovery could be attained if a big commodity production is directed towards export. A handy and easier solution could be to squeeze government spending a good deal, he maintained.

Deputy Chair of the Chamber of Commerce (Sudanese Businessmen Association) Sameer Ahmad Gasim said the restrictions on liquidity had hiked the pound's rate of exchange against the dollar "and this is an asset."

"On the other hand these measures had affected the trade and the economy in general when traders lost confidence in the banks and abstained from depositing their money in the banks as they formerly used to do," Gasim has said.

He said imported commodities continue to congest at Port Sudan Harbor due to the ban on certain imports and this has created a scarcity in many goods. This has forced importers to pay $ 25 a day in storage fees for a 20 feet container, in addition to levies paid to the Sea Ports Corporation.

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