South Sudan Secession: Modelling the Fiscal Shock and Its Spillover Effects

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Onour, Ibrahim A.
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University of Khartoum
In this paper we set up a macroeconomic model designed to describe small open economy enduring political uncertainty arising from split of a country into two indpendent parts. The findings in the paper indicate, stabilization of asset markets in either country at the post-secession era depends on political stability, which will impact on foreign currency inflows to each country. Our model predict that if political unrest coninue after the split of the country, the foreign currency reserves at Central Bank in each country will deteriorate over time, and that may lead to domestic currency depreciation in terms of hard currenies. The model also predict that expanding budget deficit and declining official reserves will eventually force governments to abandon fixed exchange rate system in favor of more flexible exchange rate system that result in further acceleration of both domestic inflation rate and domestic money growth rate. As a result, the post-secession period is likely to be characterized by economic instability and political unrest in the two sides unless economic cooperation between the two countries maintained.
Parallel rate; Official rate; Stability; Steady-state. JEL: C10, C50, G10