South Sudan Referundum: A Macroeconomic Analysis of Post-Secession Scenario

The purpose of this paper to analyse financial stability in small open economy, with dual foreign exchange markets, enduring political uncertainty and facing the likelihood of perminant adverse export shock. The finding in the paper indicate, given capital outflow is maintained at minimal level, there exist stable equilibrium exchange rates, despite the adverse export shock. However, for the foreign exchange market to adjust more quickly towards a new steady state equilibrium the central bank need to build sufficient foreign exchange reserves. If the reserve level remains at low levels the recovery process from the adverse shock will take longer time, as periodic devaluation of the official rate remain the only available tool for the central bank. When expanding fiscal deficit and declining official reserves force the government adopting a floating exchange rate system, our model predict depreciation of foreign exchange rate is identical to domestic money growth.