1. 1 Modernizing Sudan’s Monetary Policy Framework By Ghiath Shabsigh Middle East and Central Asia Department International Monetary Fund e-mail: gshabsigh@imf.org

2. 2 Monetary Policy Exists because of fiat money Refers to central bank (as the monopoly issuer of fiat money) management of high- power monetary emissions through adjustments in its balance sheet Aims at achieving a strategic objective (e.g., low inflation) and stabilizing financial markets

3. 3 The Monetary Policy Framework - 1 Monetary Policy Strategy Strategy Objectives Price Stability Long-term economic growth Intermediate Targets Money Supply Exchange rate Long-term interest rates

4. 4 The Monetary Policy Framework - 2 Monetary Policy Operation Operating Targets Bank Reserves Short term Money Market Interest Rate Instruments Direct Controls Legal Reserve Requirements Official Interest Rate Market Operations

5. 5 The Monetary Policy Framework - 3 Central Bank Structure Status & Mandate Internal Organization Human Capacity Information Management

6. 6 Balance Sheet of the Central Bank Assets Liabilities ∆ Net foreign assets∆ Currency ∆ Net lending to the government∆ Bank reserves ∆ Net lending to banks ∆ Other net assets

7. 7 Central Bank Liquidity Management “Autonomous” liquidity position = ∆ Net foreign assets (+) ∆ Net lending to the government (+) ∆ Other net assets (+) ∆ Currency (−) ∆ Bank reserves (s) = Autonomous liquidity position + ∆ Net policy position ∆ Net liquidity position = Autonomous liquidity position – ∆ Bank reserves (d)

8. 8 Basic Central Banking Facilities Type of facility 1. Overdraft window. 2. Lender-of-last resort window. 3. General financing window. 4. Market operations (OMO, Repo, interbank). Purpose of facility 1. Support the payments system. 2. Support the soundness of the banking system. 3. Provide general-purpose financing to the economy. 4. Quick intervention to influence money and foreign exchange markets.

9. 9 Sudan: Summary Monetary Policy framework -1 PeriodPre-19971997-20012002-2004 StrategyBudget financing & credit allocation Price stability Price stability & economic growth Policy AnchorNoneExchange rate Money supply Operating target Credit planBank reserves (& credit) Bank reserves

10. 10 Sudan: Summary Monetary Policy framework - 2 PeriodPre-19971997-20012002-2004 InstrumentPervasive direct controls: Credit ceilings, Rates, bank lending, & high legal reserves Moderate direct controls Financing windows Indirect instrument Indirect controls Financing windows OMO Information Basic Substantial lags Better coverage & data quality Simple flash report Shorter lags Expanded flash report Short-term Forecasting

11. 11 Sudan: Summary Monetary Policy framework - 3 PeriodPre-19971997-20012002-2004 BOS StatusPowers delegated by MOF Increased operational autonomy Independent (by Law) BOS StructureDepartments acting separately to implement the credit and FX plans Improved coordination Monetary policy Comm. MOU Departments are guided by The above

12. 12 Broad Money Growth January 1993 - October 2004

13. 13 Average 12-month CPI inflation January 1992-December 2004

14. 14 Time Deposits to Total Deposits Ratio January 1992 - October 2004

15. 15 Currency to Total Deposits Ratio January 1992 - October 2004

16. 16 Money Multiplier January 1992 - October 2004

17. 17 Velocity of Money (1993-2004)

18. 18 Variance

19. 19 Next Challenges to Monetary Policy Instituting a market-based monetary policy framework Establishing an effective federal structure

20. 20 Modern Market-Based Central Banking - 1 I.Central Bank Mandate –Effective independence –Strategic focus (price stability) II.Market-based indirect monetary control instruments (OMO / standing windows) –Easily transacted in financial markets –Can be freely and effectively priced by financial markets –Establish benchmark price/rate (or yield curve)

21. 21 Modern Market-Based Central Banking - 2 III.Central bank structure and capacity –effective monetary decision making process –Coordination mechanisms with MOF –Centralized implementation body –Short-term liquidity forecasting and analysis capacity –Deep knowledge with financial markets and instruments IV.Information management –Improving data coverage, quality and collection –Flash reporting system

22. 22 Federal Monetary Policy - 1 I. Federal central bank structure –New governance structure (central bank board) –Independence –More responsive to regional needs –Effective data management and communication –Strengthened payment system –Improved human capacity (particularly at the regional level)

23. 23 Federal Monetary Policy - 2 II. Dual banking system in South Sudan –Enabling laws –Appropriate regulatory regime –Central banking facilities for conventional banks III. Uniform monetary policy –Successful introduction of the new currency –Common monetary instrument for dual banking –Coordinated monetary actions

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