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Experience has shown that in such circumstances, experience suggests that there is no quick or easy fix. Worsening the Real Exchange Rate (RER) and growth of parallel market are good proxy mirror not only of a country's international... more
Experience has shown that in such circumstances, experience suggests that there is no quick or easy fix. Worsening the Real Exchange Rate (RER) and growth of parallel market are good proxy mirror not only of a country's international competitiveness and a country's international terms of trade but also a serious decline in RER reflects deep changes macroeconomic policies misalignment (Edwards, 1989). Sudan has long history since Nemairy era during 1970s and 1980s of structural exchange rate misalignment and inconsistencies between macroeconomic policies, particularly monetary policy. Sudan's economic conditions deteriorated rapidly after the permanent shock of South Sudan independent. The fiscal deficit widened owing to the loss of oil revenues and delays in fiscal adjustment. The recourse to multiple exchange rates raises the need for another anchor for cohesion in monetary policy. The shortage of Foreign Exchange rate have driven virtually all private sector transactions to the parallel market. With a full-fledged Islamic banking system, the monetary policy framework lacks adequate instruments for monetary operations, liquidity management, and non-inflationary financing of government deficits. Under the Islamic mode of finance, debt-based instruments cannot earn a positive rate of return through interest and cannot be discounted in a secondary market. These constraints have limited the space of development of efficient instruments for monetary policy. As a result, the monetary policy framework in Sudan has to rely on the conventional instruments for regulating money supply, using quantitative control by fixing ad hoc credit ceilings and imposing high unremunerated reserve requirements. Given the central bank limited monetary options to maneuver, the government must think of developing new instruments. At this point, there was a clear danger of returning to hyperinflation as experienced by Argentina several times in its history. Current attempts by authority to rectify structural issues associated with the real exchange has failed to translate short run policy measures into actual changes of the RER. This is call for robust structural approach.The psychology and rational expectations among the society and their view and perception about persistent looming both political and economic crisis has exacerbate the mission of the Central Bank. This is require the Bank to adopt sound non-traditional policy measures for more positive expectation about the stability. Drawing lessons from developing countries through desk review, the advisory Paper is intended to the ongoing discussion on the current currency crisis by reviewing the experiences of other developing countries. The aim is an attempt to contribute to the ongoing debate on current exchange rate crisis in Sudan and draw some lessons and policy measures that can help to provide stability. Experience has shown that in such circumstances, experience suggests that there is no quick or easy fix: effective solutions depend on developing a comprehensive strategy combining the full range of policy instruments. As such, propping up the exchange rate through administrative tools cannot last for long and solve the deep structural problems of misalignment of the exchange rate caused by many factors. We call for new generation of both macroeconomic and institution policies. Smart devaluation coupled by sound structural policy measures overweigh and more beneficial than administrative measures and devaluation imposed by the parallel market. Other conclusions are reported and policy drawn. Background The current currency crisis has worsened by the independent of South Sudan, absence of policy cohesion that was needed to address the expected shock and the inappropriate macroeconomic policies. Adding to