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South Sudan devalues currency by 34 pct, raising inflation threat

Ilya Gridneff
Tuesday, 12 Nov 2013 | 10:07 AM ET

* World's newest country relies on imports

* Move follows Sudan's currency devaluation

* Disputes with Khartoum have prevented oil exports

JUBA, Nov 12 (Reuters) - South Sudan has devalued its pound currency against the dollar by 34 percent to bring it onto a par with the black market rate, a move that risks fanning inflation.

South Sudan has had a currency problem ever since it gained independence from Sudan in July 2011. Its oil exports have been disrupted by disputes with Khartoum, as well as by endemic corruption, leaving it struggling to pay for the food and other imports that it depends upon.

In devaluing its currency late on Monday, South Sudan followed the example of Sudan's central bank which has devalued its pound by 22.6 percent against the dollar, the second such move in little over a year.

On Tuesday, Bank of South Sudan indicated the official foreign exchange rate as one dollar to 4.5 pounds from 2.95 pounds before the devaluation.

Central bank officials were not immediately available to comment.

The bank said in a statement on Monday the devaluation was part of reforms intended to bring such markets into the formal economy and create jobs.

"It will lower short-term exchange rate volatility, provide more reliable access to foreign exchange by the business community and members of the public and help to build buffers for the economy to deal with unanticipated shocks," it said.

Stability in South Sudan is vital for the crude oil producers from China, India and Malaysia operating in the country and for east African neighbours Ethiopia, Kenya and Uganda which were swamped with refugees during the civil war.

Economic analysts warned of quickening inflation.

"Adjusting the rate is very unfortunate for South Sudan but there is no way out. We now can't avoid inflation, definitely prices are going to go up," Kenyi Spencer, a World Bank economic consultant and a director of Equity Bank told Reuters.

"The black market will increase their rate, it will increase beyond five SSP (South Sudan pounds) for a dollar, this is going to affect a lot of businesses," he said.

Spencer said fuel shortages and rising fuel prices were also imminent after heavy rains flooded and blocked the main road to Uganda, a key link for South Sudan's food.

Taban Albert, treasurer at Eden Commercial Bank said neighbouring Uganda and Kenya, South Sudan's main trading partners, would also be affected by the price hikes.

"We think a better idea would have been to inject dollars into the market, that would be a better way to combat the black market," he said.

(Writing by James Macharia; Editing by Ruth Pitchford)