The Determinants of Inflation in Sudan

This paper examines the main determinants of inflation in Sudan, using quarterly data during 1970a-2002, by applying cointegration and error correction modelling. The analytical framework views inflation as responding to disequilibria in the internal and external sectors of the economy augmented by the dynamics of the variables determining the equilibrium relationships in these sectors. The results reveal that the external sector's disequilibrium matters for price growth. This signifies a strong long-run impact of foreign price and exchange rate on inflation, with slow adjustment to equilibrium. Inflation is also found to be perpetuated by feedback from the short-run nominal exchange rate, foreign price, drought shocks and deterioration in expectations. Money growth does not appear to affect inflation in the long run, but the elasticity of inflation to the short-run money supply is significant and relatively high. The findings suggest that a monetarycum- exchange rule is more suitable for inflation control while maintaining external competitiveness. Fighting inflation also depends on the ability of policy to reduce the effects of supply shocks emanating from droughts and foreign price movements.