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The Macroeconomics of the Gold Economy in Sudan

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  • Ibrahim Elbadawi
  • Kabbashi Suliman

    (Department of Economics, University of Khartoum, Sudan)

Abstract

After the secession of South Sudan and the resultant drop in oil exports, Sudan has enjoyed a surge in gold exports, dominated by vast networks of artisanal and small-scale informal mining operations. A combination of fiscally dominated monetary policy and stifling foreign exchange gap prompted the government to pursue a policy of large scale gold purchases by the Central Bank, almost all financed by printing money. We argued in this paper that such policy has resulted in a ‘resource curse’, manifested by short-term macroeconomic instability and medium-term loss of competitiveness. To substantiate the argument, the paper developed a simple game-theoretic rational expectations macroeconomic model, where the payoffs associated with the strategic behavior of individual gold’s traders are used to define the Bank’s problem. The results suggested that the Bank’s monetary policy was largely influenced by the international gold price, the social tolerance for high inflation and the public sector borrowing requirements that rendered it ineffective for anchoring inflation expectations. Also, we found that higher international gold prices and the probability of successful gold’s smuggling lead to higher domestic gold pricing by the Bank. Moreover, we showed that the Bank’s gold dealership and the chosen mode of financing has caused short term inflationary spiral, excessive nominal exchange rate devaluation and medium to longer term real exchange rate appreciation. Therefore, we recommend that the gold dealership should be operated by a fiscal authority, rather than the Bank, and be part of a macroeconomic framework based on economic diversification and geared towards stabilization of the economy.

Suggested Citation

  • Ibrahim Elbadawi & Kabbashi Suliman, 2018. "The Macroeconomics of the Gold Economy in Sudan," Working Papers 1203, Economic Research Forum, revised 07 Jun 2018.
  • Handle: RePEc:erg:wpaper:1203
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    References listed on IDEAS

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