Just a few weeks after the government implemented a new initiative to inject more dollars into the economy through commercial banks and forex bureaux, the South Sudanese Pounds have gained a remarkable strength.
As of last week, 100 USD was worth merely SSP 45,000, a drastic and sudden drop from SSP 61,000 two weeks earlier. Forex dealers also say the exchange rate could fall even further. The local currency is not only appreciating against the USD but also other foreign currencies like Shillings.
SSP 1,500 is traded for UGX 10,000. But one would have exchanged SSP 1,800 for the same amount of Shillings less than two weeks ago. As the South Sudanese Pounds rise against foreign currencies, citizens remained dissatisfied and unappreciative.
Why is that?
Well, the rise of the South Sudanese Pounds against foreign currencies has changed nothing in terms of prices. Commodity prices remained at record high. This phenomenon has sparked a range of concerns among the public.
Think about it in stock market terms. When prices are high, the first impact this is likely to have is that people with shares will see a fall in their wealth. If the fall is significant, that will affect their financial outlook.
The moment these shareholders begin losing more money on shares, they become even more hesitant to spend, which will, in the long run, contribute to a fall in consumer spending.
But wait, this effect should be given too much importance. Why? Because people who buy shares are wealthy and always prepared to lose money; their spending patterns are, under most circumstances, independent of share prices, especially for short –term losses. The direct impact of this is felt by low and middle-income consumers.
Anybody with a private pension or investment trust will be affected, at least indirectly. Pension funds invest a significant part of their funds in the stock market.
Therefore, if there is a serious and prolonged fall in prices, it reduces the value of pension funds. This means that future pension payouts will be lower. If share prices fall too much, pension funds can struggle to meet their promises.
The important thing is the long-term movements in the share prices. If share prices fall for a long time, then it will definitely affect pension funds and future payouts. This may cause households to have lower pension income, and they may feel the need to save more in other terms.
Often share price movements are reflections of what is happening in the economy. E.g. a fear of a recession and global slowdown could cause share prices to fall.
The stock market itself can affect consumer confidence. Bad headlines of falling share prices are another factor which discourages people from spending.
For example, the stock market falls of 2008/09 reflected the fall in confidence. On its own, it may not have much effect, but combined with falling house prices, share prices can be a discouraging factor.
However, there are times when the stock market can appear out of step with the rest of the economy. In the depth of a recession, share prices may rise as investors look forward to a recovery two years in the future.
Falling share prices can hamper firms ability to raise finance on the stock market. Firms who are expanding and wish to borrow often do so by issuing more shares – it provides a low-cost way of borrowing more money. However, with falling share prices it becomes much more difficult.
A fall in the stock market makes other investments more attractive. People may move out of shares and into government bonds or gold.
These investments offer a better return in times of uncertainty. Though sometimes the stock market could be falling over concerns in government bond markets.